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American Stock Exchange
(Amex)
An open auction market similar to the NYSE where buyers and sellers compete in
a centralized marketplace. The Amex typically lists small to medium cap stocks
of younger or smaller companies. Until 1921 it was known as the New York
Cumulative Exchange.
Arbitration
A low-cost alternative to settling disputes over securities transactions in the
court system. The NYSE administers this service.
Assets
Property and items of value owned by a person or business. The primary
classifications of assets are:
Base Point
One one-hundredth of one percentage point. Such a small measurement is
especially helpful in expressing the often small but significant variations in
bond yields. For example, the difference between a 12.83% yield and a 12.88%
yield is 5 basis points.
Bear Market
A term to describe a market of declining prices.
Blue Chip
A company known nationally for the quality of its products or services, it’s
reliability, and its ability to operate profitably in good and bad economic
times.
Bond
Bonds are promissory notes or IOUs issued by a corporation or government to its
lenders. They are usually issued in multiples of $1,000 or $5,000, although
$100 and $500 denominations are available.
A bond is evidence of a debt on which the issuing company usually promises to pay the bondholder a specified amount of interest at intervals over a specified length of time, and to repay the original loan on the expiration date. A bond represents debt; therefore its holder is a creditor of the corporation and not a part owner, as the stockholder is.
Broker
An agent who acts as an intermediary between buyer and seller in trading securities,
commodities, or other property. He/She charges a commission for this service
Capital Gain
Profit earned on the sale of securities, either through dividends or by selling
the securities at a higher price than they originally cost.
Capital Stock
All shares representing ownership of a business, including common and
preferred.
Commodities
Articles of commerce or products that can be used for commerce. In a narrow
sense, products traded on an authorized commodity exchange. Types of
commodities include agricultural products, metals, petroleum, foreign
currencies, financial instruments and indexes to name a few.
Common Stock
Securities that represent an ownership interest in a corporation. If the
company has also issued preferred stock, both common and preferred have
ownership rights. Common stockholders assume the greater risk, but generally
exercise the greater control and may gain the greater award in the form of
dividends and capital appreciation. The terms common stock and capital stock
are often used interchangeably when the company has no preferred stock
CUSIP
CUSIP is the trademark for a system that uniquely identifies securities trading
in the United States. It was developed in the late 1960's by The American
Bankers Association as a way to standardize the identification and tracking of
securities. The CUSIP number consists of nine digits. The first six identify
the issuer and 7-9, identify the issue. Please note that CUSIP numbers are a
trademark of the American Bankers Association and, as such, cannot be posted on
our website.
Diversification
Spreading investments among different types of securities and various companies
in different fields.
Dividend
The payment designated by the Board of Directors to be distributed pro rata
among the shares out-standing. For preferred shares, the dividend is usually a
fixed amount. For common shares, the dividend varies with the fortunes of the
company and the amount of cash on hand, and may be omitted if business is poor
or if the directors determine to withhold earnings to invest in plants and
equipment. Sometimes a company will pay a dividend out of past earnings even if
it is not currently operating at a profit.
Dow Jones Industrial
Average (DJIA)
The Dow Jones Industrial Average (DJIA) is an index used to measure the
performance of the U.S. financial markets. Introduced on May 26, 1896 by
Charles H. Dow, it is the oldest stock price measure in continuous use. Over
the past century "the Dow" has become the most widely recognized
stock market indication in the U.S. and probably in the entire world. The 30
stocks included in today's Dow are listed on the New York Stock Exchange,
except for Microsoft and Intel, and are all large blue-chip companies that
reflect the health of the U.S. economy. All but a handful of these have major
business operations throughout the rest of the world, thus providing some
insight into the economic well being of the global economy.
The Dow has been repeatedly updated over the decades to reflect changes in Corporate America. From the original 12 stocks used in 1896 it was increased to 20 stocks in 1916 and then 30 stocks in 1928. The most recent modification occurred on November 1, 1999 when Home Depot, Intel, Microsoft, SBC replaced Chevron, Goodyear, Sears, Union Carbide, respectively. Intel and Microsoft, which both trade on the NASDAQ stock market, are the first Dow 30 components that are not listed on the New York Stock Exchange since the Dow Jones Industrial Average was created in 1896.
Though it is only the unweighted average of 30 stock prices, over the long run the DJIA's tracking of market movements has closely paralleled more broadly based capitalization-weighted indexes like the New York Stock Exchange Composite, the Standard & Poor's 500 and the Wilshire 5000. In 1896 the Dow was computed as the sum of the prices of 12 stocks divided by the number of stocks. Since then the divisor has been adjusted to compensate for stock splits and other distributions that would create distortions in the average that did not reflect a change in value of the stocks. The value of the adjusted divisor as of November 1, 1999 was 0.20435952. Its current value is printed in the Wall Street Journal every day.
The following are the companies that make up the Dow:
Company Name(Ticker Symbol)
ALCOA Inc.(AA)
American Express Co.(AXP)
AT&T Corp.(T)
Boeing Co. (BA)
Caterpillar Inc.(CAT)
Citigroup Inc.(C)
Coca-Cola Co.(KO)
Dupont Co.(DD)
Eastman Kodak Co.(EK)
Exxon Mobil Corp.(XON)
General Electric Co.(GE)
General Motors Corp.(GM)
Hewlett Packard Co.(HPQ)
Home Depot (HD)
Honeywell International Inc.(HON)
Intel (INTC)
International Business Machines Corp.(IBM)
International Paper Co.(IP)
J.P. Morgan Chase & Co.(JPM)
Johnson & Johnson(JNJ)
McDonalds Corp. (MCD)
Merck & Co.(MRK)
Microsoft (MSFT)
Minnesota Mining & Manufacturing Co. (MMM)
Phillip Morris Co.(MO)
Procter & Gamble Co.(PG)
SBC Communications, Inc. (SBC)
United Technologies Corp.(UTX)
Wal-Mart (WMT)
Walt Disney Co. (DIS)
Face Value
The value of a bond that appears on the face of the bond, unless the value is
otherwise specified by the issuing company. Face value is ordinarily the amount
the issuing company promises to pay at maturity. Face value is not an
indication of market value. Sometimes referred to as par value.
Fiscal Year
Any consecutive 12-month period of financial accountability for a corporation
or government. For example, because of the Christmas rush many department
stores find it easier to wind up their yearly accounting on January 31 instead
of December 31. Fiscal year is often abbreviated FY with a date. For example,
FY May 31 means that the company's fiscal year goes from June 1 to May 31 of
the following year.
Futures
A contract specifying a future date of delivery or receipt of a certain amount
of a specific tangible or intangible product. The commodities traded in futures
markets include stock index futures; agricultural products like wheat, soybeans
and pork bellies; metals; and financial instruments. Futures are used by
business as a hedge against unfavorable price changes and by speculators who
hope to profit from such changes.
Government Bonds
Obligations of the U.S. Government, regarded as the least risky, highest-grade
securities issues.
The major types of debt instruments issued by the U.S. government are:
Growth Stock
Shares of a company known for a history of rapid earnings growth. Most growth
stocks do not pay dividends because management reinvests earnings to feed the
growth.
Income Bond
Bonds that promise to repay principal but to pay interest only when earned. In
some cases the unpaid interest on an income bond may accumulate as a claim
against the corporation when the bond becomes due.
Index
Any comprehensive measure of market trends, intended for investors who are
concerned with general stock market price movements.
Investment Portfolio
A variety of securities owned by an individual or an institution.
IRA (Individual Retirement
Account)
An individual pension fund that anyone may open. An IRA permits investment of
contributed funds through intermediaries like mutual funds, insurance
companies, and banks or directly in stocks and bonds through stockbrokers.
Because it is intended for retirement, money in an IRA enjoys many tax advantages
over traditional investments, but may not be withdrawn early without heavy
penalty fees.
Market Value
The current resale value of a security. The market value of an issue is easily
computed as the closing price multiplied by the shares outstanding.
Maturity Date
The date that a bond comes due and must be paid off.
Money Market Account
An account in which your money is reinvested in short-term securities by the
bank or investment firm managing the account.
Money Market Fund
A mutual fund whose investments are in high-yield money market instruments such
as federal securities, CDs and commercial paper. Its intent is to make such
instruments, normally purchased in large denominations by institutions,
available indirectly to individuals.
Mutual Fund
A portfolio of stocks, bonds, or other securities administered by a team of one
or more managers from an investment company who make buy and sell decisions on
component securities. Capital is contributed by smaller investors who buy
shares in the mutual fund rather than the individual stocks and bonds in its
portfolio. The return on the fund's holdings is distributed back to its
contributors, or shareholders, minus various fees and commissions. This system
allows small investors to participate in the reduced risk of a large and
diverse portfolio that they could not otherwise build themselves. They also
have the benefit of professional managers overseeing their money who have the
time and expertise to analyze and pick securities.
NASDAQ
An automatic information network that provides brokers and dealers with price
quotations on securities traded over-the-counter
New York Stock Exchange
(NYSE)
The NYSE marketplace blends public pricing with assigned dealer
responsibilities. Aided by advanced technology, public orders meet and interact
on the trading floor with a minimum of dealer interference. The result is
competitive price discovery at the point of sale. Liquidity in the NYSE auction
market system is provided by individual and institutional investors, member
firms trading for their own accounts, and assigned specialists. The NYSE is
linked with other markets trading listed securities through the Intermarket
Trading System (ITS).
NYSE-assigned dealers, known as specialists, are responsible for maintaining a fair and orderly market in the securities assigned to them. Most trading, however, is conducted by brokers acting on behalf of customers, rather than by dealers trading for their own account. For this reason, the NYSE is often described as an agency auction market. The interaction of natural buyers and sellers determines the price of a NYSE-listed stock.
Penny Stocks
Low-priced issues, often highly speculative, selling at less than $1 a share.
Frequently used as a term of disparagement, although some penny stocks have
developed into investment-caliber issues.
Portfolio
The collection of different investment instruments owned by one individual or
institution. A portfolio can consist of any combination of stocks, bonds,
derivatives and such.
Preferred Stock
A type of stock that pays a fixed dividend regardless of corporate earnings,
and which has priority over common stock in the payment of dividends. However,
it carries no voting rights, and should earnings rise significantly the
preferred holder is stuck with the same fixed dividend while common holders
collect more. The fixed income stream of preferred stock makes it similar in
many ways to bonds.
Prime Rate
The lowest interest rate charged by commercial banks to their most creditworthy
and largest corporate customers; other interest rates such as personal,
automobile, commercial and financing loans are often pegged to the prime.
Prospectus
The issuer must provide according to SEC regulations, the official documents to
potential purchasers of a new securities issue. It highlights the much longer
registration statement filed with the Commission that gives information on the
financial well being of the issuer and the specifics of the issue itself.
Potential investors can consult this information before buying.
Rate of Return
In stocks and bonds, the amount of money returned to investors on their
investments. Also known as yield.
Securities and Exchange Commission (SEC)
A watchdog agency created by the U.S. Congress to monitor the securities
industry and enforce punishments of those that violate the industry's
regulations.
Stock Dividend
A dividend paid in securities rather than cash. The dividend may be additional
shares of the issuing company, or in shares of another company (usually a
subsidiary) held by the company.
S&P 500
A capitalization weighted index of 500 stocks. Standard and Poor's 500 index
represents the price trend movements of the major common stock of U.S. public
companies. It is used to measure the performance of the entire U.S. domestic
stock market.
Ticker
A telegraphic system that continuously provides the last sale prices and volume
of securities transactions on exchanges. Information is either printed or
displayed on a moving tape after each trade
Ticker Symbol
A three or four letter abbreviation used to identify a security whether on the
floor, a TV screen, or a newspaper page. Ticker symbols are part of the lore of
Wall Street. They were originally developed in the 1800s by telegraph operators
to save bandwidth. One-letter symbols were therefore assigned to the most
active stocks. Railroads were the dominant issues at the time, so they retain a
majority of the one-letter designations.
Ticker symbols today are assigned on a first-come, first-served basis. Each marketplace -- the NYSE, the American Stock Exchange, and others -- allocates symbols for companies within its purview, working closely to avoid duplication. A symbol used for one company cannot be used for any other, even in a different marketplace.
Transfer Agent
A transfer agent keeps a record of the name of each registered shareowner,
his/her address, the number of shares owned, and sees that the certificates
presented for transfer are properly cancelled and new certificates issued in
the name of the new owner.
Treasury Stock
Shares, formerly outstanding, that were repurchased by the issuing company.
Companies often repurchase stock to benefit existing shareholders. Those who
sell receive a premium price from the company for their shares, thus
substituting a large capital gain for future dividends. This ploy is used when
dividend taxes are higher than capital gains taxes. Remaining investors who
keep their shares benefit from a tightened supply, which raises the share
price. Companies may later resell treasury stock, or retire it according to a
shareholder vote.
Triple Witching Hour
The last trading hour on the third Friday of March, June, September and
December when options and futures on stock indexes expire concurrently.
Variable Annuity
A life insurance policy where the annuity premium (a set amount of dollars) is
immediately turned into units of a portfolio of stocks. Upon retirement, the
policyholder is paid accordingly to accumulated units, the dollar value of,
which varies according to the performance of the stock portfolio. Its objective
is to enhance, through stock investment, the purchasing value of the annuity
which otherwise is subject to erosion through inflation.
Volatility
A measure of the fluctuation in market price of a security. A volatile issue
has frequent and large swings in price. Mathematically, volatility is
calculated as the annualized standard deviation of returns.
Yield
In stocks and bonds, the amount of money returned to investors on their
investments. Also known as rate of return.
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Various methods of depreciation that yield larger deductions in the earlier years of the life of an asset than does the straight-line method. The double (or 200 percent) declining balance method is an example of an accelerated depreciation method.
Accounting Method
The method under which income and expenses are determined for tax purposes. Major accounting methods are the cash method and the accrual method.
Accounting Period
The 12-month period that a taxpayer uses to determine federal income tax liability. Unless a taxpayer makes a specific choice to the contrary, his accounting period is the calendar year.
Accrual Method of Accounting
One of the two most common methods of accounting, the other being the cash method. Under the accrual method of accounting, income is reported in the tax year earned, whether or not received, and deductions are claimed in the tax year incurred, whether or not paid.
Accrued Interest
Interest that has been earned but not yet paid or credited; for example, interest earned on a bond since the last interest payment was made.
Active Participant
Taxpayer who is covered by an employer-maintained qualified retirement plan, or a qualified self-employed retirement plan, if even for only one day during the year.
Adjusted Basis
The cost or other original basis of property reduced by adjustments such as depreciation allowed or allowable and increased by capital improvements and other adjustments.
Adjusted Gross Income (AGI)
Adjusted gross income equals gross income less reductions that are allowable regardless of whether personal deductions are itemized. On the 1999 tax forms, AGI is entered on line 4 Form 1040EZ, line 18, Form 1040A, and line 33, Form 1040.
Audit
An IRS examination and verification of a taxpayer's return or other transactions with tax consequences. An office audit is an audit by the IRS that is conducted in the agent's office. A field audit is conducted by the IRS on the business premises of the taxpayer or in the office of the tax practitioner representing the taxpayer.
The gain from the sale or exchange of a capital asset.
Cash Method of Accounting
One of the two most common methods of accounting, the other being the accrual method defined elsewhere in this glossary. Under the cash method of accounting, income is reported in the tax year actually or constructively received and expenses are deducted in the tax year paid.
Charitable Contributions
Money or property donated to a qualified charitable organization. Such donations are deductible on Schedule A as an itemized deduction.
The deduction of a reasonable allowance for the wear and tear of assets (excluding inventory) used in a trade or business or held for the production of income. In a more narrow sense, the term depreciation refers to the method used to write off the cost or other basis of assets placed in service before 1981 over their estimated useful lives.
The right of a government authority to take private property for public use and paying fair compensation to the owner.
Estimated Tax
The amount of tax a taxpayer expects to owe for the year after subtracting expected amounts withheld and the amount of any expected credits.
The amount withheld from an employee's wages and submitted by the employer to the IRS as an advance payment of the employee's federal income tax.
Fiscal Year
An accounting year ending on the last day of any month except December.
A transfer of property from one person or entity to another without consideration or compensation. For income tax purposes, the words "gift" and "contribution" usually have separate meanings, the latter word being used in connection with contributions to charitable, religious, etc., organizations, whereas the word "gift" refers to transfers of money or property to private individuals, needy persons, friends, relatives, etc. The recipient of a gift is not required to include it in his gross income, and the maker of the gift is not entitled to deduct it (except for business gifts to customers of $25 or less per donee per year).
Gift Tax
A graduated federal tax paid by donors on gifts exceeding $10,000 per year per donee.
The filing status used by an unmarried taxpayer who pays over half the cost of maintaining his home that is the principal residence for over half the tax year of his unmarried child or other lineal descendent (this child does not have to be a dependent) or of his dependent married child or other qualified relative. A dependent parent who does not live with the taxpayer may also qualify the taxpayer for the head of household status if qualifications are met.
As distinguished from a bequest or devise, an inheritance is property acquired through laws of descent and distribution from a person who dies without leaving a will. Property so acquired usually takes as its basis, for gain or loss on later disposition or for depreciation, the fair market value at the date of the decedent's death. An inheritance of property is not a taxable event, but the income from an inheritance is taxable.
Internal Revenue Service (IRS)
The division of the U.S. Treasury Department responsible for collecting taxes.
A form of joint ownership. Each tenant has an undivided interest in the entire property. On death of one of the owners, the survivor becomes the owner of the whole. A joint tenancy may involve more than two persons.
The U.S. Treasury, as part of its tax collection effort, may attach a lien (a legal claim) on the property of a taxpayer who is delinquent in the payment of amounts owed to the IRS and who has not made arrangements to pay.
The filing status used by a couple who are married at the end of the tax year and not legally separated under a final decree of divorce or separate maintenance and who record total income, exemptions, and deductions of both spouses on one tax return.
Married Filing Separately
The filing status used by a married couple that chooses to record their respective incomes, exemptions, and deductions on separate individual tax returns.
A general term applied to stock dividend distributions that are not taxable. These distributions generally take the form of return of capital, stock dividends, stock splits, and/or tax-free distributions.
A form of business in which two or more persons join their money and skills in conducting the business. Partnerships are treated as a conduit and are not subject to taxation. Various items of partnership income, expenses, gains, and losses flow through to the individual partners and are reported on their personal income tax returns.
Proprietor
The sole owner of a trade or business.
Proprietorship
A business controlled and operated by one person.
Qualified Charitable Organization
An entity, usually an association or nonprofit corporation, designed to provide some form of public charity or service and specifically approved by the U.S. Treasury as a recipient of deductible charitable contributions.
Qualified Pension or Profit-Sharing Plan
An employer-sponsored plan that meets the requirements of IRS Code section 401. If these requirements are met, none of the employer's contributions to the plan are taxed to the employee until distributed to him. The employer is allowed a deduction in the year the contributions are made.
Earnings that the shareholder has accepted as additional shares of stock rather than as cash. They are taxable in the year constructively received.
An elective provision permitting certain small business corporations and their shareholders to elect special income tax treatment. Of major significance is the fact that S corporation status usually avoids the corporate income tax and corporate losses can be claimed by the shareholders.
Simplified Employee
Pension (SEP
An arrangement whereby an employer makes contributions to an employee's individual retirement account (IRA), or a self-employed person contributes to his own plan.
Adjusted gross income less itemized deductions or the standard deduction, less allowable personal and dependent exemption amounts.
Tax Bracket
The rate at which income at a particular level is taxed.
Tax Credit for the Elderly or the Disabled
Eligible taxpayers 65 years old and older, and those under 65 retired on a permanent and total disability, may claim the credit. The amount of the credit, if any, is computed on Schedule R, Form 1040, or Schedule 3, Form 1040A.
If a taxpayer did not pay enough tax on a timely basis during the year, he or she will have an underpayment of estimated tax, and may, depending on circumstances, be required to pay a penalty. The penalty, if any, is computed on Form 2210.
Unearned Income
Taxable income other than that received for services performed (earned income). Unearned income includes money received for the investment of money or other property, such as interest, dividends, and royalties. It also includes pensions, alimony, unemployment compensation, and other income that is not earned.
A loss is allowed for a security that becomes worthless during the year. The loss is deemed to have occurred on the last day of the year. Special rules apply to securities of affiliated companies and small business stock.