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- The term's meaning depends very much on the
- context. In finance, in general, you can think of equity as ownership in
- any asset after all debts associated with that asset are paid off. For
- example, a car or house with
- no outstanding debt is considered the owner's equity because he or
- she can readily sell the item for cash. Stocks are equity
- because they represent ownership in a company.
- A security is essentially a contract
- that can be assigned a value and traded.
- Examples of a security include a note, stock, preferred share, bond,
- debenture, option, future, swap, right, warrant, or virtually any other financial asset.
- Limited liability refers to the terms of limited partnerships,
- which comprise at least one general partner, who takes on unlimited
- liability, and one or more limited partners, who would never lose
- more than their original initial investment in
- fulfilling the partnership's obligations. Limited liability
- protects a partner's personal assets from being liquidated should the
- company become insolvent. Additionally, limited liability can refer to an investment that has
- limited downside risk, such as a long position in a stock, with which the
- investor can lose no more than his or her initial investment.
Act of 1933
- The Securities Act of 1933 was the first major piece of federal
- legislation regarding the sale of securities. Prior to this legislation, the
- sale of securities was primarily governed by state laws; however, the market crash
- of 1929 raised some serious questions about the effectiveness of how the
- markets were being governed. Because of the turmoil surrounding the investing community at this
- time, the federal government had to bring back stability and investor
- confidence in the overall system. In general, the legislation was enacted as the need for
- more information within and about the securities markets was
- acknowledged. The legislation addressed the need for better
- disclosure by requiring companies to register with the Securities and Exchange
- Commission. Registration ensures companies provide the SEC and potential
- investors with all relevant information by means of the prospectus and registration
- The indebted
- entity (issuer) issues a bond that states the interest
- rate (coupon) that will be paid and when the loaned funds (bond principal)
- are to be returned (maturity date). Interest on bonds is usually paid every six
- months (semi-annually). The main categories of bonds are corporate bonds,
- municipal bonds, and U.S. Treasury bonds, notes and bills, which are
- collectively referred to as simply "Treasuries". Two features of a bond - credit quality and duration - are the
- principal determinants of a bond's interest rate. Bond maturities range from a
- 90-day Treasury bill to a 30-year government bond. Corporate and
- municipals are typically in the three to 10-year range
- Mortgage-backed certificates are
- the most common type of pass-through, where homeowners' payments pass from
- the original bank through a government agency or investment bank to
- Treasury Receipts In general, stripped U.S. Government
- bonds are referred to as Treasury receipts but are better known as
- TIGRS (Treasury Investment Growth
- Receipts), CATS (Certificates of Accrual on Treasury Securities), etc.
- The call protection is advantageous to investors because it prevents the
- issuer from forcing redemption early on in the life of a security. This means
- that investors will have a minimum number or years, regardless of how poor the
- market becomes, to reap the benefits of the security.
- The period for which the bond is protected is known as
- the "deferment period" or the "cushion".
Insider Trading Act of 1988
- Insider Trading Act of 1988 An act enabled
- in 1988 to increase the liability penalties to all involved parties to
- insider trading. This act was
- established due to the increase in high profile insider trading cases, as
- well as the increase in monetary values of the trades. The act allows the
- SEC to order a penalty of up to three times the profit, and the guilty
- parties may serve significant jail time according to the extent of their
- crime. Insider trading occurs when members outside of the establishment
- are given information which is not available to the public as a whole, and
- use it to increase their wealth through buying/selling stock.
- A "Private Securities Transaction", as defined
- by the NASD, is the sale of a security by a broker working for a NASD-licensed
- firm wherein a) the security is not recognized by the employer or typically
- sold by the broker, b) the broker receives outside compensation for the
- transaction, or c) both.
- Underwriters generally receive
- underwriting fees from their issuing clients, but they also
- usually earn profits when selling the underwritten shares to
- investors. However, underwriters assume the responsibility of
- distributing a securities issue to the public. If they can't sell
- all of the securities at the specified offering price, they may be
- forced to sell the securities for less than they paid for them, or retain
- the securities themselves.
Gross Domestic Product
- Gross Domestic Product The monetary value of all the
- finished goods and services produced within a country's borders in a
- specific time period, though GDP is usually calculated on an annual basis.
- It includes all of private and public consumption, government
- outlays, investments and exports
- less imports that occur within a defined territory.
- is equal to all private consumption, or consumer spending, in a nation's
- is the sum of government spending
- is the sum of all the country's businesses spending on capital
- is the nation's total net exports, calculated as total exports minus
- total imports. (NX = Exports - Imports)
Call and Put
- 1. In some exchanges, the call period is
- an important time in which to match and execute a large number of orders
- before opening and closing.
- 2. A call becomes more valuable as the price of the underlying asset
- (stock) appreciates.
- When an investor
- purchases a put, he or she expects the underlying asset will decline
- in price. The investor will then profit by either selling the put options
- at a profit, or by exercising the option. If an investor writes a put
- contract, he or she is estimating the stock will not decline
- below the exercise price, and will not fall significantly below the exercise
- A security that
- represents ownership in a corporation. Holders of common stock exercise control
- by electing a board of directors and voting on corporate policy. Common
- stockholders are on the bottom of the priority ladder for ownership structure.
- In the event of liquidation, common shareholders have rights to a company's
- assets only after bondholders, preferred shareholders and other debtholders
- have been paid in full.
The degree of uncertainty that an
- investor can handle in regard to a negative change in the value
- of his or her portfolio.
- Breakpoint For example, suppose that
- an investor plans to invest $95,000 in a front-end load mutual fund and faces a
- sales charge of 6.25%, or $6,125. If a breakpoint of $100,000 exists with
- a lower sales charge of 5.5%, the investor should be advised to
- invest an additional $5,000. If the investor can add another $5,000
- to the investment, he or she would benefit from a lower breakpoint
- sales charge of $5,500, or a savings of $625 on this transaction.
- Mutual funds are required to give a description of these breakpoints and
- the eligibility requirements in the fund prospectus. By reaching or
- surpassing a breakpoint, an investor will face a lower sales charge and
- save money. Any investor
- purchase of fund shares that occurs just below a breakpoint is considered
- unethical and in violation of NASD rules.
Letter of Intent
- 1. Letters of intent are used
- during the merger and acquisitions process to outlines a
- firm's plan to buy/take over another company. For example, the
- letter of intent will disclose the specific terms of the transaction
- (whether it is a cash or stock deal).
- 2. Unlike wills, letters of intent are often not legal documents.
- However, because a letter of intent represents the wishes and
- desires of the parents, the courts will still often use it as a benchmark
- in conjunction with other documents to determine what happens to the
- Call Risk The risk, faced by a holder of a
- callable bond, that a bond issuer will take advantage of the
- callable bond feature and redeem the issue prior to maturity. This means
- the bondholder will receive payment on the value of the bond and, in most
- cases, will be reinvesting in a less favorable environment (one with a
- lower interest
- Most growth
- funds offer higher potential capital appreciation but usually at
- above-average risk. Growth funds are more volatile than funds in the
- value and blend categories. The companies in a growth fund portfolio are
- in an expansion phase and they are not expected to pay dividends. Investing in growth funds
- requires a tolerance for risk and a holding period with a time horizon of
- five to 10 years.
- 1. Dividends may be in the form of cash, stock or
- property. Most secure and stable companies offer dividends to their
- stockholders. Their share prices might not move much, but the dividend
- attempts to make up for this.
- High-growth companies rarely offer dividends because all of their
- profits are reinvested to help sustain higher-than-average growth.
- 2. Mutual
- pay out interest and dividend income received from their portfolio
- holdings as dividends to fund shareholders. In addition, realized capital
- gains from the portfolio's trading activities are generally paid out
- (capital gains distribution) as a year-end dividend.