Finance definitions

375 finance terms from Achievable exam prep courses, each defined in plain language with links into the course textbook.

• 11-bond indexThe 11-bond index is a benchmark published by The Bond Buyer that tracks the average yield of 11 high-grade general obligation municipal bonds with 20-year maturities. It gauges borrowing costs for top-quality municipal issuers.
• 529 planA 529 plan is a state-sponsored, tax-advantaged account for education savings. Contributions grow tax-deferred, and withdrawals are tax-free at the federal level when used for qualified education expenses.
• Absorption vs. variable costingAbsorption costing and variable costing are two methods of valuing inventory that differ in how they treat fixed manufacturing overhead. Absorption costing includes it in product cost, while variable costing expenses it in the period incurred.
• Access equals delivery ruleThe access equals delivery rule lets an issuer or broker-dealer satisfy prospectus delivery requirements by filing the final prospectus with the SEC's EDGAR system instead of mailing a paper copy. Because the document is publicly available online, investors are considered to have received it.
• Accounting equationThe accounting equation states that assets = liabilities + equity. It is the foundation of double-entry bookkeeping: everything a business owns is financed either by what it owes to others or by its owners' investment.
• Accounts receivableAccounts receivable is the money customers owe a company for goods or services delivered on credit but not yet paid for. It appears on the balance sheet as a current asset because it is expected to convert to cash within a year.
• Accretion vs. amortizationAccretion and amortization are opposite cost basis adjustments for bonds. Accretion gradually increases the cost basis of a bond bought at a discount, while amortization gradually decreases the cost basis of a bond bought at a premium, moving both toward par by maturity.
• Accruals and prepaymentsAccruals and prepayments are period-end adjustments that match income and expenses to the period they relate to. An accrual records an expense incurred but not yet paid, while a prepayment records a payment made for a future period's expense.
• Accrued expensesAccrued expenses are costs a business has incurred during an accounting period but has not yet paid or been billed for. They are recorded as a current liability so the expense appears in the period it relates to.
• Accrued incomeAccrued income is income a business has earned during an accounting period but has not yet received or invoiced by the period's end. Under accrual accounting it is recognized as revenue and recorded as a current asset.
• Accrued interestAccrued interest is the interest a bond has earned since its last coupon payment but that has not yet been paid. When a bond trades between coupon dates, the buyer pays the seller the accrued interest on top of the bond's price.
• Activity-based costing (ABC)Activity-based costing (ABC) is a method of assigning overhead costs to products based on the activities each product actually consumes. It replaces a single plantwide overhead rate with multiple cost pools, each allocated using its own cost driver.
• Adjustable rate preferred stockAdjustable rate preferred stock is preferred stock whose dividend rate resets periodically based on a benchmark interest rate, such as the Treasury bill rate. The floating dividend keeps its market price more stable than fixed-rate preferred stock.
• Agency CMOAn agency CMO is a collateralized mortgage obligation built from mortgage-backed securities issued or guaranteed by GNMA, FNMA, or FHLMC. The agency guarantee greatly reduces credit risk — only GNMA carries the government's full faith and credit — but the tranches still carry prepayment and extension risk.
• Agency vs. principal capacityAgency and principal capacity describe the two ways a firm can execute a customer's trade: as an agent (broker) matching the customer with another party for a commission, or as a principal (dealer) trading from its own inventory for a markup or markdown.
• Aggregate demandAggregate demand is the total quantity of goods and services demanded across an entire economy at each price level. It is the sum of consumption, investment, government spending, and net exports (AD = C + I + G + NX).
• Aggregate supplyAggregate supply is the total quantity of goods and services that producers in an economy are willing and able to supply at each price level. It is modeled with a short-run curve that slopes upward and a long-run curve that is vertical at full employment.
• Alpha and betaBeta measures how much an investment moves relative to the overall market, while alpha measures the return an investment earned above or below what its beta predicted. Beta describes risk; alpha describes performance after adjusting for that risk.
• American depositary receipt (ADR)An American depositary receipt (ADR) is a certificate issued by a U.S. bank that represents shares of a foreign company, allowing the stock to trade on U.S. markets in U.S. dollars.
• AmortizationAmortization is the gradual reduction of an amount over time — either spreading the cost of an intangible asset across its useful life, or paying down a loan's principal through scheduled payments.
• Annualized returnAnnualized return converts an investment's performance over any time period into the equivalent yearly rate, making returns earned over different horizons directly comparable.
• Anti-money laundering (AML)Anti-money laundering (AML) refers to the laws, regulations, and firm procedures designed to stop criminals from disguising illegally obtained funds as legitimate income. In the U.S., the Bank Secrecy Act is the foundation of AML compliance.
• Anticipation notes (TAN, BAN, GAN)Anticipation notes are short-term municipal securities issued to cover temporary cash needs until an expected source of money arrives — taxes (TANs), bond proceeds (BANs), grants (GANs), or revenues (RANs).
• AON vs. FOK ordersAn all-or-none (AON) order must be filled in its entirety but can stay open until it is, while a fill-or-kill (FOK) order must be filled in its entirety immediately or it is cancelled. Both forbid partial fills; only FOK adds the immediacy requirement.
• Assessable stockAssessable stock is stock that can require its holder to pay additional money to the issuer beyond the original purchase price. Nearly all stock issued today is non-assessable, but the concept remains a tested point under the Uniform Securities Act.
• Assumed interest rate (AIR)The assumed interest rate (AIR) is the benchmark rate of return used to set the initial payment on a variable annuity and to adjust each payment thereafter. Separate account performance above the AIR raises the next payment, while performance below it lowers the payment.
• Available-for-sale securitiesAvailable-for-sale (AFS) securities are debt investments a company holds without intending to trade them actively or hold them to maturity. They are reported at fair value, with unrealized gains and losses recorded in other comprehensive income rather than net income.
• Balance of paymentsThe balance of payments is a record of all economic transactions between one country's residents and the rest of the world over a period. It is divided into the current account, which tracks trade in goods and services, and the capital and financial accounts, which track investment flows.
• Balanced scorecardA balanced scorecard is a performance management framework that measures an organization from four perspectives — financial, customer, internal business processes, and learning and growth — rather than by financial results alone.
• Bank reconciliationA bank reconciliation is the process of comparing a company's cash book balance to its bank statement balance and explaining every difference between them, such as outstanding checks, uncleared deposits, bank charges, and errors.
• Banker's acceptanceA banker's acceptance is a short-term time draft guaranteed by a bank, used mainly to finance international trade. It trades at a discount to face value in the money market and matures in 270 days or less.
• Bid and askThe bid is the highest price a buyer is willing to pay for a security, and the ask (or offer) is the lowest price a seller will accept. The difference between them is the bid-ask spread.
• Board of directorsA board of directors is the group of individuals elected by a corporation's shareholders to oversee management and represent shareholder interests. The board sets strategy, hires and monitors executives, and declares dividends.
• Bond durationBond duration measures how sensitive a bond's price is to a change in interest rates, expressed as a weighted average of the time until the bond's cash flows are received. The longer a bond's duration, the more its price will move when rates change.
• Bond quotesBond quotes express a bond's price as a percentage of its par value rather than in dollars. A corporate bond quoted at 98½ is trading at 98.5% of its $1,000 par, or $985.
• Bond ratingsBond ratings are letter grades assigned by credit rating agencies that measure a bond issuer's ability to make interest and principal payments on time. They classify bonds by default risk, from the highest investment grade down to speculative junk status.
• Books of prime entryBooks of prime entry are the day books where a business first records transactions, grouped by type, before they are posted to the general ledger. Examples include the sales day book, purchases day book, cash book, and the journal.
• Break-even analysisBreak-even analysis determines the sales volume at which total revenue exactly equals total cost, so profit is zero. It separates costs into fixed and variable components and shows how many units must be sold before a project or product starts earning.
• Broker-dealerA broker-dealer is a firm that buys and sells securities for customers (as a broker) or for its own account (as a dealer). Most brokerage firms act in both capacities, which is why the two roles share one label.
• Brokerage account statementsBrokerage account statements are the periodic reports firms send customers showing their positions, balances, and account activity. Firms must send statements at least quarterly, and most send them monthly in any month with activity.
• Business continuity planA business continuity plan (BCP) is a written procedure describing how a firm will keep serving customers and protect their assets during a significant business disruption. Broker-dealers and investment advisers are required to maintain one and update it as their business changes.
• Business cycleThe business cycle is the recurring pattern of expansion and contraction in a nation's overall economic activity. It moves through four phases — expansion, peak, contraction, and trough — measured largely by changes in real GDP, employment, and output.
• Business development company (BDC)A business development company (BDC) is a publicly traded investment company that lends to and invests in small and mid-sized private businesses. BDCs give everyday investors access to private-market returns through shares traded on an exchange.
• Butterfly spreadA butterfly spread is a four-option strategy built from three equally spaced strike prices, combining a bull spread with a bear spread. It has limited risk and limited reward, and pays off best when the underlying settles at the middle strike.
• Call premiumA call premium is the extra amount above par value that an issuer pays bondholders when it redeems a callable bond before maturity. It compensates investors for losing the remaining interest payments they expected to collect.
• Call protectionCall protection is a period after issuance during which the issuer of a bond or preferred stock is barred from redeeming (calling) the security. It guarantees investors a stretch of time when their income stream cannot be taken away early.
• Call spreadA call spread is an options strategy that combines buying one call and selling another call on the same stock with the same expiration but different strike prices. It caps both the maximum gain and the maximum loss.
• Callable preferred stockCallable preferred stock is preferred stock the issuing company can buy back from investors at a preset call price after a specified date, typically when interest rates have fallen.
• Capital budgetA capital budget is a plan for a company's long-term investments in assets such as equipment, facilities, and technology. It identifies which large projects to fund, when to fund them, and how the spending will be financed.
• Capital gains and lossesA capital gain is the profit realized when an investment is sold for more than its cost basis, and a capital loss is the shortfall when it sells for less. Gains held longer than one year are taxed at lower long-term rates than short-term gains.
• Capital market theoryCapital market theory is a framework for explaining how risk and expected return are related in the securities markets. It builds on modern portfolio theory and includes concepts like the capital asset pricing model (CAPM), beta, and the efficient frontier.
• Capital structureCapital structure is the mix of debt and equity a company uses to fund its assets and operations. The balance between borrowed money and owners' capital determines a firm's financing cost, its financial risk, and the order in which claims are paid.
• Cash accountA cash account is a brokerage account in which the customer must pay in full for every purchase, with no borrowing from the firm. It is the default account type and the opposite of a margin account.
• Cash dividendA cash dividend is a distribution of a company's earnings paid to shareholders in cash, typically quarterly. Each stockholder receives a proportional payment based on the number of shares they own.
• Cash management billA cash management bill (CMB) is a very short-term security the U.S. Treasury issues on an as-needed basis to cover temporary gaps in the government's cash flow. Like Treasury bills, CMBs are sold at a discount and mature at face value.
• Certificate of deposit (CD)A certificate of deposit is a bank deposit that pays a fixed interest rate in exchange for leaving the money untouched until a set maturity date. Withdraw early and the bank charges a penalty, usually a forfeit of some of the interest earned.
• Chicago Board Options Exchange (CBOE)The Chicago Board Options Exchange (CBOE) is the largest U.S. options exchange and the first marketplace created specifically for trading listed options. It standardizes options contracts and provides a central, regulated market where they can be bought and sold.
• Circular flow modelThe circular flow model is a diagram showing how money, goods, and resources move between households and firms in an economy. It illustrates why total spending, total income, and total output in an economy are always equal.
• Class B sharesClass B shares are mutual fund shares sold without a front-end sales charge but subject to a contingent deferred sales charge if you redeem within a set number of years. They are also known as back-end load shares.
• Class C sharesClass C shares are a mutual fund share class with no front-end sales charge but a higher ongoing 12b-1 fee, often called a level load. They typically suit investors with shorter time horizons.
• Closed-end fundA closed-end fund is an investment company that raises capital once through an IPO, issuing a fixed number of shares that then trade on an exchange. Unlike mutual funds, its shares are bought and sold between investors at market prices that can differ from NAV.
• Closing sale (options)A closing sale is an options order that sells a contract the investor already owns, exiting an existing long position. It is one of the four options transaction types, alongside opening purchases, opening sales, and closing purchases.
• Collar (options)A collar is an options strategy in which an investor who owns stock buys a protective put and sells a covered call at the same time. The put sets a floor under the position while the call caps its upside, and the call premium helps pay for the put.
• Collateral trust certificateA collateral trust certificate is a secured corporate bond backed by securities — typically stocks or bonds of another company — that the issuer deposits with a trustee as collateral for the bondholders.
• Collateralized mortgage obligation (CMO)A collateralized mortgage obligation (CMO) is a mortgage-backed security that pools home loans and divides the resulting cash flows into separate classes, called tranches, each with its own maturity and prepayment profile.
• Combination (options)A combination is an options strategy that pairs a call and a put on the same underlying security with different strike prices, different expirations, or both. It works like a straddle but gives the trader more flexibility in positioning.
• Commercial paperCommercial paper is short-term, unsecured corporate debt issued to cover near-term obligations like payroll and inventory. It has a maximum maturity of 270 days, is typically sold at a discount, and is exempt from SEC registration when it also meets the Securities Act's other conditions — chiefly that the proceeds fund a current transaction.
• Common stockCommon stock is a security that represents ownership in a corporation. Common stockholders can vote on corporate matters and may receive dividends, but they are last in line for assets if the company liquidates.
• Consolidated financial statementsConsolidated financial statements combine the results of a parent company and the subsidiaries it controls into a single set of statements, presented as if the group were one economic entity. Intercompany transactions and balances are eliminated so nothing is counted twice.
• Contract assets and contract liabilitiesA contract asset is a company's right to payment for goods or services it has already transferred, when that right depends on something more than the passage of time. A contract liability is the obligation to transfer goods or services for which the company has already been paid.
• Contribution marginContribution margin is sales revenue minus variable costs. It shows how much of each sales dollar is left over to cover fixed costs and, once those are covered, to become profit.
• Control stockControl stock is stock owned by an affiliate of the issuer — an officer, director, or shareholder controlling more than 10% of the company's voting shares. Sales of control stock are subject to the volume limits of SEC Rule 144.
• Conversion ratioThe conversion ratio is the number of common shares an investor receives when converting a convertible bond or convertible preferred stock. It equals the security's par value divided by its conversion price.
• Convertible bondA convertible bond is a corporate bond that the holder can exchange for a fixed number of the issuer's common shares. It pays interest like a normal bond but also lets the investor participate if the company's stock rises.
• Convertible preferred stockConvertible preferred stock is preferred stock that can be exchanged for a fixed number of the issuer's common shares. It pays a fixed dividend while giving the holder a way to participate if the common stock rises.
• Cooling-off periodThe cooling-off period is the waiting time between the day an issuer files a registration statement with the SEC and the day the offering becomes effective. It lasts a minimum of 20 days, during which the securities may be marketed but not sold.
• Corporate actionA corporate action is an event initiated by a company that affects its outstanding securities or shareholders, such as a dividend, stock split, merger, tender offer, or rights offering. Actions may be mandatory or voluntary.
• Corporate debtCorporate debt is money borrowed by corporations through securities like bonds, debentures, and commercial paper. Investors who buy corporate debt lend money to the issuer in exchange for interest payments and repayment of principal.
• Corporate governanceCorporate governance is the system of rules, structures, and processes by which a company is directed and controlled. It defines how power and accountability are shared among shareholders, the board of directors, and management.
• Corporate securitiesCorporate securities are the investment instruments a corporation issues to raise capital, including equity securities such as common and preferred stock and debt securities such as bonds, debentures, and commercial paper. Investors buy them for growth, income, or both.
• COSO frameworkThe COSO framework is the most widely used model for designing and evaluating internal control, published by the Committee of Sponsoring Organizations of the Treadway Commission. It organizes internal control into five integrated components supporting operations, reporting, and compliance objectives.
• Cost basisCost basis is the original value of an investment for tax purposes, typically the purchase price plus commissions. It is subtracted from the sale proceeds to determine the capital gain or loss when the investment is sold.
• Coterminous debtCoterminous debt is municipal debt issued by two or more governmental units whose boundaries are identical. Because the same taxpayers back both issues, analysts add the debt together when evaluating a municipality's total obligation.
• Covered call taxationCovered call taxation refers to the tax rules applied when an investor sells call options against stock they own. The premium received is not taxed until the option expires, is closed out, or is exercised, and the outcome determines whether it becomes a short-term gain or an adjustment to the stock sale.
• Cumulative preferred stockCumulative preferred stock is preferred stock whose missed dividends accumulate as arrears. The company must pay all skipped preferred dividends before it can pay any dividend to common shareholders.
• Currency optionsCurrency options are option contracts that give the holder the right to buy or sell a foreign currency at a set exchange rate before expiration. Businesses and investors use them to hedge or speculate on exchange-rate movements.
• Currency transaction report (CTR)A currency transaction report (CTR) is a form that a financial institution must file with FinCEN whenever a customer conducts more than $10,000 in cash transactions in a single business day. It is a routine anti-money-laundering filing, not an accusation of wrongdoing.
• Current and quick ratiosThe current and quick ratios are liquidity measures that compare a company's short-term assets to its short-term liabilities. The current ratio uses all current assets, while the quick ratio strips out inventory for a stricter test.
• Current yieldCurrent yield is a bond's annual interest payment divided by its current market price. It measures the income an investor earns relative to what the bond costs today, not its face value.
• Custodial accountA custodial account is an investment account an adult manages on behalf of a minor. The assets legally belong to the minor, but the custodian makes all investment decisions until the minor reaches the age of majority.
• De minimis exemption (investment advisers)The de minimis exemption allows an investment adviser with no place of business in a state and only a handful of clients there to avoid registering in that state. Under the Uniform Securities Act, the limit is five or fewer non-institutional clients in a 12-month period.
• DebentureA debenture is an unsecured corporate bond backed only by the issuer's general creditworthiness and promise to pay, rather than by specific collateral. Investors rely on the company's overall financial strength for repayment.
• Deferred incomeDeferred income is money a business has received from customers before delivering the goods or services. Because the revenue has not yet been earned, it is recorded as a liability until the company fulfills its obligation.
• DepreciationDepreciation is the systematic allocation of a tangible asset's cost over its useful life. Rather than expensing a machine or building all at once, a business records a portion of the cost as an expense each period the asset helps generate revenue.
• Derivative (finance)A derivative is a financial contract whose value is derived from the price of an underlying asset, such as a stock, bond, commodity, currency, or index. Common derivatives include options, futures, forwards, and swaps.
• Designated market maker (DMM)A designated market maker (DMM) is a firm on the New York Stock Exchange responsible for maintaining a fair and orderly market in its assigned stocks. DMMs quote continuous two-sided markets and manage the opening and closing auctions.
• Digital assetsDigital assets are assets that exist in electronic form and are recorded on a distributed ledger, such as cryptocurrencies, stablecoins, and non-fungible tokens (NFTs). They can be transferred, traded, or held as investments.
• Direct participation program (DPP)A direct participation program (DPP) is a pooled investment, typically structured as a limited partnership, that passes its income, gains, losses, and tax benefits directly through to investors instead of being taxed at the entity level.
• Discount rateThe discount rate is the interest rate the Federal Reserve charges banks for direct loans from its discount window. In valuation, the same term means the rate used to discount future cash flows to their present value.
• Discounted cash flow (DCF)Discounted cash flow is a valuation method that estimates what an investment is worth today by projecting the cash it will pay out and discounting each payment back to the present. The sum of those present values is the investment's intrinsic value.
• Discretionary authorityDiscretionary authority is written permission from a customer allowing a financial professional to place trades in the customer's account without asking approval for each order. An account operating this way is called a discretionary account.
• Dividend growth modelThe dividend growth model values a stock as the present value of its future dividends, assuming those dividends grow at a constant rate. Its formula is value = next year's dividend ÷ (required return − growth rate).
• Dividend tax rateThe dividend tax rate depends on whether a dividend is qualified or nonqualified. Qualified dividends are taxed at the lower long-term capital gains rates, while nonqualified (ordinary) dividends are taxed as ordinary income.
• Double-entry bookkeepingDouble-entry bookkeeping is a system in which every transaction is recorded in at least two accounts — a debit in one and an equal credit in another. It keeps the accounting equation in balance and provides a built-in check on recording errors.
• DVP and RVP accountsDVP and RVP accounts are institutional brokerage accounts that settle trades on a cash-on-delivery basis: in a DVP account payment is made when securities are delivered, while in an RVP account securities are delivered only when payment is received.
• Earnings per share (EPS)Earnings per share (EPS) is a company's profit available to common shareholders divided by its outstanding common shares. The formula is EPS = (net income − preferred dividends) ÷ outstanding common shares.
• Efficient market hypothesis (EMH)The efficient market hypothesis (EMH) is the theory that security prices already reflect all available information, making it impossible to consistently beat the market through stock picking or market timing.
• Elasticity of demandElasticity of demand measures how much the quantity demanded of a good changes when its price changes. Demand is elastic when buyers cut back sharply in response to a price increase, and inelastic when they keep buying roughly the same amount.
• Employee stock optionsEmployee stock options are rights granted by a company to its employees to buy the employer's stock at a fixed price for a set period. They are a form of compensation designed to align employee and shareholder interests.
• Equipment trust certificateAn equipment trust certificate is a secured corporate bond backed by specific physical equipment, such as airplanes or railroad cars. A trustee holds title to the equipment until the debt is fully repaid.
• ERISAERISA is the Employee Retirement Income Security Act of 1974, the federal law that sets minimum standards for private-sector retirement and benefit plans, including participation, vesting, funding, fiduciary conduct, and disclosure requirements.
• ERISA 1,000-hour ruleThe ERISA 1,000-hour rule requires employers to let employees participate in a qualified retirement plan once they work at least 1,000 hours in a 12-month period, extending eligibility to many part-time workers.
• Eurodollar bondsEurodollar bonds are bonds denominated in US dollars but issued and sold outside the United States. They pay interest and principal in dollars, and they can avoid SEC registration when the offering satisfies Regulation S — meaning it takes place in an offshore transaction with no directed selling efforts in the US.
• Eurodollar certificate of depositA Eurodollar certificate of deposit is a US dollar-denominated CD issued by a bank located outside the United States, often a foreign branch of a US bank. It pays interest and principal in dollars but sits outside the US banking system.
• Exchange privilegeAn exchange privilege lets a mutual fund investor swap shares of one fund for shares of another fund in the same fund family at net asset value, without paying a new sales charge.
• Exchange rateAn exchange rate is the price of one country's currency expressed in terms of another currency. Exchange rates determine what imports, exports, foreign investments, and international payments cost in domestic terms.
• Exchange-traded fund (ETF)An exchange-traded fund (ETF) is a pooled investment fund whose shares trade on stock exchanges throughout the day like a stock, typically tracking an index at low cost.
• Exchange-traded note (ETN)An exchange-traded note (ETN) is an unsecured debt security, typically issued by a bank, whose return is linked to the performance of a market index. Unlike an ETF, an ETN holds no underlying assets, so investors bear the issuer's credit risk.
• Exempt securitiesExempt securities are securities that do not have to be registered with regulators before being sold. Common examples include U.S. government securities, municipal bonds, and securities issued by banks — though antifraud rules still apply to all of them.
• Exempt transactionAn exempt transaction is a securities trade that does not require state registration of the security because of how the transaction occurs — for example, an unsolicited order, a private placement, or a sale to an institutional investor.
• Exemption (securities)An exemption in securities law excuses a security, transaction, or person from registration requirements that would otherwise apply. Exempt parties still fall under the law's antifraud provisions — they are excused from registration, not from the law itself.
• Face-amount certificate companyA face-amount certificate company is one of the three types of investment companies defined by the Investment Company Act of 1940. It issues debt certificates that promise to pay investors a fixed sum — the face amount — at a stated maturity date.
• Factoring of accounts receivableFactoring is the sale of a company's accounts receivable to a third party, called a factor, at a discount. The company receives cash immediately instead of waiting for customers to pay, and the factor earns the difference when it collects the receivables.
• Federal covered adviserA federal covered adviser is an investment adviser that registers with the SEC rather than with state securities administrators, typically because it manages $100 million or more in client assets.
• Federal covered securityA federal covered security is a security that is exempt from state (blue sky) registration because federal law governs its registration instead. Common examples include exchange-listed stocks and securities issued by registered investment companies.
• Federal ReserveThe Federal Reserve is the central bank of the United States. It conducts monetary policy to promote stable prices and maximum employment, supervises banks, and acts as a lender of last resort to the banking system.
• Fiduciary accountA fiduciary account is a brokerage or bank account managed by one person or entity for the benefit of another, such as a trust, custodial, guardianship, or estate account. The fiduciary must act solely in the beneficiary's best interest.
• FIFO and LIFOFIFO (first-in, first-out) and LIFO (last-in, first-out) are inventory cost flow assumptions. FIFO expenses the oldest inventory costs first, while LIFO expenses the newest costs first, producing different cost of goods sold and ending inventory values.
• Finance leaseA finance lease is a lease that transfers substantially all the risks and rewards of owning an asset to the lessee. The lessee records both a right-of-use asset and a lease liability on its balance sheet, treating the arrangement much like a financed purchase.
• FINRA Code of ProcedureThe FINRA Code of Procedure is the set of rules governing how FINRA investigates and disciplines member firms and their associated persons for violations of securities rules. It covers complaints, hearings, sanctions, and appeals.
• FINRA customer complaint rulesFINRA customer complaint rules govern how broker-dealers must handle written grievances from customers alleging misconduct. Firms must record each complaint, investigate it, keep the records for four years, and report complaint data to FINRA quarterly.
• FINRA record retention requirementsFINRA record retention requirements are the rules dictating how long broker-dealers must keep their business records. Most records fall into three buckets: lifetime retention for organizational documents, six years for core account and financial records, and three years for most everything else.
• FINRA Rule 2165FINRA Rule 2165 allows broker-dealers to place a temporary hold on disbursements or transactions in a customer's account when the firm reasonably believes a "specified adult" is being financially exploited.
• FINRA Rule 2210FINRA Rule 2210 governs member firms' communications with the public. It sorts communications into retail, institutional, and correspondence categories and requires that all be fair, balanced, and not misleading.
• FINRA Rule 4530FINRA Rule 4530 is the reporting requirements rule that obligates member firms to notify FINRA when specified events occur, such as regulatory actions, criminal charges, certain customer complaints, and internal findings of securities law violations.
• FINRA Rule 5130FINRA Rule 5130 prohibits industry insiders, known as restricted persons, from buying new issues of equity securities (IPOs) for their own accounts. It prevents broker-dealers and their associates from keeping IPO shares meant for the public.
• Firm commitment underwritingFirm commitment underwriting is an arrangement in which the underwriter buys an entire securities issue from the issuer and resells it to the public, guaranteeing the issuer its money and bearing the risk of unsold shares.
• Fiscal policyFiscal policy is the use of government spending and taxation to influence the economy. It is controlled by Congress and the President — not the Federal Reserve, which handles monetary policy.
• FNMA (Fannie Mae) bondsFNMA bonds are debt securities issued by the Federal National Mortgage Association (Fannie Mae), a government-sponsored enterprise that supports the U.S. mortgage market. They are not backed by the full faith and credit of the U.S. government.
• Foreign exchange riskForeign exchange risk is the possibility that changes in currency exchange rates will reduce the value of a business's transactions, assets, or reported profits. It affects any company that buys, sells, borrows, or invests across currencies.
• Fundamental analysisFundamental analysis is a method of valuing a security by examining the issuing company's financial statements, management, industry, and the broader economy to determine what the security is intrinsically worth.
• Funded debtFunded debt is a corporation's long-term debt — borrowings such as bonds and debentures that mature in more than one year. It contrasts with short-term, money-market-style borrowing used to cover temporary needs.
• Futures and forwardsFutures and forwards are derivative contracts obligating two parties to buy and sell an asset at a set price on a future date. Futures are standardized and exchange-traded, while forwards are private, customizable agreements.
• General obligation bondA general obligation (GO) bond is a municipal bond backed by the full faith, credit, and taxing power of the issuing state or local government, rather than by revenue from a specific project.
• Goodwill (accounting)Goodwill is an intangible asset recorded when one company acquires another for more than the fair value of its identifiable net assets. It captures value that cannot be assigned to specific assets, such as brand strength, customer relationships, and assembled workforce.
• Gross domestic product (GDP)Gross domestic product is the total market value of all final goods and services produced within a country's borders during a given period, usually a quarter or a year. It is the standard measure of the size and growth rate of an economy.
• Guaranteed bondA guaranteed bond is a corporate bond whose interest and principal payments are backed by a company other than the issuer, typically a parent company guaranteeing the debt of its subsidiary. The guarantee adds a second layer of protection for bondholders.
• Guardianship accountA guardianship account is a brokerage account managed by a court-appointed guardian on behalf of someone who cannot manage their own finances, such as a minor without parents or a legally incompetent adult.
• Head and shoulders patternA head and shoulders pattern is a chart formation with three peaks — a tall middle peak (the head) flanked by two lower peaks (the shoulders). Technical analysts read it as a signal that an uptrend is reversing into a downtrend.
• Health savings account (HSA)A health savings account (HSA) is a tax-advantaged account that lets people enrolled in a high-deductible health plan set aside money for qualified medical expenses. Contributions are deductible, growth is tax-deferred, and qualified withdrawals are tax-free.
• Hedge fundA hedge fund is a private, loosely regulated investment pool that uses aggressive strategies — leverage, short selling, derivatives — to seek high returns for wealthy, accredited investors.
• HedgingHedging is the practice of taking an offsetting position — often with options — to protect an existing investment against loss. It works like insurance: the hedge costs something up front but limits downside if the market moves against you.
• Held orderA held order is an order that must be executed immediately at the best available price, with no discretion given to the executing broker over timing or price. Ordinary market orders are held orders by default.
• High water markA high water mark is the highest value an investment has previously reached, used as the benchmark for what comes next. Equity-indexed annuities credit interest from the index's highest anniversary value, and hedge funds charge performance fees only on gains above the fund's previous peak.
• Horizontal spreadA horizontal spread is an options position built from two contracts on the same underlying security with the same strike price but different expiration dates. Traders use it to profit from the faster time decay of the nearer-term contract.
• Hypothecation agreementA hypothecation agreement is the margin account document in which a customer pledges their securities as collateral for the loan their broker-dealer extends. Signing it is mandatory to open a margin account.
• Impairment of assetsImpairment of assets occurs when an asset's carrying value on the balance sheet exceeds the amount the company can recover through use or sale. The company must write the asset down and recognize an impairment loss on the income statement.
• Income bondAn income bond is a corporate bond that promises to repay principal at maturity but pays interest only if the issuer earns sufficient income and its board declares the payment. They are typically issued by companies reorganizing after financial distress.
• Income fundAn income fund is a mutual fund or other pooled investment whose primary objective is generating current income rather than capital appreciation. It typically holds bonds, preferred stock, and dividend-paying common stock.
• Income statementAn income statement is a financial statement that reports a company's revenues, expenses, and resulting profit or loss over a period of time. It answers whether the business made money during the quarter or year.
• Index fundAn index fund is a mutual fund or ETF designed to match the performance of a market index, such as the S&P 500, by holding the same securities in the same proportions. Because it is passively managed, it typically charges lower fees than actively managed funds.
• Index optionsIndex options are option contracts based on the value of a stock market index, such as the S&P 500, rather than an individual stock. They settle in cash instead of shares, since an index itself cannot be delivered.
• Indication of interest (IOI)An indication of interest (IOI) is a non-binding expression by an investor that they may want to buy shares of a new securities offering before it is priced. It is not an order and creates no obligation for either side.
• Individual accountAn individual account is a brokerage account owned and controlled by one person, who alone holds the account's assets and directs its activity unless they grant written authority to someone else. It is the simplest form of account registration and the baseline against which joint, custodial, and trust registrations are compared.
• Individual retirement account (IRA)An individual retirement account is a tax-advantaged account an individual opens on their own to save for retirement. Contributions and withdrawals are taxed differently depending on whether the account is a traditional IRA or a Roth IRA.
• InflationInflation is a sustained rise in the general price level of goods and services, which reduces the purchasing power of money. It is usually measured as the percentage change in a price index such as the consumer price index.
• Initial public offering (IPO)An initial public offering (IPO) is the first sale of a company's stock to the public. The issuer registers the offering with the SEC, works with underwriters to price and distribute the shares, and afterward its stock trades on the secondary market.
• Insider tradingInsider trading is buying or selling a security based on material, non-public information in breach of a fiduciary duty or duty of trust and confidence. It is illegal, punishable by civil fines of up to three times the profit gained or loss avoided, plus criminal fines and prison time.
• Institutional investorAn institutional investor is an organization that invests large pools of money on behalf of others — such as banks, insurance companies, pension funds, mutual funds, and endowments — rather than an individual investing personal assets.
• InterpositioningInterpositioning is the prohibited practice of inserting an unnecessary third party, such as another broker-dealer, between a customer's order and the best available market, adding cost without benefit to the customer.
• Intrinsic value (options)Intrinsic value is the amount by which an option is in the money. For a call, it equals the stock price minus the strike price; for a put, the strike price minus the stock price. Intrinsic value is never less than zero.
• Inventory valuationInventory valuation is the process of assigning a monetary cost to the goods a business holds. The chosen method determines both the inventory figure reported on the balance sheet and the cost of goods sold reported on the income statement.
• Inverted saucer patternAn inverted saucer is a technical analysis chart pattern showing a slow, rounded top in a stock's price. It signals a gradual reversal from an uptrend to a downtrend and is considered bearish.
• Investment adviser representative (IAR)An investment adviser representative (IAR) is an individual who works for an investment adviser firm and provides investment advice, manages accounts, solicits advisory clients, or supervises those who do. IARs register at the state level.
• Investment companyAn investment company is a firm that pools money from many investors and invests it in securities on their behalf. The Investment Company Act of 1940 defines three types: face-amount certificate companies, unit investment trusts, and management companies.
• Investment objectiveAn investment objective is the primary financial goal an investor wants a portfolio to achieve, such as growth, income, capital preservation, or speculation. It anchors every suitability determination a financial professional makes.
• Investment suitabilityInvestment suitability is the requirement that a recommendation fit the customer's financial situation, objectives, time horizon, and risk tolerance. A registered representative must gather and evaluate that profile before recommending any security or strategy.
• Iron condorAn iron condor is a four-leg options strategy that combines a short put spread and a short call spread on the same underlying security. It profits when the underlying stays inside a defined price range through expiration, with both risk and reward capped.
• IssuerAn issuer is any entity — a corporation, government, or municipality — that offers or sells its own securities to raise money. Stocks, bonds, and other securities all originate with an issuer.
• Job order costingJob order costing is a cost accounting system that accumulates direct materials, direct labor, and applied overhead separately for each distinct job or batch. It suits businesses producing custom or clearly distinguishable products, such as construction, printing, or consulting.
• Joint accountA joint account is an account owned by two or more people, each of whom has full authority to trade and withdraw from it. The two common brokerage forms are joint tenants with rights of survivorship and tenants in common, which differ in what happens when an owner dies.
• Keogh plan (HR-10)A Keogh plan, also known as an HR-10 plan, is a tax-deferred qualified retirement plan for self-employed individuals and unincorporated businesses such as sole proprietorships and partnerships.
• Kiddie taxThe kiddie tax is a federal rule that taxes a dependent child's unearned income above an annual threshold at the parents' marginal tax rate rather than the child's. It exists to stop families from shifting investment income to children in lower brackets.
• Learning curveA learning curve describes how the time or cost required to produce a unit falls as workers repeat a task and gain experience. In cost accounting, it is modeled so that each doubling of cumulative output reduces the cumulative average time per unit by a fixed percentage.
• Legislative riskLegislative risk is the risk that a change in law — such as new tax rules, regulations, or government policy — will reduce the value of an investment. It is a nonsystematic risk that cannot be predicted from market movements.
• Life-cycle costingLife-cycle costing accumulates all costs a product generates across its entire life, from research and design through production, marketing, service, and disposal. It gives managers a total cost picture that period-by-period production costing misses.
• Limit orderA limit order is an order to buy or sell a security at a specified price or better. It guarantees the execution price but not that the order will be filled.
• Limited partnershipA limited partnership is a business entity with at least one general partner who manages it and carries unlimited liability, plus limited partners who invest capital and risk only what they contributed. Income and losses flow through to the partners rather than the entity.
• Limited tax bondA limited tax bond is a general obligation municipal bond backed by a specific tax source or a capped tax rate, rather than the issuer's unlimited taxing power. The restriction makes it slightly riskier than an unlimited tax G.O. bond.
• Liquidity ratiosLiquidity ratios measure a company's ability to meet its short-term obligations using its current assets. The most common are the current ratio and the quick (acid-test) ratio, both drawn from the balance sheet.
• Loanable funds marketThe loanable funds market is an economic model showing how the supply of savings and the demand for borrowing interact to determine the real interest rate. Savers supply funds, borrowers demand them, and the real interest rate is the price.
• Long callA long call is the options position created by buying a call option, which gives the holder the right to buy the underlying stock at the strike price before expiration. It is a bullish strategy with limited risk and unlimited profit potential.
• Long putA long put is an options position created by buying a put contract, giving the holder the right to sell 100 shares of the underlying stock at the strike price before expiration. It is a bearish strategy that profits when the stock falls.
• Long straddleA long straddle is an options strategy in which you buy a call and a put on the same underlying security with the same strike price and expiration. It profits when the security makes a large move in either direction.
• Maintenance marginMaintenance margin is the minimum equity an investor must keep in a margin account after a position is established. Under FINRA rules, it is 25% of market value for long positions and 30% for short positions.
• Margin accountA margin account is a brokerage account that lets an investor borrow money from the broker-dealer to buy securities, using the securities themselves as collateral. It amplifies both gains and losses compared to paying in full.
• Margin equityMargin equity is the portion of a margin account the investor actually owns — the account's market value minus the amount borrowed from the broker-dealer. It rises and falls with the value of the securities in the account.
• Market makerA market maker is a broker-dealer that stands ready to buy and sell a security at publicly quoted prices, trading from its own inventory. Market makers provide liquidity and earn the spread between their bid and ask prices.
• Market manipulationMarket manipulation is any deliberate attempt to interfere with the free and fair operation of a securities market, such as creating a false appearance of trading activity or artificially moving a security's price. It is prohibited under federal securities law.
• Market orderA market order is an instruction to buy or sell a security immediately at the best price currently available. It guarantees the trade executes, but it does not guarantee the price you receive.
• Master budgetA master budget is a company's comprehensive financial plan for the year, combining all operating budgets and financial budgets into a coordinated set of budgeted financial statements.
• Matched ordersMatched orders are coordinated buy and sell orders for the same security, placed to create the false appearance of active trading. The practice is a form of market manipulation and is illegal under securities law.
• Monetary policyMonetary policy is the set of actions a central bank takes to manage the money supply and interest rates in pursuit of stable prices and full employment. In the United States, it is conducted by the Federal Reserve.
• Money marketThe money market is the segment of the financial system where short-term debt with maturities of one year or less is traded. It includes instruments like Treasury bills, commercial paper, and negotiable CDs, prized for safety and liquidity.
• Mortgage bondA mortgage bond is a corporate bond secured by a lien on real property owned by the issuer, such as land, buildings, or factories. If the issuer defaults, bondholders can claim the pledged real estate to recover their investment.
• Mortgage-backed security (MBS)A mortgage-backed security (MBS) is a bond backed by a pool of home mortgages. Investors receive monthly payments of principal and interest as homeowners pay down the underlying loans.
• Municipal bondA municipal bond is a debt security issued by a state, city, county, or other local government entity to fund public projects. Interest on most municipal bonds is exempt from federal income tax, making them attractive to investors in high tax brackets.
• Municipal bond underwritingMunicipal bond underwriting is the process by which a syndicate of broker-dealers buys a new bond issue from a state or local government and resells it to investors. The syndicate earns the spread between what it pays the issuer and what investors pay for the bonds.
• Municipal Securities Rulemaking Board (MSRB)The Municipal Securities Rulemaking Board (MSRB) is the self-regulatory organization that writes the rules governing broker-dealers and banks that underwrite and trade municipal securities. It creates rules but does not enforce them — enforcement falls to FINRA, the SEC, and bank regulators.
• Mutual fundA mutual fund is an open-end investment company that pools money from many investors and invests it in a diversified portfolio of securities. Shares are bought from and redeemed with the fund itself at net asset value (NAV).
• Mutual fund share classesMutual fund share classes are different versions of the same fund that vary in how investors pay sales charges and ongoing fees. Class A shares charge a front-end load, Class B shares a declining back-end load, and Class C shares an ongoing level load.
• NASDAQThe NASDAQ is a fully electronic U.S. stock market where competing market makers post quotes and trade listed securities. It is one of the world's largest exchanges and is known for its heavy concentration of technology companies.
• Nasdaq Market Center Execution SystemThe Nasdaq Market Center Execution System is the electronic platform that collects quotes from Nasdaq market makers and automatically matches and executes orders. It replaced Nasdaq's earlier separate order-entry systems with a single integrated trading engine.
• NAV vs. POPNAV (net asset value) is the per-share value of a mutual fund's holdings, while POP (public offering price) is what investors actually pay to buy shares — the NAV plus any sales charge.
• Negotiable vs. redeemable securitiesA negotiable security can be freely transferred or sold to another investor in the secondary market, while a redeemable security can only be turned back in to the issuer for cash. Common stock and bonds are negotiable; open-end mutual fund shares are redeemable.
• Negotiated underwritingNegotiated underwriting is a process in which an issuer selects an underwriter directly and negotiates the terms of the offering with that firm, rather than awarding the deal to the lowest bidder through competitive bidding.
• Net present value (NPV)Net present value (NPV) is the sum of an investment's expected future cash flows discounted to today's dollars, minus the initial cost. A positive NPV means the investment is expected to earn more than the required rate of return.
• Net revenue pledgeA net revenue pledge is a revenue bond covenant that pays operations and maintenance expenses first, then applies what is left to debt service. It is the more common of the two revenue bond flow-of-funds structures.
• New account formA new account form is the document a broker-dealer completes to open a customer account. It records the customer's identifying details, financial situation, and investment objectives so the firm can verify identity and recommend suitable investments.
• New York Stock Exchange (NYSE)The New York Stock Exchange (NYSE) is the world's largest stock exchange by the market value of its listed companies. It operates as an auction market where buyers and sellers trade listed securities through a centralized system.
• Nominal yieldNominal yield is a bond's stated coupon rate — the fixed annual interest divided by par value. A bond paying $60 per year on $1,000 par has a 6% nominal yield, regardless of its current market price.
• Non-issuer transactionA non-issuer transaction is a securities trade in which the issuer does not receive the proceeds, directly or indirectly. Ordinary secondary market trades between investors are non-issuer transactions, in contrast to issuer transactions such as an IPO.
• Nonsystematic riskNonsystematic risk is the risk unique to a specific company, industry, or security rather than the market as a whole. Unlike systematic risk, it can be reduced or nearly eliminated through diversification.
• Not-held orderA not-held order is an order in which the customer gives the broker discretion over the time and price of execution, meaning the broker is not held responsible for missing the best available price while working the order.
• Notice filingNotice filing is a simplified state registration process in which a federal covered security or federal covered adviser simply notifies a state regulator of its activity and pays a fee, rather than submitting to a full state review.
• Odd lot theoryThe odd lot theory is a contrarian technical analysis theory holding that small investors — who trade in odd lots of fewer than 100 shares — tend to be wrong, especially at market turning points. Followers do the opposite of what odd lot traders are doing.
• OEX indexThe OEX is the ticker symbol for the S&P 100 index, which tracks 100 of the largest U.S. blue-chip companies. OEX options, launched on the Cboe in 1983, were the first index options ever traded.
• Oil and gas partnershipsAn oil and gas partnership is a direct participation program (DPP) that lets investors share directly in the income, expenses, and tax benefits of drilling for or producing oil and natural gas.
• OligopolyAn oligopoly is a market structure in which a small number of large firms supply most or all of an industry's output. Because each firm is big enough to affect the market, their pricing and output decisions are interdependent.
• Open-end investment companyAn open-end investment company, commonly known as a mutual fund, continuously issues new shares and redeems them on demand at net asset value. Shares are bought from and sold back to the fund itself, not traded on an exchange.
• Operating leaseAn operating lease is a lease that transfers the right to use an asset without transferring ownership or most of the asset's economic life, functioning more like a rental than a financed purchase.
• Opportunity costOpportunity cost is the value of the next-best alternative you give up when you make a choice. Because resources are scarce, every decision carries an opportunity cost, even when no money changes hands.
• Option contractAn option contract gives its owner the right — but not the obligation — to buy or sell an underlying asset at a set price before expiration. A standard equity option contract covers 100 shares of the underlying stock.
• Option income strategiesAn option income strategy is any options position built around selling (writing) contracts to collect premium. The writer keeps the premium as income if the option expires worthless, in exchange for taking on the obligation to buy or sell if the option is exercised.
• Option premiumAn option premium is the price a buyer pays the seller to acquire an options contract. It is quoted per share but paid per contract, so a premium of 3 on a standard 100-share contract costs the buyer $300.
• Options accountAn options account is a brokerage account approved for trading option contracts. Opening one requires suitability review, approval by a designated options principal, and delivery of the options disclosure document.
• Options disclosure document (ODD)The options disclosure document (ODD) is a risk-disclosure booklet, created by the Options Clearing Corporation (OCC), that must be delivered to every customer at or before the approval of their account for options trading.
• Options expirationOptions expiration is the date an option contract ceases to exist. Standard equity options expire on the third Friday of the expiration month — trading stops at 4:00 pm ET, and the contracts technically expire at 11:59 pm ET.
• Options position limitsOptions position limits are caps on the number of options contracts on the same underlying security that a single investor or group acting together may hold on the same side of the market. They exist to stop any one trader from cornering or manipulating a stock.
• Options taxationOptions taxation covers how gains and losses on options contracts are taxed. Most options that are closed or expire produce short-term capital gains or losses, while exercised options adjust the cost basis or sale proceeds of the underlying stock.
• Order of liquidationThe order of liquidation is the sequence in which a bankrupt corporation's stakeholders are paid from the sale of its assets. Secured creditors are paid first, followed by unsecured creditors, subordinated debt holders, preferred stockholders, and finally common stockholders.
• Output gapThe output gap is the difference between an economy's actual output (real GDP) and its potential output at full employment. A negative gap signals a recessionary economy; a positive gap signals an overheating, inflationary one.
• Over-the-counter (OTC) marketThe over-the-counter (OTC) market is a decentralized dealer network where securities trade directly between broker-dealers rather than on a centralized exchange. It hosts stocks that don't meet exchange listing standards, along with most bond trading.
• Overlapping debtOverlapping debt is the portion of debt issued by other governmental units — like a county or school district — that a municipality's taxpayers are also responsible for because the jurisdictions share the same tax base.
• Painting the tapePainting the tape is an illegal form of market manipulation in which traders buy and sell a security among themselves to create the false appearance of heavy trading activity and lure other investors into the stock.
• Participating preferred stockParticipating preferred stock is preferred stock that can receive dividends above its stated rate, sharing in additional payouts alongside common stockholders when the issuer's board declares them.
• Passive ETFA passive ETF is an exchange-traded fund that tracks a market index, such as the S&P 500, rather than trying to beat it. It trades on an exchange throughout the day and typically carries low expenses.
• Penny stock ruleThe penny stock rule is a set of SEC requirements that broker-dealers must follow before selling penny stocks — unlisted equity securities trading below $5 per share — to new customers, including obtaining a signed suitability statement.
• Periodic vs. perpetual inventory systemsPeriodic and perpetual inventory systems are the two methods of tracking inventory. A periodic system updates inventory and cost of goods sold only at period end via a physical count, while a perpetual system updates records continuously with every purchase and sale.
• Permanent differences (tax)Permanent differences are items of income or expense that appear in a company's financial statements but never in its tax return, or vice versa. Because they never reverse, they do not create deferred tax assets or liabilities.
• PerpetuityA perpetuity is a stream of equal cash payments that continues forever. Its present value is calculated by dividing the periodic payment by the discount rate: PV = payment ÷ r.
• Power of attorneyA power of attorney is a legal document that authorizes one person (the agent or attorney-in-fact) to act on behalf of another (the principal). In brokerage accounts, it lets a third party place trades or manage the account for the owner.
• Preferred dividendsPreferred dividends are the fixed dividend payments made to preferred stockholders, calculated as the stated dividend rate multiplied by the stock's par value. They must be paid before any dividends go to common stockholders.
• Preferred stockPreferred stock is an equity security that pays a fixed dividend and has priority over common stock for dividends and liquidation proceeds. It typically carries no voting rights and trades more like a bond than common stock.
• Preliminary prospectusA preliminary prospectus, or red herring, is the disclosure document circulated during a new issue's SEC registration period. It describes the offering but omits the final offering price and effective date, and no sales can be made from it.
• Price elasticity of demandPrice elasticity of demand measures how much the quantity demanded of a good changes when its price changes. It is calculated as the percentage change in quantity demanded divided by the percentage change in price.
• Prime brokeragePrime brokerage is a bundle of services — custody, margin financing, securities lending, and consolidated clearing and reporting — that a broker-dealer provides to large institutional clients such as hedge funds.
• Prime rateThe prime rate is the interest rate that commercial banks charge their most creditworthy corporate customers. It serves as a benchmark for many other loans, including credit cards, home equity lines of credit, and small business loans.
• Pro forma financial statementsPro forma financial statements are projected income statements, balance sheets, and cash flow statements built from a set of assumptions rather than completed transactions. Companies use them to show what results would look like under a budget, a forecast, or a proposed transaction.
• Pro rata shareA pro rata share is a portion allocated in proportion to ownership. In investing, it means each shareholder receives dividends, distributions, or rights based on the percentage of shares they own.
• Proceeds vs. cost basisProceeds are the total dollars you receive when you sell a security, while cost basis is what you originally paid for it. The difference between the two is your capital gain or loss, which is the figure the IRS taxes.
• Profitability ratiosProfitability ratios measure how effectively a business converts sales, assets, or invested capital into profit. Common examples include gross profit margin, operating profit margin, net profit margin, and return on capital employed.
• Property, plant, and equipment (PP&E)Property, plant, and equipment (PP&E) are the long-lived tangible assets a company uses to run its business, such as land, buildings, machinery, and vehicles. They appear on the balance sheet at cost less accumulated depreciation.
• ProspectusA prospectus is the formal disclosure document an issuer must provide to investors when offering securities to the public. It describes the company, the offering price, risk factors, use of proceeds, and financial statements.
• ProtectionismProtectionism is government policy that shields domestic producers from foreign competition using tools such as tariffs, quotas, and subsidies. It raises the cost or limits the quantity of imported goods to make home-produced substitutes more competitive.
• Public offeringA public offering is the sale of securities to the general investing public, typically through underwriters and an SEC-registered prospectus. It includes IPOs, follow-on offerings by the issuer, and secondary offerings by existing shareholders.
• Purchasing power riskPurchasing power risk is the risk that inflation will erode the real value of an investment's returns, so the dollars you get back buy less than the dollars you invested. It hits fixed-income investments hardest.
• Put spreadA put spread is an options strategy that combines buying one put and selling another put on the same underlying stock with different strike prices or expirations. It limits both the maximum gain and the maximum loss.
• Qualified retirement planA qualified retirement plan is an employer-sponsored retirement plan that meets IRS and ERISA requirements, earning tax advantages: contributions are typically pre-tax and earnings grow tax-deferred until withdrawal.
• Real estate investment trust (REIT)A real estate investment trust (REIT) is a company that owns, operates, or finances income-producing real estate and passes most of its income to investors as dividends. REITs let investors buy into real estate through shares that trade like stocks.
• Real estate limited partnership (RELP)A real estate limited partnership (RELP) is a direct participation program that pools investor money to buy, develop, or manage real estate. Income, gains, and losses flow through directly to the partners rather than being taxed at the partnership level.
• Reasonable basis suitabilityReasonable basis suitability is the requirement that a firm or registered representative understand a security well enough — through reasonable diligence — to believe it is suitable for at least some investors. It is one of the three suitability obligations under FINRA Rule 2111.
• Recession indicatorsRecession indicators are economic data points that signal a downturn is approaching or underway, such as declining GDP, rising jobless claims, and an inverted yield curve. Economists group them into leading, coincident, and lagging indicators.
• Registered representativeA registered representative is a person licensed through FINRA to sell securities and provide investment recommendations on behalf of a broker-dealer. They must pass qualifying exams, be associated with a member firm, and follow FINRA conduct rules.
• Registration by coordinationRegistration by coordination is a method of registering a security at the state level by coordinating with a concurrent federal SEC registration. The state registration becomes effective at the same moment the federal registration does.
• Registration by filingRegistration by filing is the simplest state securities registration method, available to established issuers that are already registered with the SEC and meet a track-record test. The issuer notifies the state administrator rather than proving the offering's merits from scratch.
• Registration by qualificationRegistration by qualification is the most rigorous method of registering a security at the state level, requiring full disclosure directly to the state administrator. It is typically used for intrastate offerings not registered with the SEC.
• Regular way settlementRegular way settlement is the standard timeframe for completing a securities trade — when the buyer pays and the seller delivers. For stocks, corporate and municipal bonds, US government securities, and options, it is one business day after the trade date (T+1).
• Regulation Best Interest (Reg BI)Regulation Best Interest is an SEC rule requiring broker-dealers to act in a retail customer's best interest when making a recommendation, without placing the firm's interests ahead of the customer's. It is satisfied through four obligations: disclosure, care, conflict of interest, and compliance.
• Regulation BIRegulation Best Interest (Regulation BI) is an SEC rule requiring broker-dealers and their registered representatives to act in a retail customer's best interest when making a recommendation, without putting the firm's own financial interests ahead of the customer's.
• Regulation S-PRegulation S-P is the SEC rule that governs how broker-dealers, investment advisers, and investment companies protect customers' nonpublic personal information. It requires privacy notices, an opt-out before sharing data with unaffiliated third parties, and written safeguards.
• Regulation T (Reg T)Regulation T is the Federal Reserve rule governing how much credit broker-dealers may extend to customers buying securities. It sets the initial margin requirement, currently 50% of a purchase, and the deadline for paying for trades.
• Reinvestment riskReinvestment risk is the risk that cash flows from an investment — bond coupons, maturing principal, or called bonds — will have to be reinvested at a lower interest rate than the original investment earned.
• RescissionRescission is the cancellation of a contract from the beginning, restoring both parties to the positions they held before it was made. In securities law it is the buyer's civil remedy for an unlawful sale; in insurance it is the insurer's remedy for a material misrepresentation on an application.
• Responsibility centersA responsibility center is a segment of an organization whose manager is held accountable for a defined set of financial outcomes. The four standard types are cost centers, revenue centers, profit centers, and investment centers.
• Restricted and control stockRestricted stock is unregistered stock acquired through a private transaction, while control stock is stock — registered or not — held by an affiliate of the issuer. Both face resale limits under SEC Rule 144.
• Restricted stockRestricted stock is stock acquired in an unregistered transaction, such as a private placement, and therefore cannot be freely resold to the public. Rule 144 sets the holding period and conditions that must be met before it can be sold.
• Retail communicationA retail communication is any written or electronic message from a broker-dealer distributed to more than 25 retail investors within a 30-calendar-day period. Under FINRA Rule 2210, it generally requires principal approval before use.
• Return on investment (ROI)Return on investment measures profit as a percentage of the money invested to earn it. Divide the gain or operating income by the investment base, and the result lets you compare opportunities of very different sizes on a common scale.
• Revenue bondA revenue bond is a municipal bond repaid from the income generated by a specific project or facility — such as tolls, utility charges, or airport fees — rather than from the issuer's taxing power.
• Revenue recognitionRevenue recognition is the accounting rule that determines when a company records revenue in its financial statements. Under accrual accounting, revenue is recorded when the company delivers what it promised to the customer, not when cash changes hands.
• Ricardian tradeRicardian trade is the economic model showing that two countries both gain from trade when each specializes in the good it produces at the lower opportunity cost. It is the foundation of the theory of comparative advantage.
• Rights of common stockholdersCommon stockholders hold a package of ownership rights: the right to vote on corporate matters, to receive dividends when declared, to inspect certain corporate records, to transfer their shares, to maintain proportionate ownership, and to claim residual assets if the company liquidates.
• Rights offeringA rights offering is an issue of new stock in which a company gives its existing shareholders short-term rights to buy the additional shares, usually at a discount to the market price, before the public can. It lets shareholders maintain their proportionate ownership.
• Rule 144Rule 144 is an SEC rule that lets investors sell restricted or control securities to the public without a full registration, provided they meet conditions on holding periods, volume limits, and disclosure.
• Rule 147Rule 147 is the SEC's intrastate offering exemption, allowing a company to sell securities without federal registration if the offering is made only to residents of the state where the issuer does business.
• Sales charge (load)A sales charge, or load, is the fee an investor pays to buy or sell mutual fund shares, compensating the salesperson and distributor. It equals the difference between the fund's public offering price and its net asset value.
• Sales taxSales tax is a tax on the sale of goods and services, collected by the seller at the point of sale and remitted to the government. It is an indirect tax: the business collects it, but the final consumer bears the cost.
• Sallie Mae (SLMA)Sallie Mae is the common name for SLM Corporation, originally chartered as the Student Loan Marketing Association, a government-sponsored enterprise created to support student lending. It is now a fully private company with no government backing.
• Sarbanes-Oxley ActThe Sarbanes-Oxley Act is a 2002 U.S. federal law that tightened corporate governance, financial reporting, and auditing requirements for public companies. It was passed after the Enron and WorldCom accounting scandals to restore confidence in published financial statements.
• Saucer patternA saucer pattern is a technical chart formation in which a security's price declines, flattens out over an extended period, and then gradually turns higher, tracing a shallow U shape. Technical analysts read it as a bullish reversal signaling a shift from a downtrend to an uptrend.
• SEC Release IA-1092SEC Release IA-1092 is a 1987 interpretive release, issued jointly by the SEC and NASAA, that clarified who qualifies as an investment adviser. It established the three-part test of giving advice about securities, doing so as part of a business, and receiving compensation for it.
• Secondary marketThe secondary market is where investors buy and sell securities from one another after the original issuance. Trades occur between investors — not with the issuer — on exchanges like the NYSE or over the counter.
• Securities Act of 1933The Securities Act of 1933 is the federal law governing the sale of new securities to the public. It requires issuers to register an offering with the SEC and deliver a prospectus containing full and fair disclosure to investors.
• Securities Exchange Act of 1934The Securities Exchange Act of 1934 is the federal law that regulates the secondary market — the trading of securities after they are issued. It created the SEC and requires exchanges, broker-dealers, and public companies to register and report.
• Securities Investor Protection Corporation (SIPC)The Securities Investor Protection Corporation (SIPC) is a nonprofit corporation that protects brokerage customers if their broker-dealer fails. Coverage is limited to $500,000 per separate customer, of which no more than $250,000 can be cash.
• Segregation of dutiesSegregation of duties is an internal control that divides key responsibilities — authorizing transactions, recording them, and holding custody of assets — among different people so no single employee can both commit and conceal fraud.
• Serial bondA serial bond is a bond issue structured so that portions of the principal mature at regular intervals over a period of years, rather than all at once. Municipal bonds are commonly issued with serial maturities.
• Short callA short call is an options position created by selling (writing) a call option. The seller collects a premium up front but takes on the obligation to sell the underlying stock at the strike price if the buyer exercises.
• Short putA short put is an options position created by selling a put contract. The seller collects a premium and takes on the obligation to buy the underlying stock at the strike price if the buyer exercises the option.
• Short sellingShort selling is selling borrowed shares in the hope of buying them back later at a lower price. It is a bearish strategy that profits when a security's price falls and loses when the price rises.
• Short straddleA short straddle is an options strategy in which an investor sells a call and a put on the same stock with the same strike price and expiration. It profits when the stock stays near the strike price, and loses when the stock makes a big move in either direction.
• Sinking fundA sinking fund is a pool of money an issuer sets aside on a regular schedule to retire a bond issue before or at maturity. It reduces the risk that the issuer will be unable to repay principal when the debt comes due.
• SLoBS and BLiSS (order mnemonics)SLoBS and BLiSS are memory aids for where stock orders sit relative to the current market price: Sell Limits and Buy Stops go above the market (SLoBS), while Buy Limits and Sell Stops go below the market (BLiSS).
• Snowbird exemptionThe snowbird exemption lets a broker-dealer or investment adviser with no office in a state avoid registering there when its only business in that state is with existing clients who live elsewhere and are just temporarily present, such as seasonal visitors.
• Soft dollar compensationSoft dollar compensation is research, analysis, and other services an investment adviser receives from a broker-dealer in exchange for directing client trades to that firm, rather than paying for those services in cash.
• Source documents (accounting)Source documents are the original records — invoices, receipts, credit notes, bank statements — that provide evidence a business transaction occurred. They are the starting point of the accounting process and the audit trail behind every entry.
• Special memorandum account (SMA)A special memorandum account (SMA) is a line of credit in a margin account that records excess equity. It preserves buying power generated when securities in the account rise in value, even if prices later fall.
• Stabilizing bidA stabilizing bid is a bid placed by the managing underwriter of a new issue to keep the market price from falling below the public offering price. It is the one form of price support regulators permit, and it must be disclosed in the prospectus.
• Standard costingStandard costing is a cost accounting method that assigns predetermined costs to materials, labor, and overhead, then compares them with actual costs. The differences, called variances, help managers spot and investigate performance problems.
• Standby underwritingStandby underwriting is an arrangement used in rights offerings where an underwriter agrees to purchase any shares that existing shareholders do not buy. It guarantees the issuer will sell the entire offering.
• State administratorThe state administrator is the government official or agency responsible for enforcing a state's securities laws under the Uniform Securities Act. It registers securities professionals and securities offerings at the state level and can investigate and penalize violations.
• Statement of cash flowsThe statement of cash flows is a financial statement that reports a company's cash receipts and payments over a period, grouped into operating, investing, and financing activities. It reconciles the beginning and ending cash balances.
• Statement of changes in equityA statement of changes in equity is a financial statement that reconciles the opening and closing balances of each component of owners' equity for a period, showing the effects of profit, dividends, share issuances, and other equity movements.
• Statement of financial positionA statement of financial position, also called a balance sheet, reports a company's assets, liabilities, and equity at a single point in time. It shows what the business owns, what it owes, and the owners' residual claim.
• Statutory votingStatutory voting is a shareholder voting method that grants one vote per share for each open board seat or ballot item, with no ability to pool votes. It contrasts with cumulative voting, which lets shareholders concentrate all their votes on a single candidate.
• Stock buybackA stock buyback is a corporation's repurchase of its own outstanding shares, either through open-market purchases or a tender offer. Buybacks reduce shares outstanding, which tends to increase earnings per share and return capital to shareholders.
• Stock splitA stock split is a corporate action that changes the number of a company's outstanding shares and adjusts the share price proportionally, leaving the total value of each investor's position unchanged.
• Stock warrantsA stock warrant is a long-term security issued by a corporation that gives the holder the right to buy the company's stock at a fixed price, typically set above the market price at issuance. Warrants are often attached to bond offerings as a "sweetener."
• Stop orderA stop order is an order to buy or sell a security that activates only when the market hits a specified trigger price, then executes as a market order. Investors use stop orders to limit losses or protect gains on existing positions.
• Stop-limit orderA stop-limit order is a customer order that activates when the market hits a stop price, then executes only at the limit price or better. It combines a stop order's trigger with a limit order's price protection.
• Structured productsStructured products are pre-packaged investments that combine a debt instrument with a derivative, producing returns linked to an underlying asset such as a stock index. Common examples include principal-protected notes and market-linked CDs.
• Subchapter MSubchapter M is the section of the Internal Revenue Code that lets mutual funds, other regulated investment companies, and REITs avoid corporate tax on income they distribute to shareholders, provided they meet the qualification tests and pay out at least 90% of their taxable income.
• Suitability (investing)Suitability is the requirement that a financial professional have a reasonable basis to believe a recommended investment or strategy fits the customer's investment profile, including their objectives, time horizon, financial situation, and risk tolerance.
• Supply chain managementSupply chain management is the coordination of the flow of materials, information, and money from raw material suppliers through manufacturers and distributors to the final customer. Its goal is to deliver products at the lowest total cost while meeting customer demand.
• Supply-side fiscal policySupply-side fiscal policy is an approach that tries to grow the economy by increasing production rather than consumption, mainly through lower tax rates and lighter regulation. The goal is to give businesses and workers stronger incentives to invest, hire, and produce.
• Support and resistanceSupport and resistance are price levels in technical analysis where a stock repeatedly stops falling (support) or stops rising (resistance). Traders use these levels to identify trading ranges and breakouts.
• Systematic riskSystematic risk is the risk that affects the entire market or economy rather than a single company, so it cannot be eliminated through diversification. Market risk, interest rate risk, and inflation risk are common examples.
• Tail riskTail risk is the risk of rare, extreme market events — outcomes far out in the 'tails' of a return distribution. Tail events occur more often than a normal distribution predicts and can cause severe portfolio losses.
• Takedown (underwriting)In a municipal bond underwriting, the takedown is the portion of the underwriting spread that a syndicate member earns for selling bonds. Total takedown equals the concession plus the additional takedown, and it is the largest piece of the spread.
• Tax creditsA tax credit is a dollar-for-dollar reduction in the amount of tax owed. Unlike a deduction, which only reduces taxable income, a $1,000 credit cuts the tax bill itself by $1,000.
• Tax deductionA tax deduction is an amount subtracted from gross income before tax is calculated, reducing taxable income rather than the tax bill directly. Its dollar value depends on the taxpayer's marginal tax rate.
• Technical analysisTechnical analysis is a method of evaluating securities by studying past price movements and trading volume rather than a company's financial fundamentals. Technical analysts use charts and patterns to forecast where prices are likely to move next.
• Telephone Consumer Protection Act (TCPA)The Telephone Consumer Protection Act (TCPA) is a 1991 federal law that regulates telemarketing, including cold calls by financial firms. It restricts solicitation calls to 8:00 am through 9:00 pm in the recipient's local time zone and requires callers to honor do-not-call requests.
• Tender offerA tender offer is a public offer to buy shares directly from a company's shareholders, usually at a premium to the market price, for a limited time. Shareholders choose whether to "tender" (sell) their shares on the stated terms.
• Time value (options)The time value of an option is the part of its premium that exceeds its intrinsic value. It represents what buyers will pay for the chance that the option moves further into the money before it expires.
• Time value of moneyThe time value of money is the principle that a dollar today is worth more than a dollar in the future, because money in hand can be invested and earn a return. It underlies present value, future value, and discounted cash flow analysis.
• Tombstone advertisementA tombstone advertisement is a plain, strictly limited notice announcing a new securities offering. It states basic facts such as the issuer, the type and amount of securities, the price, and where to obtain a prospectus — and nothing more.
• Trade confirmationA trade confirmation is the written record a broker-dealer must send a customer at or before the completion (settlement) of each securities transaction, detailing the security, price, quantity, trade date, and costs involved.
• Trading aheadTrading ahead is the prohibited practice of a broker-dealer executing a trade for its own account before executing a customer order it is holding for the same security. FINRA rules require firms to fill customer orders first or immediately match any better price the firm received.
• Transfer pricingTransfer pricing is the price one division of a company charges another division for goods or services exchanged internally. It determines how profit is split between divisions and shapes the performance evaluation of each responsibility center.
• Treasury bill (T-bill)A Treasury bill (T-bill) is a short-term debt security issued by the US government with a maturity of one year or less. T-bills pay no coupon interest; instead, they are sold at a discount and mature at face value, with the difference representing the investor's return.
• Treasury bills, notes, and bondsTreasury bills, notes, and bonds are debt securities issued by the US government and backed by its full faith and credit. They differ mainly by maturity: bills mature in one year or less, notes in two to ten years, and bonds in twenty to thirty years.
• Treasury Inflation-Protected Securities (TIPS)Treasury Inflation-Protected Securities (TIPS) are US government bonds whose principal adjusts with inflation as measured by the Consumer Price Index. The fixed coupon rate is applied to the adjusted principal, so interest payments rise with inflation.
• Treasury quotesTreasury quotes are the prices at which US government securities trade. Treasury bills are quoted on a discount yield basis, while Treasury notes and bonds are quoted as a percentage of par in 32nds of a point.
• Treasury STRIPSTreasury STRIPS are zero-coupon securities created by separating the interest and principal payments of Treasury notes and bonds. They are bought at a discount and pay no interest until they mature at face value.
• Trial balanceA trial balance is a list of all the ledger accounts in a company's books with their debit or credit balances at a point in time. Total debits must equal total credits, providing an arithmetic check before financial statements are prepared.
• Trust account (brokerage)A trust account is a brokerage account opened in the name of a trust and managed by a trustee for the benefit of one or more beneficiaries. The trustee controls the investments, but every decision must serve the beneficiaries under the terms of the trust document.
• Types of brokerage accountsBrokerage account types are the registration categories investors choose when opening an account with a broker-dealer, such as cash, margin, individual, joint, retirement, and custodial accounts. The registration determines ownership, tax treatment, and what activities the account allows.
• Types of incomeFor tax purposes, income falls into three types: earned income from work, passive income from activities like rental real estate, and portfolio income from investments such as dividends, interest, and capital gains.
• Uniform Securities ActThe Uniform Securities Act is model legislation that serves as the template for state-level securities laws, often called blue sky laws. It governs the registration of securities, broker-dealers, agents, and investment advisers at the state level.
• Unit investment trust (UIT)A unit investment trust (UIT) is an investment company that holds a fixed, unmanaged portfolio of securities and sells redeemable units to investors. The portfolio is assembled once and held until the trust terminates on a set date.
• Unqualified legal opinionAn unqualified legal opinion is a bond counsel's statement that a municipal bond issue is legally valid and its interest is tax-exempt, with no reservations attached. A qualified opinion, by contrast, flags a condition or uncertainty the buyer should weigh.
• US GAAP vs. IFRSUS GAAP is the rules-based accounting framework used for financial reporting in the United States, while IFRS is the principles-based framework used in most other major economies. They differ in areas such as inventory costing, asset revaluation, and impairment reversals.
• Value chain analysisValue chain analysis is a framework for breaking a company into the activities it performs to create value for customers, then evaluating each one to find cost advantages and opportunities for differentiation.
• Variable annuityA variable annuity is an insurance contract whose value and payouts fluctuate with the performance of investments the owner selects, typically mutual-fund-like subaccounts. Because returns depend on market performance, variable annuities are regulated as securities.
• Variable rate demand note (VRDN)A variable rate demand note (VRDN) is a long-term municipal security with an interest rate that resets at short intervals and a demand (put) feature letting the holder sell it back at par, giving it the profile of a short-term investment.
• VIX optionsVIX options are cash-settled index options based on the CBOE Volatility Index, which measures expected 30-day volatility of the S&P 500. Because the VIX typically rises when stocks fall, investors use VIX calls to hedge equity portfolios.
• Wash saleA wash sale occurs when an investor sells a security at a loss and buys a substantially identical security within 30 days before or after the sale. The loss is disallowed for tax purposes and is instead added to the cost basis of the replacement shares.
• With rights of survivorship (WROS)With rights of survivorship (WROS) is a joint account registration in which a deceased owner's share passes directly to the surviving owner(s), bypassing the deceased's estate and the probate process.
• Yield curveA yield curve is a graph plotting the yields of bonds of equal credit quality across different maturities. Its shape shows what the market expects interest rates and economic conditions to do, with the U.S. Treasury curve serving as the standard benchmark.
• Yield to call (YTC)Yield to call (YTC) is the total return an investor earns on a callable bond if the issuer redeems it on the earliest call date instead of letting it mature. It accounts for the bond's price, coupon payments, call price, and the shortened time frame.
• Yield to worstYield to worst is the lowest yield an investor can receive on a bond without the issuer defaulting — the smaller of its yield to maturity and the yield to each possible call date. It is the most conservative yield measure for callable bonds.
• Yield-based optionsYield-based options are cash-settled options whose underlying value is the yield of a US Treasury security rather than its price. Investors use them to speculate on or hedge against changes in interest rates.
• Zero-based budgetingZero-based budgeting is a budgeting method in which every expense must be justified from scratch each period, starting from a base of zero. It contrasts with incremental budgeting, which adjusts the prior period's figures up or down.