canadian dictionary of finance and investment terms

Association, American Council of Life Insurance, American ExpressCompany, American Institute of Certified Public Accountants, AmericanSociety of CLU & CHFC Chartered Life Underwriters, A

Page i

Canadian Dictionary of Finance and Investment Terms

Jerry White

M.A., Econ., M.B.A., D.Litt

Chairman, J White & Associates Inc & Nework Corp

John Downes

Editor, Beating the Dow

Former Vice President, AVCO Financial Services, Inc

Office for Economic Development, City of New York

Jordan Elliot Goodman

Financial Analyst, NBC News at Sunrise

Author, Everyone's Money Book

Creator, The Money Answers Program

Former Wall Street Correspondent,

MONEY Magazine, Time Warner Incorporated

Former Business News Commentator,

Mutual Broadcasting System

Second Edition

© Copyright 2000 by Barron's Educational Series, Inc.

Prior edition © 1995 by Barron's Educational Series, Inc

All rights reserved

No part of this book may be reproduced in any form, by photostat,

microfilm, xerography, or any other means, or incorporated into any

information retrieval system, electronic or mechanical, without the writtenpermission of the copyright owner

All inquiries should be addressed to:

Barron's Educational Series, Inc

250 Wireless Boulevard

Hauppauge, NY 11788

http://www.barronseduc.com

Library of Congress Catalog Card No 00-036294

International Standard Book No 0-7641-1261-9

Library of Congress Cataloging-in-Publication Data

White, Jerry, 1946–

Canadian dictionary of finance and investment terms /

Jerry White, John Downes, Jordan Elliot Goodman.—2nd

ed

p cm

Includes bibliographical references and index

ISBN 0-7641-1261-9 (pbk.)

1 Finance — Dictionaries 2 Finance — Canada —

Dictionaries I Downes, John, 1936– II Goodman, Jordan

Elliot III Title

HG151.W47 2000

332´.03—dc21

036294

00-PRINTED IN THE UNITED STATES OF AMERICA

9 8 7 6 5 4 3 2 1

Page iv

PREFACE

In this new millennium, the quest is for knowledge as well as information Arecent survey of consumers/investors shows that male investors seek

information on how to make better informed decisions, while female

investors wanted education on how to make better decisions

The E-commerce and Internet revolution has democratized capitalism,allowing the consumer equal access to corporate information as well asinvestment options and services Today, any consumer with investabledollars can access the services that in the sixties and seventies were

available only to the very rich

With the explosion of on-line information, there is an ever increasing level

of sales in books Perhaps, the model of high-tech-high-touch was correct

As the population ages, the demand for the bound book has made a greatrecovery This volume is a prime example of the value of the printed word

as a reference and educational source accessible to all

A reader wrote to us to compliment us on the first Canadian edition Hesaid that while he was in his late fifties, he was new as an investor and untilfour years ago, he found himself lost while reading newspapers,

newsletters, books, and watching financial programs on television He wasunable to follow them as he did not have the background in the field and he

”could not grasp the terminology or concepts.” His financial adviser gavehim a copy of this text He now keeps it on his nightstand for quick access,while he does his financial research The reader said that the book

“empowered” him to be a more knowledgeable and better-educated

consumer of financial products and now he recommends it to all of his

friends and even his children

This is the key role of this book: to be a companion to you in your researchand reading, and to add clarity, to simplify, and, to ultimately improve yourknowledge

We also recognize that the financial world is quite dynamic, and that theterminology and concepts must be constantly updated to reflect the ‘‘hereand now.” Otherwise, this text would be of no strategic value

In this second Canadian edition, we have tried to ensure that we have

covered tax terminology more extensively to reflect its ever increasing

incursion into our lives and its actual importance in all financial decision

Mutual fund terms and related concepts have also been greatly expandedand we have reviewed all regulatory sources to make sure that the mostcurrent legislation and regulatory matters have been included.

We, of course, have deleted terms that lack contemporary relevance orare in such select usage, as to be of little value today

The text should benefit students, stockbrokers, financial planners, theirclients, writers, consumer readers and researchers

Extensive research was conducted by Ian White, Hartley White, and

Mariam White in preparation of this update

Will this new era of affluence and the inclusion economy continue? Wehave no idea But the better informed and educated reader will certainlyhave

Association, American Council of Life Insurance, American Express

Company, American Institute of Certified Public Accountants, AmericanSociety of CLU & CHFC (Chartered Life Underwriters), American StockExchange, Associated Credit Bureaus, Bankers Trust Company, The BondBuyer, Boston Stock Exchange, Chase Manhattan Bank NA, Chicago

Board Options Exchange, Coffee, Sugar & Cocoa Exchange, CommodityFutures Trading Commission, DD&W Limited, Dow Jones, Employee

Benefit Research Institute, Fannie Mae, Federal Energy Regulatory

Commission, Federal Reserve Bank of New York, Federal Trade

Commission, FINEX, Frank Russell Company, Futures Industry

Association, Goldman, Sachs & Company, Health Insurance Institute ofAmerica, Hulbert Financial Digest, IBC/Donoghue Incorporated, I/B/E/SIncorporated, Insurance Information Institute, Intermarket ManagementIncorporated, Internal Revenue Service, International Petroleum Exchange,International Swaps and Derivatives Association, Investment ManagementConsultants Association, Investment Program Association, J.P Morgan,Richard J Kittrell, Esq./Kittrell & Kittrell P.C., Liquidity Financial

Corporation, Mercer and Company, Merrill Lynch, Montreal Exchange,

Morgan Stanley, Morningstar, Mortgage Bankers Association, MunicipalBond Investors Assurance Corporation, National Association of InvestorsCorporation, National Association of Real Estate Investment Trusts,

National Association of Variable Annuities, National Credit Union

Administration, New York Cotton Exchange, New York Life Insurance

Company, New York Mercantile Exchange, New York Stock Exchange,Office of Thrift Supervision, Options Clearing Corporation, Options

Institute, Pension Benefit Guaranty Corporation, Prudential Securities,

Salomon Brothers Incorporated, Securities and Exchange Commission,Standard & Poor's, Toronto Stock Exchange, Trimedia Incorporated, U.S.Department of Commerce, U.S Department of Labor, Value Line,

Vancouver Stock Exchange, Visa International, The Weiser Walek Group,Wheat First Butcher Singer Incorporated, Wilshire Associates, WinnipegCommodity Exchange, World Gold Council, Wrap Industry Association,and Zacks Investment Research

Expert reviewing was provided by Paul Bates of Charles Schwab Canada,Mark Borkowski of Mercantile Mergers and Acquisitions, Robert Walker,president of J White & Associates, Inc We also received material

assistance from brokers, financial planners, and professional advisors too

Special thanks are due to Roberta Yafie, whose fact-checking and

research went far beyond the call of duty and to Brian Cox of Barron's, whoworked with us in championing the project

Jerry White

John Downes

Jordan Elliot Goodman

Page vi

Alphabetization: All entries are alphabetized by letter rather than by word

so that multiple-word terms are treated as single words For example, NET ASSET VALUE follows NET ASSETS as though it were spelled

NETASSETVALUE, without spacing Similarly, ACCOUNT EXECUTIVE follows ACCOUNTANT'S OPINION In unusual cases, abbreviations or

acronyms appear as entries in the main text, in addition to appearing in theback of the book in the separate listing of Abbreviations and Acronyms.This is when the short form, rather than the formal name, predominates incommon business usage For example, NASDAQ is more commonly used

in speaking of the National Association of Securities Dealers Automated

Quotations system than the name itself, so the entry is at NASDAQ.

Numbers in entry titles are alphabetized as if they were spelled out

Abbreviations and Acronyms: A separate list of abbreviations and

acronyms follows the Dictionary It contains shortened versions of termsdefined in the book, plus several hundred related business terms

Cross references: In order to gain a fuller understanding of a term, it will

sometimes help to refer to the definition of another term In these casesthe additional term is printed in SMALL CAPITALS Such cross referencesappear in the body of the definition or at the end of the entry (or subentry).Cross references at the end of an entry (or subentry) may refer to related

or contrasting concepts rather than give more information about the

concept under discussion As a rule, a term is printed in small capitals onlythe first time it appears in an entry Where an entry is fully defined at

another entry, a reference rather than a definition is provided; for example,

EITHER-OR ORDER see ALTERNATIVE ORDER.

Italics: Italic type is generally used to indicate that another term has a

meaning identical or very closely related to that of the entry Occasionally,italic type is also used to highlight the fact that a word used is a businessterm and not just a descriptive phrase Italics are also used for the titles ofpublications

Parentheses: Parentheses are used in entry titles for two reasons The

first is to indicate that an entry's opposite is such an integral part of the

concept that only one discussion is necessary; for example, REALIZED PROFIT (OR LOSS) The second and more common reason is to indicate

that an abbreviation is used with about the same frequency as the term

itself; for example, OVER THE COUNTER (OTC).

Examples, Illustrations, and Tables: The numerous examples in this

Dictionary are designed to help readers gain understanding and to help

them relate abstract concepts to the real world of finance and investment.Line drawings are provided in addition to text to clarify concepts best

understood visually; for example, technical chart patterns used by

securities analysts and graphic concepts used in financial analysis

to the state under the laws of ESCHEAT In addition to financial assets,other kinds of property that are subject to abandonment include patents,inventions, leases, trademarks, contracts, and copyrights.

ABC INVENTORY CONTROL SYSTEM system of dividing a firm's

inventory system into three groups, A, B, and C, according to the

contribution of each to the firm's overall investment in the inventory Thesystem facilitates the application of more effective and efficient inventorycontrol techniques

ABILITY TO PAY

Finance: borrower's ability to meet principal and interest payments on

long-term obligations out of earnings Also called ability to service See

also FIXED CHARGE COVERAGE.

Industrial relations: ability of an employer, especially a financial

organization to meet a union's financial demands from operating income

Municipal bonds: issuer's present and future ability to generate enough

tax revenue to meet its contractual obligations, taking into account all

factors concerned with municipal income and property values

Taxation: the concept that tax rates should vary with levels of wealth or

income; for example, the progressive income tax

ABOVE PAR see PAR VALUE.

ABSORBED

Business: a cost that is treated as an expense rather than passed on to a

customer

Also, a firm merged into an acquiring company

Cost accounting: indirect manufacturing costs (such as property taxes

and insurance) are called absorbed costs They are differentiated from

variable costs (such as direct labour and materials) See also DIRECT

OVERHEAD

Finance: an account that has been combined with related accounts in

preparing a financial statement and has lost its separate identity Also

called absorption account or adjunct account.

Securities: issue that an underwriter has completely sold to the public.

Also, in market trading, securities are absorbed as long as there arecorresponding orders to buy and sell The market has reached the

absorption point when further assimilation is impossible without an

adjustment in price See also UNDIGESTED SECURITIES.

ACCELERATED COLLECTION see LOCK-BOX SERVICE.

ACCELERATED FUNDS TRANSFER a computer-based electronic fundstransfer system for inter- and intra-account transfer, bill payment, accountsreceivable collection, and overall management

ACCELERATION CLAUSE provision, normally present in an INDENTUREagreement, mortgage, or other contract, that the unpaid balance is to

become due and payable if specified events of default should occur Suchevents include failure to meet interest, principal, or sinking fund payments;insolvency; and nonpayment of taxes on mortgaged property

ACCEPTANCE

In general: agreement created when the drawee of a TIME DRAFT (bill of

exchange) writes the word “accepted” above the signature and designates

a date of payment The drawee becomes the acceptor, responsible forpayment at maturity

Also, paper issued and sold by sales finance companies, such as GeneralMotors Acceptance Corporation

Banker's acceptance: time draft drawn on and accepted by a bank, the

customary means of effecting payment for merchandise sold in export transactions and a source of financing used extensively in

import-international trade With the credit strength of a bank behind it, the banker'sacceptance usually qualifies as a MONEY MARKET instrument The

liability assumed by the bank is called its acceptance liability See also

LETTER OF CREDIT

Trade acceptance: time draft drawn by the seller of goods on the buyer,

who becomes the acceptor, and which is therefore only as good as thebuyer's credit

ACCEPTANCE PAPER colloquial term for short-term promissory notesissued by sales finance companies to fund loans to consumers for cars,

appliances, etc See also FINANCE COMPANY PAPER.

ACCIDENT, DEATH AND DISMEMBERMENT INSURANCE insurancethat provides benefits if the policyholder dies as a result of an accident or if

he or she suffers the loss of a limb

ACCIDENT INSURANCE mandatory auto insurance that provides

coverage for medical payments over and above those paid by any

provincial health plan

ACCOUNT

In general: contractual relationship between a buyer and seller under

which payment is made at a later time The term open account or charge

account is used, depending on whether the relationship is commercial or

personal

Also, the historical record of transactions under the contract, as

periodically shown on the statement of account.

Banking: relationship under a particular name, usually evidenced by a

deposit against which withdrawals can be made Among them are demand,time, custodial, joint, trustee, corporate, special, and regular accounts.

Administrative responsibility is handled by an account officer.

Bookkeeping: assets, liabilities, income, and expenses as represented

by individual ledger pages to which debit and credit entries are

chronologically posted to record changes in value Examples are cash,accounts receivable, accrued interest, sales, and officers' salaries Thesystem of recording, verifying, and reporting such information is called

accounting Practitioners of accounting are called accountants.

Investment banking: financial and contractual relationship between

parties to an underwriting syndicate, or the status of securities owned andsold

Securities: relationship between a broker-dealer firm and its client

wherein the firm, through its registered representatives, acts as agent inbuying and selling securities and sees to related administrative matters

See also ACCOUNT STATEMENT.

ACCOUNT ANALYSIS informational report provided by a bank to its

corporate customers with data detailing account service activity Such

reports are produced monthly as well as annually and usually detail: theaverage daily book balance, the average daily float, average available

balances, itemized activity charges, earnings credit rate, the balanced

required to compensate for services, and the balance available to supportcredit arrangement and other bank services

ACCOUNTANT'S REVIEW report attached to financial statements thathave been prepared without audit but reviewed by a firm of Chartered

Accountants The “Review Engagement Report” states that the review

‘‘consisted primarily of enquiry, analytical procedures and discussion” ofthe figures and “does not constitute an audit” or result in an audit opinion

Outsiders usually do not place full confidence in such figures See also

AUDITED FINANCIAL STATEMENTS

ACCOUNT BALANCE net of debits and credits at the end of a reportingperiod Term applies to a variety of account relationships, such as withbanks, credit card companies, brokerage firms, and stores, and to

classifications of transactions in a bookkeeping system The same

account may be an asset account balance or a liability account balance,depending on which side of the transaction you are on For example, yourbank balance is an asset account to you and a liability account to the bank

Your credit card (debit) balance is a liability account to you and an assetaccount (account receivable) to the credit card company.

ACCOUNTING PRINCIPLES BOARD (APB) board of the American

Institute of Certified Public Accountants (AICPA) that issued (1959–73) aseries of accountant's opinions constituting much of what is known as

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES See also

FINANCIAL ACCOUNTING STANDARDS BOARD (FASB); CANADIANINSTITUTE OF CHARTERED ACCOUNTANTS (CICA)

ACCOUNT RECONCILIATION the process of adjusting the balance inyour chequebook to match your bank statement Your chequebook

balance, plus outstanding cheques, less bank charges, plus interest (if

any), should equal the balance shown on your bank statement

ACCOUNTS PAYABLE amounts owing on open account to creditors forgoods and services that are payable within one year or business cycle.Analysts look at the relationship of accounts payable to purchases for

indications of sound day-to-day financial management See also TRADE

CREDIT

ACCOUNTS RECEIVABLE money owed to a business for merchandise orservices sold on open account, payable within one year or business cycle.Accounts receivable are a key factor in analyzing a company's LIQUIDITY

—its ability to meet current obligations without additional revenues See

also ACCOUNTS RECEIVABLE TURNOVER; AGING SCHEDULE;

COLLECTION RATIO

ACCOUNTS RECEIVABLE FINANCING short-term financing whereby

accounts receivable serve as collateral for working capital advances See

also FACTORING.

ACCOUNTS RECEIVABLE INSURANCE insurance that protects

accounts receivable of a client owing money from physical loss because offire, theft or any other named peril

ACCOUNTS RECEIVABLE TURNOVER ratio obtained by dividing totalcredit sales by accounts receivable The ratio indicates how many timesthe receivables portfolio has been collected during the accounting period

See also ACCOUNTS RECEIVABLE; AGING SCHEDULE;

COLLECTION RATIO

ACCOUNT STATEMENT

In general: any record of transactions and their effect on charge or

open-account balances during a specified period

Banking: summary of all cheques paid, deposits recorded, and resulting

balances during a defined period Also called a bank statement.

Securities: statement summarizing all transactions and showing the status

of an account with a broker-dealer firm, including long and short positions.Such statements must be issued quarterly, but are generally provided

monthly when accounts are active.

ACCRETION

1 asset growth through internal expansion, acquisition, or such

causes as aging of whisky or growth of timber

2 adjustment of the difference between the price of a bond bought at

an original discount and the par value of the bond

ACCRUAL BASIS accounting method whereby income and expense itemsare recognized as they are earned or incurred, even though they

may not have been received or actually paid in cash Accrual accountingprovides an accurate picture of a company's performance buy cannot

assist in monitoring cash flow The alternative is CASH BASIS accounting

ACCRUED BENEFITS pension benefits that an employee has earned

based on his or her years of service at a company See also VESTING.

ACCRUED CAPITAL GAIN unrealized gain that has been created by theincrease in value of an investment or other asset; excess of market valueover adjusted cost base An accrued gain is a gain that exists before theinvestment is sold, or deemed sold, to realize the gain

ACCRUED INTEREST interest that has accumulated between the mostrecent payment and the sale of a bond or other fixed-income security Atthe time of sale, the buyer pays the seller the bond's price plus accruedinterest, calculated by multiplying the coupon rate by the number of daysthat have elapsed since the last payment

ACCRUED MARKET DISCOUNT increase in market value of a

DISCOUNT BOND that occurs because of its approaching MATURITYDATE (when it is redeemable at PAR) and not because of declining marketinterest rates

ACCRUED TAX LIABILITY unrealized tax liability relating to an accruedCAPITAL GAIN The tax liability continues to accrue as the accrued capitalgain increases This liability will become taxes payable when the investment

is eventually sold, or deemed sold, and the gain is realized

ACCUMULATED DIVIDEND dividend due, usually to holders of cumulativepreferred stock, but not paid It is carried on the books as a liability until

paid See also CUMULATIVE PREFERRED.

ACCUMULATION

Corporate finance: profits that are not paid out as dividends but are

instead added to the company's capital base See also ACCUMULATED

PROFITS TAX

Investments: purchase of a large number of shares in a controlled way so

as to avoid driving the price up An institution's accumulation program, forinstance, may take weeks or months to complete

Mutual funds: investment of a fixed dollar amount regularly and

reinvestment of dividends and capital gains.

ACCUMULATION AREA price range within which buyers accumulate

shares of a stock Technical analysts spot accumulation areas when astock does not drop below a particular price Technicians who use the ON-BALANCE VOLUME method of analysis advise buying stocks that

have hit their accumulation area, because the stocks can be expected to

attract more buying interest See also DISTRIBUTION AREA.

ACES acronym for Advanced Computerized Execution System, run by

the NASDAQ stock market ACES automates trades between order-entryand market-maker firms that have established trading relationships witheach other, designating securities at specified quantities for automatic

execution Once trading parameters are set, ACES facilitates order entry,best-price order execution and limited-order maintenance, as well as a

variety of inventory control capabilities Trades are then automatically

reported for public dissemination and sent for comparison and clearing

ACID TEST current cash and “near” cash assets (e.g., government bondsand current receivables, but excluding inventory) compared to the currentdebts (bank loans, payables) The acid test shows how much and how

quickly cash can be found if a company gets into trouble

ACID-TEST RATIO See QUICK RATIO.

ACKNOWLEDGMENT verification that a signature on a banking or

brokerage document is legitimate and has been certified by an authorizedperson Acknowledgment is needed when transferring an account from onebroker to another, for instance In banking, an acknowledgment verifies that

an item has been received by the paying bank and is or is not available forimmediate payment

ACQUIRED SURPLUS uncapitalized portion of the net worth of a

successor company in a POOLING OF INTERESTS combination In otherwords, the part of the combined net worth not classified as CAPITAL

STOCK

In a more general sense, the surplus acquired when a company is

purchased

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ACQUISITION one company taking over controlling interest in another

company Investors are always looking out for companies that are likely to

be acquired, because those who want to acquire such companies are

often willing to pay more than the market price for the shares they need to

complete the acquisition See also MERGER; POOLING OF INTERESTS;

TAKEOVER

ACQUISITION COST

Finance: price plus CLOSING COSTS to buy a company, real estate or

other property

Investments: SALES CHARGE incurred to buy a LOAD FUND or the

original price, plus brokerage commissions, of a security See also TAX

BASIS

ACQUISITION FEE see LOAD.

ACROSS THE BOARD movement in the stock market that affects almostall stocks in the same direction When the market moves up across theboard, almost every stock gains in price

An across-the-board pay increase in a company is a raise of a fixed

percent or amount for all employees

ACTIVE BOND CROWD members of the bond department of the NewYork Stock Exchange, the most important bond traders in North America,responsible for the heaviest volume of bond trading The opposite of theactive crowd is the CABINET CROWD, which deals in bonds that are

infrequently traded Investors who buy and sell bonds in the active crowdwill tend to get better prices for their securities than in the inactive market,where spreads between bid and asked prices are wider

ACTIVE BOX collateral available for securing brokers' loans or customers'

margin positions in the place—or box—where securities are held in

safekeeping for clients of a broker-dealer or for the broker-dealer itself.Securities used as collateral must be owned by the firm or hypothecated—that is, pledged or assigned—by the customer to the firm, then by the

broker to the lending bank For margin loans, securities must be

hypothecated by the customer to the broker

ACTIVE MANAGEMENT management of, for example, MUTUAL FUNDS

by professional money managers who actively buy and sell investments in

ACTIVE MARKET heavy volume of trading in a particular stock, bond, orcommodity The spread between bid and asked prices is usually narrower

in an active market than when trading is quiet

Also, a heavy volume of trading on the exchange as a whole Institutionalmoney managers prefer such a market because their trades of large

blocks of stock tend to have less impact on the movement of prices whentrading is generally active

Page 8

ACTUALS any physical commodity, such as gold, soybeans, or pork

bellies Trading in actuals ultimately results in delivery of the commodity tothe buyer when the contract expires This contrasts with trading in

commodities of, for example, index options, where the contract is settled incash, and no physical commodity is delivered upon expiration However,even when trading is in actuals most futures and options contracts are

closed out before the contract expires, and so these transactions do notend in delivery

ACTUARY mathematician employed by an insurance company to calculatepremiums, reserves, dividends, and insurance, pension, and annuity rates,using risk factors obtained from experience tables These tables are

based on both the company's history of insurance claims and other

industry and general statistical data

ADDITIONAL BONDS TEST test limiting the amount of new bonds that can

be issued Since bonds are secured by assets or revenues of a corporate

or governmental entity, the underwriters of the bond must insure that thebond issuer can meet the debt service requirements of any additional

bonds The test usually sets specific financial bench-marks, such as whatportion of an issuer's revenues or cash flow can be devoted to paying

interest

ADDITIONAL PAID-IN CAPITAL see PAID-IN CAPITAL.

ADEQUACY OF COVERAGE test of the extent to which the value of anasset, such as real property, securities, or a contract subject to currencyexchange rates, is protected from potential loss either through

INSURANCE or HEDGING

ADJUSTABLE RATE see FLOATING RATE.

ADJUSTED BALANCE METHOD formula for calculating finance chargesbased on ACCOUNT BALANCE remaining after adjusting for paymentsand credits posted during the billing period Interest charges under this

method are lower than those under the AVERAGE DAILY, PREVIOUS

BALANCE, and PAST DUE BALANCE METHODS

ADJUSTED BASIS base price from which to judge capital gains or lossesupon sale of an asset like a stock or bond The cost of commissions in

effect is deducted at the time of sale when net proceeds are used for taxpurposes The price must be adjusted to account for any stock splits thathave occurred since the initial purchase before arriving at the adjusted

ADMINISTRATOR court-appointed individual or bank charged with

carrying out the court's decisions with respect to a decedent's estate until it

is fully distributed to all claimants Administrators are appointed when a

person dies without having made a will or without having named an

executor, or when the named executor cannot or will not serve The term

administratrix is sometimes used if the individual

Page 9

appointed is a woman, and the term personal representative is also used

to describe the role

In a general sense, an administrator is a person who carries out an

organization's policies

AD VALOREM Latin term meaning “according to value” and referring to away of assessing custom, duties, or taxes on property As one example, advalorem DUTY assessment is based on value of the imported item ratherthan on its weight or quantity

ADVANCE

Securities: increase in the price of stocks, bonds, commodities, or other

assets Often heard when referring to the movement of broad indexes,

e.g., “The Toronto Stock Exchange 300 advanced 12 points today.’’

Trade: advance payment for goods or services that will be delivered in the

near future For example, home contractors require an advance from

homeowners to pay for building materials

ADVANCE-DECLINE (A-D) measurement of the number of stocks thathave advanced and the number that have declined over a particular period

It is the ratio of one to the other and shows the general direction of the

market It is considered bullish if more stocks advance than decline on anytrading day It is bearish if declines outnumber advances The steepness ofthe A-D line graphically shows whether a strong bull or bear market is

underway

ADVERSE OPINION opinion expressed by a company's independent

auditors that the firm's financial statements do not accurately reflect thecompany's current financial position or operating results An adverse

opinion is a far more serious finding than a QUALIFIED OPINION, in whichonly some issues are of concern to the auditor Investors should be

extremely cautious about investing in any company with an adverse opinion

coverage to such applicants.

ADVISORY LETTER newsletter aiming to offer financial advice to

subscribers The letter may offer a broad economic and market outlook, or

it may focus on a particular sector of the stock, bond, or commodity

markets Some advisory letters specialize in recommending only mutualfunds Some letters also advise their subscribers of new recommendationsthrough a toll-free hotline, which can be updated much more quickly than aprinted letter

AFFIDAVIT written statement made under oath before an authorized

person, such as a notary public

AFFILIATE

In general: two companies are affiliated when one owns less than a

majority of the voting stock of the other, or when both are subsidiaries of athird company A SUBSIDIARY is a company of which more than 50% ofthe voting shares are owned by another corporation, termed the PARENTCOMPANY A subsidiary is always, by definition, an affiliate, but subsidiary

is the preferred term when majority control exists In everyday use, affiliate

is the correct word for intercompany relationships, however indirect, wherethe parent-subsidiary relationship does not apply

AFFILIATED COMPANY company with less than 50% of its shares owned

by another corporation or one whose stock is owned by the same

controlling interests as that of another corporation

AFFILIATED CORPORATION corporation that is an AFFILIATE

AFFILIATED PERSON individual in a position to exert direct influence onthe actions of a corporation Among such persons are owners of 10% ormore of the voting shares, directors, and senior elected officers and anypersons in a position to exert influence through them—such as members

of their immediate family and other close associates Sometimes called a

AFTER-HOURS DEALING OR TRADING twenty-four-hour trading

services now provided by many brokerage on-line services and based systems for investors who wish to buy and sell stocks outside ofnormal market trading hours This is especially common when there isspecific or major news on earnings, mergers, or new developments Thestock then opens on the next trading day with all of these buy-and-sellorders in place, which reflect the overnight transactions

Internet-Page 11

AFTERMARKET see SECONDARY MARKET.

AFTERTAX REAL RATE OF RETURN amount of money, adjusted for

inflation, that an investor can keep, out of the income and capital gains

earned from investments Every dollar loses value to inflation, so investorshave to keep an eye on the aftertax real rate of return whenever they

commit their capital By and large, investors seek a rate of return that willmatch if not exceed the rate of inflation

AGAINST THE BOX SHORT SALE by the holder of a LONG POSITION in

the same stock Box refers to the physical location of securities held in

safekeeping When a stock is sold against the box, it is sold short, but only

in effect A short sale is usually defined as one where the seller does not

own the shares Here the seller does own the shares (holds a long

position) but does not wish to disclose ownership; or perhaps the long

shares are too inaccessible to deliver in the time required; or he may beholding his existing position to get the benefit of long-term capital gains taxtreatment In any event, when the sale is made against the box, the sharesneeded to cover are borrowed, probably from a broker

AGED FAIL contract between two broker-dealers that is still not settled 30days after the settlement date At that point the open balance no longercounts as an asset, and the receiving firm must adjust its capital

accordingly

AGENCY

In general: relationship between two parties, one a principal and the other

an AGENT who represents the principal in transactions with a third party

Finance: certain types of accounts in trust institutions where individuals,

usually trust officers, act on behalf of customers Agency services to

corporations are related to stock purchases and sales Banks also act asagents for individuals

Investment: act of buying or selling for the account and risk of a client.

Generally, an agent, or broker, acts as intermediary between buyer andseller, taking no financial risk personally or as a firm, and charging a

commission for the service

AGENCY SECURITIES securities issued by U.S government-sponsoredentities (GSEs) and federally related institutions

the economy, such as farmers, homeowners, and students They includethe Federal Farm Credit Bank System, Farm Credit Financial AssistanceCorporation, Federal Home Loan Bank, FEDERAL HOME LOAN

MORTGAGE CORPORATION, FEDERAL NATIONAL MORTGAGE

ASSOCIATION (FNMA), STUDENT LOAN MARKETING ASSOCIATION(SLMA), FINANCING CORPORATION (FICO) GSEs issue discount

notes (with maturities ranging from overnight to 360 days) and bonds Withthe exception of the Farm Credit Financial Assistance

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Corporation, GSE securities are not backed by the full faith and credit ofthe U.S government Other GSEs that formerly issued directly now borrowfrom the FEDERAL FINANCING BANK

Federally related institutions are arms of the U.S government and

generally have not issued securities directly into the marketplace since theFederal Financing Bank was established to meet their consolidated

borrowing needs in 1973 They include the EXPORT-IMPORT BANK

(EXIMBANK) of the United States, the Commodity Credit Corporation, theFarmers Housing Administration, the General Services Administration, theGOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA), theMaritime Administration, the Private Export Funding Corporation, the RuralElectrification Administration, the Rural Telephone Bank, the SMALL

BUSINESS ADMINISTRATION (SBA), the Tennessee Valley Authority(TVA), and the Washington Metropolitan Area Transit Authority Except forthe Private Export Funding Corporation and the TVA, federally related

institution obligations are backed by the full faith and credit of the U.S

AGENT individual authorized by another person, called the principal, to act

in the latter's behalf in transactions involving a third party Banks are

frequently appointed by individuals to be their agents, and so authorize theiremployees to act on behalf of principals Agents have three basic

characteristics:

1 They act on behalf of and are subject to the control of the principal

2 They do not have title to the principal's property

3 They owe the duty of obedience to the principal's orders

See also ACCOUNT EXECUTIVE; BROKER; TRANSFER AGENT.

AGENT FOR EXECUTOR a trust company hired by the named executor toprovide advice and administration services for a fee

AGGREGATE EXERCISE PRICE

1 in stock options trading, the number of shares in a put or call

not included in the aggregate exercise price A July call option on

100 XYZ at 70 would, for example, have an aggregate exerciseprice of 100 (number of shares) times $70 (price per share), or

$7000, if exercised on or before the July expiration date

2 in index options, the exercise price × $100

AGGREGATE SUPPLY in MACROECONOMICS, the total amount ofgoods and services supplied to the market at alternative price levels in a

given period of time; also called total output The central concept in

SUPPLY-SIDE ECONOMICS, it corresponds with aggregate demand,

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defined as the total amount of goods and services demanded in the

economy at alternative income levels in a given period, including both

consumer and producers' goods; aggregate demand is also called total

spending The aggregate supply curve describes the relationship between

price levels and the quantity of output that firms are willing to provide

AGGRESSIVE GROWTH MUTUAL FUND mutual fund holding stocks ofrapidly growing companies While these companies may be large or small,they all share histories of and prospects for above-average profit growth.Aggressive growth funds are designed solely for capital appreciation, sincethey produce little or no income from dividends This type of mutual fund istypically more volatile than the overall stock market, meaning its shares willrise far more than the average stock during bull markets and will fall muchfarther than the typical stock in a bear market Investors in aggressive

growth funds must realize that the value of their shares will fluctuate sharply

over time Aggressive growth funds are also called maximum capital gains

funds or capital appreciation funds.

AGING SCHEDULE classification of trade ACCOUNTS RECEIVABLE by

date of sale Usually prepared by a company's auditor, the aging, as the

schedule is called, is a vital tool in analyzing the quality of a company's

receivables investment It is frequently required by grantors of credit

The schedule is most often seen as: (1) a list of the amount of receivables

by the month in which they were created; (2) a list of receivables by

maturity, classified as current or as being in various stages of delinquency.The following is a typical aging schedule

dollars (in thousands)Current (under 30 days)$14,06561%1–30 days pastdue3,72516 31–60 days past due2,90012 61–90 days past

due1,8008 Over 90 days past due7503 23,240100%

The aging schedule reveals patterns of delinquency and shows where

collection efforts should be concentrated It helps in evaluating the

adequacy of the reserve for BAD DEBTS, because the longer accountsstretch out the more likely they are to become uncollectible Using the

schedule can help prevent the loss of future sales, since old customerswho fall too far behind tend to seek out new sources of supply

AGREEMENT AMONG UNDERWRITERS contract between participatingmembers of an investment banking SYNDICATE; sometimes called

syndicate contract or purchase group agreement It is distinguished from

the underwriting agreement, which is signed by the

of the selling group agreement; (5) states the life of the syndicate, usuallyrunning until 30 days after termination of the selling group, or ending earlier

by mutual consent

AIR POCKET STOCK stock that falls sharply, usually in the wake of suchnegative news as unexpected poor earnings As shareholders rush to sell,and few buyers can be found, the price plunges dramatically, Eke an

airplane hitting an air pocket

ALBERTA STOCK EXCHANGE (ASE) exchange dating back to the

incorporation of the Calgary Stock Exchange in 1913 by an act of the

Alberta government Trading commenced following the discovery of oil inthe Turner Valley in 1914, and the Exchange's trading history has closelyparalleled significant oil and gas discoveries in Western Canada In 1974,the name was changed to the ASE

In 1983, the ASE was the first exchange in Canada to accept corporatebonds for listing along with equities Since 1988, the ASE has operated anAutomated Trade Execution System (ATES), in which trading is fully

automated

Currently, approximately 30% of all trading is on ATES The ASE is located

at 300 Fifth Avenue S.W., Calgary, Alberta T2P 3C4

In 1999, the ASE merged with the Vancouver Stock Exchange to form theCDNX Canadian Venture Exchange

ALLIGATOR SPREAD spread in the options market that “eats the investoralive” with high commission costs The term is used when a broker

arranges a combination of puts and calls that generates so much

commission the client is unlikely to turn a profit even if the markets move

as anticipated

ALL IN underwriting shorthand for all included, referring to an issuer's

ALL OR NONE (AON)

Investment banking: an offering giving the issuer the right to cancel the

whole issue if the underwriting is not fully subscribed

Securities: buy or sell order marked to signify that no partial transaction is

to be executed The order will not automatically be canceled, however, if acomplete transaction is not executed; to accomplish that, the order entrymust be marked FOK, meaning FILL OR KILL

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ALL ORDINARIES INDEX the major index of Australian stocks,

representing 330 of the most active listed companies, or the majority of theequity capitalization (excluding foreign companies) listed on the

AUSTRALIA STOCK EXCHANGE (ASX) The index is made up of 23 indices representing various industry categories, and it summarizes marketprice movements by following changes in the aggregate market values ofthe companies listed

sub-ALLOTMENT amount of securities assigned to each of the participants in

an investment banking SYNDICATE formed to underwrite and distribute a

new issue, called subscribers or allottees The financial responsibilities of

the subscribers are set forth in an allotment notice, which is prepared bythe SYNDICATE MANAGER

ALLOWANCE deduction from the value of an invoice, permitted by a seller

of goods to cover damages or shortages See also RESERVE.

ALPHA

1 coefficient measuring the portion of an investment's RETURN

arising from specific (nonmarket) risk In other words, alpha is a

mathematical estimate of the amount of return expected from an

investment's inherent values, such as the rate of growth in earningsper share It is distinct from the amount of return caused by

VOLATILITY, which is measured by the BETA coefficient For

example, an alpha of 1.25 indicates that a stock is projected to rise25% in price in a year when the return on the market and the stock'sbeta are both zero An investment whose price is low relative to its

alpha is undervalued and considered a good selection

In the case of a MUTUAL FUND, alpha measures the relationshipbetween the fund's performance and its beta over a three-year

period

2 on the London Stock Exchange, now called the International Stock

Exchange of the United Kingdom and Republic of Ireland (ISE), the

designation alpha stocks applied to the largest and most actively

traded companies in a classification system that was adopted afterthe BIG BANG in October 1986 and was replaced in January 1991.with the NORMAL MARKET SIZE (NMS) classification system

ALPHABET STOCK categories of common stock associated with

particular subsidiaries created by acquisitions and restructuring Exampleswould be General Motors “E” stock, issued to acquire Electronic Data