AB trust See bypass trust. AAII See American Association
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03 526359 A.qxd 7/24/03 8:48 AM Page 4 transfer the seat to another of the firm’s employees. ABC News/Money Magazine Consumer Comfort Index A survey, released week- A shares ly, that has information from interviews with about 1,000 adults nationwide that 1. In a mutual fund with multiple share took place during the previous four weeks. classes, the mutual fund class that typi- Telephone survey respondents are asked to cally comes with a front-end load, which is rate the national economy, the buying cli- a sales charge that is paid when investing mate, and their personal financial condition, in the fund. and they are asked if they agree with positive 2. In China, the shares of stock that are or negative comments about the economy. denominated in local currency and The most positive score the index can have traded on stock exchanges in Shanghai is +100 and the most negative is –100.The and Shenzhen.These markets have been index has a relatively low impact on the closed to foreign investment since they financial markets. However, if confidence were established. shows a multi-week decline, it is viewed as an indicator that consumer spending will decline. A/B trust See bypass trust. The data is not seasonally adjusted. It is AAII See American Association of Individual broken down into responses by age, Investors. employment status, education, income, and gender. It also is calculated for four differ- AB Stands for aktiebolag, which is a ent U.S. regions. Swedish company designation, similar to Inc. Companies with the AB designation abeyance can be publicly traded or privately held. 1. A suspension of the title to real estate The designation also is used in Switzerland. while the rightful ownership is being abatement The reduction or suspension discovered. of payments. For example, a municipality 2. Temporarily setting aside, such as may give a corporation tax abatements to holding a plan in abeyance. lure the corporation to the city. An abate- ment also may be used in a contract in the event that some extraordinary situation abnormal rate of return A return on a arises. See also tax abatement. security that differs from the market’s expected rate of return, or the return that a ABC agreement An agreement that security would normally produce. outlines a brokerage firm’s rights when it purchases a seat, or membership, on the ABS New York Stock Exchange for one of its 1. See asset-backed security. employees. The membership must be pur- chased for the employee, and not for the 2. See automated bond system. company, because only individuals may own an NYSE membership. The term absolute priority rule A legal concept ABC agreement may have gotten its name used in bankruptcy proceedings that says from the options that the employee who is that creditors’ claims are given priority over given the seat has when leaving the broker- shareholders’ claims if a company is liqui- age firm.The employee can a) keep the seat dated or reorganized. Shareholders receive a but buy another seat for a person named by payout if anything is left after debtors have the company; b) sell the seat and give the been fully paid off. sale proceeds to the brokerage firm; or c) 03 526359 A.qxd 7/24/03 8:48 AM Page 5 5 accounts payable absorption rate In the real estate indus- work for a professional services organi- try, the speed at which vacant properties are zation, such as an advertising agency. able to be sold or leased. abusive tax shelter An investment that account reconciliation The act of is being used to avoid taxes illegally. The matching a checkbook balance to its bank Internal Revenue Service lists abusive shel- statement. Charges are subtracted from the ters and gives people using those shelters a checkbook balance; interest earned is limited time to propose settlement options. added. Checks that haven’t been cleared are Some abusive transactions involve inaccu- added back into the checkbook balance. rately setting the price that an asset or When these steps are completed, the business is acquired at in order to decrease checkbook balance and the balance shown the amount of taxes that have to be paid. on the bank statement should equal each Abusive tax shelters may involve contingent other. liabilities. accountant A highly trained professional ACARS See American Corporate Accrual who is responsible for reporting financial Receipts. results for a company or individual in accordance with governmental and profes- acceleration clause A clause in a loan sional regulations. A certified public accountant agreement that can be invoked by the is a person who has passed a licensing test, lender when the borrower fails to make has taken a minimum number of college payments, files bankruptcy, or otherwise courses, and has met experience guidelines breaks a loan agreement. The clause allows established by the state of residence. See the lender to demand that the borrower pay also certified public accountant. the outstanding loan balance or provide additional collateral. accounting A system that measures, organizes, and communicates financial accommodative monetary policy A information about a specific business, gov- policy of having low interest rates; a central ernment, or other entity. bank is attempting to stimulate economic growth by lowering short-term interest accounting equation The foundation rates. If interest rates are lower, more people of the accounting system used in the and businesses may borrow money, thus United States, which states that assets equal stimulating growth. The opposite is a tight liabilities plus owners’ equity.The two sides monetary policy, which signifies increasing of the equation must always be in balance. interest rates. Accommodative monetary accounting fraud Knowingly falsifying policy may also be referred to as easy mone- accounting records, such as sales or cost tary policy. records, in order to boost net income or account executive sales figures. Accounting fraud is illegal and subjects the company and the executives 1. A person who sells securities and who involved to civil lawsuits. Company officials works for a brokerage firm. In order to may resort to accounting fraud to reverse a be an account executive, a person must loss or to ensure that they meet Wall Street’s pass the Series 7 and Series 63 exams, earnings expectations. which are administered by the National Association of Securities Administrators accounts payable The amount of (NASD). Also called stock broker or a reg- money that a company owes for goods and istered representative. services received. The amount of accounts payable is listed on the company’s balance 2. In companies other than brokerage sheet as a liability. firms, salespeople, often salespeople who 03 526359 A.qxd 7/24/03 8:48 AM Page 6 accounts receivable 6 accounts receivable Money that is become bearish and merger, acquisition, owed to a company by a customer. and joint venture activity slows in response, Accounts receivable are listed on a compa- a merger, acquisition, or joint venture must ny’s balance sheet under assets. Reserves be perceived as being accretive to earnings, can be set aside to provide the company or shareholders will not be supportive. with a cushion in the event that the accounts receivable are not paid. In order to accrual accounting A type of account- obtain quick cash, accounts receivable may ing system that records income when be sold to another party that will provide products or services are sold and recognizes the value of the receivables at a discount expenses when they are incurred. In con- from what the company would have trast, the cash method of accounting recognizes received. expenses and income when the actual money is received. accounts receivable financing Obtaining funds by selling a company’s accounts accrual basis accounting The most fre- receivable. Typically, a company that sells quently used accounting method, it records accounts receivable takes less than the full income when it is earned and expenses amount for the money owed on the when they are incurred, regardless of when accounts. The advantage is that the funds the money is actually received or spent. are obtained now rather than later, which Guidelines govern the timing of when eliminates credit risk. It also allows com- income and expenses must be recognized. pany management to focus on business This contrasts with cash-basis accounting, issues instead of on collecting payments. which reports income and expenses when they are received or paid. accounts receivable turnover Net sales divided by average net accounts receivable. accrual bond See zero-coupon bond. This financial measure shows the relative accrued benefit Pension benefits that size of a company’s accounts receivables and have been earned by an employee based on how well the company is doing at collect- years of employment, but not yet paid.The ing the money it is owed. In order to be benefits are paid to the employee upon relevant, a company’s turnover must be leaving employment. compared with others in the industry. accrued dividend A regular dividend accredited investor A legal term issued by a company that is anticipated, but defined by federal securities law to mean an hasn’t been declared or paid. investor who is financially knowledgeable. An accredited investor is someone who has accrued interest Interest that is owed on a net worth over $1 million, or who has a a fixed-income security such as a bond. trust with over $5 million in total assets that Interest accrues on bonds between regularly is managed by a professional. Another mea- scheduled interest payments, which usually sure of an accredited investor is someone occur every six months. When a bond is who has had an individual annual income sold in the secondary market, the buyer pays in excess of $200,000 for the past 2 years or the price and the accrued interest and is $300,000 for a married couple with reason- reimbursed for it when the issuer makes the able expectations of achieving the same next interest payment. For corporate and income in the current year. municipal bonds, accrued interest is calcu- lated using a 360-day year; for government accretive A term commonly used to bonds, accrued interest is calculated on an refer to a merger, acquisition, or joint ven- actual calendar-day basis. If a bond is in ture that will be accretive to earnings, default, there is no accrued interest. meaning that it is expected to add to earn- Accrued interest also shows up as a current ings per share. When equity markets liability on a company’s balance sheet. 03 526359 A.qxd 7/24/03 8:48 AM Page 7 7 adequacy of coverage accumulated dividend A dividend that month is August, the active month is has been declared, but hasn’t yet been paid September.The August contract will be sig- to stockholders. nificantly less active because traders will be closing out their positions in order to avoid ACH See Automatic Clearing House. having to buy or sell the actual product or acid-test ratio The ratio of current financial instruments. See also nearby month. assets, minus inventories, to total current acts of God A phrase that is found in liabilities.This ratio shows how well a com- legal and financing agreements that refers pany is covering its short-term obligations. to events that are beyond either party’s con- It also indicates how much of a company’s trol, such as earthquakes, floods, or riots. short-term debt could be paid off if the company sold its liquid assets. actual/360 A method of calculating the accrued interest that is earned on a bond. acquisition An act by one company to The actual number of days in each month acquire control of another company, either and a 360-day year are used to calculate the through an agreed-upon deal or a hostile interest payments. takeover. Companies also may acquire units of a company, property, or other assets. actual/actual A method of calculating Often used interchangeably with merger. the accrued interest that is earned on a bond. The actual number of days in each acreage report A yearly report, produced month and the actual number of days in the by the U.S. Department of Agriculture, that year are used to calculate the interest pay- surveys farmers to ask them what crops ments. they have planted that will be harvested in the fall. The report also provides the total actuary A specialist in mathematics who acreage planted for each crop. is employed by an insurance company or other financial institution. For example, an across-the-board An action or event insurance actuary reviews the data of claims that affects a market or a group of people in filed by policyholders to determine how the same way. For instance, stocks may be risk should be priced. The actuary recom- rising across-the-board or a pay cut may be mends the amount of premiums that should made across-the-board. be charged, the amount of reserves that active income Income that is actively should be kept, and the amount of divi- earned such as a salary, hourly wages, fees, dends paid. Actuaries in other companies and commissions. For tax purposes, the attempt to project results and potential out- Internal Revenue Service distinguishes comes by analyzing numerical data. between active income and passive income, ACUs See Asian currency units. such as income from real estate limited partnerships or other real estate activities ad valorem A Latin term that means that don’t occupy more than 50 percent of “according to the value.” It frequently is a person’s time. used to refer to a way of assessing taxes on property or duties on goods in which a active market Heavy volume; can be percentage of the value of the item is paid used for an exchange or a specific security. as the tax or duty. An active market is more liquid and has a smaller bid/ask spread, which is the differ- additional paid-in capital Capital that ence between the sell and purchase prices. is received from investors after the initial capital infusion from when the company active month In the futures market, the was established.Also called contributed capital. active month is the nearest base contract month that is not the current delivery adequacy of coverage The extent to month. For example, if the current delivery which the value of an asset, such as real 03 526359 A.qxd 7/24/03 8:48 AM Page 8 adjustable-rate mortgage 8 estate, an investment, or a security, is AFFO, or may be called cash available for insulated from loss either through insurance distribution (CAD) or funds available for coverage or by hedging using futures distribution (FAD).To arrive at the adjusted contracts. funds from operations, two expenses are subtracted from funds from operations adjustable-rate mortgage A mortgage (FFO): 1) straight-line rents, which averages with an interest rate that will rise or fall the tenant’s fixed-rent payments over the life over time as interest rates fluctuate. The of the lease, and 2) routine expenses, such as interest rate of an ARM, as they are fre- carpeting, painting, or leasing expenses, quently referred to, will change every year, which are capitalized by the REIT and then every 3 years, or every 5 years. Lenders peg amortized. the interest rate on an ARM to an index. For example, a lender might use as a bench- adjusted gross income (AGI) The mark the interest rates that Treasury bills are amount used in the calculation of an indi- paying for the equivalent time frame or a vidual or couple’s income tax liability after national or regional average cost of funds; deductions, such as IRA contributions, half alternatively, the lender may develop its of self-employment taxes, and health insur- own index. Thanks to low interest rates, ance and alimony payments, have been adjustable-rate mortgages have grown in subtracted. AGI is income before the stan- popularity in recent years, enabling people dard or itemized deductions or personal to buy homes that they normally couldn’t exemptions are subtracted. afford. If interest rates rise, however, the monthly payment of an ARM will rise in administrator kind. 1. A person who is appointed by a pro- adjustable-rate preferred stock Preferred bate court to manage the settlement of an stock in which the dividend changes estate of someone who died intestate, or according to a pre-set formula matched to without a will. If there is a will, the per- movements in a benchmark such as the son who settles the estate is an executor. U.S. Treasury bill rate. Typically, these stock 2. A person who manages an organiza- prices are less volatile than fixed-rate pre- tion, often a non-profit organization. ferred stock.Adjustable-rate preferred stock is quite rare. May also be called variable rate stock or floating rate preferred stock. adoption credit A tax credit given by the Internal Revenue Service for expenses adjusted basis The price of an asset or incurred in the adoption of a child. For security that has been altered to reflect 2002, the tax credit was $5,000 per child, commissions paid, improvements made to unless the child has special needs, in which the asset, or stock splits that have occurred. case the credit was $6,000. Adjusted basis is used for income tax purposes. adoption tax credit A tax credit of up to $10,000 for expenses associated with the adjusted book value The value of an adoption of a child, such as attorneys’ fees, asset that has been adjusted to reflect mar- travel expenses, and other qualifying ket prices. Also referred to simply as book expenses. value. ADP See Alternative Delivery Procedure. adjusted funds from operations A calculation used for Real Estate Investment ADR American Depository Receipts, Trusts (REITs) that measures a real estate sometimes called American Depository company’s cash flow generated from opera- Shares. These represent shares of a foreign tions.This calculation is often referred to as company that can be purchased in the U.S., with transactions settled and dividends paid 03 526359 A.qxd 7/24/03 8:48 AM Page 9 9 after-hours trading in dollars. When an investor purchases affiliated company The definition of ADR shares, the bank makes a deposit “affiliated company” will vary, depending abroad to buy the actual shares of the for- on the context in which the term is used. eign stock. Companies issuing ADRs have One way that companies are considered to follow U.S. regulatory and accounting affiliated is when one company owns less rules. than the majority interest in another com- pany. Companies also may be affiliated advance refunding Issuing a bond or when they are subsidiaries of a third com- note with a longer maturity period than pany. Another test of affiliation is the the original issue in order to pay off that amount of effective control that a company original issue.Advance refunding is done to has over another company, even though a take advantage of decreased interest rates, relatively small percentage of stock may be which makes the new debt less expensive held, such as 10 percent or 25 percent. than the current debt.Also called prefunding. affordability index An index that mea- advance/decline ratio A ratio that is sures how affordable housing is. Compiled commonly used to determine the strength by the National Association of Realtors, it of a stock market. The ratio is the number measures whether a family earning the of stocks whose price rose compared with median family income, as reported by the the number of stocks whose price fell.The U.S. Bureau of the Census, could qualify for more rising stocks, the more bullish the a mortgage loan on an existing single- market; the more stocks declining, the less family home priced at the national median. bullish the market. To make the calculation, the prevailing advancing volume A breakdown of the mortgage interest rate on loans closed on trading volume produced during a trading existing homes from the Federal Housing session on an exchange by those stocks Finance Board and HSH Associates is used. whose prices rose, in contrast to that pro- An index value of 100 means that the duced by the stocks that declined, which is average family has exactly enough income the declining volume. By looking at the vol- to qualify for a mortgage. An index value ume of stocks advancing and comparing it over 100 means that the family has more to the volume of those stocks declining, it is than enough income, while a value below possible to determine how strong the mar- 100 means that a family doesn’t have ket move was.Advancing volume details are enough income to qualify for a mortgage published daily in financial newspapers. loan. The calculation assumes a 20 percent down payment and that the loan doesn’t adverse opinion An opinion by an exceed 25 percent of the median family independent auditor that a company’s finan- income. The index is calculated for fixed cial statements are not accurate. An adverse mortgages, adjustable-rate mortgages, and opinion is worse than a qualified opinion, composite mortgages. which says that only some areas of the financial reports are problematic. Adverse afghani The currency unit of Afghanistan, opinions occur infrequently and typically comprised of 100 puls. lead to investors selling their shares in the after-acquired clause A paragraph company. found in a mortgage that says that any addi- AEX See Amsterdam Exchange Index. tional mortgages acquired after the first mortgage is obtained will be additional col- affidavit A sworn, written statement lateral for the first mortgage. made in the presence of a notary public or a person who is authorized to administer an after-hours trading The trading of oath.Affidavits are used in legal proceedings securities after the official close of a market. and may be submitted in lieu of having a The proliferation of Internet trading sites person appear in court. has allowed individuals to trade after the 03 526359 A.qxd 7/24/03 8:48 AM Page 10 AG 10 markets have closed, which once was some- (Ginnie Mae), Federal Home Loan thing only institutional investors could do. Mortgage Corporation (Freddie Mac), and Exchanges may have their own electronic Federal National Mortgage Association trading services or traders may use ECNs (Fannie Mae). Only the securities issued by (electronic communications networks). the Farm Credit Financial Assistance Corp. However, the liquidity may be limited, are backed by the U.S. government. which means that the investor may not However, because of their special GSE receive the best price after hours. status, the market doesn’t demand as high of an interest rate as it would from an equiva- AG Stands for aktiengesellschaft, which is a lent private sector issuer because of the German company designation, similar to perception that the government would step Inc. Aktiengesellschaft translates to “stock in to back the securities in the case of a corporation.” In Germany, all publicly default. However, the U.S. government traded companies are AG’s, but not all AG’s does not actually back these debt issues. are publicly traded. agency trade A buy or sell order that is AGA See American Gas Association. initiated by a brokerage firm on behalf of a against actuals A method of settling a customer. An agency trade is in contrast to futures contract that is used by two hedgers a trade that is initiated directly by the who want to exchange their futures posi- customer. If a customer has given a broker- tions for cash, instead of delivering the actual age firm discretion to manage his or her commodity or underlying financial instru- account, then any trades from that account ment. Also called an exchange for physicals. are agency trades. aged fail A contract or trade between aggressive growth fund A mutual fund two brokers or dealers that remains unset- that invests primarily in common stock of tled after 30 days of the settlement date.The small growth companies that have potential account can no longer be treated as an asset for capital appreciation. An aggressive for the firm on the receiving end of the growth fund does not attempt to generate transaction. income through dividends. agency An arrangement in which a per- aging schedule A list of accounts son, or agent, matches up buyers and sellers receivables that is broken down into groups and charges a commission. such as 0–30 days, 31–60 days, 61–90 days, and over 90 days from date of sale. A com- agency cross A trade in which one pany uses an aging schedule to show how broker acts as the agent for both the buyer effectively it is collecting on its accounts and the seller.This typically occurs when a receivables. broker receives orders from two different customers for the same number of shares agreement among underwriters A for the same security. The order can be contract signed by the members of an processed without sending it to the exchange investment banking syndicate that has been because both parties already have been established to sell stock or bonds for a cor- identified. poration. It appoints the managing agents, defines how much each firm is allowed to agency securities Fixed-income securi- sell, outlines each firm’s liability, determines ties that are issued by U.S. government- how costs will be allocated, and sets other sponsored entities (GSEs) that were started rules as needed. to reduce borrowing costs for students, farmers, and homeowners. Agency securi- agricultural futures Futures whose ties are issued by organizations such as underlying instruments are based on agri- Government National Mortgage Association cultural commodities, such as grains, cattle, coffee, or butter. Agricultural futures have 03 526359 A.qxd 7/24/03 8:48 AM Page 11 11 amended tax return had a long history, with the first contracts all-or-none A type of buy or sell order originating in 1865 on the Chicago Board placed with a broker to indicate it cannot of Trade. Wheat and corn futures and be partially filled. The broker must fill the options have traded since 1877 on the entire order or not fill it at all. Unlike a fill- Chicago Board of Trade. Agricultural or-kill order, an all-or-none order will not futures are in contrast to financial futures, be automatically canceled if a broker can’t which are based on financial instruments fill it fully right away. such as the U.S. Treasury bond or stock market indices. allotment The number of securities that each company in an underwriting syndi- AICPA See American Institute of Certified cate is given to sell. Public Accountants. allowance method A method of writ- AIMR See Association for Investment ing off bad debts in which uncollectible Management and Research. accounts are expensed in the period when the related sales take place. The allowance air pocket A sharp drop in the price of a method contrasts with the direct charge-off stock or a futures or option contract in method, which directly debits an expense response to unexpected negative news gaps. account when bad debts are discovered. Often air pockets are indicated on a price chart by a discrepancy between the previous alpha A measure of the risk-adjusted day’s closing price and the next day’s price. performance of an investment that factors in the individual risk of the security and Allen, William M. The president of not the overall market risk. A large alpha Boeing Co. in 1945 when the U.S. govern- indicates that the stock or mutual fund has ment cancelled all of the company’s World performed better than would be predicted War II contracts, forcing Boeing to cut its given its beta, which is a measurement of an workforce from 63,000 to 8,000 employees. investment’s volatility. To keep the company alive, Allen pushed Boeing into the commercial aircraft market. Alternative Delivery Procedure (ADP) Although Boeing remained in the defense A provision in a futures contract that allows business, producing the B-52 bomber, it buyers and sellers to make and take delivery also produced the first commercial jet air- of the underlying product under terms or plane, the Boeing 707. conditions that differ from those outlined by the contract.An ADP may be invoked at alligator spread A combination of call any time during the delivery period after options and put options that produces long and short futures positions have been excessively high commissions, making it matched for the purpose of delivery. nearly impossible for an investor to make a profit.The term is so named because such a alternative minimum tax (AMT) A combination, like an alligator, can eat an federal income tax provision that ensures investor alive. that wealthy individuals, estates, trusts, and corporations pay a minimum level of tax. all-in cost The total amount of costs that To arrive at AMT, certain items, such as a bank incurs when it creates and sells a passive losses from tax shelters, are added to certificate of deposit to its customers.These adjusted gross income.The tax rate charged costs include the interest rate it has to pay to individuals varies, though the tax rate a to the CD owner, the premium it pays for corporation pays is 20 percent. insurance from the Federal Deposit Insurance Corp., and the cost it incurs amended tax return A tax return, filed because it has to keep some of the money on a 1040X Form, that is filed because mis- on deposit at the Federal Reserve in a non- takes were made on the original tax return. interest bearing account in order to meet Amended returns have to be filed within reserve requirements. three years of the original filing date. 03 526359 A.qxd 7/24/03 8:48 AM Page 12 American Association of Individual Investors (AAII) 12 American Association of Individual American Petroleum Institute (API) Investors (AAII) A not-for-profit orga- The primary U.S. oil industry trade associ- nization formed in 1978 whose purpose is ation, based in Washington, D.C. API to educate investors about investing in a conducts research and sets technical stan- variety of investment vehicles including dards for industry equipment and products, stocks, bonds, and mutual funds. The AAII from wellheads to retail outlets. It also com- also provides information about tax plan- piles statistics that are regarded as industry ning, portfolio management, and retirement benchmarks. A widely watched statistics is planning and offers guidelines about work- its weekly stock report that shows what ing with a broker. crude oil inventories are and how much product has been imported. The API also American Corporate Accrual Receipts reports data for derivative products, such as (ACARS) The coupon, or interest pay- gasoline. ments, of corporate bonds that have been separated from the principal payments. It is American Stock Exchange (AMEX) the corporate bond equivalent of STRIPS, The third largest exchange in the United which are U.S.Treasury bonds whose inter- States, behind the New York Stock est payments have been stripped from the Exchange and the NASDAQ. It offers principal payments. trading on equities, options, and exchange traded funds (ETFs). Companies with American Eagle A popular bullion coin shares traded on the AMEX are generally that is minted by the U.S. government. smaller than those listed on the New York American Eagles are purchased by coin col- Stock Exchange. In 1993, it created the first lectors and precious metals investors from domestic product market for ETFs and traders in the secondary market. They are listed 122 at the end of 2002.The AMEX is made of gold, silver, or platinum. the listing exchange for most U.S.- American Gas Association (AGA) registered ETFs and a variety of listed The major natural gas industry trade associ- derivative securities including equity and ation, based in Alexandria, Virginia. AGA index options. conducts technical research and helps create The AMEX is the second largest options standards for equipment and products exchange in the United States. It also lists involved in every facet of the natural gas over 100 closed-end funds ranging from industry. It also compiles the statistics that single-state tax-free bond funds to global are considered to be industry standards.The equity funds. The benchmark index is AGA’s weekly report on how much natural the AMEX Composite whose symbol is gas is in storage is closely watched by XAX. The AMEX also allows trading on traders. If gas supplies increase, then prices NASDAQ-listed stocks. are likely to decline and vice versa. AGA In 1998, AMEX was purchased by the also creates outlooks for the industry and National Association of Securities Dealers compiles heating degree and cooling degree (NASD), which operates the NASDAQ data. See also heating degree day and cooling stock market. degree day. American-style option An option that American Institute of Certified Public can be exercised at any time before its expi- Accountants (AICPA) The professional ration date. An American option contrasts association of certified public accountants, with a European option, which can be exe- formed in 1887. Membership is open to cuted on its expiration date only. (An CPAs who pass an exam and agree to pur- option gives the holder the right to pur- sue continuing education, along with other chase or sell a security during a specific requirements. The organization promotes time and price.) continued learning, ethical behavior, and professionalism. 03 526359 A.qxd 7/24/03 8:48 AM Page 13 13 annual meeting AMEX See American Stock Exchange. analyst An employee of a sell-side firm (a Wall Street broker), a buy-side firm (a Amex Composite Index A composite mutual fund or investment management value of all of the stocks traded on the company), or an independent research firm American Stock Exchange. The value of that makes buy and sell recommendations each stock in the American Stock Exchange on companies in a particular industry. is derived by multiplying the stock’s market Analysts also are employed by companies price by the number of shares outstanding. involved in commodities trading to recom- The trading symbol is XAX. mend when customers should buy and sell Amivest Liquidity Ratio A liquidity futures contracts and suggest appropriate measure that calculates the dollar value of trading strategies. trading that would occur if prices changed anchor A term used by Federal Reserve 1 percent. The Amivest Liquidity Ratio Governor Edward M. Gramlich in January shows how well a stock or investment is 2003 to say that U.S. monetary policy able to absorb trading volumes without a needed an anchor, or a long-term strategy. significant move in its price. A high ratio He said that a clear strategy would help the means that large amounts of stock can be Federal Reserve react to economic prob- traded with little effect on prices. lems such as a surge in unemployment amortization without riling financial markets. 1. An accounting technique that reduces angel A wealthy individual who agrees to the cost of an intangible asset, such as invest money with a start-up company in goodwill, by assessing the charge against what is likely its first funding. Angels invest income over a specific amount of time. even before venture capital firms do so. For a tangible asset, such as machinery, Typically, the amount of money invested by the term depreciation is used. an angel is smaller than the amount that would be received from a venture capitalist, 2. The act of reducing debt by making and may be $10,000 up to about $200,000. regular principal and interest payments. Angel also is used in the context of a fallen angel, which is a bond that has been Amsterdam Exchange Index (AEX) reduced to junk status. A weighted arithmetic average index of the Annan, Kofi The secretary-general of top stocks that are traded on the the United Nations, as of this printing. He Amsterdam Stock Exchange. The value of was awarded the Nobel Peace Prize for the exchange was adjusted to 538.36 on 2001. January 4, 1999, after the euro was adopted. annual meeting Public companies hold AMT See alternative minimum tax. an annual meeting once a year. During the analog In telecommunications terms, an meeting, members of the board of directors early technology that frequently has been are elected, the selection of an auditor is superceded by digital technology. For voted on, and shareholders may bring forth example, to transmit sound in analog, as other issues. Shareholders unable to attend broadcast and telephone companies did, the may vote through a proxy, which may be frequency is altered by amplifying the mailed in or transmitted over the Internet strength of the signal or varying the fre- or telephone. In an annual meeting, the quency in order to transmit information. In chief executive officer or chief financial contrast, digital, which is now the dominant officer typically will discuss the company’s technology, uses a series of electronic data performance during the last year as well as represented by ones and zeros to store or its outlook. transmit data. 03 526359 A.qxd 7/24/03 8:48 AM Page 14 annual percentage rate (APR) 14 annual percentage rate (APR) The annuity A financial instrument that pays interest expense a consumer pays for debt out the investor’s earnings on a regular, that is expressed in simple, annual-percentage periodic basis for a set amount of time. terms. The Federal Truth in Lending Act Annuities typically are used to provide funds requires that each consumer loan agree- for retirement. Annuities may be paid for ment includes the APR. the duration of a person’s life or may be set for a certain period of time. Annuities are annual percentage yield (APY) The tax-deferred, so the earnings from invest- effective interest rate from the standpoint of ments in these accounts grow without tax a person receiving interest. For instance, liability until the benefits are paid out. compare two interest-bearing accounts: one pays 1 percent interest monthly and the annuity certain A financial instrument other pays 3 percent interest quarterly. The which pays out the investor’s earnings in a account paying monthly interest will have a specific amount of money each month for higher annual percentage yield than the a set amount of time, often ten years. If the account paying quarterly interest, because annuitant dies before the time period is up, interest is credited to the account more the payments are made to the beneficiary. frequently, which increases the amounts of See also annuity. funds in the account that interest is paid upon. annuity in arrears An annuity whose first payment occurs at the end of the year annual report Once a year, public com- rather than at the beginning. Annuity in panies summarize their financial results, arrears also may be used to refer to periodic outline their competitive accomplishments, payments that must be made by the annui- and outline the various areas of their business tant that falls behind schedule. and product lines to shareholders. Typically, financial results will go back over a multi- annuity starting date The date on year period. The annual report is mailed to which annuity payments begin.The longer all shareholders. Formats of the annual report the annuitant waits to begin receiving pay- vary depending on the financial health of the ments, the higher the payments will be company. For instance, companies that are because the life expectancy period is short- losing money may produce a plain report on ened and the insurance company paying white paper with black ink that is relatively the annuity has a longer time to invest the inexpensive to print. Other companies that money.Typically, people don’t begin receiv- are established and profitable are likely to ing an annuity until after 591⁄2 years of age produce magazine-quality reports with lots because withdrawals before then are subject of design elements, photography, and the use to a 10 percent penalty from the Internal of color throughout. Revenue Service. See also annuity. annualized gain The amount of appre- anticipated growth rate An approxi- ciation of an investment during a 12-month mation of the annual rate of return that an period. If an investment appreciates 1.5 investor can expect for bond mutual funds percent during one month, the annualized based on the maturity of the fund’s bond gain is 18 percent, which is 12 multiplied portfolio. The anticipated growth rate by 1.5 percent. is calculated using the fund’s weighted- average maturity and assumes that all annuitant A person who receives the dividends and capital gains are reinvested. benefits from an annuity. When the owner The calculation also assumes that bonds are decides to receive regular payments, it is held until maturity and are not sold or called annuitizing the policy or contract. recalled early by the issuers. See also annuity. 03 526359 A.qxd 7/24/03 8:48 AM Page 15 15 arbitrage pricing theory anticipated value at maturity Although countries. It meets periodically to discuss this can be a generic term, for a mutual economic and trade issues as well as topics bond fund it indicates the expected important to the international capital redemption value of one share of a port- markets. folio based on the portfolio’s weighted- average maturities. There is no guarantee API See American Petroleum Institute. that the bond mutual fund’s share price will appraisal The evaluation of a property reach its anticipated value at maturity. and assessment of its worth by an indepen- antidilution right See dilution protection. dent professional. Typically, appraisals are done on property before a bank approves a antitrust laws A collection of different mortgage. Appraisals also may be done on laws and court rulings that have evolved other assets, such as jewelry or a business. over time to govern the anti-competitive The person conducting the appraisal is behavior of large business. Some of the called an appraiser. business practices that may be illegal are agreements among competing businesses, appreciation The increase in value, over such as agreements on price or related mat- time, of an asset, stock or investment. The ters; agreements to restrict output; group opposite is depreciation. boycotts, which drive up prices; and agree- apps Short for software applications; jargon ments among competitors to divide sales that is often found in technology research territories or allocate customers. reports written by Wall Street analysts. The Sherman Antitrust Act of 1890 pro- hibits contracts, conspiracies, and combina- APR See annual percentage rate. tions that would restrain trade or create a monopoly. The Act provides criminal APY See annual percentage yield. penalties as an enforcement tool. ARA An abbreviation used in Europe, The Clayton Antitrust Act of 1914 out- usually in conjunction with the futures mar- laws exclusive dealing arrangements, tie-in ket, which stands for Antwerp, Rotterdam, and sales, price discrimination, and mergers that Amsterdam. would restrain trade and interlocking direc- torates. It carries only civil penalties and is arbitrage A situation in which a trader enforced by both the Department of Justice attempts to profit from minute differences and the Federal Trade Commission. The in price for the same security on different Clayton Act was significantly amended in stock or futures markets. Traders that 1936 by the Robinson-Patman Act and in employ this strategy are called arbitrageurs 1950 by the Celler-Kefauver Antimerger and use specially designed computer pro- Act. grams to identify price discrepancies. The Federal Trade Commission Act was arbitrage pricing theory A mathemat- passed in 1914. It created a governmental ical theory that attempts to determine the agency whose responsibility is to protect expected or required rates of return on consumers against illegal business practices risky assets based on the asset’s systemic and may catch loopholes in the other relationship to more than one risk factor. statutes. The theory was developed by Stephen The antitrust laws are enforced by the Ross in the early 1970s and was initially Federal Trade Commission and the Antitrust published in 1976. It assumes that capital Division of the U.S. Department of Justice. markets are perfectly competitive and APAC The Asia Pacific Advisory investors always prefer more wealth to less Committee is a governmental committee wealth, even if less wealth comes with more that includes representatives from Asia-Pacific certainty. In contrast, another popular theory, 03 526359 A.qxd 7/24/03 8:48 AM Page 16 arbitrage trading program (ATP) 16 the Capital Asset Pricing Model, focuses on a ARPS See Dutch auction. single risk factor. ARPU Average revenue per user is calcu- arbitrage trading program (ATP) A lated by dividing revenues by the subscriber computer program that traders rely on to base. Non-service revenues, such as equip- indicate when stocks or investments should ment or other sales, are included in the be bought or sold. Because many people calculation. The definition often is used in use the same program, program trading the telecom industry. User refers to one often produces excessive volatility in the customer, such as a cell phone user. market. articles of incorporation This is a doc- arbitration A binding dispute-resolution ument that is filed by a company with the process in which an impartial person or Secretary of State in the state where the group of people hear the facts and decides company wants to incorporate.The articles how the matter should be resolved. include the names of the major shareholders, Arbitration has the effect of a court order. the officers, and the number of authorized Many brokerage firms require their clients to shares, and describe the corporation’s pur- sign agreements stating that they will use pose.They also list the registered address for arbitration, rather than take legal action, in the business. Once the articles are approved the event that there is a disagreement. Stock, by the state, the corporation is issued a char- futures, or options exchanges, and other ter, or right to do business. professional or regulatory associations are often involved in administering arbitration artificial currency A substitute for an proceedings.Arbitration contrasts with medi- actual currency that is used in economic ation, which isn’t binding on the parties. transactions.An example of an artificial cur- rency is the special drawing rights (SDR) Archer Medical Savings Account that were created by the International (Archer MSA) A savings account that is Monetary Fund (IMF). SDRs are used by set up to pay qualified medical expenses of the members of the IMF to pay their dues the account holder or a family member. It and transfer funds between countries. The is used by employees who work for a small value of the SDR is computed using a business, which is usually 50 employees or grouping of currencies and adjusts as the less, and contrasts with a Flexible Spending prices of the underlying currencies change. Plan, which is offered by large corpora- tions. In order to use the Archer MSA, a ascending tops In technical analysis, a company must have a high-deductible chart pattern in which the peaks in a secu- health plan. For medical expenses to qualify rity’s price are increasingly higher than the for payment from an Archer MSA, they previous peaks.A descending top is the oppo- generally must be unreimbursed and could site of an ascending top. be deducted on Schedule A of the 1040 ascending triangle A price-chart pattern Income Tax Return form. that indicates that a market is consolidating Arpanet The first generation of the and is about to break out to either the Internet, which consisted of electronic mail upside or downside.Ascending triangles are and software that allowed users to transfer identified by charting the closing prices of files.The second generation of the Internet a stock, futures contract or other financial is the World Wide Web, which allows peo- instrument in a technique called technical ple to connect to databases in addition to analysis. Arpanet services. Today, the third genera- ASEAN Association of Southeast Asian tion of the Internet allows people to Nations. A cooperative group formed in connect directly to the Internet’s comput- 1967 that focuses on economic, social, and ers via software. cultural issues. It has a political objective of 03 526359 A.qxd 7/24/03 8:48 AM Page 17 17 asset regional peace and stability, but does not in emerging markets also begin to weaken. require member countries to adopt com- Although the situation has stabilized, the mon political views. Member countries are emerging Asian countries still haven’t Brunei Darussalam, Cambodia, Indonesia, regained their former status as attractive Laos, Malaysia, Myanmar, Philippines, places to invest. Singapore,Thailand, and Vietnam. Asian option A specialized form of Asian currency units (ACUs) Dollar option whose payoff is connected to the deposits that are held in Asian financial cen- average value of the underlying security on ters, such as Singapore. Dollar deposits are specific dates. An Asian option’s strike price funds that have been deposited into a bank is equal to either the lowest underlying outside of the United States. security value (call option) or the highest underlying security value (put option) over Asian Financial Crisis A chain of a period of time that ends on the option events that led to turmoil in the financial expiration date. An Asian option is typically markets during the latter half of 1997 and more expensive than a regular option. Also continued into 1998.The crisis began when called average rate option. traders decided that Thailand’s currency, the baht, was too highly valued given that ask The price at which someone is willing country’s financial situation.Thailand had a to sell a financial contract or security. Also very large current account deficit, a growing synonymous with sell. foreign debt, and a governmental budget shortfall. To stop the baht from falling, the Aspirin An acronym for Australian Stock Thai government used its currency reserves Price Riskless Indexed Notes. These are four- to buy baht. The effort was short lived and year, zero-coupon bonds that are guaranteed the Thai government had to let the baht by the Treasury of New South Wales. The trade freely, instead of being linked to the bonds are repayable at face value plus a per- U.S. dollar. centage increase that the Australian All As the baht weakened, so, too, did other Ordinaries stock index rises above a prede- currencies in the region, particularly the termined level during the time period. Philippines’ peso, Malaysia’s ringgit, and assay The process of testing a metal or an Indonesia’s rupiah. Stock markets, such as oil for its purity or quality. The term is Hong Kong’s market, posted sharp declines. often used in the context of metal and South Korea was drawn into the turmoil energy products that are delivered against when it spent much of its foreign currency futures contracts on futures exchanges and reserves to protect the value of the won. which have to meet certain minimum In January, attention turned to Indonesia, requirements. which agreed to implement economic reforms in order to continue receiving IMF assessed valuation The value that is assistance. In particular, the IMF wanted to assigned to a property by a state or munic- reduce the country’s use of crony capitalism, ipality in order to assess taxes. The assessed whereby many large businesses were con- valuation of properties is important to trolled by members of the then-President municipal bond investors when the bonds Suharto’s family. are backed by the property taxes collected In March, the Thai baht and South by the governmental unit. Korean won begin to firm as investors con- fidence began to return to the markets. asset Cash, accounts receivables, property, However, by May riots in Indonesia left or equipment that has value and is listed on Jakarta in ruins, and President Suharto a company’s balance sheet. An asset may be resigned after 32 years in office. Currencies bought or sold and its price can range from hundreds of dollars to millions of dollars. 03 526359 A.qxd 7/24/03 8:48 AM Page 18 asset allocation 18 asset allocation The allocation of invest- inventory. Second mortgages also are fre- ment dollars between major asset classes quent sources of asset financing. such as stocks, bonds, precious metals, real estate, and cash. Asset allocation is a highly asset impairment Impairment occurs recommended investment strategy because when the sum of the expected cash flows it lets investors diversify risk between differ- from the asset is less than the book value of ent investments. For example, if the stock the asset. Accounting practices require that market is performing poorly, then it is likely long-term assets be evaluated for impair- that the fixed-income market is performing ment. If a reduction is made in the carrying well as investors shift money from stocks to value because of impairment, it is recorded bonds in order to lock in a return. In this as a loss. case, an investor with a well-allocated port- asset management The professional folio will lose money on stocks but gain management of financial assets by managers money on bonds. Asset allocation is a way who make investment decisions for indi- for investors to weather market downturns viduals, institutions, or pension funds. by spreading their risk. Although asset management has existed asset allocation fund A mutual fund since the early 1900s, it began to show that invests in a set mixture of equities, strong growth in the 1970s. Concerns fixed-income securities, and money market about the solvency of the Social Security instruments. These funds are required to Administration increased individual’s atten- maintain a precise weighting in each asset tion to their retirement planning. The class, unlike a flexible portfolio fund. See Employment Retirement Income Security also flexible portfolio fund. Act (ERISA), which passed in 1974, created private retirement plans called 401(k) plans. asset allocation mutual fund A type of Those changes paved the way for firms to a mutual fund that divides its investment specialize in managing money for individu- dollars among stocks, bonds, and money als and institutions. Also called and often market securities in order to maximize the used interchangeably with investment man- return to investors and minimize risk. agement. A professional referring to the job he or she holds is likely to use the term asset class A class of investments that investment manager. A person referring to the have similar characteristics, including risk industry itself is likely to use the term asset factors and how returns are created. Stocks, management industry. bonds, real estate, precious metals, and cash are different types of asset classes. asset management account An account at a brokerage house or other financial ser- Asset Depreciation Range (ADR) vices institution that combines checking System A schedule that the Internal account features and the ability to make Revenue Service accepts for determining investments including buying stocks, bonds, the depreciable lives of different assets. and other investments. Business managers can select the ADR sys- tem or may elect a straight-line depreciation asset play A stock that is attractive schedule. because the current price doesn’t reflect the true value of the company’s assets. asset financing A financing method Companies that are an asset play are a available to businesses in which lenders tempting target for takeovers because they look at the cash flow from a particular asset are an inexpensive way to buy assets, thereby and base a loan on the asset’s expected rate guaranteeing a certain return. of return. The asset secures the loan. Most common forms of asset financing are loans asset stripper A type of corporate made against account receivables and takeover in which the buyer is taking over a company in order to sell the company’s 03 526359 A.qxd 7/24/03 8:48 AM Page 19 19 Association for Investment Management and Research (AIMR) assets.The income from the sale of the assets assignment The act of telling a futures pays for the debt incurred in funding the or options writer that his or her contract takeover.The buyer will profit if the value of has been exercised and that he or she must the assets sold exceeds the liabilities purchase or sell the underlying security at incurred in acquiring the target company. the specified strike price. At expiration, the exchange or clearinghouse assigns the asset turnover Net sales divided by futures or options contract to either a ran- average total assets. Asset turnover measures domly or systematically chosen party. how much each dollar of assets produced in sales. assimilation The absorption by the public of a new stock issue after it has been asset/equity ratio A ratio calculated by sold in its entirety by the underwriter. dividing total assets by stockholder equity. The ratio number is not important by itself associated gas Natural gas that is present and must be compared to other companies in a crude oil reservoir, either separate from in the same industry to have relevance. the oil or mixed in with it. Associated gas may increase the value of the crude oil if the asset-backed commercial paper cost involved in extracting the gas doesn’t Commercial paper that is backed by assets exceed its value. of the issuer and is often abbreviated ABCP. Commercial paper is an unsecured promis- associated person A person engaged in sory note that is sold by a corporation. It the investment-banking or securities busi- has a fixed maturity of 1 to 270 days and is ness who is either directly or indirectly usually sold at a discount from face value. controlled by a member firm of the National Association of Securities Dealers. asset-backed security (ABS) A fixed- It doesn’t matter whether this person is reg- income security that is collateralized, or istered with the NASD or exempt from backed by, mortgages, credit card or other registration. An associated person also is receivables, installment contracts, or by some every sole proprietor, partner, officer, direc- other type of asset. These securities have tor, or branch manager of any NASD become increasingly popular during the last member.An associated person is also some- several decades. Government-sponsored one who is involved in business dealings entities, such as Fannie Mae and Freddie with a member firm of the National Mac, have issued an increasing amount of Futures Assocation that requires the person ABS securities that are backed by home to be registered with the Commodity mortgages. By removing those mortgages Futures Trading Commission. from their balance sheet, the agencies are able to loan additional money so that more Association for Investment Manage- people can receive home mortgages. ment and Research (AIMR) An international, nonprofit organization of asset-for-asset swap A situation in more than 50,000 investment practitioners which creditors exchange the debt of one and educators in over 100 countries. The defaulting borrower for the debt of another organization was founded in January 1990 defaulting borrower. Typically, debt is when the Financial Analysts Federation exchanged for new debt that reduces the (FAF) and the Institute of Chartered amount owed but increases the interest that Financial Analysts (ICFA) merged. Its pur- is paid. Debt also may be swapped for addi- pose is to educate and examine investment tional equity. managers and analysts and to ensure that assign To transfer ownership from one high standards of professional conduct and party to another by signing a contract.The financial analysis are followed. AIMR assignor gives up ownership and the assignee administers the Chartered Financial Analyst becomes the owner. (CFA) program, which is a three-year test- ing and study program to certify that 03 526359 A.qxd 7/24/03 8:48 AM Page 20 assumed interest rate 20 investment management professionals are at risk Exposed to the danger of loss.The qualified. Pass rates for the CFA exam in concept of at risk is used in limited part- 1963, the first year it was introduced, was nerships in which the investor deducting a 94 percent.That rate declined steadily to 54 loss must prove to the Internal Revenue percent in 2001. AIMR’s members are Service that there was a chance of never securities analysts, portfolio managers, realizing any profit and that the investment strategists, consultants, educators, and other may be lost as well. investment specialists who work in a variety of financial services companies. ATM assumed interest rate An interest rate 1. See asynchronous transfer mode. used by an insurance company to calculate 2. Stands for automatic teller machine, the payout on an annuity contract. which a consumer can use to withdraw Typically, a monthly annuity payment cor- funds from his or her bank account or to relates to the level of interest rates. See also obtain a cash advance on a credit card. annuity. assumption The act of taking responsi- ATP See arbitrage trading program. bility for another person or corporation’s liabilities. For example, a mortgage may be at-the-close order A trade order for a assumed by another buyer. In this case, the stock, futures, or options contract that is to seller remains secondarily responsible for be executed at the closing price of the the mortgage payment unless the seller is security. If the execution can’t occur at the relieved of those responsibilities by the close, then the order is cancelled. In this lender. respect, it is a particular type of all-or-none market order. On futures and options ASX See Australian Stock Exchange. exchanges, there often is a closing period that lasts for approximately ten minutes asymmetric information Information when at-the-close orders can be executed. that is known to some people but not to others. For example, in a merger situation, auction markets A securities market in the parties involved in the deal have more which price is determined through the knowledge than their competitors that the open and free interaction of buyers and industry is about to undergo a significant sellers. In contrast, electronic trade process- change. ing systems are not auction markets. asynchronous transfer mode (ATM) auction rate preferred stock (ARPS) A network that divides messages into small See Dutch auction. cells, or fixed-size units, that establish a switched connection between two com- audit The process of verifying a compa- puters. By separating the transmission into ny’s financial information. Auditors are small pieces, different types of signals (such certified public accountants who are inde- as data, voice, and audio) can be sent over a pendent of the corporation. An auditor single line without any one type dominat- examines a company’s accounting books ing the transmission. It provides fast and records in order to determine whether transmission speeds. the company is following appropriate account procedures. An auditor issues an at In trading jargon, a stock is offered for opinion in a report that says whether the sale “at” a certain price. In a trading trans- financial statements “present fairly” the action the syntax is “quantity-at-price.” company’s financial position and its opera- tional results in accordance with Generally at par At a price that is equal to the nom- Accepted Accounting Principles (GAAP). inal, or face value, of a security. Corporate financial statements are audited once a year. 03 526359 A.qxd 7/24/03 8:48 AM Page 21 21 Autex audit committee A committee made involved, and the time the transaction up of some of the members of a company’s occurred. board of directors that is responsible for the overall management of the auditing process Aunt Millie A rude term applied to an and the auditors. The audit committee unsophisticated investor by a market profes- assists the board of directors in overseeing sional. If an investment interests Aunt the integrity of the company’s financial Millie, it is simple and not too complicated. statements and also may be involved with legal and regulatory compliance, including Australasia Australia and the Far East. the internal audit function. The board of directors appoints the audit committee.The Australian All Ordinaries Index A audit committee also recommends whether market capitalization-weighted index com- shareholders should approve the choice of prised of the largest 500 companies listed an independent auditor. on the Australian Stock Exchange. It was Under the 2002 Sarbanes-Oxley legisla- developed in 1979 with a base value of 500. tion, members of an audit committee must Australian Kangaroo A popular bullion be independent directors.This means those coin that is minted by the Australian gov- members cannot be company executives ernment. Kangaroos are purchased by coin and they must limit business involvement collectors and precious metals investors between their employer and the company from the Australian government or from on whose board they serve. The rules also traders in the secondary market. They are require that the board of directors evaluate made of gold, silver, or platinum. whether a board member serving simulta- neously on more than two companies’ Australian Stock Exchange (ASX) boards would impair an audit member’s An exchange formed in 1987 by the performance; membership on different Australian Parliament by consolidating six audit boards must be disclosed in the com- independent stock exchanges that had pany’s proxy statement. In addition, the rules operated in the capital cities of the require that at least one member have sig- Australian states.Those individual exchanges nificant financial expertise, although exactly had been in existence since the 19th century. what constitutes significant financial exper- In 1994, the first stage of an electronic tise is left up to the companies. clearing and settlement system (CHESS) The Sarbanes-Oxley law requires com- was introduced and was fully implemented panies to have an internal audit function, in 1996. During that same year, the ASX which may be outsourced to independent voted to demutualize, and phase two of auditors. The audit committee also is CHESS was implemented, which allowed required to have a charter that specifies the the shares of foreign companies to be set- purpose, duties, and evaluation procedures tled. During the latter half of the 1990s, the of the committee. number of finance, insurance, communica- tions, and media companies increased audit trail dramatically, thereby diversifying the stock 1. The papers that validate accounting market from its heavy concentration of records.The audit trail shows how finan- mining and natural resources companies. cial numbers and conclusions were Equities, fixed-income securities, and developed. derivatives trade on the ASX. Its lead index is the All Ordinaries Index, which is com- 2. The record of trading information prised of the largest 500 companies. that identifies the brokers participating in each transaction, the firms clearing Autex An automated trading system used the trade and its terms, the customers by broker/dealers, exchanges, and others. 03 526359 A.qxd 7/24/03 8:48 AM Page 22 authentication 22 authentication The process of validating the Small Order Execution System (SOES), a bond certificate to determine that it is which automatically executes agency genuine and not a fraud. orders in NASDAQ SmallCap securities for 1,000 shares or less. Another system is authority bond A bond that is issued by Auto-Ex. a government entity to provide funds for revenue-producing agencies. The bond is Automatic Clearing House (ACH) A paid for from revenues earned by the nationwide electronic funds transfer net- agency, or authority, which may operate toll work that lets financial institutions distribute roads, transportation hubs such as bridges electronic credit and debit entries to bank and airports, or public utilities.The author- accounts and settle them.The ACH enables ity bond contract may include bondholder banks to settle accounts with other banks. protections. Authority bonds are similar to revenue bonds, which are paid for from the automatic extension The extension taxing revenues of a public agency. that is granted by the Internal Revenue Service to taxpayers giving them 90 addi- authorized shares The number of stock tional days beyond the April 15 deadline to shares that a company may issue as autho- file their tax returns. rized by its articles of incorporation or by its shareholders. Often, a company does not automatic funds transfer The move- issue all of its authorized stock shares. If a ment of funds from one account to another company has issued all its authorized shares using electronic technology. and wants to issue more shares, it usually automatic investment program An has to obtain permission from the board of investment plan where money is added directors and/or the shareholders. automatically each month (or at another authorized stock The maximum num- interval) to a checking account, savings ber of shares of stock that a corporation is account, mutual fund, or another investment allowed to issue. If corporate management vehicle. wants to exceed that limit, typically they automatic rebalancing A portfolio- have to obtain approval from shareholders management process in which investments in order to issue more shares. that have appreciated are sold in order to automated bond system (ABS) An take a profit and the profits are reinvested electronic bond information and trading into sectors that are out of favor.Automatic system operated by the New York Stock rebalancing helps investors keep the asset Exchange that allows subscriber firms to allocation of their portfolios in line with automatically execute orders in corporate, their stated investment goals. Often, auto- agency, Treasury, and municipal securities. matic rebalancing is used for managing Most of the trading occurs in corporate mutual funds, retirement accounts and vari- debt, including convertible bonds. ABS able annuities. allows trading for over 2,000 debt securities. automatic stay A provision allowed automated order system A computer- under U.S. Bankruptcy law that prevents ized trading order-entry system that sends the commencement or continuation of single-order entries directly to the appro- most judicial, administrative, or other pro- priate specialist on the exchange floor.The ceedings against the debtor or the debtor’s New York Stock Exchange’s system is called estate after bankruptcy is filed.The purpose Super DOT. The Philadelphia Stock behind an automatic stay is to give breath- Exchange uses PACE (Philadelphia ing room to a debtor filing a Chapter 11 or Automated Communication and Execution Chapter 13 bankruptcy, and to give a System) and Autom (Automated Options Chapter 7 trustee the time and protection Market). The NASDAQ stock market uses to administer the assets of the estate. The 03 526359 A.qxd 7/24/03 8:48 AM Page 23 23 average maturity automatic stay also stops Chapter 7 debtors during the period.The average cost is com- from being pressured by collection agen- puted by dividing the total cost of goods cies. However, anyone who doesn’t want to available for sale by the total units available abide by the automatic stay can file a for sale. The average unit cost is applied to motion with the bankruptcy court and ask the units in ending inventory. for an exception. average daily balance automatic withdrawal A type of mutual fund that lets shareholders receive a fixed 1. A method that credit card companies payment from dividends on a monthly or use to calculate how much interest is quarterly basis. owed by a customer. average A number arrived at by totaling 2. A method used by a bank or savings a set of values and then dividing that sum and loan to calculate how much interest by the number of values in the set.Averages, is payable to the customer in the case of such as the Dow Jones Industrial Average a savings account or interest-bearing (DJIA), are cited as a measure of the stock checking account. market’s performance. To arrive at the DJIA, the prices of the 30 stocks in the average days payable A ratio calculated DJIA are added and divided by an adjusted by dividing 365 days by the payables divisor whose value is printed daily in the turnover ratio. Payables turnover ratio is cal- Wall Street Journal. culated by adding cost of goods sold to any change in inventory and dividing that average accounting return The average number by average accounts payable. return that is calculated on an investment. It Average days payable gives an idea of how is calculated by taking the average projected much time passes before a company pays its earnings after taxes and depreciation and accounts payables. If the time increases, dividing them by the average book value of then the company may be having difficulty the investment during its projected lifetime. paying its bills. average annual return While this term average days’ inventory on hand The has many different uses, it generally means number of days in the year divided by the annually compounded return that inventory turnover, which is cost of goods would have been produced for a mutual sold divided by average inventory.The ratio fund or other investment’s cumulative total shows how many times inventory turns returns if the performance had been con- over during a year, which indicates how stant over the entire period. Average annual vibrant sales are. return is used to smooth out variations in a fund’s return and is not the same as indi- average down An investment strategy vidual fiscal year results. that reduces the average cost of shares pur- chased. When prices are falling, then the average cost same amount of money buys more shares. 1. The average cost of shares of a stock See also average up. or mutual fund that were bought at dif- average life The average number of ferent prices over a period of time. years before the principal of a debt or 2. In a manufacturing context, the total mortgage remains outstanding. Businesses amount of costs divided by the number calculate average life; individuals typically of units produced. do not. Also called weighted-average life. average maturity The average time average cost inventory method A before bonds or other fixed-income invest- method of pricing inventory at the average ments mature. Often cited as a measure in cost of goods that are available for sale mutual fund portfolios. The longer the 03 526359 A.qxd 7/24/03 8:48 AM Page 24 average rate of return (ARR) 24 average maturity, the greater the risk of ris- tax rate is calculated by combining the dif- ing interest rates. ferent rates weighted to the payment amounts in order to arrive at an average tax average rate of return (ARR) The rate. Corporations usually have an average ratio of the average cash flow received to tax rate of 35 percent to 40 percent. The the amount of funds invested. rate declines if a company’s profits fall and average receivable collection period it often rises as profits increase. The amount of receivables turnover (net average up An investment strategy used sales divided by average receivables) divided in a rising market that is designed to reduce by the average receivables to calculate how the overall cost of purchasing securities. For many times during the year that accounts example, purchasing equal amounts of receivable turns over. Average receivables are shares at $40, $43, $45, and $49 means that equal to the sum of beginning receivables the average share cost is $44.25. and ending receivables, divided by two.The number alone doesn’t provide much infor- away from the market In a limit order, mation. It must be compared to average a situation in which an order to buy is receivable collection periods for other lower than the current market price for the companies in the industry, as well as past security or in which the offer price, or sell collection periods, to find out if collection price, is higher than the current market times are increasing or decreasing. price. The opposite is in-line order. Away- from-the-market orders typically are held average tax rate The amount of taxes for later execution, unless they are specified paid as a percentage of income.The average as fill-or-kill orders.