Quick Reference Securities
Glossary
The information
contained in this article is intended for informational purposes only
and should not be construed as legal advice or a substitution for obtaining
legal advice from an attorney. Reading this article is not intended
to create an attorney-client relationship. For personal legal advice,
please consult an attorney of your choice. Because of the possible unanticipated
changes in industry regulations and applicable state and federal laws,
the authors and creators and any and all persons or entities involved
in any way in the preparation of this article disclaim all responsibility
for the legal effects or consequences of the interpretation of the information
provided.
Accredited Investor:
At least one of the following criteria must be met to be an accredited
investor: (i) a buyer with a net worth individually or with a spouse
of $1,000,000 or more; (ii) institutional investors including banks,
insurance companies, registered broker/dealers, and large pensions plans;
(iii) tax-exempt organizations with total assets in excess of $5,000,000;
(iv); private business development companies; (vii) directors, officers,
or general partners of the issuer; and (viii) entities owned entirely
by accredited investors.
Advertising:
Under NASD rules, means promotional items that have uncontrolled distribution.
In other words, the firm has no way to know who will see the item. The
material is published or designed for use in newspapers, magazines or
other periodicals, radio, television, telephone or tape recording, video
tape display, signs or billboards, motion pictures, telephone listings
(other than white-page listings), or other public media. Does not include
communications that are neither advertising nor sales literature.
All-Or-None
underwriting: A type of best-efforts underwriting that withdraws
the offering if it cannot be sold completely.
Arbitrage: Taking
advantage of minor aberrations in the market to try to profit as the
market returns to normal. Arbitrage might take advantage of imbalances
in prices between two markets for the same security (such as a domestic
and a foreign market) or between two types of securities whose value
depends on the same underlying security (such a stock and a bond convertible
into the stock).
Bear Market:
A situation in a market for investments in which price trends are
generally downward.
Blue Chip Stocks:
Stocks of strong, well established corporations with a history of
paying dividends in good and bad times.
Blue Sky Laws:
State securities laws. The name is derived from a court decision
in which a state judge held that a particular offering had "no
more substance than the blue sky above."
Bull Market:
A situation in a market for investments in which price trends are generally
upward.
Capital Gain:
A gain recognized when a security is purchased at one price and sold
at a higher price. It does not include dividend or interest income.
Commodity Futures
Trading Commission: U.S. Government Agency that regulates U.S. exchange
trading in futures.
Common Stock:
The most basic type of equity security, representing ownership of the
corporation.
Control Stock:
Stock owned by control persons.
Convertible:
Designation for a bond, debenture, or preferred stock which signifies
that it may be exchanged by the owner for common stock or another security,
usually one issued by the same corporation. Conversions are subject
to terms established in the issue of the original security.
Cumulative Preferred
Stock: A preferred stock whose dividends continue to accumulate
even though they are not earned or declared.
Current Assets:
Assets that are converted to cash within one year.
Current Liabilities:
Obligations that must be paid within one year.
Dealer: One
who buys or sells stock for his own account, charging a markup when
he sells to a customer and a markdown when he buys from the customer.
Debentures:
Bonds not secured by any specific property, based on the full faith
and credit of the issuer.
Depreciation:
A non-cash expense reflecting wear and tear of property used as
part of a trade or business or held for the production of income.
Derivative Security:
A contract whose value depends on the performance of some other
security, index, or other investment. For example, a stock option is
a derivative security whose value depends on the value of the underlying
stock.
Dilution: Reduction
of the percentage ownership of the existing shareholders through the
sale of more stock by the corporation.
Dividend:
A payment of corporate earnings to shareholders. Dividends are normally
paid in cash, but may also be in stock or property.
Dow Jones Composite
Average: An average of 65 stocks, including the 30 stocks in the
Dow Jones Industrial Average, plus 20 transportation stocks and 15 utility
stocks.
Earnings Per
Share: The net income of a corporation after taxes and payment of
preferred stock dividends, divided by the number of common shares outstanding.
Equity: The
value of an asset (or part of an asset) which is not indebted.
Exchanges:
Organizations or groups of individuals and/or firms that provide a means
of bringing buyers or sellers of securities together. Unless their volume
is so small to qualify for an exemption, exchanges must register with
the SEC as national exchanges and abide by their rules.
Fair market
price: The price a willing buyer would pay a willing seller for
an asset, where both are acting rationally with full knowledge.
Fixed assets:
Corporate assets that are used in a trade or business having a useful
life of more than one year.
Fully diluted
earnings per share: The earnings per share if all convertible securities
were converted into common stock.
General Partner:
The partner who has the responsibility to manage the business and affairs
of a limited partnership, and who has unlimited liability.
Howey Test to
Determine if an Investment is a Security: The test established in
the 1946 case of SEC v. W.J. Howey Co. to determine what a security
is. According to the Howey test, an instrument is only a security if
it involves an investment of money or other tangible or definable consideration
in a common enterprise with a reasonable expectation of profits to be
derived primarily from the entrepreneurial or managerial efforts of
others. The form of the security (whether it is a formal certificate
or nominal interests in the physical assets employed by the enterprise)
is irrelevant. Thus, notes that a furniture store issues to finance
a customer's purchases are not securities, since their primary purpose
is to facilitate the purchase. However, notes issued by a corporation
for the general use of the company, where the buyer is primarily interested
in the interest to be derived primarily from the entrepreneurial or
managerial efforts of others. The form of the security (whether it is
a formal certificate or nominal interests in the physical assets employed
by the enterprise) is irrelevant. Thus, notes that a furniture store
issues to finance a customer's purchases are not securities, since their
primary purpose is to facilitate the purchase. However, notes issued
by a corporation for the general use of the company, where the buyer
is primarily interested in the interest to be earned on the notes, would
be considered a security.
Initial Public
Offering: The initial sale of securities to the public, often called
an IPO.
Insider: Anyone
in a position to influence the decisions of a corporation. Insiders
include officers, directors, principal stockholders, and their respective
immediate families. Insiders of a corporation are also referred to as
affiliated persons or control persons.
Intrastate Offering:
A solicitation to sell stock made only to residents of the state in
which it originates. Also known as a Rule 147 offering.
Investment Banker:
A firm acting as intermediary either between a corporation issuing new
securities and the public or between the holder of large blocks of securities
and potential buyers. The investment banker may operate individually
or in a syndicate with other investment bankers, and as an underwriter
or an agent in the transaction.
Issuer: The
corporation offering or proposing to offer securities.
Leverage: The
use of debt when purchasing investments. Leverage increases the percentage
profit, but also the percentage loss.
Liabilities:
All claims on the assets of an individual or corporation. Includes accrued
payable amounts, long-and short-term debt, debentures, and notes. Does
not include the ownership equity.
Limited Partnership:
A partnership comprised of one or more general partners with unlimited
obligations and liability, and one or more limited partners with limited
obligations and liability.
Long-Term Capital
Gains: Gains on assets held for more than 12 months. Usually qualify
for lower tax rates short-term gains do.
Market Maker:
A firm that buys and sells a particular security for its own account.
Merger: The joining
of two or more corporations into a single corporation.
Minimum-Maximum
Underwriting: A type of best efforts underwriting. It is similar
to an all-or-none underwriting until the minimum amount is raised, in
that the offering is canceled if that amount is not raised. It then
becomes a normal best efforts underwriting above that amount. An example
is a real estate limited partnership with a $2 million minimum and a
$50 million maximum.
NASDAQ: The
computer system designed to facilitate trading of over-the-counter securities.
NASDAQ stands for the National Association of Securities Dealers Automated
Quotation System.
National Association
of Securities Dealers, Inc.: Usually referred to as the NASD, this
is the self-regulatory organization which is responsible for supervising
the OTC market.
Net worth:
Owners' equity of the firm, or all assets less all liabilities. For
a corporation, net worth is equal to the total of capital stock, paid-in
capital, and retained earnings.
Option:
A contract that gives the right to a holder to buy (call option) or
sell (put option) a fixed amount of a security at a specific price anytime
before the stated expiration date (for an American-style option). If
the holder does not exercise his option, the option expires and he forfeits
the amount he paid for the option (the premium).
OTC Bulletin
Board (OTCBB): Quotation system developed for penny stocks and other
thinly traded securities. The system lists domestic and foreign equity
securities (including registered ADRs) that have at least one market
maker, are not listed on NASDAQ or a national securities exchange, and
are not listed on a regional exchange and eligible for consolidated
tape reporting. To be eligible for listing, foreign equity securities
must be fully registered with the SEC and domestic securities must be
providing current financial information to the SEC.
Penny stocks:
Speculative equity securities (excluding options and investment company
shares) with prices under $5 per share. Usually do not meet the listing
requirements for NASDAQ or the exchanges. Their sale through broker/dealers
is subject to certain rules as to approval of customers, maintenance
of information to support quotations, distribution of account statements,
and disclosure of risk, quotations, and compensation.
Pink sheets:
A listing (on pink paper) of OTC securities (securities not listed
on an exchange) their quotes, and the firms that make the market.
Preemptive right:
A corporate shareholder's right to maintain his share of ownership
when new shares are sold through a rights offering.
Preferred stock:
A type of corporate stock with a stated dividend which must be paid
before the common stockholders may receive a dividend. A preferred stock
also has priority in liquidation over the common stock.
Price to Earnings
ratio: The ratio of the price of a common stock to its earnings
per share, often referred to as the P/E ratio. It is used to measure
how expensive a stock is, relative to its earnings.
Principal stockholder:
Any person or entity owning ten percent or more of the common stock
of the corporation.
Private placement:
A securities offering under Regulation D, which is not registered with
the SEC. The offering is generally made to a limited number of persons
who meet certain suitability standards.
Public Offering:
Securities offerings that are made to the general public.
Registration:
Process by which securities must be filed with the SEC. Registration
of new issues is covered under the Securities Act of 1933. Registration
of securities admitted to trading on a national securities exchange
is covered under the Securities Exchange Act of 1934.
Regulation A
offerings: Offerings of $1,500,000 or less that do not have to be
fully registered with the SEC.
Regulation D:
The federal regulation pertaining to private placements of offerings
to a limited number of people meeting certain suitability standards.
Private placements need not register with the SEC.
Restricted securities:
Securities that have been purchased directly from the issuer or an affiliate
of the issuer rather than through a public offering.
Reverse split:
Combine multiple stock shares into one share such that the stockholder's
equity (both in total and for the individual stockholder) remains unchanged,
but each stockholder holds fewer shares worth more each.
Rule 144: The
federal law regarding resale of securities without registration if the
securities are owned by affiliated persons or the securities are restricted.
Securities and
Exchange Commission: The federal agency that regulates the securities
markets and administers federal securities laws. Commonly known as the
SEC.
Securities Investor's
Protection Corporation (SIPC): Organization that insures customers
of brokerage firms in the event of the bankruptcy of a brokerage firm,
much the same way the FDIC insures customers of banks.
Selling short:
Selling a security or future that the seller does not own, either
to lock in a gain on a long position or to make a gain on an anticipated
decline in the market.
Stock Split:
Divide stock shares into multiple shares such that the stockholder's
equity (both in total and for the individual stockholder) remains unchanged,
but each stockholder holds more shares worth less each.
Tenants-in-common:
A joint account in which, if one party to the account dies, his or her
share goes to his or her estate, not to the surviving tenant(s)-in-common.
Treasury stock:
Stock that has been repurchased by the issuing corporation. It has no
voting rights, does not receive dividends, and is not used in calculating
earnings per share.
Venture capital:
Equity investment for a company not large enough to go public that is
supplied by partnerships set up to pool funds and invest in untried
companies, by wealthy individuals, or by large institutional investors.
Venture capitalists take on high risks in hopes of making extraordinary
returns on some of their investments.
Warrant:
A security that gives the holder the right to buy the common stock of
the issuer at a specified price for a period of time, usually years.
Working capital:
A corporation's current assets less its current liabilities.
Laura Anthony
is the founding partner of Legal & Compliance, LLC, a corporate
and securities law firm specializing in securities & regulatory
matters, business transactions, commercial litigation and entity formation.
She is also a member the NASD Dispute Resolution Board of Arbitrators
and can be reached at 800-341-2684; by e-mail at LauraAnthonyPA@aol.com
or contacted through the company’s web sites http://www.LegalAndCompliance.com
and http://www.MyWebLawyer.com.
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