Glossary of Alternative Financial Terms, Keywords and Phrases

The world of alternative lending isn’t all that complicated but there are some key terms business owners should be acquainted with before applying for a loan. Here are several key words and phrases, across several categories.

Marketplace Lending

A non-banking financial institution, often using technology for speed and simplicity, that connects borrowers with lenders.

Accrued Interest – Accrued Interest refers to interest earned but not yet paid. Accrued interest for fixed income investments is calculated from the date of issue or the last interest payment made. When a buyer purchases a bond, the buyer owes the seller the accrued interest in addition to the market price of the security purchased, not when it is sold or when a sell trade is in settlement.

Active Tranche –An active portfolio component inside of a Real Estate Management Investment Company that is currently paying principal payments to its owners.

Advance Formula –A payment made in advance of a larger line of credit. Typically, this acts as a sublimit draw based upon the maximum amount borrowed. Typically, an advance formula limits the amount that can be borrowed under a line of credit to either a lesser amount of a credit line or a percentage of receivables collateral.

Affirmative Covenant – This refers to a provision in the lender’s terms that requires a borrower to fulfill a future obligation. For example, a requirement for annual audited financial statements to a lender during the term of the loan is an example of a clause in an affirmative covenant.

Alternative Lending – a term used to describe the various loan options made available to business owners outside of traditional bank loans.

Break Even Occupancy – The minimum occupancy level required by a commercial real estate property that will generate enough income to make all required principal and interest payments.

Binder – A binder refers to a tentative agreement, secured by the payment of a deposit under which a buyer makes an offer to purchase real estate.

Blanket mortgage – The mortgage that is secured by all assets within a larger property such a co-op building, as opposed to the share loans on individual units within the property

Busted PAC (Planned Amortization Class) – A busted PAC refers to tranches in collateralized mortgage obligations for which the supplemental tranches has been completely retired by larger than expected prepayments. Since the supplemental tranche is no longer outstanding and therefore requires no prepayments, the maturity of these tranches may be shorter than usual.

Buy-Down mortgage – A temporary buy-down is a mortgage on which initial payments are made by any party to reduce a borrower’s monthly payments in the first few years of the loan. A permanent buy-down reduces the interest rate over the entire lifetime of the loan.

Call Risk – Call risk refers to the risk that a decrease in interest rates will create an economic incentive for the owner of a security with a call option to exercise that option. This accelerates prepayment of the underlying loans in the portfolio and thereby shortens the duration of the investment.

Capitalized Lease – Under GAAP (Generally Accepted Accounting Principles), this refers to the unpaid future lease payments due under the terms of the lease. These payments must be shown as a liability on the firm’s balance sheet. Generally, this requirement applies to most equipment and buildings leased by a business and used in the day to day operations of the business.

Cash Flow Recapture Clause – An agreement or indenture provision that requires a borrower to make additional payments (or increase payment amounts by a certain percentage of excess cash flow) in order to reduce the outstanding debt balance.

Clean Letter of Credit – A letter of credit that can be drawn upon with a simple written request. This is also known as a standby letter of credit. This type of letter of credit is often used to enhance credit quality and usually requires no additional paperwork or supporting documentation.

Collateralization – when a borrower pledges an asset to the lender in the event that the borrower defaults on the initial loan.

Constant Prepayment Rate (CPR) – This refers to the rate of historical or expected prepayment of principal on a loan. This amount is expressed as a rate of prepayment as a constantly proportional to the amount of the outstanding principal. The CPR reflects annualized and compounded prepayment amounts and as a result is generally more accurate.

Credit Score – based on a person’s credit history, a credit score is a number between 300-850 used by lenders to determine the likelihood that a person will repay his or her debt. The higher the number the better.

Daily ACH – an acronym for Automated Clearing House, it is a secure electronic funds transfer network that processes the credit and debit transactions of public and privates sectors.

Direct Lending – a term used to describe a loan made between a borrower and a lender with no third-party involvement, many times resulting in lower interest rates and fees. Direct lenders are not traditional banks, but instead are typically investment banks, brokers or private equity firms.

Equipment Financing – a small business equipment loan used to purchase business equipment using the purchased equipment as collateral to secure the loan.

FICO – an acronym for Fair Isaac Corporation, FICO is the largest and most well-known company that provides software for calculating a person’s credit score.

ISO – an acronym for Independent Sales Organization, ISO is an individual or organization that is not an Association member (ie. Not a Visa or Mastercard member bank), but still has a bank card relationship with an Association member bank. ISO’s provide payment-related services to members of an Association, either directly or indirectly, including customer service, sales, merchant solicitation and training activities.

Merchant Cash Advance – a quick, easy way to get your business a lump sum payment in exchange for a share of future sales. There’s no need for collateral, even if your business has bad credit.

Peer to Peer Lending – a term used to describe a loan agreement between a borrower and a lender without the use of an official financial institution, resulting in achieving higher interest rates for the lender and lower rates for the borrower than either would achieve through a third-party bank.

Unsecured Loan – a loan not protected by an asset or collateral, but extended based on the borrowers credit history and financial position.

Private Equity

A type of investment vehicle created for the purpose of investing and acquiring equity ownership in private companies or in public companies that eventually become delisted from public stock exchanges as they “go private”. Private-equity firms raise funds and manage these funds to yield favorable returns for their shareholders, typically with a medium-term investment horizon that can range anywhere from four to seven years.

Asset Allocation – The process of investing in different types of asset classes, such as equities, fixed income, alternative investments and cash that is consistent with a particular risk profile or objective.

Prospectus – A legal document providing important information about a security that is filed with the Securities and Exchange Commission and available to all investors. The prospectus contains information on the objectives and policies, risks, costs, past performance, fees, and other important information related to a security to current and prospective investors

Wealth Management

A high-level financial service that encompasses various elements of a person’s financial life. A wealth management plan will be developed in line with a client’s objectives, based on a review of the client’s financial picture, goals and the client’s comfort level with risk. After the original plan is developed, the manager will regularly meet with a client to review the plan and rebalance the portfolio.

401(k) – A type of retirement plan offered by a corporation to its employees, which allows employees to set aside tax-deferred income for retirement. Some employers will match contributions made into these types of accounts on a dollar-for-dollar basis.

403(b)A tax-advantaged retirement plan that enjoys similar tax benefits to a 401(k) plan but is only available for employees of public organizations such as education, public health and some non-profit corporations as opposed to traditional corporations.

457A deferred compensation program available to employees of state and federal agencies. A 457 plan is similar to a 401(k) plan, except employers cannot make matching contributions as it is not considered a qualified retirement plan by the IRS.

Accrued InterestThe interest payable on a bond or other fixed income security since the last interest payment was made. The buyer of these types of securities pays the market price along with accrued interest.

American Depositary Receipt (ADR) – An American Depository Receipt is issued by a U.S. Depository Bank that represents shares of a foreign corporation ADRs are quoted in U.S. dollars and trade just like any other type of securities and allow investors to diversify their holdings internationally.

American Stock Exchange (AMEX)An open auction marketplace similar where buyers and sellers compete in a centralized bidding system to get the best price on their transactions. The AMEX typically lists stocks of small- to medium-sized younger companies.

Arbitrage – Arbitrage refers to the practice of simultaneously buying and selling an asset in order to profit from the difference (spread) between them, striking a series of transactions that capitalize upon the imbalance, the profit being the difference between the sale and purchase prices.

AssetRefers to any ownership of property and any items of value owned by a person or business. Assets are primarily classified by:

Current assets—liquid cash and other liquid instruments, including receivables, that can be converted to cash within the maximum allowable time limit of one year.

Long-term assets—physical locations, equipment, real estate, and other capital assets net of any depreciation.

Prepaid and deferred assets—Assets set aside for future costs or expenses, such as insurance, interest, or rent, that can be amortized over an applicable period.

Intangible assets—Assets that may not be scalable or easily monetized, such as goodwill, patents, copyrights, and brand-name.

Asset ClassA type of investment, such as stocks, bonds, real estate, or cash.

Basis Point – Representative of one-hundredth of one percent. This measurement is especially helpful in financial markets, such as expressing the often small but significant spreads in bond yields. For example, the difference between a 12.83-percent yield and a 12.88-percent yield is five basis points.

Bear Market – A term to describe a market of declining stock prices and negative market sentiment.

Bearer Bond – A bond that is not registered on the issuer’s books. Interest and principal, when due, are payable to the owner.

Beta – Beta refers to the coefficient that measures a stock’s volatility relative to the rest of the market. The beta is a covariance of the stock in relation to the rest of the stock market. The Standard & Poor’s 500 Stock Index provides a benchmark beta coefficient of 1. Any stock with a higher beta is more volatile than the market average; any stock with a lower beta is less volatile.

Bid and Ask – Also known as the quote, the bid refers to the highest price a buyer will pay for a stock, while the ask is the minimum that a seller will accept.

Blue Chip – A company well known in publicly traded markets that is known quality of its products or services, its reliability, longevity and its profitability in both good and bad economic times.

Blue Sky Laws – Various state-level legislation enacted to protect the public against securities fraud.

Bond – Bonds are debt instruments structured as promissory notes or IOUs issued by a corporation or government to lenders. They are issued in multiple lots of $1,000 or $5,000, although $100 and $500 denominations are available and is referred to as “Par”.

A bond is evidence of debt that the issuing company promises to pay the bondholder back over a specified amount of time and to also make specified interest payments over the life of the bond. The creditor must also repay the original loan by the expiration date. Since a bond represents debt, its holder is a creditor of the corporation and cannot claim ownership like a stockholder.

Book Value – A stock’s book value is determined by the taking the sum of a company’s assets and then deducting all of its debt and liabilities, including any preferred securities. This sum is then divided by the number of outstanding common shares and the result is book value per common share. Book value of a company’s assets or its securities may have little to no relationship relative to the market value.

Broker – An agent who acts as an intermediary between buyer and seller in transactions involving securities, commodities, or other property. He or she charges a commission for their services.

Bull Market – A term to describe a market of appreciating stock prices and positive market sentiment.

Buy – To purchase a security or other asset in exchange for money or value.

Capital Gain – Profit earned on the sale of securities over the duration of one year, captured either through dividends or by selling the securities at a higher price than was originally purchased.

Capital Stock – All shares that represents ownership of a business, which including common and preferred.

Cash Flow – Any reported net income of a corporation plus any charges for depreciation, depletion, amortization, and one-time charges, which are deductions and not paid out in actual dollars and cents but captured on the company’s financial statements.

Cash In Lieu – Investors can receive cash in lieu of fractional shares when a company issues a dividend, goes private or is bought out.

Cash Sale – A transaction conducted on the floor of the stock exchange that calls for delivery of the securities the same day. This differs from regular stock trades as the seller is to deliver on the third business day after the trade. Fixed income securities must be delivered the day after a trade.

Certificate of Deposit – A security issued by a bank that lets investors leave a sum for a specified period of time in exchange for a specific amount of interest payable on that amount.

Commission – The broker’s basic fee collected for conducting purchase or sell transactions as an agent.

Common Stock – Securities that represent ownership interest in a corporation. If the company issued preferred stock, both common and preferred stockholders have ownership rights but common stockholders assume greater risk but generally exercise greater control and may reap more rewards in the form of dividends and capital appreciation.

Corporate Bond – A debt security issued by a corporation.

Cumulative Preferred – A type of stock that contains a provision that if one or more dividends are not paid out, those dividends must be paid before any additional dividends may be paid on the company’s common stock.

Current Assets – Assets that can be deployed or realized within one year. These include cash, U.S. government bonds, receivables and inventories.

Current Liabilities – Any outstanding debt owed and payable by a company within one year.

CUSIP – A system that uniquely identifies securities traded in the U.S. It was created in the late 1960s by the American Bankers Association as a way to standardize the way securities are identified and tracked. s. A CUSIP number consists of nine digits; the first six identify the issuer, and seven through nine identify the type of issue.

Debit Balance – Any balance in a customer’s margin account that is covered by credit extended from the broker to the margin customer which covers the purchase price of stock, bonds, or commodities.

Deliver In/Out – Delivering a position or cash in or out of a portfolio.

Depository Trust Company (DTC) – DTC provides a central securities depository clearinghouse through which brokers deliver securities by computerized book entries, which eliminates the physical transfer of stock certificates. DTC is operated by a separate management entity and has an independent board of directors.

Discretionary Account – A type of brokerage account where a client will provide the financial adviser or someone else the permission to buy and sell securities on behalf of the client, This includes, but not limited to, investment selection and the execution of buy or sell orders.

Dividend – Payments distributed to shareholders that are comprised of either cash or equity. Dividends are drawn from profits made by a company and must be disclosed by the company’s board of directors before they are paid out.

Dollar-Cost Averaging – A methodology of buying securities at regular intervals, often with a set amount of dollars behind each purchase. Investors will purchase securities according to a particular dollar amount as opposed to the number of shares. If each investment is composed of the same number of dollars, an investor will buy more shares when the price is low and less when it rises.

Dow Jones Industrial Average (DJIA) – The DJIA is an index used to measure the health and performance of the U.S. financial markets. First introduced in May, 1896, by Charles H. Dow, the DJIA is the oldest stock price measure in continuous operation. Over the past century, it has become the most widely recognized stock market indication in the U.S., and probably in the world. The 30 stocks included are typically large companies that reflect the health and composition of the U.S. economy.

Equity – Proportional ownership in a company. Whereas bonds and fixed income are synonymous with debt, stocks represent equity.

Ex-Dividend – A synonym for without a dividend. The buyer of a stock ex-dividend is not entitled to the next dividend payment. Dividends are paid to shareholders on a specified date recorded on the company’s books, referred to as the “Ex-Dividend Date”.

Exercise – An action taken by an option holder that requires the writer to execute the terms of the contract.

Exercise Price – The price point at which an option may be exercised. This is also referred to as the strike price.

Exercise Settlement Amount – The difference between the exercise price of an option and the index’s exercise settlement value on the day an exercise notice is tendered, multiplied by the index multiplier.

Growth Stock – Shares of a company known for their rapid earnings growth. Most growth stocks do not pay dividends because management reinvests the earnings to continue to grow.

Income Bond – Bonds that promise to repay principal but to pay interest only when it is earned. In some cases, the unpaid interest on an income bond may accumulate and may only be payable by the corporation when the bond becomes due.

Income Stock – Common stocks that pay large dividends that investors can utilize as income.

Independent Broker – Member on the floor of the NYSE who executes orders for other brokers who are too busy to handle client orders or for firms who do not have an exchange member on the floor. Independents receive commissions for effecting transactions on behalf of the brokers they work with.

Index – An index refers to a comprehensive benchmark of market trends, intended for investors concerned with the performance of their portfolio.

Individual Retirement Account (IRA) – An Individual Retirement Account is a that allows an individual to set aside pre-tax dollars every year, in which the account will grow tax-deferred until withdrawals are allowed age 59 1/2 or later. Account holders can take proceeds earlier but are subject to penalties.

Industry Group – A classification of a group of securities by industry specification.

Interest – Refers to the cost of borrowing money. For example, a bond represents a loan to a company. The lender receives interest at regular intervals or at maturity depending on the structure of the bond.

Interest Rate – The price that banks charge borrowers for the use of the banks’ money, calculated as a percentage of the money loaned by the prevailing market rate.

Internal Rate of Return (IRR) – The rate of return that represents future cash flows plus the final market value of an investment or business opportunity, against the current market price of the investment or opportunity.

Investment Portfolio – A collection of securities owned by an individual or institution.

Investment – The use putting money to work for the purpose of making more money, whether to gain income or increase capital for investment, or for both purposes.

Keogh Plan – Tax-advantaged, qualified personal retirement program that a self-employed individual can establish. Also known as a Simplified Employer Pension (SEP) IRA.

Leverage – Leverage refers to the use of various debt-related instruments in order to facilitate the acquisition of assets.

Liabilities – All claims against a corporation’s assets. Liabilities can include accounts, wages, and salaries payable; dividends declared; taxes accrued; and fixed or long-term debt, such as bonds and bank loans.

Liquidity – The ease in which one’s assets can be converted back into cash. It also refers to the ability of the market in a particular security to absorb a reasonable amount of buying or selling at various princes. Liquidity is one of the most important characteristics of a confident marketplace and the confidence in a company.

Listed Stock – A company stock that is available for trading on a stock exchange.

Margin – A line of credit available to clients of a brokerage firm. Margin is paid by the customer when utilizing a credit line extended by a broker’s to buy or sell securities. Under current Federal Reserve regulations, the initial margin requirement may range from 40 percent up to 100 percent of the purchase price. The current margin requirement of 50 percent has been in effect since 1974.

Margin Call – A margin call is a demand made by a securities broker of a client to put up money or securities in order to cover a loan. This takes place when the value of a customer’s equity in a margin account declines below a minimum standard set by a securities exchange or by the house (broker).

Market Order – An order to buy or sell a security at the best available price currently on the trading floor.

Market Price – The last price at which the stock or bond sold, or the current price for a security.

Market Value – The outstanding value of a company whose shares are traded on a stock exchange. An issue’s market value is easily computed as the closing price multiplied by the shares outstanding.

Maturity Date – The date that a bond comes due and must be paid off (or called) by the issuer.

Money Market Account – A type of account in which the manager of the account invests in short-term securities.

Mortgage Bond – A bond secured by the mortgage on a property. The market value of the property may or may not equal the value of the bond issued against it.

Municipal Bond – A bond issued by a municipal entity such as a county, city, school district, or public works authority.

National Association of Securities Dealers Automated Quotation System (NASDAQ) – Nasdaq is a global exchange platform that provides brokers and dealers with price quotations on traded, over-the-counter securities. Unlike the NYSE auction market where orders are fulfilled on a trading floor, Nasdaq orders are executed on a computer network. Level I service provides the best buy and sell offers in a given security without identifying the market maker. Level II service provides the best offers and identifies the market maker. Level III lets registered market makers compete and trade by entering their own buy and sell orders.

Net Asset Value (NAV) – The price per share of a mutual fund or an exchange-traded fund’s (ETF) per-share value. In both cases, this calculation is performed by dividing the total value of all the securities in its portfolio, less any liabilities, by the number of shares outstanding.

Net Change – Any change in a security’s price from the closing price on one day to the closing price on the next day the stock is traded. The net change is ordinarily the last figure in the newspaper stock price list. The mark +1 1/8 means an increase of $1.125 a share from the last sale on the previous day the stock traded.

New York Stock Exchange (NYSE) – The NYSE marketplace is an exchange that allows public orders to be executed on the trading floor with a minimum of dealer interference. The result is more competitive pricing for both individual and institutional investors, member firms trading for their own accounts and for assigned specialists that provide liquidity throughout the NYSE auction market system. The NYSE also links data from other markets that trades their own listed securities through the Intermarket Trading System (ITS).

NYSE-assigned dealers, known as specialists, are responsible for maintaining fair and orderly market conditions for the securities assigned to them. Most trading, however, is conducted by brokers acting on behalf of customers, rather than by dealers trading for their own accounts. For this reason, the NYSE is often described as an agency auction market.

NYSE-Listed – Companies that are approved to have their shares traded on the New York Stock Exchange.

NYSE Composite Index – The New York Stock Exchange (NYSE) established the NYSE Composite Index in 1966 to provide a comprehensive benchmark of the overall market for the benefit of investors concerned with general stock price movements. The indices consist of a Composite Index of all common stocks listed on the NYSE and four subgroup indices, Industrials, Transports, Utilities, and Financials.

The indices are basically a measure of the change in the aggregate market value of a basket of securities. The market value of each stock is obtained by multiplying its price per share by the number of shares listed. The aggregate market value, which is the sum of the individual market values, is then expressed relative to a base-point market value. The base value was set at 50 on December 31, 1965, because this figure was reasonably close to the actual average price of all common stocks at that time.

The arithmetic procedure in calculating the index is shown in the following simplified example: year-end total market value of common stocks, $5,943.5 billion, divided by adjusted base market value, $901.9 billion, multiplied by 50 equals the index, 329.51 at year-end.

Every measure of changes in stock prices—index or average—must frequently be adjusted to reflect only movements resulting from auction market activity and to eliminate the influence of corporate actions. This index deals with any change in the capitalization of an individual issue or of all issues in aggregate by making a proportionate change in the base figure’s market value.

Paydown – The process of paying back principal on asset-backed securities, which reduces the current face value and cost basis for the issuer.

Penny Stocks – A penny stock is a risky and highly speculative stock that trades at under $1 a share.

Point – For stocks, a point equals $1 dollar. If ABC shares rise 3 points, each share has risen $3 dollars in price. In the case of bonds, a point equals $10 because bonds are quoted in denominations of $1,000. An increase from 87 to 90 would mean a rise in value of $30 from $870 to $900.

Portfolio – A collection of securities owned by one individual or institution. A portfolio can consist of any combination of stocks, bonds, commodities, alternative assets, derivatives, and more.

Preferred Stock – A type of stock that pays a fixed dividend, regardless of earnings and has priority over common stock in the payment of dividends. It has no voting rights, however, and should earnings rise significantly, the preferred holder will receive the same fixed dividend while common shareholders may receive more. The fixed income stream of preferred stock makes it similar to bonds.

Prospectus – The official document that, according to SEC regulations, every issuer must provide to potential investors for a new securities issue. It highlights some of the information contained in the much longer registration statement filed with the SEC that gives information on the financial health of the issuer and the specifics of the issue itself. Potential investors should consult this information before investing.

Quote – The highest offer to buy and the lowest offer to sell any stock at any given time.

Rate of Return – In stocks and bonds, the amount of money that an investor earns on their investments. This is also known as the “yield”.

Real Estate Investment Trust (REIT) – A structure similar to an investment company that concentrates its holdings in real estate investments. The yield is generally higher since REITs are required to distribute as much as 90 percent of their income.

Record Date – The date on which an investor must be registered on the company’s records as a shareholder in order to receive a declared dividend or, among other things, vote on company board proposals.

Redemption Price – The price at which a bond may be redeemed before it matures. This is left at the discretion of the issuer. Redemption value also applies to the price the company must pay in order to call in preferred stock.

Registered Bond – A bond that is registered on the books of the issuing company in the owner’s name. It can be transferred only when the bond is endorsed by the registered owner.

Registered Representative – A person employed by a brokerage firm or by a broker/dealer who acts on behalf of customers by buying and selling securities. The term registered means the individual has passed the necessary qualifying examinations and is currently registered with FINRA.

Regulation T – The federal regulation regarding the amount of credit that brokers and dealers may loan to customers for the purchase of securities.

Regulation U – The federal regulation governing the amount of credit that a bank may advance to its clients for the purchase of stock listed on a stock exchange.

Reinvest – Putting profits back into a company to enhance its operations. An individual stockowner can also reinvest by purchasing more shares with dividends paid on the existing stock.

Return of Capital

A distribution of cash resulting from depreciation, tax savings, the sale of a capital asset or securities, or any other transaction unrelated to retained earnings.

Rights – When a company wants to raise capital from issuing additional securities, it may give its existing stockholders the opportunity to buy new securities in proportion to the number of shares they own ahead of other investors. The privilege is referred to as a “right”. Since the additional stock is usually offered to stockholders below the current market price, rights ordinarily have their own market value and are actively traded. In most cases, they must be exercised within a short period of time.

Roth IRA – A type of qualified retirement plan that allows an individual to save for retirement while allowing the earnings to grow tax-free. Contributions are made with after-tax income, but qualified withdrawals may be made tax-free and individuals can only contribute if they make below a certain income level.

Sector – A distinct niche of a market, society, industry, or economy, whose components share unique similarities.

Security – An investment instrument, aside from an insurance policy or fixed annuity, issued by a corporation, government, or other organization that offers evidence of a debt or equity instrument. The official definition, according to the Securities Exchange Act of 1934, is, “Any note, stock, treasury stock, bond, debenture, certificate of interest or participation in any profit-sharing agreement or in any oil, gas, or other mineral royalty or lease; any collateral trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit; for a security; any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof); or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency; or, in general, any instrument commonly known as a security’; or any certificate of interest or participation in, temporary or interim certificate for, receipt for, or warrant or right to subscribe to or purchase any of the foregoing; but shall not include currency or any note, bill of exchange, or banker’s acceptance, which has a maturity at the time of issuance of not exceeding nine months, exclusive of days of grace, or any renewal thereof, the maturity of which is likewise limited.”

Securitization – Securitization is the financial practice of packaging together various types of contractual debt or other types of illiquid assets and selling them as securities to investors.

Sell – To liquidate a security or other asset in exchange for money or value.

Short Sale – A transaction by a person who believes a security will decline in value. If the investor sells it, though the person does not own the security. For instance, an investor shorts 100 shares of ABC. Their broker borrows the stock so the 100 shares can be made available to the buyer. The money value of the shares borrowed is deposited by the broker with the lender as collateral. Sooner or later, the investor must cover the short by buying the same amount of stock borrowed.

If ABC can be purchased at a lower price than it was sold, the profit is the difference between the two prices excluding commission and taxes. Stock exchange and federal regulations govern and limit the conditions under which a short sale may be made on a national securities exchange.

SIMPLE – A type of qualified employer-provided retirement plan that certain small business employers can establish for their employees. A SIMPLE may be established as a IRA-based plan, or as part of a 401(k) plan.

Spinoff – The divestment of a subsidiary or a division of a corporation from its parent by creating a new corporate entity and issuing shares. The parent company will receive shares in the new company in proportion to their original holding and total value will remain approximately the same.

Split – A split occurs when the outstanding shares of a corporation are divided into either a larger or smaller number of shares. For example, a 3-for-1 forward split by a company with 1 million shares would result in 3 million shares outstanding afterwards. Each holder of 100 shares before the split would now have 300 shares, which then become worth less, although the shareholders’s equity in the company would remain proportionate and stay the same. Conversely, a reverse split would reduce the number of shares outstanding and as a result each share would be worth more.

Stock Dividend – A dividend paid in stock as opposed to cash. The dividend may be additional shares of the issuing company or shares of a subsidiary issued by the parent company.

S&P 500 – A capitalization-weighted index of 500 stocks. Standard & Poor’s 500 Index represents the price-trend movements of the major common stock of U.S. public companies. It is used to measure the performance of the entire U.S. domestic stock market.

Tender Offer – A tender offer is made by a company attempting an acquisition by purchasing shares of another company. So called since stockholders are asked to tender (surrender) their holdings, usually at a premium above the current market price.

Ticker Symbol – A three- or four-letter abbreviation used to identify a security, whether on the floor, a TV screen, or a newspaper page. Ticker symbols are part of the lore of Wall Street. Ticker symbols today are assigned on a first-come, first-served basis. Each exchange, such as the NYSE, the AMEX, the NASDAQ and others will assign ticker symbols for companies listed on their exchanges, assigning different symbols to avoid duplicating each other. A symbol used for one company cannot be used for any other company.

Trader – An employee of a broker/dealer or other financial institution who specializes in handling purchases and sales of securities for the firm or its clients.

Transfer Agent – A transfer agent is the entity who keeps a record of the name of each registered shareowner, their address, and the number of shares that they own. The transfer agent also sees that certificates presented for transfer are properly canceled and new certificates are issued in the new owner’s name upon transfer of ownership.

Transfer – The legal change of ownership after a securities transaction. This task may involve the physical delivery of a certificate or bond, or the change of ownership on corporation’s records by the transfer agent.

Wilshire 5000 – An index of all U.S.-based companies (currently about 6,800). The portfolio’s capitalization is the sum of the market capitalizations of all companies listed on the index.

Yield – In stocks and bonds, the amount of money returned to investors on their investments. This is also known as the rate of return.

Zero Coupon Bond – A bond that lacks a coupon but is priced, at issue, at a discount from its redemption price. The investor reaps the difference between the issue price and the price at maturity.

Regulatory Agency

(also regulatory authority, regulatory body or regulator) is a public administrative authority or government agency responsible for exercising authority over certain activities in a regulatory or supervisory capacity that serves the public.

Farm Credit Administration – The Farm Credit Administration is an independent agency of the Executive Branch that regulates and audits the banks and associated entities of the Farm Credit System. The Farm Credit System is a network of borrower-owned financial institutions that provide credit to farmers, ranchers and agricultural and rural agribusiness cooperatives.

Federal Housing Finance Agency (FHFA) – The Federal Housing Finance Agency (FHFA) is an independent federal agency that regulates Fannie Mae, Freddie Mac, and the Federal Home Loan banking system. It is wholly separate from the Federal Housing Administration, which provides mortgage insurance. The agency was created as the successor regulatory agency resulting from the merger of the Federal Housing Finance Board (FHFB) and the Office of Federal Housing Enterprise Oversight (OFHEO), absorbing the powers and regulatory authority of both entities. The agency also has ability to place government sponsored enterprises (GSEs) into receivership or conservatorship.

Federal Financial Institutions Examination Council (FFIEC) – The Federal Financial Institutions Examination Council (FFIEC) is a formal U.S. government interagency body that is made up of five banking regulators, the Federal Reserve Board of Governors (FRB), the Federal Deposit Insurance Corporation (FDIC), the National Credit Union Administration (NCUA), the Office of the Comptroller of the Currency (OCC), and the Consumer Financial Protection Bureau (CFPB). The agency is charged with the mission “to prescribe uniform principles, standards, and report forms to promote uniformity in the supervision of financial institutions”. The agency is also responsible for real estate appraisal oversight in the United States.

Internal Revenue Service – The Internal Revenue Service (IRS) is a government agency that operates as a bureau of the Department of the Treasury and is responsible for collecting taxes and the administration of the Internal Revenue Code. The IRS is organized around four major operating divisions, the Large Business and International division (LB&I), the Small Business/Self-Employed (SB/SE) division, the Wage and Investment (W&I) division, and the Tax Exempt & Government Entities (TE/GE) division. The IRS also includes a criminal law enforcement section known as the IRS Criminal Investigation Division.

Municipal Securities Rulemaking Board (MSRB) – The Municipal Securities Rulemaking Board (MSRB) is the entity responsible for drafting investor protection rules and other rules regulating institutions in the U.S. municipal securities market. This includes tax-exempt and taxable municipal bonds, municipal notes, and other securities issued by states, cities, and counties or their affiliated agencies in order to finance public projects to fund other public policy initiatives.

Office of Thrift Supervision (OTS) – The Office of Thrift Supervision (OTS) was a United States federal agency under the Department of the Treasury that chartered, supervised, and regulated all federally chartered and state-chartered savings banks and savings and loans associations. Like other U.S. federal bank regulators, it derived its revenue from the institutions that the agency regulates. The agency was dissolved in 2011.


An instrument of debt secured by a specific piece of real estate as collateral. Mortgages are utilized by individuals and businesses to make purchases of real estate without a huge financial outlay up front. Over a period of time, the borrower will repay the loan, plus interest until he or she eventually can claim ownership of the property free and clear.

Mortgages are also known as “encumbrances”, “liens against property” or “claims on property.”

Adjustable Rate Mortgage (ARM) – A type of mortgage loan that is structured to follow certain market indexes and will automatically adjust or fluctuate accordingly. Usually, an ARM begins with an initial interest rate, which may rise or fall, but monthly payments may not exceed a certain level (known as the cap).

Annual percentage rate, APR – The actual true cost of a home loan. In accordance with the the Truth in Lending Act, all mortgage lenders must disclose their APR and any associated fees. Sometimes, the APR may include fees such as private mortgage insurance and title insurance, among others.

Appraisal – A report prepared by a qualified appraiser which provides an estimate on a piece of real estate.

Amortization – The repayment of principal on a loan that exceeds the interest owed. The scheduled payment less any interest equals amortization. When a payment is made, the loan balance will decline by the amount of the scheduled payment, plus the amount of any extra payment.

Closing costs – Expenses that are incurred by both buyers and sellers when transferring ownership of a piece of property. Closing costs may include legal fees, taxes, origination fees and escrow payments, among others. Lenders must provide full disclosure or at least a good-faith estimate of closing costs to potential home buyers.

Combination loan – A type of loan that includes an initial loan that is to be utilized for new home construction, with a second conventional home loan that will supplant the initial construction loan.

Deed of Reconveyance – A deed of reconveyance is issued when a borrower has fully paid off a mortgage. A lender will then award the borrower a deed of reconveyance, a document of public record conveying ownership of the property to the borrower.

Depreciation – Depreciation refers to the measure of decline in the value of a home or property. Depreciation could be driven by a decline in the economy or from adverse conditions such as weather, crime or environmental factors.

Discount Points – Discount points refer to a measure of interest. One point is equivalent to one percent of the home loan value. Home buyers have the option to pay for points upfront, a type of buy-down that lowers their overall interest rate and mortgage payment.

Equity – Equity refers to the measurable valuation of real estate above and beyond that owed on a loan. Equity also refers to the basis upon which many homeowners often borrow against their property.

Notional Value – Notional value refers to the underlying value, or face value of the financial instrument or commodity specified in a futures or options on futures contract. Usually denominated in U.S. Dollars.

Outages – Outages refers to the scheduled shutdown of a generating unit, transmission line, or other type of infrastructure in order to perform inspection and maintenance. A forced outage is the unplanned interruption of service for purposes other than inspection and maintenance.

Point – Factored into the loan’s annual percentage rate (APR), a point is equivalent to one percent of a mortgage loan. Some lenders will charge “origination points” to cover loan expenses. Other times, borrowers will pay “discount points” to reduce the interest rate of the loan.

Preferred Lender – A preferred lender is a lending entity that is closely affiliated with a brokerage. A mortgage lender that comes recommended by a broker, but must also disclose any relationships or conflicts of interest.

Quit claim deed – A document that releases an entity in a home title from any responsibility and grants all responsibility to another. Commonly used in situations in which more than one individual has a stake in a mortgage or property title.

Refinance – The process by which a borrower may negotiate a lower interest rate on a mortgage, which lowers their monthly payments. They may choose to refinance their loan with their current lender or refinance with another lender

Underwriter – An underwriter is an entity that provides the service of evaluating a borrower’s creditworthiness prior to loan and mortgage approval.


A basic good utilized in commerce that is interchangeable with other commodities of the same type. Commodities are most often used as inputs in the production of various goods or services. The quality of a given commodity may vary slightly, but it is essentially uniform. Commodities must also meet a specific minimum standard when they are publicly traded on an exchange, which is known as a basis grade.

Carrying Charge – For physical commodities, carrying charges include the cost of storage, insurance, and finance charges incurred by holding the actual commodity. Carrying charges are also used in interest rate futures markets, which refer to the difference between the yield on a cash instrument and the cost of funds necessary to buy the cash instrument.

Cash Commodity -The actual underlying physical commodity which forms the basis for a futures contract. This may include agricultural commodities, financial instruments and cash equivalents.

Clean Cargo – Refined petroleum products such as kerosene, gasoline, heating oil, and jet fuel carried by midstream resources such as tankers, barges, and railroad tank cars. This does not include other refined such as bunker fuels, residual fuel oil, asphalt, and petroleum coke.

Collar – A commodity contract between a buyer and seller where the buyer is guaranteed that they will not have to pay more than a preset maximum price on a contract and whereby the seller is guaranteed to receive a minimum price. This is similar to an options fence for equity options.

Force Majeure – A clause that indemnifies either or both parties to a transaction whenever extraordinary events occur which the Exchange declares to be beyond the control of the exchange or both parties in the transaction. Natural disasters, outbreaks of war and economic panics are among the reasons to declare a Force Majeure.

Futures Contract – A futures contract which represents any or all contracts covering the sale of a particular commodity (including financial instruments and cash equivalent indexes) for delivery in the future. Contracts are made on an exchange and are subject to its regulations.

Mortgage Insurance Premium – A 1.5% fee added into a FHA loan, paid at closing.

Mortgage Originator – The actual entity that provides the mortgage, also known as the “originator.”

Paper Barrels – A paper barrel is a term used to denote trade in non-physical oil (futures, forwards, swaps, etc.). This grants buyers and sellers the right to a certain quantity and quality of crude or refined products at a future date, but does not guarantee a certain physical amount.

Partner Clearinghouse – A “Partner Clearinghouse” refers to a derivatives clearing organization or a clearinghouse which has agreed to act in cooperation with an Exchange to facilitate clearance of Futures Contracts as defined. A Partner Clearinghouse shall be considered a Clearing Member for purposes of exchange rules except to the extent otherwise provided in an agreement that is established with the Exchange.

Performance Bond – A performance bond refers to the minimum amount of funds that must be deposited by a customer with their broker or by a broker on behalf of a client with a clearing member or by a clearing member with the Clearing House.

Position Adjustment – A position adjustment may increase or decrease a position within a contract and origin, long or short, in order to correct discrepancies in the reporting of a trade position. The adjustment is made to reconcile out of balance trades for both clearing records and transaction records.

Speculator – A speculator is a market participant who accepts market risk in order to profit from buying and selling futures and/or options contracts. Speculators profit by anticipating future movements in the price of a traded investment.

Spot – Spot commodities refer to the actual physical commodity as opposed to the futures contract that it is based upon. Also known as the “cash commodity.”