Series 66 Cards 13th Edition Glossary

1035 exchange

A tax-free exchange between like contracts. This provision applies to transfers from annuity to annuity, life to life, and life to annuity. It cannot be used for transfers from an annuity to a life insurance policy.

12b-1 fee

A section of the Investment Company Act of 1940 that permits an open-end investment company (mutual fund) to levy an ongoing charge for advertising and sales promotional expenses. This fee may not exceed .75% and, if above .25%, the fund may not describe itself as no-load.

401(k) plan

A tax-deferred defined contribution retirement plan offered by a private-sector employer.

403(b) plan

A tax-deferred retirement plan available to employees of public schools and certain nonprofit organizations.

529 savings plans

Plans designed by states to provide tax-advantaged means of saving for eligible education expenses.

access person

Those persons required under an investment adviser’s code of ethics to report their personal securities transactions and holdings on a quarterly basis.

accredited investor

Any institution or individual meeting minimum requirements for the purchase of securities qualifying under the Regulation D registration exemption.

accumulation stage

The period during which contributions are made to an annuity contract.

accumulation unit

An accounting measure used to determine an annuitant’s proportionate interest in the insurer’s separate account during a variable annuity’s accumulation (deposit) stage.

acid-test ratio

A measure of a corporation’s liquidity, calculated by adding cash, cash equivalents, and accounts and notes receivable, but not inventory, and dividing the result by total current liabilities. It is a more stringent test of liquidity than current ratio.

active competitive market

A market where no market maker dominates trading activity and where interdealer trades occur at competitive prices.

adjusted (cost) basis

Adjusted basis is used to compute the gain or loss on the sale or other disposition of the asset or security.

adjusted gross income (AGI)

Gross income from all sources minus certain adjustments to income, such as deductible contributions to an IRA and net capital losses. It is the amount of income that will be subject to tax.

administrator

(1) The official or agency administering the securities laws of a state. (2) A person authorized by a court of law to liquidate an intestate decedent’s estate.

adoption

A firm’s endorsement or approval of the social media content of a third-party site.

ADR

Facilitate trading in foreign securities in the U.S. domestic markets. Sometimes these are shown as ADS (American Depositary Shares) and are similar to a GDR (Global Depositary Receipt), which is traded outside the United States.

advance/decline line

A technical analysis tool representing the total of the differences between advances and declines of security prices. The advance/decline line is considered the best indicator of market movement as a whole. See also breadth-of-market theory.

advertisement

Any promotional material where the firm has little control over the type of individuals being exposed to the material.

advisory account

An account through which a registered investment adviser (RIA) or investment adviser representative (IAR) of the RIA provides investment advice to her clients for a fee.

affiliate

Anyone in a position to influence decisions made in a corporation, including officers, directors, principal stockholders, and members of their immediate families. See affiliated person.

affiliated person

Anyone in a position to influence decisions made in a corporation, including officers, directors, principal stockholders, and members of their immediate families. Their shares are often referred to as control stock.

agency cross transaction

For an advisory client, a transaction in which a person acts as an investment adviser in relation to a transaction in which that investment adviser acts as a broker for both an advisory client and for another person on the other side of the transaction.

agency issue

A debt security issued by an authorized agency of the federal government. Such issues are backed by the issuing agencies themselves, not by the full faith and credit of the U.S. government (except GNMA and Federal Import Export Bank issues). See government security.

agency transaction

A transaction in which a broker-dealer acts for the accounts of others by buying or selling securities on behalf of customers.

agent

(1) An individual or firm that effects securities transactions for the accounts of others. (2) A securities salesperson who represents a broker-dealer or issuer when selling or trying to sell securities to the investing public; this individual is considered an agent whether he actually receives or simply solicits orders. See broker; broker-dealer; dealer;

aggressive investment strategy

A method of portfolio allocation and management aimed at achieving maximum return. Aggressive investors pursue aggressive policies, including margin trading, arbitrage, and option trading. See also balanced investment strategy, defensive investment strategy.

algorithmic trading

Algorithmic trading makes use of computer programs for entering pre-programmed trading instructions on electronic trading platforms. The algorithm, usually proprietary, has a set of automatic responses to many complex market conditions.

alpha

The return on an investments measured against the return of the market as a whole or a certain benchmark index.

alternative minimum tax (AMT)

An alternative tax computation that adds certain tax preference items back into adjusted gross income. If the AMT is higher than the regular tax liability for the year, the regular tax and the amount by which the AMT exceeds the regular tax are paid. See tax preference item.

American Depositary Receipt (ADR)

Facilitate trading in foreign securities in the U.S. domestic markets. Sometimes these are shown as ADS (American Depositary Shares) and are similar to a GDR (Global Depositary Receipt), which is traded outside the United States.

American-style option

An option contract that may be exercised at any time between the date of purchase and the expiration date. Most exchange-traded options are American-style.

annuitant

A person who receives an annuity contract’s distribution.

annuitize

To change an annuity contract from the accumulation (pay-in) stage to the distribution (pay-out) stage.

annuity

A contract between an insurance company and an individual. Upon annuitization, it guarantees lifetime income to the individual on whose life the contract is based in return for either a lump sum or a periodic payment to the insurance company.

annuity unit

An accounting measure used to determine the amount of each payment during an annuity’s distribution stage. See also accumulation unit; annuity; distribution stage.

anti-dilutive covenant

A protective clause found in most convertible issues (preferred stock or debentures) that adjusts the conversion rate for stock splits and/or stock dividends. This ensures that the holder of the convertible will not suffer a dilution in value.

appreciation

The increase in value of an asset.

arbitrage

The purchase of securities on one market and the simultaneous resale on another market to take advantage of a price discrepancy. This is not a form of market manipulation and is completely legal.

arithmetic mean

The average of a set of numbers, arrived at by adding them together and dividing by the number of terms in the set.

ask

An indication by a trader or dealer of a willingness to sell a security or a commodity; the price at which an investor can buy a security.

assessable stock

Stock issued below par, carrying with it the option on the part of the issuer or creditors to assess the owner for the remainder. A gift of assessable stock is considered an offer and a sale under the Uniform Securities Act.

asset

A balance sheet item expressing what a corporation owns.

asset allocation fund

A mutual fund that splits its investment assets among stocks, bonds, and other vehicles, with a view to provide a consistent return for the investor.

asset class allocation

Dividing an investment portfolio among different asset categories such as stocks, bonds, cash, and tangible assets, such as real estate, precious metals, and other commodities.

assignment

Transferring an investment advisory contract to another firm. This may not be done without written consent of the customer. A change in the majority interest in an investment advisory firm organized as a partnership is also considered assignment.

associated person

Any employee, manager, director, officer, or partner of a member broker-dealer or another entity (e.g., issuer or bank), or any person controlling, controlled by, or in common control with that member, is considered an associated person of that member.

assumed interest rate (AIR)

(1) The net rate of investment return that must be credited to a variable life insurance policy to ensure that at all times, the variable death benefit equals the amount of the death benefit. The AIR forms the basis for projecting payments, but it is not guaranteed. (2) The rate that a variable annuity separate account must earn to keep annuity payments level. If the account earns more than the AIR, the next payment will increase; if it earns less, the next payment will decrease.

auction market

A market in which buyers enter competitive bids and sellers enter competitive offers simultaneously. The NYSE is an example.

audited financial statement

A financial statement of a program, a corporation, or an issuer that has been examined and verified by an independent certified public accountant.

automatic reinvestment

A feature available to shareholders whereby dividend distributions are automatically reinvested.

back-end load

A fee that is charged when mutual fund shares or variable annuity contracts are redeemed. It is typically found with Class B shares (and for one year with Class C shares). It declines annually, decreasing to zero over an extended holding period—up to eight years—as described in the prospectus.

backdating

The predating of a letter of intent (LOI) by as many as 90 days to allow an investor to incorporate recent deposits for the purpose of qualifying for a sales load discount (breakpoint) on a purchase of open-end investment company shares.

bad actor

A person whose past disciplinary history or potential for improper actions disqualifies certain exemptions.

balance sheet

A financial statement showing the assets, liabilities, and shareholders' equity at a particular moment.

balance sheet equation

A formula stating that a corporation’s assets equal the sum of its liabilities plus shareholders’ equity.

balanced fund

A mutual fund whose stated investment policy is to have, at all times, some portion of its investment assets in bonds and preferred stock, as well as in-common stock, in an attempt to provide both growth and income. See also mutual fund.

bank holding company

A holding company whose primary asset is a commercial bank.

Bank Secrecy Act (BSA)

Authorizes the Treasury Department to require financial institutions to maintain records of personal financial transactions that involve the movement of currency in excess of $10,000 in and out of accounts. It also authorizes the Treasury Department to require any financial institution to report any suspicious transaction. These reports, called suspicious activity reports (SARs), are filed with the Treasury Department’s Financial Crimes Enforcement Network (FinCEN).

banker’s acceptance (BA)

A money market instrument used to finance international trade. A time draft drawn on a bank by an importer or exporter of goods, and it represents the bank’s conditional promise to pay the face amount of the note at maturity (normally less than three months).

basis

(1) The cost of an asset or security. (2) Another term for yield to maturity (e.g., this bond is selling at a 5.78 basis).

basis point

A measure of a bond’s yield, equal to 1/100 of 1% of a yield. A bond whose yield increases from 5.0% to 5.5% is said to increase by 50 basis points. A basis point is equal to 10 cents.

bear

An investor who acts on the belief that a security or the market is falling or is expected to fall. See bull.

bear market

A market in which prices of a certain group of securities are falling or are expected to fall. See bull market.

benchmark portfolio

A model portfolio of a large number of assets, such as the S&P 500, against which the performance of a fund or portfolio is measured.

beta

A means of measuring the comovement of the return of a security or a portfolio of securities to the return on the overall market. A beta of 1 indicates that the security’s returns will be expected to move in tandem with the market. A beta greater than 1 indicates that the security’s returns will be expected to exceed those of the market. A beta less than 1 means returns will be expected to be lower than those of the market.

bid

(1) An indication by an investor, a trader, or a dealer of a willingness to buy a security or commodity; the price at which an investor can sell to a broker-dealer. (2) The price at which an investor can redeem shares of a mutual fund. See also offer; public offering price; quotation.

blank check SPAC

A special purpose acquisition company that raises money through an IPO without identifying a specific acquisition target, but intends to merge with or acquire an existing business in the future.

blind pool SPAC

Similar to a blank check SPAC, except it has identified the type or category of business it intends to acquire (e.g., tech or healthcare), though not the specific company. A blank check SPAC has no stated focus at all, while a blind pool SPAC at least gives investors an idea of the industry or sector for the future acquisition.

block trade

A large trading order, defined as an order that consists of 10,000 or more shares of a given stock or at a total market value of $200,000 or more.

blockchain

The underlying distributed ledger technology that records transactions securely and transparently. Remember that blockchain is the technology, while cryptocurrencies (like Bitcoin) are one application of it.

blotter

A book of original entry in which a broker-dealer records on a daily basis every transaction, movement of securities, and cash receipt and disbursement.

blue-chip stock

The equity issues of financially stable, well-established companies that have demonstrated their ability to pay dividends in both good and bad times.

blue-sky

To register a securities offering in a particular state.

blue-sky laws

The nickname for state regulations governing the securities industry.

board of directors

Individuals elected by stockholders to establish corporate management policies. A board of directors decides, among other issues, if and when dividends will be paid to stockholders.

bona fide

From the Latin “good faith,” something that is bona fide is genuine, authentic, and real. An example would be a bona fide quote.

bond

A legal obligation of an issuing company or government to repay the principal of a loan to bond investors at a specified future date. Corporate bonds are usually issued with a par or face value of $1,000, and municipal bonds with a par of $5,000, representing the amount of money borrowed. The issuer promises to pay a percentage of the par value as interest on the borrowed funds. The interest payment is stated on the face of the bond or its description at issue.

bond fund

A mutual fund whose investment objective is to provide stable income with a minimal capital risk. It invests in income-producing instruments that may include corporate, government, or municipal bonds.

bond laddering

A fixed income investment strategy that involves purchasing several smaller bonds, each with a different maturity date spread over months or years, rather than one larger bond maturing on a single date.

bond quote

Corporate, municipal, and government bonds are percentages of the bonds’ face values (usually $1,000).

bond rating

An evaluation of the possibility of a bond issuer’s default, based on an analysis of the issuer’s financial condition and likelihood of meeting all obligations. Standard & Poor’s, Moody’s Investors Service, and Fitch Investors Service, among others, provide bond rating services. Ratings of municipal bonds may be found on the EMMA System operated by the Municipal Securities Rulemaking Board.

book value per share

A measure of the net worth of each share of common stock. It is calculated by subtracting intangible assets and preferred stock from total net worth, then dividing the result by the number of shares of common outstanding.

breadth-of-market theory

A technical analysis theory that predicts the strength of the market according to the number of issues that advance or decline in a particular trading day.

breakout

In technical analysis, the movement of a security’s price through an established support or resistance level. See also resistance level; support level.

breakpoint

The schedule of sales charge discounts a mutual fund offers for lump-sum or cumulative investments. They are available to any person. Investment clubs or associations formed for the purpose of investing do not qualify for them.

breakpoint sale

The sale of mutual fund shares in an amount just below the level at which the purchaser would qualify for reduced sales charges. This violates the Conduct Rules.

bridge loan

A short-term loan made to bridge the gap until permanent financing is arranged.

brochure

A written disclosure statement that investment advisers must provide to most clients and prospective clients. The Form ADV Part 2A may be used for this purpose.

brochure rules

A state-registered investment adviser must provide its customer with its brochure (Parts 2A and 2B of Form ADV) at least 48 hours before having them sign the contract. If delivery is made after that (but no later than the finalization of the contract), the customer must be given five days to void the contract without penalty.

brochure supplement

A written disclosure statement containing information about certain of an investment adviser’s supervised persons. This disclosure is usually accomplished by the delivery of Form ADV Part 2B to most clients and prospective clients.

broker

(1) An individual or firm that charges a fee or commission for executing buy and sell orders submitted by a customer. (2) The role of a firm when it acts as an agent for a customer and charges the customer a commission for its services. See also agent; broker-dealer; dealer.

broker-dealer

Person or firm in the business of buying and selling securities and or futures. A firm may act as both broker (agent) or dealer (principal) but not in the same transaction. Securities broker-dealers normally must register with the SEC, futures broker-dealers with the CFTC and the appropriate SROs, and any state in which they do business.

bull

An investor who believes that a security, a commodity, or the market overall is likely to rise.

bull market

A market where prices of a certain group of commodities or securities are rising or are expected to rise. See also bear market.

business continuity plan

A plan required by regulators for broker-dealers to identify procedures relating to an emergency or significant business disruption, which allows the member to meet all existing obligations.

business cycle

A predictable long-term pattern of alternating periods of economic growth and decline. The cycle passes through four stages: expansion, peak, contraction, and trough.

business development company

A business development company (BDC) is one that is created to help grow small companies while still in the initial stages of their development. Also referred to as growth development companies, these allow smaller nonaccredited investors the opportunity to invest in startup companies.

business risk

The risk inherent in equity securities that poor management decisions will have a negative impact on the stock’s performance. Can be reduced through diversification.

buy stop order

An order to buy a security that is entered at a price above the current offering price and that is triggered when the market price touches or goes through the buy stop price.

bypass trust

A trust that is funded with property in an amount equal to the exemption equivalent of the transfer tax credit amount applicable to the decedent ($11.7million in 2021); thus, the property is not subject to federal estate tax. See generation skipping trust.