1035 Exchange

A 1035 exchange is a tax-deferred exchange between similar contracts. 1035 exchanges are allowed from life insurance into life insurance, an annuity into an annuity, and life insurance into an annuity. If an investor takes cash surrender from an annuity and uses it to purchase life insurance this exchange is not allowed under section 1035, but would instead be a taxable event.

12b-1 Fees

12b-1 fees are asset-based sales charges used to reimburse a fund for sales and advertising expenses. For a fund to call itself a no-load, it must have a 12b-1 fee of no more than ¼ of 1% of net assets. The maximum allowable 12b-1 fee is ¾ of 1% of net assets. 12b-1 fees are operating expenses that have the effect of lowering dividends. They are often referred to as trailer fees because they will affect the investors’ yield for as long as they own the shares.

529 Plan

Almost every state offers a Section 529 plan. 529 plans are also known as qualified tuition plans. They are savings accounts for education expenses. Any person may fund a 529 plan. The term 529 plan includes both prepaid tuition plans and college savings plans. A prepaid tuition plan requires the student to attend a specific school, whereas the college savings plan monies can be used anywhere. There are only a handful of states that still offer prepaid tuition plans, and the plans vary by state. 529 plans may be set up for anyone of any age. Once established for a beneficiary, the account owner can change the beneficiary but only to a family member of the original beneficiary. Earnings in a 529 plan are income tax free when the distribution is for qualified educational expenses.

ABLE Account

The Achieving a Better Life Experience Act of 2014 allowed states to create tax-advantaged savings programs for people with disabilities (designated beneficiaries). These 529A ABLE accounts are designed to provide a way for families to save money for disability-related expenses. Distributions are tax-free if used for qualified disability-related expenses. There are annual contribution limits that vary by year and maximum account balances that vary by state. The contributions made are not federally tax deductible but may be tax deductible at the state level. Anyone of any age and income level can contribute to a 529A account.

Accredited Investor

An accredited investor is a term that is defined under Regulation D, rule 501. Accredited investors can purchase private placements. An individual can meet the definition of an accredited investor in one of two ways. First, based upon their adjusted gross income. An individual is considered an accredited investor if they have an adjusted gross income above $200,000 in the preceding two years and reasonably expected to be so this year if single, or over $300,000 if they are married filing jointly. The second way an individual can meet the definition of accredited investor is by having a net worth above $1 million, excluding the value of their primary residence. The net worth calculation would include the assets of a spouse and any minor children, but not adult children or friends.

Accrued Interest

Accrued interest is the interest that has accumulated between the recent payment and the sale of the fixed-income security. At the time of the sale, the buyer pays the seller the bond’s price plus accrued interest. Accrued interest is calculated by multiplying the coupon rate by the number of days that have elapsed since the last payment.

Accumulation Unit

An accounting measurement that represents an annuity contract owner’s proportionate unit of interest in the separate account during the pay-in period, before the contract has been annuitized.

Acid Test Ratio

The acid test ratio is also known as the quick ratio. It is the most stringent measurement of a company’s liquidity. The formula for the quick ratio (acid test) is current assets minus inventory divided by current liabilities.

Active Portfolio Management

An active portfolio management strategy attempts to time the market. Technical analysis is used to determine which securities to buy and sell, and when. The active style of portfolio management has higher transaction costs than a passive approach.

Adjustable Rate Preferred Stock

Both floating rate and adjustable rate preferred stock have dividends that may be adjusted, the difference is the reference benchmark. Adjustable rate preferred stocks’ most common benchmark is the rate associated with Treasury bills or the federal funds rate. The calculation of the dividend and the linked benchmark rate is set when the shares are issued. The dividend payment is based on the benchmark, plus a fixed spread, which is primarily a reflection of the issuer’s credit risk. The dividend typically has a minimum rate and a rate cap, to prevent the issuer from having to pay inordinately large dividends.

Adjusted Gross Income (AGI)

A person’s AGI comes from their income tax return. AGI is gross income minus certain adjustments to income such as deductible IRA contributions and net capital losses. AGI is the basis for determining a person’s taxes owed.


The Administrator is the person responsible for administering a state’s securities laws.


An advertisement is any material designed for use by newspapers, magazines, radio, television, telephone recordings, or any other public medium to solicit business. Advertising may not be sent to clients considering a new issue unless accompanied by a prospectus.

Affiliated Person

As defined by the Investment Company Act of l940, the term affiliated person of another person includes any person directly or indirectly controlling, controlled by, or under common control with, such other person.

Agency Basis

Agency basis refers to a transaction in which the broker-dealer acts for the client, charging a commission on the transaction. The broker side of broker-dealer.

Agency Cross Transaction

An agency cross transaction is a transaction in which the investment adviser represents both the party buying and the party selling the security.

Agency Debt

Debt obligations of agencies of the Federal government are referred to as agency debt. This debt is not a direct obligation of the U.S. government. Ginnie Mae debt is the only agency issue that is backed by the federal government. Agency debt can be in the form of notes or bonds issued at face value and carry a stated interest rate payable semi-annually. Often called indirect debt.


An agent is an individual who affects securities transactions for the accounts of others. Agents most commonly represent broker-dealers. An individual representing an issuer in the sale of non-exempt securities or through non-exempt transactions would also be required to register as an agent. Most states require a series 63 license to register in that state as an agent. This individual is also referred to as a registered representative when they hold either a Series 6 or Series 7 license.

Aggressive Growth Portfolio

An aggressive growth portfolio is characterized by a high turnover of holdings and attempts to cash in on higher-risk rapid capital appreciation situations.  Aggressive growth portfolios are unsuitable for clients looking for income since they pay low to no dividends.

Aggressive Investment Policy

An aggressive investment policy concentrates on maximizing return. Such a policy entails increased risks, such as buying on margin, using options, and buying stocks with high beta factors.

Algorithmic Trading

Algorithmic trading uses computer programs to determine which securities to buy and sell and when. Most high frequency trading is driven by algorithms.

All-or-None (AON) Underwriting:

All-or-none is one form of best-efforts underwriting.  The underwriter agrees to sell all the shares or none of them. Commissions will not be paid unless the offering is completed.

All-or-None Order

An all-or-none order is one in which the broker must execute all of the order in one transaction or it will be allowed to expire.


Alpha is the rate of return that is more than that which is predicted by an equilibrium model, such as the capital asset pricing model. A positive alpha is desirable.

Alternative Minimum Tax (AMT)

The alternative minimum tax is a tax computation system that high-income earners may be required to determine. When calculating the AMT certain items, called tax preference items, are disallowed.

American Depository Receipt

American depository receipts are used to facilitate U.S. trading in foreign corporations. The ADR trades in the United States and is denominated in U.S. dollars. ADRs are used to diversify an investor’s portfolio.

American Style

Calls and puts are option contracts that may be exercised by the owner anytime the contract has intrinsic value, this is referred to as an American style option. European style options can only be exercised at expiration, if in the money.


To amortize a debt is to pay the principal down over a period of time in periodic installments.


The annuitant is the annuity contract holder.


An annuity is a contract between an insurance company and an individual (the annuitant).  An annuity generally guarantees lifetime income to the person on whose life the contract is based in return for a lump sum or a periodic payment to the insurance company. Annuities offer tax-deferred earnings during the pay-in period. They may or may not be annuitized. If an annuitant dies without annuitizing their beneficiary will receive either the balance in the account or the premiums paid in, whichever is higher.

Annuity Unit

An annuity unit is the accounting measure used to determine the amount of each payment to an annuitant during the payout period.


Appreciation is the increase in the value of an asset.  Appreciation is a common investment objective. Appreciation is also called growth. Realized appreciation is taxable. Unrealized appreciation is subject to market risk and is not taxable.


Arbitrage is dealing in differences. Arbitrage is legal.

Ask Price

The ask price is the price at which the dealer is willing to sell the stock to an investor or another dealer. The ask price of an open-end mutual fund share is what the client will pay to purchase the share.


An asset is something that is owned by either an individual or a business. Assets are found on the balance sheet. Assets include current assets, fixed assets, and intangible assets.

Asset Allocation Fund

In an asset allocation fund the portfolio is invested a specific percentage in each of the various asset classes.

Asset Class Allocation

Asset class allocation involves determining certain percentages of asset classes to be held in a portfolio. Asset classes include stocks, bonds, real estate, cash, and precious metals.

Assumed Interest Rate (AIR)

The assumed interest rate is a base rate used for illustrating payments from a variable annuity, the assumed interest rate is not a guarantee. Assumed interest rates vary by insurance company. Naturally, the higher the assumption, the higher the initial benefit, and vice versa. When the actual return is equal to the AIR, the monthly payment will remain the same as the prior month.

Auction Market

In an auction stock exchange the securities are sold to the highest bidder.  It is a two-way auction since some brokers are bidding to sell at the highest possible price while others are bidding to buy at the lowest possible price.  The NYSE was historically an auction market. Today, the NYSE is a hybrid market, with some trades taking place electronically and some trades at auction.

Auction Rate Securities

Auction rate securities were sold as either a type of debt security or preferred stock. If the ARS was a debt security it was sold as either a corporate or municipal bond. ARS had an interest rate or dividend that were periodically re-set through auctions, typically every 7, 14, 28, or 35 days. When the ARS is tax-exempt the interest rates were reset approximately monthly. In 2007, interest-rate auctions for ARS began to fail when the auctions attracted too few bidders to establish a clearing rate. In 2008, the ARS market collapsed when lead underwriters chose not to step in to support the auctions. Investors were left holding illiquid investments with long-term maturities.

Audited Financials

Audited financials are financial statements that have been verified by an independent certified public accountant (CPA). Audited financials include a company’s annual report (10-K filing with the SEC).

Authorized Stock

Authorized stock is the maximum number of shares a corporation may issue under the terms of its charter. The number of shares authorized may be changed, with the approval of the stockholders.

Back-end Load

Back-end loads are most commonly found on class B mutual fund shares. Also called a contingent deferred sales charges. If an investor redeems their shares before the period of time described in the prospectus has expired, they will have a sales charge charged on their redemption amount.

Balance of Payments

The balance of payments is a country’s record of its transactions with the rest of the world over a period of time.

Balance of Trade

A country’s balance of trade is its exports versus its imports. A county that imports more than it exports has a balance of trade deficit. A country that exports more than it imports has a balance of trade surplus.

Balance Sheet

The balance sheet is a financial statement that shows the financial health of a company or an individual at a moment in time. The balance sheet includes what is owned and what is owed.

Balance Sheet Equation

The balance sheet equation is assets = liabilities plus shareholders’ equity. For a client, assets minus liabilities = net worth.

Balanced Fund

A balanced mutual fund is a type of mutual fund whose stated investment policy is to have at all times some portion of its investment assets in bonds and stocks, creating a balance between the two types of securities.

Banker’s Acceptance

Banker’s acceptances are letters of credit from a bank guaranteeing payment of a debt. Generally, bankers’ acceptances are used in the import and export business.  They are short-term, money market instruments.


A bond’s yield to maturity is sometimes referred to as its basis yield. Basis can also be used to reference an investment’s after-tax dollars (cost basis).

Basis Point

A basis point is 1/100th of yield, ten cents.

Bear Market

A bear market is one in which the prices of securities are falling or are expected to fall.

Benchmark Portfolio

A benchmark portfolio is an index that is used for comparison purposes when judging a portfolio manager’s performance.

Best-efforts Underwriting

In a best-efforts underwriting the underwriter is acting as an agent for the issuer, the underwriter puts forth his or her best efforts to sell as many shares as possible. The issuer pays the underwriter a commission for those shares sold. The underwriter does not have liability for unsold shares, as in the case of a firm-commitment agreement.


Beta measures a stock or portfolio’s volatility as compared to the market as a whole. A beta of 1 means the security or portfolio moves with the market. The market in this case is the S&P 500. A beta of greater than 1 is aggressive, and less than 1 but greater than 0 is defensive. A negative beta would mean the performance is the opposite of the market.

Bid Price

The bid price is the price at which a dealer is willing to buy stock from an individual or another dealer. The client sells at the bid. On an open-end mutual fund share, the client redeems at the bid. The bid price of an open-end mutual fund is also called the redemption price, or net asset value per share.


The Black-Scholes is a pricing model for options.

Blend/Core Fund

A blend/core fund is an equity fund that has different classes of stock within its portfolio. The prospectus of the fund would fully describe the investments found in this type of fund’s portfolio, as well as the management strategies used. A blend/core fund is actively managed.

Block Trade

A block of stock is 10,000 shares or a value of $200,000 or more.


Blockchain is an electronic distributed ledger or list of entries that is maintained by various participants in a network of computers. Blockchains use cryptography to process and verify transactions on the ledger, providing comfort to users and potential users of the blockchain that entries are secure.

Blue Chip Stock

Blue chips are stocks of strong, well-established companies that have demonstrated their ability to pay dividends in good times and bad times. Blue chip stocks include General Motors, Johnson & Johnson, JPMorgan Chase, and 3M Company, to name a few.

Blue Sky Laws

Blue Sky laws are state securities laws, the Uniform Securities Act.

Board of Directors

A board of directors consists of individuals elected by shareholders to establish corporate management policies. The board of directors will determine dividend distributions, among other duties.

Bona Fide

Bona fide means genuine, authentic, and real.


Bonds represent the borrowing of money by a corporation or government.   The bond is a legal obligation of the company or government to repay the principal at the maturity of the bond.  Terms of the repayment and any interest to be paid are stated in the indenture. Bonds are issued with a par value ($1,000), representing the amount of money borrowed by the company. The issuer promises to pay a percentage of the par value as interest on the borrowed funds. The interest rate is stated on the face of the bond at issue and is called the nominal or coupon rate and is fixed.

Bond Fund

A bond fund is a type of mutual fund whose investment policy is to provide stable income with a minimum of capital risks. Bond funds may invest in corporate, government, or municipal bonds.

Bond Rating

A bond rating is a measurement of the quality of a bond issue as determined by independent bond rating services. AAA is of the highest quality. Both Moody’s Investor’s Service and Standard & Poor’s Corporation have such services.

Book Entry Security

Book entry securities do not have paper certificates. Most securities today are book entry, with the ownership recorded electronically.

Book Value Per Share

Book value per share is the net worth of the company minus intangible assets and preferred stock divided by the number of shares of common stock outstanding in the hands of the public. Value stocks have a low price/book ratio. Value stocks’ market price trades at a low multiple of its book value per share.

Brady Bonds

Brady bonds are debt instruments that were issued by Latin American countries in the 1980s, that were backed by U.S. government bonds as collateral.


When trading securities a client’s breakeven is the dollar price at which a transaction produces neither a gain nor a loss. In options, breakeven will vary depending upon the contract. For long calls and uncovered short calls, the breakeven is the strike price plus premium. For long puts and short uncovered puts, the breakeven is the strike price minus the premium.


A breakout occurs when a security’s market price trades above the resistance level or below support. A breakout is taken to signify a continuing move in the same direction.

Breakpoint Sale

A breakpoint sale involves the sale of investment company shares in dollar amounts just below the point at which the sales charge is reduced on quantity transactions so as to share in the higher sales charges applicable. Breakpoint sales are a violation of the Rules of Fair Practice.


Breakpoints are the schedule of sales charge discounts offered by a mutual fund for a lump sum or cumulative investment.  Eligibility requirements for breakpoints must be disclosed in the prospectus.


BRIC is an acronym used to refer to investments in Brazil, Russia, India, and China.


The brochure is the written disclosure document that an investment adviser must deliver to all new clients. The firm brochure is Part 2A of Form ADV.

Brochure Supplement

The brochure supplement is the written disclosure document that must be given to new clients describing the investment adviser representative’s background. The brochure supplement is Part 2B of Form ADV.


The broker is the role of a brokerage firm when it acts as an agent for customers and charges the customers a commission for its services.


A broker-dealer is a person in the business of buying and selling securities, either for themselves or for their clients. Broker-dealers file Form BD to register as a firm. Broker-dealers are registered with the SEC, self-regulatory organizations (SROs), and in each state in which they do business.

Build America Bonds

Build America Bonds (BABs) were authorized by the American Recovery and Reinvestment Act (ARRA) which was enacted in February 2009. With BABs, the interest was taxable to the investors, but the federal government gave state and local governments the choice of a direct subsidy to cover 35% of the interest cost (Direct Payment Bonds) or to offer bondholders a federal tax credit worth 35% of the interest earned (Tax Credit bonds). BABs were issued through December 2010. The BABs program broadened the market for municipal debt beyond that of just those investors in high-income tax brackets. BABs were purchased by pension funds, endowments, and foreign investors as well.

Bull Market

A bull market is one in which prices of securities are moving higher or are expected to move higher.

Business Cycle

The business cycle is a predictable pattern of economic activity. It consists of four phases, that always follow this order: expansion, peak, contraction, trough.

Business Day

A day the New York Stock Exchange is open for business (trading).

Buy Stop Order

A buy stop order is an order to buy a security at a price that is above the current market price. The order is held on the books of the specialist. Open buy stops are the best way to hedge a short position. If an order should occur at the stop price (or higher) the order will become a market order to buy at the next market price.

Call Option

A call option is a contract to buy 100 shares of stock at a definite price within a specified period of time (up to 9 months).  The owner of the call has the power to call away (buy) the shares at the strike price should the market price be above the strike. The seller of the call has an obligation to sell shares at the strike price.

Call Price

The call price is the price paid (usually a premium over the par value of the issue) for callable preferred stock or callable bonds when they are redeemed by the issuer prior to maturity. Issuers call securities when interest rates have fallen.

Call Protection

Call protection is a period of time when the issuer can not call the bond, generally 5-10 years from issuance.

Call Provision (Stock or Bond)

When a security has a call provision the issuing corporation retains the ability to recall (redeem) its issues of equity or debt. The call provision must be clearly stated on the face of the certificate at issue.

Callable Bond

A callable bond is a bond that may be paid off early by the issuer. Exactly when a bond can be called is listed in the bond’s indenture. Just because a bond can be called, does not mean it will be called. Issuers call bonds when the interest rates have gone down enough that it makes sense to refinance the debt at a lower nominal yield. The issuer will often pay a little extra to the bondholder when calling a bond. An investor that purchases a bond at a premium in the secondary market should be most concerned with the bond’s yield to call (in this situation it will be referred to as yield to worst).

Capital Asset Pricing Model (CAPM)

The CAPM is used to determine a security’s or a portfolio’s expected return based on the investment’s systematic risk.

Capital Gain

A capital gain occurs when the selling price of the asset is more than its cost basis. If the asset was held for a period of longer than 12 months, it is considered a long-term gain, taxable at long-term capital gains rates.  Short-term gains are those that occur when the asset was held for 12 months or less, and they are taxed as ordinary income.

Capital Gain Distribution

A mutual fund may make a capital gain distribution to its shareholders at most one time a year. The capital gain is the result of the sale of assets held within the fund’s portfolio for a year and a day or longer. The distribution is taxable to the shareholder at long-term rates, regardless of the investor’s holding period.

Capital Structure

A company’s capital structure is also referred to as its capitalization. It is the amount of debt and equity issued by a corporation.

Cash Account

A cash account is a brokerage account in which the client must pay for the securities within two business days, under regular way settlement.

Cash Equivalent

Cash equivalents are securities that are the most liquid, the “safest” on the risk spectrum. Money market instruments are sometimes referred to as cash equivalents.


The Chicago Board Options Exchange (CBOE) is where listed options trade in the United States.

Cease and Desist Order

A cease and desist order instructs a person to abstain from an action. The Administrator can issue a cease and desist order when he knows or has a reason to believe an individual or firm is about to commit a violation of the Uniform Securities Act. It may be issued with or without a prior hearing.

Certificate of Deposit

There are two types of certificates of deposit. Negotiable CDs and bank CDs. Negotiable CDs are issued by commercial banks, representing bank borrowing for a short period of time. Negotiable CDs are sold by the bank to institutional clients. Negotiable CDs have high face amounts and trade in the money market. Negotiable CDs are securities. Bank CDs are sold by the bank to retail clients. With a bank CD, the client has liquidity risk for the time period in which they have committed their deposit. In exchange for this deposit, the bank will pay the client a competitive interest rate. Bank CDs are not securities.

Certificates of Participation

Certificates of Participation (COPs) are tax-exempt bonds issued by state entities usually secured with revenue from an equipment or facility lease. COPs enable governmental entities to finance capital projects without technically issuing long-term debt. COPs are primarily used for transit investments, as transit operations often rely on capital equipment such as rolling stock, buses, or depots that are well suited to lease agreements.

Chinese Wall

The China Wall is the delineation that a firm must have between the trading desk and the research department. The Chinese wall is also called an information barrier.

Showing 1-100 of 770 flashcards