Investing Glossaries

Annuity: Even stream of payments over a given period of time.

Annuity plans: Plans provided by insurance companies that offer a predetermined amount of retirement income to individuals.

Appreciate: Increase in the value of an asset.

Arbitrage activity: In the securities industry, the purchasing of undervalued shares and the resale of these shares for a higher profit.

Ask: Price at which a seller is willing to sell.

Basis: Difference between the price movement of a futures contract and the price movement of the underlying security.

Bearer bonds: Bonds that require the owner to clip coupons attached to the bonds and send them to the issuer to receive coupon payments.

Beta: Sensitivity of an asset's returns to market returns; measured as the covariance between asset returns and market returns divided by the variance of market returns.

Bid: Price a purchaser is willing to pay for a specific security.

Bond: Debt obligation with long-term maturities issued by governments or corporations.

Bond price elasticity: Sensitivity of bond prices to changes in the required rate of return.

Bridge loan: Funds provided as temporary financing until other sources of long-term funds can be obtained; commonly provided by securities firms to firms experiencing leveraged buyouts.

Broker: Person or company that executes securities transactions between two parties.

Call option: Contract that grants the owner the right to purchase a specified financial instrument for a specified price within a specified period of time.

Call premium: Difference between a bond's call price and its par value.

Capital appreciation funds: Mutual funds made up of stocks of companies that have potential for very high growth.

Certificate of deposit (CD): Deposit offered by depository institutions that specifies maturity, deposit amount, and interest rate.

Closed-end investment funds: Mutual funds that do not repurchase the shares they sell.

Commercial paper: Short-term securities (usually unsecured) issued by well-known creditworthy firms.

Commission brokers: Brokers who execute orders for their customers.

Common stock: Certificate representing partial ownership of a corporation.

Convertibility clause: Provision that allows investors to convert a bond into a specified number of common stock shares.

Convertible bonds: Bonds that can be converted into a specified number of the firm's common stock.

Corporate bonds: Bonds issued by corporations in need of long-term funds.

Covered call: Sale of a call option to partially cover against the possible decline in the price of a stock that is being held.

Currency futures contract: Standardized contract that specifies an amount of a particular currency to be exchanged on a specified date and at a specified exchange rate.

Currency put option: Contract that grants the owner the right to sell a specified currency for a specified price, within a specified period of time.

Currency swap: An agreement that allows the periodic swap of one currency for another at specified exchange rates; it essentially represents a series of forward contracts.

Depreciate: Decrease in the value of an asset.

Discount bonds: Bonds that sell below their par value.

Discount rate: Interest rate charged on loans provided by the Federal Reserve to depository institutions.

Duration: Measurement of the life of a bond on a present value basis.

Effective yield: Yield on foreign money market securities adjusted for the exchange rate.

Equity securities: Securities such as common stock and preferred stock that represent ownership in a business.

Exercise price (or strike price): Price at which the investment that underlies a contract can be purchased or sold.

Federal funds rate: Interest rate charged on loans between depository institutions.

Federal Reserve: Central bank of the United States.

Federal Reserve district bank: A regional government bank that facilitates operations within the banking system by clearing checks, replacing old currency, providing loans to banks, and conducting research; there are twelve Federal Reserve district banks.

Financial market: Market in which financial assets (or securities) such as stocks and bonds are traded.

Floor brokers: Individuals who facilitate the trading of stocks on the New York and American Stock Exchanges by executing transactions for their clients.

Flotation costs: Costs of placing securities.

Full-service brokerage firms: Brokerage firms that provide complete information and advice about securities, in addition to executing transactions.

Futures contract: Standardized contract allowing one to purchase or sell a specified amount of a specified instrument (such as a security or currency) for a specified price and at a specified future point in time.

Growth fund: Mutual funds containing stocks of firms that are expected to grow at a higher than average rate. Growth funds are typically right for investors who are willing to accept a moderate degree of risk.

Income fund: Mutual funds composed of bonds that offer periodic coupon payments.

Initial margin: A margin deposit established by a customer with a brokerage firm before a transaction can be executed.

Initial public offering (IPO): A first-time offering of shares by a specific firm to the public.

International mutual fund: Portfolio of international stocks created and managed by a financial institution; individuals can invest in international stocks by purchasing shares of an international mutual fund.

In the money: Describes a call option whose premium is above the exercise price or a put option whose premium is below the exercise price.

Junk bond: Corporate bonds that are perceived to have a high degree of risk.

Limit order: Requests by customers to purchase or sell securities at a specified price or better.

Liquidity: Ability to sell assets easily without loss of value.

Load fund: Mutual funds that have a sales charge imposed by brokerage firms that sell the funds.

Maintenance margin: A margin requirement that reduces the risk that participants will later default on their obligations.

Margin call: Call from a broker to participants in futures contracts (or other investments) informing them that they must increase their margin.

Margin requirements: The proportion of invested funds that can be borrowed versus paid in cash; set by the Federal Reserve.

Market orders: Requests by customers to purchase or sell securities at the market price existing when the order reaches the exchange floor.

Money market account: Deposit account that pays interest and may allow checking privileges.

Municipal bonds: Debt securities issued by state and local governments, which can usually be classified as either general obligation bonds or revenue bonds.

Mutual fund: An investment company that sells shares representing an interest in a portfolio of securities.

No-load fund: Mutual funds that do not have a sales charge.

Option premium: Price paid for an option contract.

Out of the money: Describes a call option whose premium is below the exercise price or a put option whose premium is above the exercise price.

Preferred stock: Certificate representing partial ownership of a corporation, without significant voting rights. Preferred stocks may provide dividends but normally do not.

Prime rate: Interest rate charged on loans by banks to their most creditworthy customers.

Prospectus: A pamphlet that discloses relevant financial data on the firm and provisions applicable to the security.

Put option: Contract that grants the owner the right to sell a specified financial instrument for a specified price within a specified period of time.

Secondary stock offering: A new stock offering by a firm that already has stock outstanding.

Securities and Exchange Commission (SEC): Agency that regulates the issuance of securities disclosure rules for issuers, the exchanges, and participating brokerage firms.

Short selling: The sale of securities that are borrowed, with the intent of buying those securities to repay what was borrowed.

Standard & Poor 500 Index: Index of stocks of 500 large firms.

Stock index futures: Financial futures contracts on stock indexes.

Stop-loss order: Order of a sale of a specific security when the price reaches a specified minimum.

Strike price (exercise price): Price at which an option can be exercised.

Treasury bills: Securities issued by the U.S. Treasury.

Writer: The seller of an option contract.

Zero-coupon bonds: Bonds that have no coupon payments.