Glossary of Terms for the Individual Investor

Agent – Controlled by a principal, an agent has either express or implied authorization to act on the principal’s behalf when involved in transactions with a third party.

Annual Report – Report that public companies are required to file with the Securities and Exchange Commission detailing the preceding year’s financial results and plans for the upcoming year. It contains financial information concerning a company’s assets, liabilities, earnings, profits, and other year-end statistics.

Annuity – An insurance contract sold by a company that guarantees a fixed rate or offers variable rates of return to provide the buyer a stream of income at some point in the future, usually retirement.

Back-end load – Also known as a contingent deferred sales charge, it is a charge made upon withdrawal of funds from an investment. Most commonly used to discourage investors from cashing out of their mutual funds and annuities.

Bear Market – An extended period of time where prices of investments fall.

Bond Rating – A rating granted by private rating services to provide an investor with information on the possibility of default by the issuer of the bond.

Broker – An individual or firm who acts as an intermediary between a buyer and seller, usually charging a commission.

Bull Market – An extended period of time where prices of investments rise.

Buying on Margin – Using a portion of existing securities in a person’s account to purchase more securities on credit. The amounts are closely regulated by the Federal Reserve Board. If the amount used as equity decreases in value below the subscribed level as dictated by the Federal Reserve Board, a “margin call” will be issued. At that time, the investor must provide more money or securities to the account to keep the equity in the account at or above the amount dictated.

Certified Financial Planner (CFP) – Designation granted by the College of Financial Planning in Denver, Colorado, to a person who has passed all the required examinations. Examinations consist of questions involving insurance, investments, estate planning, tax affairs and the planner’s ability to coordinate a client’s income and expenses. For questions on whether an individual has the right to use such designation, call 1-800-CFP-MARK (1-800-237-6275).

Certified Public Accountant (CPA) – An accountant who has passed the necessary exams and fulfilled age and experience requirements as dictated by the state in which they work.

Chartered Financial Consultant (ChFC) – Awarded by the American College of Bryn Mawr, Pennsylvania, it is a designation that denotes an individual has passed a four-year program that consists of examinations covering investments, insurance, taxation, economics, finance and other related areas.

Commission – A transaction fee charged by a broker to buy and sell securities on the market in which the security trades. Usually calculated on the number of shares and their value.

Common Stock – Each share of common stock represents a unit of personal ownership of a corporation. Rights to vote on issues concerning the company and Board of Directors are usually attached to the shares of common stock. A corporation is not required to pay dividends on common stock, which are the stockholders’ proportionate amount of earnings.

Dividend – The proportionate amount of company earnings issued to the holder of the corresponding shares of stock. Decided upon by the Board of Directors, the amounts are typically paid quarterly.

Dollar Cost Averaging – A systematic plan of investing that when used may reduce the overall cost per share/unit of investment. By incrementally investing the same dollar amount over a period of time, an investor automatically purchases more shares/units when the price is lower and less when the price is higher.

Due Diligence – An investigation of a company that is preparing to go public.

Federal Trade Commission (FTC) – The FTC enforces a variety of federal antitrust and consumer protection laws. The Commission seeks to ensure that the nation’s markets function competitively, and are vigorous, efficient, and free of undue restrictions. The Commission also works to enhance the smooth operation of the marketplace by eliminating acts or practices that are unfair or deceptive. In general, its efforts are directed toward stopping actions that threaten consumers’ opportunities to exercise informed choices.

Financial Industry Regulatory Authority Dealers (FINRA) – A non-profit organization established by the Securities and Exchange Commission and the Investment Banker’s Conference. Nearly every broker dealer firm and investment bank dealing in the over-the-counter (OTC) market is registered with the FINRA.

Fraud – An intentional misrepresentation, concealment or omission of material fact done with the purpose of deceiving another which causes detriment to that person.

Front End Load – A sales charge applied to the initial or incoming dollars of an investment. Typically used in mutual funds and annuities.

Individual Retirement Account (IRA) – A personal, tax-deferred account set up for the purpose of retirement. Governed by several qualifying factors, the contributions may be tax deductible. Limits set by Federal Tax Code establish when and what, if any, penalties and taxable implications may prevail.

Junk Bond – Also known as high-yield bonds. Typically, the bonds of companies with less than investment grade credit strength or without proven histories of sales and growth.

Margin – The amount of equity deposited with a firm against which the investor borrows. The credit limits are established by the Federal Reserve Board and the maintenance requirements are set forth by the Financial Industry Regulatory Authority Dealers (FINRA).

Mutual Fund – A large pool of investors’ dollars that are combined and invested by professional money managers to provide diversification of risk.

Nasdaq – The Nasdaq Stock Market is a major national and international stock market that uses computers and telecommunications for the trading and surveillance of thousands of securities. It is built on a unique system of competing firms that list specific prices for the sale or purchase of securities. It uses a flexible computer screen trading system that enables people to trade by computer from wherever they are.

North American Securities Administrator’s Association (NASAA) – The oldest international organization devoted to investor protection, NASAA is a voluntary association of 65 state, provincial, and territorial securities administrators in the 50 states, the District of Columbia, Puerto Rico, Canada, and Mexico. Any individual or organization who wishes to protect themselves from securities fraud will find the information on this site useful.

Over-the-counter (OTC) Securities – Securities that are not listed and traded on an organized exchange.

Preferred stock – Each share of preferred stock represents a unit of personal ownership of a corporation but is bought under different criteria than common stock in that corporations are required to pay dividends to owners of preferred stock before any payments are made to owners of common stock. If a company is in arrears in payment of dividends, preferred stock holders are paid first by law.

Price/earnings Ratio – The price of a share of a stock divided by earnings per share, usually calculated using the latest year’s earnings. The p/e ratio is also called the multiple.

Prospectus – A formal written offer to sell securities that sets forth the plan for a proposed business enterprise, or the facts concerning an existing one that an investor needs to make an informed decision.

Proxy – Written power of attorney given by a shareholder of a corporation, authorizing someone to vote on his or her behalf at corporate meetings.

Securities and Exchange Commission (SEC) – The federal agency, created by the Securities Exchange Act of 1934, charged with upholding and enforcing the Securities Act of 1933. The statutes which the SEC enforces are designed to promote full disclosure to the investor and create an atmosphere of fair trade.

Security – Referring to investments, a unit of ownership in a corporation (stock), a note of indebtedness (bond) or a right to purchase ownership in a corporation or commodity as outlined by a contract, also defined as rights, warrants, options, futures. A security is defined as “an investment contract, transaction or scheme whereby a person (1) invests his/her money (2) in a common enterprise and (3) is led to expect profits (4) solely from the efforts of the promoter or a third party.”

Settlement – The term used once the purchaser has received the agreed upon securities and the seller has received the agreed upon dollar amount. Settlement takes place the third day after the transaction not including the day of the transaction.

Stock Option – A contract giving its holder the right to purchase or sell the underlying security before a certain point in time for a specified amount of money as outlined by the contract.

Ticker Symbol – A series of letters that are used to identify a stock in a corporation whose shares are traded on an exchange. Also known as the “ticker.”

Trade – The purchase or sale of a security once the purchaser and seller have agreed upon the terms.

Warrant – A security that is typically issued with preferred stock or bond, that allows the holder to purchase additional stocks in the future.

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