Flashcards

The Investment Company Act of l940 requires the fund’s assets to be held by an independent custodian.  The custodian is responsible for the safekeeping of all securities and cash held by the fund. Typically, a commercial bank will perform the duties of a custodian, as appointed by the directors. The securities in the portfolio are registered to the custodian.

Custody includes having physical custody of a customer’s cash and/or securities, or having the authority to obtain possession of them.

Cyclical industries expand during an economic expansion. Cyclical industries produce durable goods, raw materials, and heavy equipment.

Dark pools are where many institutional transactions take place. Dark pools are alternative trading systems run by large broker-dealers, offered to their best clients. Trading information from dark pools is very limitedly disclosed.

A day order is an order that is valid for that day only. If it is not executed by the close of business that day it is canceled.

A dealer is a person who deals in the buying and selling of securities as a principal, for the firm’s account.

A debenture is an unsecured bond. Debentures are backed only by the good faith of the corporation. Repayment of the debt is based on the company’s promise to repay.

In a long margin account the debit balance is the loan amount. Interest is charged on the debit balance.

A debit spread involves the purchase of an option and the sale of an option (buy/sell call, or buy/sell put), on the same stock, with the same expiration date. In a debit spread, more money is paid to buy the option than is collected for the sale of the option. In a debit spread, the client is hoping that the spread will widen and the options will be exercised.

Debt per capita is the total debt of a municipality divided by its population.

Debt service is the cash required in a given period, usually a year, for payment of interest and current maturities of principal on outstanding debt. In corporate bond issues, debt service is the annual interest plus annual sinking fund payments. In government bonds debt service refers to the annual payments into the debt service fund.

The debt-to-equity ratio compares a company’s long-term debt to total shareholders’ equity. The debt-to-equity ratio is a measurement of leverage.

The declaration date is the date on which the company declares an upcoming dividend, set by the board of directors.

A defensive strategy is an investment method through which investors try to minimize the risk of losing principal. One example is the policy of making purchases and sales according to predetermined objectives without regard for market changes, such as dollar cost averaging.

A deferred annuity is an annuity contract that repays principal and interest in the future. Interest earned during the accumulation (pay in) period is tax deferred. A deferred annuity is not immediately annuitized but may be annuitized in the future.

A deferred compensation plan is a type of non-qualified retirement plan. Generally only offered to highly paid workers, the employee defers some current compensation in favor of a payout in retirement. Deferred compensation is unfunded.

A defined benefit plan is a type of qualified plan. Defined benefit plans are covered by the Pension Benefit Guaranty Corporation (PBGC). A defined benefit plan specifies the amount of money the employee will receive at retirement.

In a defined contribution plan is a type of qualified plan. In a defined contribution plan the employer and the employee may defer a percentage of the employee’s income annually towards retirement.

Deflation is when there is an overall decrease in prices. Deflation is usually found during an economic contraction.

Depreciation is used to write down (expense) over time fixed assets. Depreciation is a non-cash expense that has the effect of lowering a business’s taxable income, but not affecting their cash flow. Depreciation is found as an add-back item on a company’s statement of cash flow.

A depression is at least six consecutive quarters of decline in GDP (gross domestic product).

A derivative is a financial product that may or may not have value, depending upon the value of the underlying asset. Options, rights, warrants, LEAPS, futures, and forwards, are all derivatives.

A diagonal spread is either the purchase and sale of two calls or two puts with different strike prices and different expiration months (same class, puts, or calls).

Dilution is a decrease in an investor’s holdings, due to the issuance of additional shares.

A direct participation program is usually formed as a limited partnership. They are illiquid due to the fact they do not trade in the secondary market.

Directed brokerage may or may not be allowed by an investment adviser. If the investment adviser allows directed brokerage it can take place in one of two ways. Either the investment adviser directs the clients’ trades to be executed through a specific broker-dealer, or the investment adviser allows the client to tell the firm which broker-dealer they would like to use for execution.

A discount occurs when a bond is trading in the secondary market for less than par value because interest rates have gone up since the bond was originally issued.

The discount rate is the interest rate set by the Federal Reserve for a short-term loan from the Fed to a member bank. The loan is from the lending “window”.

A discretionary account is an account permitting a client to designate an individual such as a broker-dealer to exercise authority over the selection, timing, and amount of investment for the client. The authorization for the discretionary account must be in writing, and the account must be approved and accepted by a principal of the broker-dealer firm.

Diversification is the practice of spreading out investments among the securities of different companies and different industries. Diversification helps to reduce nonsystematic risk. An S&P 500 index fund offers a client broad diversification. To diversify by asset class is to invest some money in stocks, bonds, real estate, and gold (different asset classes). Diversifying by asset class helps to reduce systematic risk.

A diversified fund is a type of mutual fund that has most of its assets invested in many types of securities, many issuers of a single type of security, or both. The Investment Company Act of l940 defines a diversified fund as one where at least 75% of its assets are invested so that 5% of its total assets own no more than 10% of the total outstanding stock of any one company. Also known as the 75 – 5 – 10 rule.

A dividend is that portion of the earnings of a corporation declared by the board of directors to be paid to shareholders.  Each shareholder receives a pro-rata distribution based on the number of shares owned.  Corporations may pay dividends up to quarterly. Dividends are never guaranteed. Blue chip stocks are more likely to pay dividends than growth stocks. In a mutual fund, a dividend is a distribution of net investment income, usually paid quarterly. Dividends are taxable in the year of distribution, even when reinvested.

Mutual fund companies, along with many publicly traded companies, allow their investors to automatically use their dividend distribution to buy additional shares. The dividend distribution is taxable in the year of distribution, even when reinvested, increasing the investor’s cost basis.

Dollar cost averaging is a defensive method of investing that requires a specified amount of money to be invested, at regular intervals. By investing the same dollar amount, when shares are priced low, the investor will purchase more shares. When shares are priced high, fewer shares are purchased. Over time, when the market prices are fluctuating, the average cost per share may be lower than the average price paid.  DCA does not guarantee a profit.

A double-barreled bond is a bond that is backed by two sources of income (e.g., a city revenue bond may also be backed by a general obligation bond of the county). Double-barreled bonds are good for the safety of the principal.

The Dow is a price weighted index consisting of 30 large cap industrial stocks. It is the most widely used market indicator.

Due diligence is the duty of the underwriter, the issuer, and the attorneys that are involved in the new issue to conduct an inquiry into the circumstances surrounding the new offering.  The underwriter(s) or party charged with discovery must not be negligent in its attempt to discover and disclose relevant facts that would affect the offering. Neither the SEC nor the state performs due diligence.

A durable power of attorney is a document that grants either limited or full authority to a third party. The word durable ensures that the power of attorney survives a declaration of mental or physical incompetence of the grantor. A durable power of attorney ceases upon the grantor’s death.

Duration is a measurement of a bond’s market price volatility as interest rates change. Zero coupon bonds have the highest duration. A long-term bond would have a higher duration than a bond maturing in the near term.

Earnings per share takes the earnings available to common (after preferred stocks’ dividends have been paid) divided by the number of shares of common stock in the hands of the public. Earnings per share are found on a company’s income statement.

The effective date is the date that the registration of an issue of securities becomes effective with the SEC. Shares of a new issue can be sold as of the effective date.

The efficient market hypothesis has three forms: weak, semi-strong, and strong. In the weak form, fundamental analysis may produce excess returns. In the semi-strong form, trading on inside information may work to produce excess returns. In the strong form, there is no way to beat the market, it is best to build a broadly diversified portfolio and invest for the long run.

The EMMA website is funded and operated by the Municipal Securities Rulemaking Board (MSRB), the self-regulatory organization charged by Congress with promoting a fair and efficient municipal securities market. The SEC designated the EMMA website as the official repository for municipal securities disclosures in 2009. EMMA houses hundreds of thousands of municipal disclosure documents that provide information about municipal securities. These include offering documents, called official statements, for most new offerings of municipal bonds, notes, 529 savings plans, ABLE programs, and other municipal securities issued since 1990. EMMA also provides access to advance refunding documents, which detail arrangements made when new bonds are issued to establish escrows to pay off existing bonds (usually to refinance the old debt at a lower interest rate). Also available are continuing disclosure documents that describe material information throughout the life of a bond and must be provided by municipal bond issuers.

Employee stock options are designed to align the employee’s interests with those of the company by allowing the employee to buy shares of the company’s stock at specific prices, over time. Employee stock options may be qualified (incentive) or non-qualified.

With ESG investing a set of standards for a company’s operations is used to screen investments. ESG investing is a form of socially conscious investing.

An equipment trust certificate is a type of secured bond. It is backed by rolling stock, such as airplanes, fleet vehicles, or railroad cars. The title to the equipment is held by a trustee until the company pays off the bonds.

Stock (common or preferred) is sold to individuals and institutions. In return for the money paid, the individual or institution receives an ownership interest in the corporation.

An equity indexed annuity is a type of annuity issued by an insurance company. An equity indexed annuity has a minimum interest rate that it promises to pay to the annuitant, commonly referred to as the floor. It also has a cap rate, which is the most it can earn. Equity indexed annuities have a participation rate as well. The participation rate describes how much of the earnings of the index the account will be credited with and varies by insurance company and product offered. An equity indexed annuity is not considered a security. The only license required to sell an equity indexed annuity is a life insurance license.  This product is best for moderate and conservative investors. It has higher fees than a mutual fund.

A Eurobond is a long-term bond that is issued by either a government or corporation that is denominated in the currency of the issuer, but sold in another country.

Eurodollars are U.S. dollars that are held in banks that are outside of the United States.