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Part IV

annual stockholders’ report
a report made available to stockholders and other interested parties that includes a variety of financial and descriptive information about a firm’s operations in the recent past
arbitration
a procedure used to settle disputes between a brokerage firm and its clients; both side present their positions to a board of arbitration, which makes a final and usually binding decision on the matter
ask price
the price at which one can purchase a security
asset allocation
a plan for dividing a portfolio among different classes of securities in order to preserve capital by protecting the portfolio against negative market developments
bear market
a condition of the market typically associated with investor pessimism and economic slowdown; characterized by generally rising securities prices
bid price
the price at which one can sell a security
bull market
a market condition normally associated with investor optimism, economic recovery, and expansion; characterized by generally rising securities prices
discount broker
a broker with low overhead who charges low commissions and offers little or no services to investors
diversification
the process of choosing securities with dissimilar risk-return characteristics in order to create a portfolio that provides an acceptable exposure to risk
Dow Jones Industrial Average (DJIA)
the most widely followed measure of stick market performance; consists of 30 blue-chip stocks listed mostly on the NYSE
full-service broker
a broker who, in addition to executing clients’ transactions, offers a full array of brokerage services
Dow Jones Wilshire 5000 index
an index of the total market value of the approximately 6,000-7,000 or so most actively traded stocks in the United States
investing
the process of placing money in some medium such as socks or bonds in the expectation of receiving some future benefit
investment plan
a statement – preferably written – that specifies how investment capital will be invested to achieve a specified goal
limit order
an order to either buy a security at a specified or lower price or to sell a security at or above a specified price
market order
an order to buy or sell a security at the best price available at the time is is places
National Association of Securities Dealers (NASD)
an agency made up of brokers and dealers in over-the-counter securities that regulates OTC market operations
NYSE index
an index of the performance of all stocks listed on the New York Stock Exchange
odd
lot A quantity of fewer than 100 shares of a stock
online broker
typically a dissent broker through which investors can execute trades electronically/online through a commercial service or on the Internet; also called Internet broker or electronic broker
portfolio
a collection of securities assembled for the purpose of meeting common investment goals
prospectus
a document made available to prospective security buyers that describes the firm and a new security issue
round lot
a quantity of 100 shares of stock or multiples thereof
Securities and Exchange Commission (SEC)
an agency of the federal government that regulators the disclosure of information about securities and generally oversees the operation of the securities exchanges and markets
Securities Investor Protection Corporation (SIPC)
a nonprofit corporation, created by Congress and subject to SEC and congressional oversight, the insures customer accounts against the financial failure of a brokerage firm
securities market
the marketplace in which stocks, bonds, and other financial instruments are traded
speculating
a form of investing in which future value and expected returns are highly uncertain
Standard & Poor’s (S&P)
indexes compiled by Standard & Poor’s that are similar to the DJIA but employ different computational menthols and consist of far more stocks
stockbroker (account executive, financial consultant)
a person who buys and sells securities on behalf of clients and gives them investment advice and information
stop-loss (stop order)
an order to sell a stock when the market prices reaches or drops below a specified level
accrued interest
the amount of interest thats been earned since the last coupon payment date by the bond hinder/seller, but which will be received by the new owner/buyer of the bond at the next regularly schedules coupon payment date
agency bond
an obligation of a political subdivision of the U.S. government
beta
an index of the price volatility for a share of common stock; a reflection of how the stock price responds to market forces
blue-chip stock
a stock generally issued by companies expected to provide an uninterrupted stream of dividends and good long-term growth prospects
book value
the amount of stockholders’ equity in a from; determined by subtracting the company’s liabilities and preferred stock from its assets
business risk
the degree of uncertainty associated with a firm’s cash flows and with its subsequent ability to meet its operating expenses
call feature
a bond feature that allows the issuer to retire the security prior to maturity
clean price
the quoted price of a bond plus accrued interest, the total of which is the relevant price to be paid by a bond buyer
conversion premium
the difference between a convertible security’s market price and its conversion value
conversion privilege
the provision in a convertible issue that stipulates the conditions of the conversion feature, such as the conversion period and conversion ratio
conversion ratio
a ratio specifying the number of shares of common stock which a convertible bond can be converted
conversion value
a measure of what a convertible issue would trade for if it were priced to sell based on its stock value
corporate bond
a bond issued by a corporation
coupon
a bond feature that defined the annual interest income that the issuer will pay the bondholder
current yield
the amount of current income a bond provides relative to its market price
cyclical stock
a stock whose price movements tend to parallel the various stages of the business cycle
debenture
an unsecured bond issued on the general credit of the firm
defensive stock
a stocks whose price movements are usually contrary to movements in the business cycle
desired rate of return
the minimum rate of return an investor feels should be earned in compensation for the amount of risk assumed
dirty (full) price
the quoted price of a bond plus accrued interest, the total of which is the relevant price to be paid by a bond buyer
discount bond
a bond whose market value is lower than par
dividend reinvestment plan (DRP)
a program whereby stockholders can choose to take their cash dividends in the form of more shared of the company’s stock
dividend yield
the percentage return provided by the dividends paid on common stock
earnings per share (EPS)
the return earned by each share of common stock; calculated by dividing all earnings remaining after paying preferred dividends by the number of common shares outstanding
equipment trust certificate
a bond secured by certain types of equipment, such as railroad cars and airplanes
event risk
the risk that some major, unexpected event will occur that leads to a sudden and substantial change in the value of an investment
financial risk
a type of risk associated with the mix of debt and equity financing used by the issuing firm and its ability to meet its financial obligations
fixed-income securities
securities such as bonds, notes and preferred stocks that offer purchasers fixed periodic income
general obligation bond
a municipal bond backed by the full faith and credit of the issuing municipality
growth stock
a stock whose earnings and market price have increased over time at a rate well above average
income stock
a stock whose appeal is the dividends it pays out; offers dividend payments that can be expected to increase over time
interest rate risk
a type of risk, resulting from changing market interest rates, that mainly affects fixed-income securities
junk bond
also known as high-yield bonds, these are highly speculative securities that have received low ratings from Moody’s or Standard & Poor’s
large-cap stock
a stock with a total market value of more than $10 billion
liquidity (or marketability) risk
a type of risk associated with the inability to liquidate an investment conveniently and at a reasonable price
market risk
a type of risk associated with the price volatility of security
mid-cap stock
a stock whose total market value falls somewhere between $2 billion and $10 billion
mortgage bond
a bond secured by a claim on real assets, such as a manufacturing plant
mortgage-backed securities
securities that are a claim on the cash flows generated by mortgage loans, bonds backed by mortgage loans; bonds backed by mortgages as collateral
municipal bond
a bond issued by state or local governments; interest income is usually exempt from federal taxes
net profit margin
a key measure of profitability that relates a firm’s net profits to its sales; shows the rate of return the company is earning on its sales
premium bond
a bond whose market value is higher than par
price/ earnings (P/E) ratio
a measure of investors’ confident in a given security; calculated by dividing marker price per share by earnings per share
proxy
a written statement used to assign a stockholder’s voting rights to another person, typically one of the directors
purchasing power risk
a type of risk, resulting from possible changes in price levels, that can significantly affect investment returns
residual owners
shareholders of the company; they are entitled to dividend income and a share of the company’s profits only after all the firm’s other obligations have been met
return on equity (ROE)
a measure that captures the firm’s overall profitability; it is important because of its impact on the firm’s growth, profits, and dividends
revenue bond
a municipal bond serviced from the income generated by a specific project
risk-free rate of return
the rate of return on short-term government securities, such as Treasury bills, that is free from default risk
serial obligation
an issue that is broken down into a series of smaller bonds, each with its own maturity date and coupon rate
sinking fund
a bond provision specifying the annual repayment schedule to be used in paying off the issue
small-cap stock
a stock with a total market value of less than $2 million
speculative stock
stock that is purchased on little more than the hope that its price per share will increase
stock dividends
new shares of stock distributed to existing stockholders as a supplement to or substitute for cash dividends
tech stock
a stock that represents the technology sector of the market
Treasury bond
a bond issued by and backed by the full faith and credit of the U.S. government
Treasury inflation-indexed bond (TIPS)
a bond issued by the U.S government that has principal payments that are adjusted to provide protection against inflation, as measured by the Consumer Price Index (CPI)
yield of maturity
the fully compounded rate of return that a bond would yield if it were held to maturity
12(b)-1 fee
an annual fee that’s supposed to be used to offset the promotion and selling expenses
automatic investment plan
an automatic savings program that enables an investor to channel a set amount of money systematically into a given mutual fund
automatic reinvestment plan
a plan that gives shareholders the option of electing to have dividends and capital gains distributions reinvested in additional fund shares
back-end load fund
a commission charged for redeeming fund shares
closed-end investment company
an investment company that issues a fixed number of shares, which are themselves listed and traded like any other share of stock
conversion (exchange) privileges
a feature that allows investors to switch from one mutual fund to another within a family of funds
exchange traded fund (ETF)
an investment company whose shares trade on stock, ETF shares can be bought or sold (or sold short) throughout the day
general-purpose money fund
a money fund that invests in virtually any type of short-term investment vehicle
government securities money fund
a money fund that limits its investments to short-term securities of the U.S. government and its agencies
income (income-producing) property
real estate purchased for leasing or renting to tenants in order to generate ongoing monthly/annual income in the form of rent receipts
international fund
a mutual fund that does all or most of its investing in foreign securities
load fund
a fund that charges a fee at time of purchase
low-load fund
a fund that has a low purchase fee
management fee
a fee paid to the professional money managers who administer a mutual fund’s portfolio
mutual fund
a financial services organization that receives money from its shareholders and invest those funds on their behalf in a diversified portfolio of securities
not asset value (NAV)
the current market value of all the securities the fund owns, less any liabilities, on a per-share basis
no-load fund
a fund on which no transaction fees are charged
open-end investment company
a firm that can issue an unlimited number of shares that it buys and sells at a price based on the current market value of the securities it owns; also called a mutual fund
pooled diversification
a process whereby investors buy into a diversified portfolio of securities for the collective benefit of individual investors
real estate investment trust (REIT)
an investment company that accumulates money, by selling shares to investors, in order to invest it in various forms of real estate including mortgages; similar to a mutual fund, but REITs invest only in specific types of real estate or real estate-related products
socially responsible fund (SRF)
a fund that invests only in companies meeting certain moral, ethical, and/or environment criteria
systematic withdrawal plan
a plan offered by mutual funds that allows shareholders to be paid specified amounts of money each period
tax-exempt money fund A money fund
that limits its investments to short-term, tax-exempt municipal securities
a bull market is characterized by
investor optimism
an individual investor is more likely to use the secondary markets than the primary market
true
the majority of U.S. securities are owned directly by individual investors
false
a retired couple can probably bear more risk in their portfolio than a younger investor with a secure job
false
a collection of investments is called
a portfolio
portfolio management involves making decisions in order to
meet your investment needs and objectives
your goals tend to set the tone for your investment program, and they play a major role in determining how conservative or aggressive you’re likely to be in making investment decisions
true
you have been offered an opportunity to buy shares of a diversified collection of securities. You will be investing in
mutual funds
investing and speculation are two entirely different activities
true
the most important investment prerequisites are
adequate insurance and liquidity
which of the following is least likely to be an investment objective?
pay monthly bills
Discount brokers discount the price of securities to below the prevailing market price
false
instructing your broker to buy or sell a stock at a particular price
limit order
brokers charge a commission on security purchases as well as on security sales
true
a retail stockbroker buys and sells securities on behalf of clients
true
diversification increases risk
false
the total return of a portfolio is influenced far more by specific security selection than asset allocation
false
investing is considered a short-term activity that involves the buying and selling of securities
false
you have been offered an opportunity to buy shares of a diversified collection of securities. You will be investing in
mutual funds
there are a variety of investment vehicles including which of the following
all of these
mutual funds provide professional management and diversification that individual investors – especially those with limited resources – can rarely obtain on their own
true
during a bull market
prices go up
which of the following types of brokers is most likely to involve an investor trading electronically from hit or her personal computer?
online broker
total portfolio return id influenced more by asset allocation than by specific security selections
true
investment company earnings result solely from dividends
false
the current market value of all the securities a mutual fund owns is called the
net asset value (NAV)
Generally speaking, socially responsible funds abstain from investing in alcohol, gambling, or tobacco stocks
true
open ended mutual funds typically offer more diversification than an individual security
true
which of the following combines the operating characteristics of an open-end fund with some of the trading characteristics of a closed-end fund?
exchange traded fund (ETF)
index funds are actively managed
false
all of the following are important advantages to buying shares in bond funds rather than investing directly in bonds EXCEPT
all of these are advantages
aggressive growth funds typically buy sticks with high PE ratios and stocks with volatile price fluctuations
true
the fund whose main objective is growth is known as a(n) _____ fund
none of these
a mutual fund allows investors to
become owners of a widely diversified portfolio of securities
a technology fund is an example of a sector fund
true
a(n) ____ fund invests primarily in a portfolio of common stocks for the income they provide
equity-income
ETTFs are set up to protect investors from capital gain taxes better than most mutual funds can
true
there are more closed end investment companies than there are open-end companies
false

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