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Trading & Investing Basics
Financial Education Center
Trading and Investing Basics
A - C
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Date of Record
The date on which a shareholder must officially own shares in order to be entitled to a dividend.
The first day that interest starts to accrue on newly issued bonds.
An order that, if not executed on the day it is entered, expires at the close of that day’s trading.
The buying and selling of the same security on the same day.
See Delivery Balance Order.
A firm that functions as a market maker and that, as such, positions the security to buy and sell versus the public and/or brokerage community.
A debt that is issued by a corporation and that is backed or secured by the good name of the issuing company.
Debt to Equity Ratio
Long–term debt divided by shareholders’ equity, showing relationship between long–term funds provided by creditors and funds provided by shareholders; high ratio may indicate high risk, low ratio may indicate low risk.
The amount of loan in a margin account.
Deed of Trust
The trust agreement drawn up when a corporation plans to issue bonds or other debt securities. It includes such items as assets, interest payments, maturity dates, etc. Also, see indenture.
An issuer’s failure to pay accreted interest when a zero coupon issue matures. Treasury securities are considered default–free.
An annuity plan in which payments are to be made at some set date in the future.
Delivery Balance Order (DBO)
An order issued by the clearing corporation to any firm that, after the day’s trades are netted, has delivery or sale position remaining. The order defines what is to be delivered to whom.
Delivery Versus Payment (DVP)
Settlement of security transactions used by institutional customers. Certificates are delivered to a bank designated by the customer whereupon the bank makes payment on delivery.
A central location for keeping securities on deposit.
Depository Trust Company (DTC)
A corporation, owned by banks and brokerage firms, that holds securities, arranges for their receipt and delivery, and arranges for the payments in settlement.
Zero coupon bonds created by stripping coupon and principal payments from a U.S. Treasury Security.
Designated Order Turnaround (DOT)
An order routing and execution reporting system of the NYSE.
A spread of the same class of options but with different exercise prices and different expiration dates.
The fraction of a point added to the purchase price or subtracted from the sale price of odd lot orders. The charge represents compensation to the dealer/specialist for executing the odd lot order.
A corporate board member elected by stockholders.
When the market price of a newly issued security is lower than the issue price.
A client account in which the account executive is permitted to buy and sell securities for the client without the client’s prior permission. The opening of such an account requires the special permission of the firm’s management.
Date on which the payout of realized capital gains on securities in the fund portfolio occurred.
District Business Conduct Committee (DBCC)
Part of the NASD that investigates, reviews, and renders a verdict on customer complaints or other industry improprieties.
A portion of a corporation’s assets paid to stockholders on a per–share basis. Preferred stock is supposed to pay a regular and prescribed dividend amount. Common stock pays varying amounts when declared.
DJIA (Dow Jones Industrial Average)
The Dow Jones Industrial Average index – (DJIA) is a price–weighted average of 30 actively traded blue chip stocks, primarily industrials but including American Express Co. and American Telephone and Telegraph Co. Prepared and published by Dow Jones & co., it is the oldest and most widely quoted of all the market indicators. The components, which change from time to time, represent between 15% and 20% of the market value of NYSE stocks. The DJIA is calculated by adding the closing prices of the component stocks and using a divisor that is adjusted for splits and stock dividends equal to 10% or more of the market value of an issue as well as substitutions and mergers. The average is quoted in points, not in dollars.
Dollar Cost Averaging
An investment method used in mutual funds by which clients invest the same dollar amount periodically. Because mutual funds permit the buying of fractional shares, all of the investor’s payment is used in the acquisition of fund shares.
Foreign securities that pay interest and principal in U.S. dollars.
Corporations pay taxes on revenue before paying dividends. The dividends, in the hands of the stockholder, are taxed again as ordinary income. Hence "double" taxation.
A trader who operates on the floor of an exchange and who "trades" positions against the public market. See also Upstairs Trader.
Down off Bid
Market maker or ECN no longer bidding (buying) for stock at market bid.
Down to Ask
Market maker or ECN lowers offering to sell stock at market offer.
A listed equity trade whose price is lower than that of the last different sale.
DNR (Do Not Reduce)
An instruction that informs the order handling personnel not to reduce the price of the order by the amount of dividends, if and when paid by the corporation. DNR is placed on buy limit, sell stop and sell stop limit GTC orders.
Due Diligence Meeting
The last meeting between corporate officials and underwriters prior to the issuance of the security. At the meeting, the content of the prospectus is discussed, and relevant parts of the underwriting are put into place.
Earnings Per Share (EPS)
EPS represents the portion of a company’s profit allocated to each outstanding share of common stock. Net income (reported or estimated) for a period of time is divided by the total number of shares outstanding during that period.
A corporate financial statement that reports and nets out all earning and expenses to a profit or loss. It is therefore sometimes referred to as the profit and loss (P&L) statement.
EE Savings Bond
A zero coupon bond issued directly by the Treasury in par values ranging from $5 to $10,000. Purchased at half of par, EE savings bonds mature in 12 years and are eligible for extended maturity.
The first date after the cooling–off period of a new issue that the security can be offered.
Electronic Data Gathering, Analysis and Retrieval (EDGAR)
An electronic system implemented by the SEC that is used by companies to transmit all documents required to be filed with the SEC in relation to corporate offerings and ongoing disclosure obligations. EDGAR became fully operational mid–1995.
Ending Net Asset Value
The market value of a fund share on a predetermined end date.
Signature on the back of a stock certificate of the person whose name appears on the face of the same. Makes the certificate negotiable.
Equipment Trust Bonds
Debt instruments that are issued by some corporations that are backed by "rolling stock" (such as airplanes or locomotives and freight cars).
The portion in an account that reflects the customer’s ownership interest.
A long–term loan issued in a currency other than that of the country or market in which it is issued. Interest is paid without the deduction of tax.
Certificates of deposit held in U.S. dollars by European, British, and Eastern depository institutions and available to U.S. investors.
Equity in a margin account above that which is required by Regulation T.
The first day on which the purchaser of the security is not entitled to the dividend. It is also the day that the price of the security drops to the next highest fraction of the dividend amount.
Execution Broker ($2.00 Broker)
Broker who owns memberships on various exchanges and executes trades on the exchanges for other brokers — execution only services on listed exchanges. The name of the clearing broker is "given up" when each trade is executed to industry clearance facilities and the trade is reported back to the introducing firm for the customer and street side processing. The charge for this service used to be $2.00 — thus the name "$2.00 Broker."
A person appointed by the last will of the deceased to carry out the provisions of the will.
The price per share the holder or owner of a call option would pay to buy the stock from the writer or the price the holder would receive should he sell the stock to the writer when exercising an option. See also Strike Price.
The day on which an option contract becomes void.
The month in which an option or futures contract ceases to exist (expires).
The date after which stocks are traded without subscription rights.
A provision whereby a bond continues to pay interest beyond its stated maturity.
The date after which stocks are traded without buyers being entitled to warrants which are to be distributed.
The debt (or loan) amount that appears on the face of the certificate and that the issuer must pay at maturity.
A decimal between 0 and 1 that represents the amount of mortgages remaining in a pool of mortgage–backed securities.
A tabular presentation that shows relevant information about factors, value of remaining mortgages, and interest rates on mortgage–backed securities.
A table used to compute the outstanding principal on Pass–Throughs — Ginnie Maes, Freddie Macs and Fannie Maes.
Family of Funds
Group of mutual funds managed by the same investment management company. Each fund typically has a different objective; one may be a growth–oriented stock fund, whereas another may be a bond fund or money market fund. Shareholders in one of the funds can usually switch their money into any of the family’s other funds, sometimes at no charge. Family of funds with no sales charges are called no load families. Those with sales charges are called load families.
Nickname for the Federal National Mortgage Association and the mortgage–backed securities it issues.
Nickname for the Federal Agricultural Corporation and the securities it issues.
Federal Farm Credit System
Established by Congress to provide credit to farms and farm–related enterprises. The FFCS is also an issuer of agency securities.
Federal Reserve Board
The government agency that regulates credit.
Federal Reserve System
The nation’s central monetary authority and the Treasury Department’s agent for selling new issues of Treasury bills, notes, and bonds.
Abbreviation for the Federal Housing Administration. The FHA is also an issuer of agency securities.
An estimate of the average life of a pool of mortgage–backed securities in relation to experience tables developed by the Federal Housing Administration.
A person legally appointed in the P&S department.
Fill or Kill (FOK) – An order that requires execution of the entire quantity immediately. If not, the order is canceled.
The dividend paid by a company at the end of its financial year, recommended by the directors but authorized by the shareholders at the company’s annual general meeting.
An agency created to assist the S&L industry by retailing securities to the public. Also the nickname for its securities.
The authority who is responsible for issuing new securities of federal agencies.
The twelve–month period during which a business maintains its financial records. Since this cycle does not have to coincide with the calendar year, it is known as the fiscal year.
Insurance company guarantees dollar amount of payments to the annuitant for the period covered under the contract.
A bond trading without accrued interest is said to be trading "flat."
An exchange member who, as such, is permitted to conduct business on the exchange floor.
The occasion on which a company’s shares are offered on the market for the first time.
A specially identified series of Treasury bonds accepted at full par in payment of estate taxes.
See Fill Or Kill.
Trading directly between institutional investors on a system named Instinet.
Nickname for the Federal Home Mortgage Association and the mortgage–backed securities it issues.
Loanable securities; that is, securities that can be used for loan or hypothecation. These securities are stock in a margin account that represents the debit balance.
An account in which all purchases must be paid for in cash in advance for a period of 90 days because of failure to make timely or proper payment in the past.
Refers to the Financial Times Industrial Ordinary Share Index, also known as the "30 Share Index." This started in 1935 at 100, and is based on the prices of 30 leading industrial and commercial shares. They are chosen to be representative of British industry, rather than of the Exchange. Government stocks, banks and insurance companies are not included. The Index is calculated hourly during the day with a "closing index" at 4:30 p.m.
FT–SE 100 Share Index
Popularly known as "Footsie"; an index of 100 leading UK shares listed on the London Stock Exchange providing a minute–by–minute picture of how share prices are moving. It started on January 3, 1984 with the base number of 1,000. Also forms the basis of a contract in the London Traded Options Market (LTOM) and the London International Financial Futures Exchange (LIFFE).
FT–SE Eurotrack 200 Index
Denominated in ECUs, this comprises the stocks of the FT–SE 100 Index plus the constituents of the FT–SE Eurotrack 100 Index. The UK component is weighted to ensure that the 200 Index closely tracks the major benchmark indices. It started on Monday, February 25, 1991 with a base value of 1,000 as at close of business on Friday, October 26, 1990.
Full Trading Authorization
Owner of the account gives power to another person to buy, sell and make withdrawals from the account.
All customer accounts of the Introducing Broker are introduced to another Broker/Dealer who clears the customers’ trades. This second broker is called a Clearing Broker. The names and addresses of the customer accounts are "fully disclosed" to the Clearing Broker whose name is also disclosed to the customers on the statements and confirmations. The Clearing Broker does all the bookkeeping involved in settling the trades and keeping the customer accounts in proper form.
Applied to new issues, when the total amount payable in relation to the new shares has been paid to the company.
Ability to shift a mutual fund investment from one fund to another sponsored by the same mutual fund family.
An investment management company that offers several types of mutual funds.
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