Accrued interest- The interest that has accumulated since the last interest payment and that is added to a bond transaction's contract price.

Adjusted basis- The value attributed to an asset or security that reflects any deductions taken on, or capital improvements to, the asset or security. Adjusted basis is used to compute the gain or loss on the sale or other dispositions of the asset or security.

Aggressive investment strategy- A method of portfolio allocation and management aimed at achieving maximum return.  Aggressive investors place a high percentage of their investable assets in equity securities and a far lower percentage in safer debt securities and cash equivalents, and they pursue aggressive policies including margin trading, arbitrage and option trading.

Annuitant- A person who receives an annuity contract's distribution.

Annuitize- To change an annuity contract from the accumulation (pay-in) stage to the distribution (pay-out) stage.

Annuity- A contract between an insurance company and an individual, generally guaranteeing lifetime income to the individual on whose life the contract is based in return for either a lump sum or a periodic payment to the insurance company.

Arbitrage- The simultaneous purchase and sale of the same or related securities to take advantage of a market inefficiency.

Asset- Anything that in individual or a corporation owns.

Back-end load- A commission or sales fee that is charged when mutual fund shares or variable annuity contracts are redeemed.

Basis- The cost of an asset or security.

Basis point- A measure of a bond's yield, equal to 1/100 of 1 percent of yield.  A bond whose yield increases from 5.0 percent to 5.5 percent is said to increase by 50 basis points.

Bear market- A market in which prices of a certain group of securities are falling or are expected to fall.

Beta- A means of measuring the volatility of a security or a portfolio of securities in comparison with the market as a whole.  A beta of 1 indicates that the security's price will move with the market.  A beta greater than 1 indicates that the security's price will be more volatile than the market.  A beta less than 1 means that it will be less volatile than the market.

Blue chip stock- The equity issues of financially stable, well-established companies that have demonstrated their ability to pay dividends in both good and bad times.

Bond- An issuing company's or government's legal obligation to repay the principal of a loan to bond investors at a specified future date.  Bonds are usually issued with par or face values of $1,000, representing the amount of money borrowed.  The issuer promises to pay a percentage of the par value as interest on the borrowed funds.  The interest payment is stated on the face of the bond at issue.

Bond fund- A mutual fund whose investment objective is to provide stable income with minimal capital risk.  It invests in income-producing instruments, which may include corporate, government or municipal bonds.

Bond rating- An evaluation of the possibility of a bond issuer's default, based on an analysis of the issuer's financial condition and profit potential.  Standard & Poor's, and Moody's Investors Service, among others, provide bond rating services.

Bond yield- The annual rate of return on a bond investment.  Types of yield include nominal yield, current yield, yield to maturity and yield to call.  Their relationships vary according to whether the bond in question is at a discount, at a premium or at par.

Breakpoint- The schedule of sales charge discounts a mutual fund offers for lump-sum or cumulative investments.

Breakpoint sale- The sale of mutual fund shares in an amount just below the level at which the purchaser would qualify for reduced sales charges.  This violates the NASD Rules of Fair Practice.

Bull market- A market in which prices of a certain group of securities are rising or will rise.

Call- (1) An option contract giving the owner the right to buy a specified amount of an underlying security at a specified price within a specified time. (2) The act of exercising a call option.

Callable bond- A type of bond issued with a provision allowing the issuer to redeem the bond before maturity at a predetermined price.

Call risk- The potential for a bond to be called before maturity, leaving the investor without the bond's current income.  Since this is more likely to occur during times of falling interest rates, the investor may not be able to reinvest his principal at a comparable rate of return.

Capital appreciation- A rise in an asset's market price.

Capital gain- The profit realized when a capital asset is sold for a higher price than the purchase price.

Capital loss- The loss incurred when a capital asset is sold for a lower price than the purchase price.

Capital risk- The potential for an investor to lose all money invested owing to circumstances unrelated to an issuer's financial strength.

Capital stock- All of a corporation's outstanding preferred stock and common stock, listed at par value.

Churning- Excessive trading in a customer's account by a registered representative who ignores the customer's interests and seeks only to increase commissions.  This violates the NASD Rules of Fair Practice.

Class A share- A class of mutual fund share issued with a front-end sales load.  A mutual fund offers different classes of shares to allow investors to choose the type of sales charge they will pay.

Class B share- A class of mutual fund share issued with a back-end load.

Class C share- A class of mutual fund share issued with a level load.

Class D share- A class of mutual fund share issued with both a level load and a back-end load.

Coincident indicator- A measurable economic factor that varies directly and simultaneously with the business cycle, thus indicating the current state of the economy.  Examples include nonagricultural employment, personal income and industrial production.

Collateral- Certain assets set aside and pledged to a lender for the duration of a loan.  If the borrower fails to meet obligations to pay principal or interest, the lender has claim to the assets.

Collaterized mortgage obligation (CMO)- A mortgage-backed corporate security.  Unlike pass-through obligations issued by FNMA and GNMA, its yield is not guaranteed and it does not have the federal government's backing.  These issues attempt to return interest and principal at a predetermined rate.

Commercial paper- An unsecured, short-term promissory note issued by a corporation for financing accounts receivable and inventories.  It is usually issued at a discount reflecting prevailing market interest rates.  Maturities range up to 270 days.

Consumer Price Index (CPI)- A measure of price changes in consumer goods and services used to identify periods of inflation or deflation.

Contraction- A period of general economic decline, one of the business cycle's four stages.

Cost basis- The price paid for an asset, including any commissions or fees, used to calculate capital gains or losses when the asset is sold.

Credit risk- The degree of probability that a bond's issuer will default in the payment of either principal or interest.

Current yield- The annual rate of return on a security, calculated by dividing the interest or dividends paid by the security's current market price.

Debenture- A debt obligation backed by the issuing corporation's general credit.

Defensive investment strategy- A method of portfolio allocation and management aimed at minimizing the risk of losing principal.  Defensive investors place a high percentage of their investable assets in bonds, cash equivalents and stocks that are less volatile than average.

Deferred annuity- An annuity contract that delays payment of income, installments or a lump sum until the investor elects to receive it.

Derivative- An investment vehicle, the value of which is based on another security's value.  Futures contracts, forward contracts and options are among the most common types of derivatives.  Institutional investors generally use derivatives to increase overall portfolio return or to hedge portfolio risk.

Discount- The difference between the lower price paid for a security and the security's face amount at issue.

Discretionary account- An account in which the customer has given the registered representative authority to enter transactions at the rep's discretion.

Diversification- A risk management technique that mixes a wide variety of investments within a portfolio, thus minimizing the impact of any one security on overall portfolio performance.

Dividend- A distribution of a corporation's earnings.  Dividends may be in the form of cash, stock or property. 

Dow Jones averages- The most widely quoted and oldest measures of change in stock prices.  Each of the four averages is based on the prices of a limited number of stocks in a particular category.

Dow Jones Composite Average (DJCA)- A market indicator composed of the 65 stocks that make up the Dow Jones Industrial, Transportation and Utilities Averages.

Dow Jones Industrial Average (DJIA)- The most widely used market indicator, composed of 30 large, actively traded issues of industrial stocks.

Dow Jones Transportation Average (DJTA)- A market indicator composed of 20 transportation stocks.

Dow Jones Utilities Average (DJUA)- A market indicator composed of 15 utilities stocks.

Earnings per share (EPS)- A corporation's net income available for common stock divided by its number of shares of common stock outstanding.

Efficient market theory- A theory based on the premise that the stock market processes information efficiently.  The theory postulates that, as new information becomes known, it is reflected immediately in the price of stock and therefore stock prices represent fair prices.

Federal Deposit Insurance Corporation (FDIC)- The government agency that provides deposit insurance for member banks and prevents bank and thrift failures.

Federal Reserve Board (FRB)- A seven-member group that directs the operations of the Federal Reserve System.  The President appoints board members, subject to Congressional approval.

Federal Reserve System- The central bank system of the United States.  Its primary responsibility is to regulate the flow of money and credit.  The system includes 12 regional banks, 24 branch banks and hundreds of national and state banks.

First in, first out (FIFO)- An accounting method used to assess a company's inventory, in which it is assumed that the first goods acquired are the first to be sold.  The same method is used by the IRS to determine cost basis for tax purposes.

Fixed annuity- An insurance contract in which the insurance company makes fixed dollar payments to the annuitant for the term of the contract, usually until the annuitant dies.  The insurance company guarantees both earnings and principal.

Fraud- The deliberate concealment, misrepresentation or omission of material information or the truth, so as to deceive or manipulate another party for unlawful or unfair gain. 

Front-end load- A mutual fund commission or sales fee that is charged at the time shares are purchased.  The load is added to the share's net asset value when calculating the public offering price.

Fundamental analysis- A method of evaluating securities by attempting to measure the intrinsic value of a particular stock.  Fundamental analysts study the overall economy, industry conditions and the financial condition and management of particular companies.

Fund manager- See portfolio manager.

Government security- A debt obligation of the U.S. government, backed by its full faith, credit and taxing power, and regarded as having no risk of default.  The government issues short-term Treasury bills, medium-term Treasury notes and long-term Treasury bonds.

Gross domestic product (GDP)- The total value of goods and services produced in a country during one year.  It includes consumption, government purchases, investments, and exports minus imports.

Growth fund- A diversified common stock fund that has capital appreciation as its primary goal.  It invests in companies that reinvest most of their earnings for expansion.

Growth industry- An industry that is growing faster than the economy as a whole as a result of technological changes, new products or changing consumer tastes.

Growth stock- A relatively speculative issue that is believed to offer significant potential for capital gains.  It often pays low dividends and sells at a high price-earnings ratio.

Income fund- A mutual fund that seeks to provide stable current income by investing in securities that pays interest or dividends.

Inside information- Material information that has not been disseminated to, or is not readily available to, the general public.

Intangible asset- A property owned that is not physical or tangible, such as a formula, a copyright or goodwill.

Interest- The charge for the privilege of borrowing money, usually expressed as an annual percentage rate.

Interest rate risk- The risk associated with investments relating to the sensitivity of price or value to fluctuation in the current level of interest rates; also, the risk that involves the competitive cost of money.  This term is generally associated with bond prices, but it applies to all investments.  In bonds, prices carry interest risk because if bond prices rise, outstanding bonds will not remain competitive unless their yields and prices adjust to reflect the current market.

Investment objective- Any goal a client hopes to achieve through investing.  Examples include current income, capital growth and preservation of capital.

Investor- The purchaser of an asset or security with the intent of profiting from the transaction.

Lagging indicator- A measurable economic factor that changes after the economy has started to follow a particular pattern or trend.  Lagging indicators are believed to confirm long-term trends.  Examples include average duration of unemployment, corporate profits and labor cost per unit of output.

Last in, first out (LIFO)- An accounting method used to value a corporation's inventory in which it is assumed that the last goods acquired are the first to be sold.  The method is used to determine cost basis for tax purposes; the IRS designates last in, first out as the order in which sales or withdrawals from an investment are made.

Leading indicator- A measurable economic factor that changes before the economy starts to follow a particular pattern or trend.  Leading indicators are believed to predict changes in the economy.  Examples include new orders for durable goods, slowdowns in deliveries by vendors and numbers of building permits issued.

Legislative risk- The potential for an investor to be adversely affected by changes in investment or tax laws.

Leverage- Using borrowed capital to increase investment return.

Liability- A legal obligation to pay a debt owed.  Current liabilities are debts payable within 12 months.  Long-term liabilities are debts payable over a period of more than 12 months.

Liquidity- The ease with which an asset can be converted to cash in the marketplace.  A large number of buyers and sellers and a high volume of trading activity provide high liquidity.

Liquidity risk- The potential that in investor might not be able to sell an investment when desired.  Syn. Marketability risk.

Long- The term used to describe the owning of a security, contract or commodity.  For example, a common stock owner is said to have a long position in the stock.

Long-term gain- The profit earned on the sale of a capital asset that has been owned for more than 12 months.

Long-term loss- The loss realized on the sale of a capital asset that has been owned for more than 12 months.

Market risk- The potential for an investor to experience losses owing to day-today fluctuations in the prices at which securities can be bought or sold.

Market value- The price at which investors buy or sell a share of common stock or a bond at a given time.  Market value is determined by buyers' and sellers' interaction.

Material information- Any fact that could affect an investor's decision to trade a security.

Modern portfolio theory (MPT)- A method of choosing investments that focuses on the importance of the relationships among all of the investments in a portfolio rather than the individual merits of each investment.  The method allows investors to quantify and control the amount of risk they accept and return they achieve.

Money-market fund- A mutual fund that invests in short-term debt instruments.  The fund's objective is to earn interest while maintaining a stable net asset value of $1 per share.  Generally sold with no load, the fund may also offer draft-writing privileges and low opening investments.

Mutual fund- An investment company that continuously offers new equity shares in an actively managed portfolio of securities.  All shareholders participate in the fund's gains or losses.  The shares are redeemable on any business day at the net asset value.  Each mutual fund's portfolio is invested to match the objective stated in the prospectus.

Nasdaq- See National Association of Securities Dealers Automated Quotation System.

National Association of Securities Dealers, Inc. (NASD)- The self-regulatory organization for the over-the-counter market.  The NASD was organized under the provisions of the 1938 Maloney Act.

National Association of Securities Dealers Automated Quotation System (Nasdaq)- The nationwide electronic quotation system for up-to-the-minute bid and asked quotations on approximately 5,500 over-the-counter stocks.

Net asset value (NAV)- A mutual fund share's value, calculated once a day, based on the closing market price for each security in the fund's portfolio.  It is computed by deducting the fund's liabilities from the portfolio's total assets and dividing this amount by the number of shares outstanding.

Net worth- The amount by which assets exceed liabilities. 

New York Stock Exchange (NYSE)- The largest stock exchange in the United States.  It is a corporation, operated by a board of directors, respondible for setting policy, supervising Exchange and member activities, listing securities, overseeing the transfer of members' seats on the Exchange and judging whether an applicant is qualified to be a specialist.

No-load fund- A mutual fund whose shares are sold without a commission or sales charge.  The investment company distributes the shares directly.  See also mutual fund; net asset value; sales load.

Numbered account- An account titled with something other than the customer's name.  The title might be a number, symbol or special title.  The customer must sign a form designating account ownership.

Odd lot- An amount of a security that is less than the normal unit of trading for that security.  Generally, an odd lot is fewer than 100 shares of stock or five bonds.

Odd-lot theory- A technical analysis theory based on the assumption that the small investor is always wrong.  Therefore, if odd lot sales are up- that is, small investors are selling stock- it is probably a good time to buy.

Option- A security that represents the right to buy or sell a specified amount of an underlying security- a stock, bond, futures contract, etc.- at a specified price within a specified time.  The purchaser acquires a right, and the seller assumes an obligation.

PE- See price-earnings ratio.

Portfolio manager- The entity responsible for investing a mutual fund's assets, implementing its investment strategy and managing day-to-day portfolio trading.
Syn. Fund manager.

Premium- The difference between the higher price paid for a security and the security's face amount at issue.  See also discount.

Price-earnings ratio (PE)- A tool for comparing the prices of different common stocks by assessing how much the market is willing to pay for a share of each corporation's earnings.  It is calculated by dividing the current market price of a stock by the earnings per share.

Price risk- The potential that the value of a currency or commodity will change between the signing of a delivery contract and the time delivery is made.  The futures markets serve to manage price risk.

Prime rate- The interest rate that commercial banks charge their prime or most creditworthy customers, generally large corporations.

Proxy- A limited power of attorney from a stockholder authorizing another person to vote on stockholder issues according to the first stockholder's instructions.  To vote on corporate matters, a stockholder must either attend the annual meeting or vote by proxy.

Prudent man rule- A legal maxim that restricts discretion in a fiduciary account to only those investments that a reasonable and prudent person might make.

Purchasing power risk- The potential that, due to inflation, a certain amount of money will not purchase as much in the future as it does today. 

Put- (1) An option contract giving the owner the right to sell a certain amount of an underlying security at a specified price within a specified time.  (2) The act of exercising a put option.  See also call.

Random walk theory- A market analysis theory that the past movement or direction of the price of a stock or market cannot be used to predict its future movement or direction.

Real estate investment trust (REIT)- A corporation or trust that uses the pooled capital of many investors to invest in direct ownership of either income property or mortgage loans.  These investments offer tax benefits in addition to interest and capital gains distributions.

Sales load- The amount added to a mutual fund share's net asset value to arrive at the offering price.

Sector fund- A mutual fund whose investment objective is to capitalize on the return potential provided by investing primarily in a particular industry or sector of the economy.

Secured bond- A debt security backed by identifiable assets set aside as collateral.  In the event that the issuer defaults on payment, the bondholders may lay claim to the collateral.

Securities and Exchange Commission (SEC)- Commission created by Congress to regulate the securities markets and protect investors.

Securities Investor Protection Corporation (SIPC)- A nonprofit membership corporation created by an act of Congress to protect clients of brokerage firms that are forced into bankruptcy.

Security- Other than an insurance policy or a fixed annuity, any piece of securitized  paper that can be traded for value.  Under the act of 1934, this includes any note, stock, bond, investment contract, debenture, certificate of interest in a profit-sharing or partnership agreement, certificate of deposit, collateral trust certificate, preorganization certificate, option on a security, or other instrument of investment commonly known as a security.

Short sale- The sale of a security that the seller does not own, or any sale consummated by the delivery of a security borrowed by or for the account of the seller.

Short-term capital gain- The profit realized on the sale of an asset that has been owned for twelve months or less.

Short-term capital loss- The loss incurred on the sale of a capital asset that has been owned for twelve months or less.

Speculation- Trading a commodity or security with a higher than average risk in return for a higher than average profit potential.  The trade is effected solely for the purpose of profiting from it.

Stagflation- A period of high unemployment in the economy accompanied by a general rise in prices.

Suitability- A determination made by a registered representative as to whether a particular security matches a customer's objectives and financial capability.  The rep must have enough information about the customer to make this judgement.

Systemic risk- The potential for a security to decrease in value owing to its inherent tendency to move together with all securities of the same type.  Neither diversification nor any other investment strategy can eliminate this risk.  See also market risk.

Technical analysis- A method of evaluating securities by analyzing statistics generated by market activity, such as past prices and volume.  Technical analysts do not attempt to measure a security's intrinsic value.

Treasury bill- A marketable U.S. government debt security with a maturity of less than one year.  Treasury bills are issued through a competitive bidding process at a discount from par; they have no fixed interest rate.

Treasury bond- A marketable, fixed-interest U.S. government debt security with a maturity of more than 10 years.

Treasury note- A marketable, fixed-interest U.S. government debt security with a maturity of between 1 and 10 years.

12b-1 asset-based fees- A mutual fund charges a fee for the promotion or sale of or another activity connected with the distribution of its shares.  The fee must be reasonable (typically ½ percent to 1 percent of net assets managed ).

Variable annuity- An insurance contract in which at the end of the accumulation stage, the insurance company guarantees a minimum total payment to the annuitant.  The performance of a separate account, generally invested in equity securities, determines the amount of this total payment.

Wash sale- Selling a security at a loss for a tax purposes and, within 30 days before or after, purchasing the same or a substantially identical security.  The IRS disallows the claimed loss.

Working capital- A measure of a corporation's liquidity; that is, its ability to transfer assets into cash to meet current short-term obligations.  It is calculated by subtracting total current liabilities from total current assets.

Yield- The rate of return on an investment, usually expressed as an annual percentage rate.  See also current yield; dividend yield; nominal yield.

Zero-coupon bond- A corporate or municipal debt security traded at a deep discount from face value.  The bond pays no interest; rather, it may be redeemed at maturity for its full face value.  It may be issued at a discount, or it may be stripped of its coupons and repackaged.

This glossary is adapted from Dearborn Financial Institute, Inc.