Calendar spread:
An options spread position with the same strike prices, but different
expiration months. Calendar spreads are entered to take advantage of
the decay of time premium.
Callable securities:
Securities that may be bought back by the issuer before they are due,
usually at a premium over the par value. Many bonds and preferred
stocks are callable.
Call option:
An option contract that gives the holder the choice to buy the stock
and the writer the obligation to sell the stock at a specified price.
Call rate: The rate of interest banks charge broker/dealers on loans collateralized by securities, often called the broker loan rate.
Call spread: An options spread position in which the customer is long a call and short a different call on the same underlying security.
Canadian interest cost: See True Interest Cost.
Cap Interval:
The point at which these special index options are automatically
exercised if the underlying index touches or exceeds the cap price on
the close.
Capital Asset Pricing Theory (CAPT):
A theory of portfolio analysis stating that diversified investments in
a portfolio are less risky than the sum of the risks of the individual
stocks.
Capital gain:
A gain recognized when a security is purchased at one price and sold at
a higher price. It does not include dividend or interest income.
Capitalization:
The long-term financing of a corporation, including the shareholder's
equity section of the balance sheet plus long-term bonds outstanding.
Cash flow: The net profits or losses of a business plus noncash expenses such as depreciation, amortization, and depletion.
Cash settlement: A trade that is settled on the same day as the trade date.
Catastrophe call: A
provision in the trust indenture of a bond issue that allows the issuer
to call the bonds if the facility is destroyed by a natural disaster.
It is usually called at par.
CBOE: See Chicago Board Options Exchange.
CD: See Certificate of deposit.
Certificate: The physical paper that evidences ownership of stock in a corporation.
Certificate of Deposit:
A document certifying an unsecured time deposit with a bank, usually
known as a CD. To be negotiable, it must be for $100,000 or more.
Certificate of Limited Partnership:
A document summarizing the provisions of a limited partnership. It must
be filed with the secretary of state in the state in which the
partnership is formed. Filing the certificate creates the limited
partnership.
Chicago Board Options Exchange (CBOEJ): The largest options exchange. Located in Chicago.
CFTC: The Commodity Futures Trading Commission.
Chinese Wall doctrine: Doctrine
by which firms must establish barriers restricting information flow
between departments to ensure that insider information acquired by one
department (legal or investment banking, for example) will not be used
in trades of another department or in recommendations to customers.
Churning:
Excessive trading in a customer's account to give profit to the
broker/dealer in disregard of the customer's best interests.
Prosecutable under the 1934 Securities Exchange Act.
Circuit breakers:
Trading halts, curtailment of automated trading systems and/or price
movement limits used by the exchanges to attempt to prevent the
free-fall of stock or stock index futures markets. Established after
Black Monday in 1987 by major stock and commodities exchanges. The
breakers are triggered when the market has fallen by a specified amount
in a specified period. Amounts that trigger the breakers are changed
from time to time.
Class of Options: Options of the same type (put or call) on the same underlying security.
Closed-end investment company: An investment company with a fixed number of shares that trade in the secondary market.
Closing purchase: A purchase of an option to eliminate or reduce a short options position.
COD: Cash on Delivery. Payment for goods is made upon delivery. See Delivery versus Payment.
Code of Arbitration:
Procedure of the NASD for settling disputes among participants in the
securities markets by arbitration. Applies to disputes between and
among members, members and their associates, members and public
customers, associates of members and public customers, and members and
clearing agencies or persons using the facilities of a clearing agency
(however, only when the clearing agency has an arbitration agreement
with the NASD).
Code of Procedure:
Procedures of the NASD that detail the form for disciplinary actions
against members and their associates for violations of the rules over
which the NASD has jurisdiction.
Coincident indicator: An
economic indicator that reflects changes in the economy. The index of
industrial production and retail sales are both coincident indicators.
Collateral:
Securities or other assets that a borrower pledges to a lender to
secure repayment of a loan. If the borrower does not make payments as
promised, the lender may legally seize the collateral and use the
proceeds from its sale to pay off the loan.
Collateralized Mortgage Obligations (CMOs): Bonds secured with GNMA, FNMA, and FHLMC mortgage-backed securities. Also known as REMICs.
Collateral trust bonds: Bonds secured by securities of another corporation.
Combination:
An options position in which an investor is long both a put and a call
option on the same stock or short both a put and a call option on the
same stock. The options usually have different strike prices.
Commercial paper: Short-term business notes, drafts, and acceptances maturing in 270 days or less.
Commission: The fee charged by a broker/dealer for acting for others in executing buying or selling orders.
Commodity Futures Trading Commission: U.S. Government Agency that regulates U.S. exchange trading in futures.
Common stock: The most basic type of equity security, representing ownership of the corporation.
Communications that are neither advertising nor sales literature:
Items exempt from the NASD's advertising and sales literature rules,
including: 1. tombstone advertisements or similar communications; 2.
documents intended for the internal use of the firm and not given to
the public; 3. communications which only identify the member and/or
offer a specific security at a stated price; 4. prospectuses, offering
circulars, etc. used in connection with a public offering of a security
that has been registered or filed with the SEC or a state (except for
the prospectus for investment company shares); and 5. communications
merely stating facts, such as the member's new name or address, facts
concerning a merger or acquisition, the firm's NASDAQ® symbol, or
the NASDAQ® symbol of a security in which the member is a
registered market maker.
Competitive bid underwriting: An offering in which syndicates enter bids for the opportunity to underwrite the issue.
Competitive trader: A person who owns a seat on an exchange and uses it to trade for his own account.
Complaint:
Defined by the NASD as a written statement of a grievance by a customer
or his agent, involving persons associated with the member concerning
the solicitation, execution, or disposition of funds or securities.
Compliance Registered Options Principal:
A registered options principal who has been designated by the
broker/dealer to maintain compliance with industry rules and federal
law, usually referred to as a CROP. He must approve all items of
advertising, sales literature, and educational material.
Concession: In a municipal underwriting, the compensation given up to broker/dealers who are not members of the syndicate.
Conduct Rules (formerly known as the Rules of Fair Practice): Rules maintained and enforced by the NASD that apply to general business activities of members.
Conduit Theory: Theory
governing an exemption on paying taxes for Regulated Investment
Companies. The theory governing this exemption is that an RIC that
distributes most of its income is acting only as a conduit for income
on investments.
Confirmation:
A written report giving details of the trade to the customer or the
other broker/dealer involved in the trade. Confirmations must be sent
the next business day after the trade.
Consent to service of process:
Legal document used by the state administrator to simplify filing of
complaints under state securities laws. The person or entity signing it
(such as the issuer of a security, or a securities registrant with the
state) agrees that, for noncriminal complaints, any legal papers
regarding the signee that are served on the state administrator in lieu
of the signee have the same force and validity as if they were served
directly on the signee.
Consolidated Tape:
System for providing the last sale price and volume of trades in
exchange-listed securities. The system has two tapes: Network A and
Network B. All trades in NYSE securities, regardless of where they
occur, are listed on Network A with an identifier as to where they
originated. Transactions in securities listed on AMEX and other
regional exchanges are reported on Network B. Participants in addition
to the NYSE and AMEX include BSE, CBOE, CSE, CHX, NASD, PSE, and PHLX.
Contemporaneous traders: Traders who buy or sell a security at the time of insider trading. Such traders may sue in court for damages.
Continuous issue of redeemable securities:
Manner in which shares of a mutual fund are issued. The shares
purchased are new shares, and when a shareholder wishes to sell shares,
he sells them back to the fund itself (redeems them) rather than
selling them on the open market. The shares repurchased by the mutual
fund are retired: they do not become treasury stock, nor may they be
reissued; the shares simply cease to exist.
Continuous net settlement:
The offsetting of payments and certificates when multiple trades
involving a particular security have the same two parties on opposing
sides. Used by registered clearing agencies.
Contractual plans:
A contract committing an investor to invest money over a period of
time. The sales charges are deducted over the life of the contract,
being higher in the early part of the contract.
Control persons: See Affiliated persons. Control persons are also called "Insiders."
Control stock: Stock owned by control persons.
Conversion price: The price of a bond or stock at which it can be converted to common stock.
Conversion ratio: The ratio specifying how many shares of a common stock will be received upon converting one bond or share of preferred stock.
Convertible:
Designation for a bond, debenture, or preferred stock which signifies
that it may be exchanged by the owner for common stock or another
security, usually one issued by the same corporation. Conversions are
subject to terms established in the issue of the original security.
Cooling-off period: The time between the filing of the offering with the SEC and the effective date when it is released by the SEC.
Cost basis: See Basis.
Coterminous:
Overlapping debt, such as the bonds of a city and a school district
where both debts are being paid by the same tax base (taxpayers).
Coupon bond:
A bond in which coupons for interest payment are physically attached to
the bond paper. The bondholder must clip the coupons as they come due
and present them for payment of interest.
Coupon rate:
The nominal yield on a bond or share of preferred stock. For example, a
bond with a face value of $1,000 that pays $100 per year has a nominal
yield or coupon rate of 10%.
Covered options:
A short options position in which the writer has the means of meeting
the obligation. For example, a person who is short a call option and
long the stock.
Credit agreement: An agreement between broker and customer on the conditions of a margin account.
Credit balance: Money on deposit in a customer's account.
Credit spreads: An options spread position in which the premium on the short position is greater than the premium on the long position.
CROP: See Compliance Registered Options Principal.
Crossed market:
A market in which either a newly entered bid is higher than an existing
asked price or a newly entered asked price is less than an existing bid
price.
Crossover: The point at which the partnership goes from showing losses for tax purposes to showing income.
Cumulative preferred stock: A preferred stock whose dividends continue to accumulate even though they are not earned or declared.
Currency exchange risk: The
risk that the value of an investor's domestic currency may drop against
the value of the currency in which an investment is held. Much of this
risk can be hedged away through the market for forwards and futures.
Current assets: Assets that are converted to cash within one year.
Current liabilities: Obligations that must be paid within one year.
Current ratio: Current assets divided by current liabilities.
Current yield: The ratio of the current income from an investment to the purchase price or the current price of the investment.
CUSIP number: A
number assigned to each issue of securities by the Committee on Uniform
Securities Identification Procedures to facilitate tracking lost,
stolen, or counterfeit securities.
Custodian:
The person appointed by the donor to manage a minor's account. Might be
the donor, a guardian, or some other adult or institution such as a
bank.
Customer:
Any person or entity for whom the broker/dealer holds funds or
securities, unless that entity is another broker/dealer. (Though
municipal securities dealers may be considered customers on
transactions not involving municipal securities.)
Customer agreement: A basic agreement between customer and broker, incorporating the margin agreement, the credit agreement and the loan consent.
Customer book: A listing maintained by the registered representative of every security a customer holds.
Cyclical stocks: Common stocks of companies whose prices vary directly with the business cycle.
Dated date: In a bond issue, the date on which interest begins to accrue.
