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.

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.

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.

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