Series 65 Glossary Terms

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 management style

Active managers believe they can identify industries that are undervalued or overvalued in order to weight them appropriately and achieve returns in excess of the market.

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.

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.

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.

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).

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

An individual or firm that effects securities transactions for the accounts of others.

aggressive investment strategy

A method of portfolio allocation and management aimed at achieving maximum return.

algorithmic trading

Algorithmic trading makes use of computer programs for entering pre-programmed trading instructions on electronic trading platforms.

alpha

The return on an investment 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.

American-style option

An option contract that may be exercised at any time between the date of purchase and the expiration date.

annual report

A formal statement issued yearly by a corporation to its shareowners.

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 that guarantees lifetime income to the individual.

annuity unit

An accounting measure used to determine the amount of each payment during an annuity's distribution stage.

anti-dilutive covenant

A protective clause found in most convertible issues that adjusts the conversion rate for stock splits and/or stock dividends.

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.

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.

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.

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.

asset class allocation

Dividing an investment portfolio among different asset categories such as stocks, bonds, cash, and tangible assets.

assignment

Transferring an investment advisory contract to another firm.

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.

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. (2) The rate that a variable annuity separate account must earn to keep annuity payments level.

auction market

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

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.

authorized stock

The number of shares of stock that a corporation may legally issue, stipulated in the corporation's state-approved charter.

automatic reinvestment

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

bad actor

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

back-end load

A fee that is charged when mutual fund shares or variable annuity contracts are redeemed, typically found with Class B shares.

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.

balance sheet

A financial statement showing the assets, liabilities, and shareholder's 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.

bank holding company

A holding company whose primary asset is a commercial bank.

Bank Secrecy Act (BSA)

The Bank Secrecy Act 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.

basis

(1) The cost of an asset or security. (2) Another term for yield to maturity.

basis point

A measure of a bond's yield, equal to 1/100 of 1% of a yield.

bear

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

bear market

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

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.

Black-Scholes

One of the most popular options pricing models. Appears frequently on the exam as an incorrect choice.

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.

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.

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.

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

Quotes for 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.

bond ratio

One of several tools used by bond analysts to assess the degree of safety offered by a corporation's bonds.

book value per share

A measure of the net worth of each share of common stock.

net tangible assets per share

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.

Brady bonds

Debt instruments, generally from third-world countries, that may have a U.S. Treasury bond as collateral.

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.

breakpoint

The schedule of sales charge discounts a mutual fund offers for lump-sum or cumulative investments.

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.

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.

brochure supplement

A written disclosure statement containing information about certain of an investment adviser's supervised persons.

broker

An individual or firm that charges a fee or commission for executing buy and sell orders submitted by a customer.

broker-dealer

Person or firm in the business of buying and selling securities and/or futures.

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.

bunching orders

Combining individual trade executions at the same price for reporting purposes into a single trade report.

business cycle

A predictable long-term pattern of alternating periods of economic growth and decline.

business development company

A business development company (BDC) is one created to help small companies grow while still in the initial stages of their development.

business risk

The risk inherent in equity securities that poor management decisions will have a negative impact on the stock's performance.

buy stop order

An order to buy a security that is entered at a price above the current offering price and 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 to the transfer tax credit amount applicable to the decedent ($11.7 million in 2021); thus, the property is not subject to federal estate tax.