GelberLaw Glossary, An Encyclopedic Dictionary of the
securities industry ©, strives to provide simple, clear, accurate, in
depth definitions and explanations of words, expressions and
terminology commonly used by lawyers and securities industry
Some terms are subject to interpretation, so please consult your own lawyer (or accountant or securities industry professional) if a definition is important to your particular circumstance. Some terms may have multiple meanings, not all of which are examined. (Look up the word “set” in an unabridged dictionary.) Please check back frequently, since this page is updated, revised and expanded on a regular basis.
– is basically a contractual relationship between a customer
and a broker. The relationship enables the broker to buy and
sell securities on the approval of and for the account of the customer
and to tend to all the administrative functions involved in such
transactions, such as maintaining balances, holding the securities,
issuing confirmations of transactions, issuing account statements among
– another name for the broker who takes customer calls,
offers advice to and follows customer instructions to buy or sell
securities in your account. Some brokerage firms call their
brokers registered representatives. This reflects the registration that
all brokers are required to have after passing certain tests and
obtaining the approval of NASD (and perhaps the New York Stock
Exchange) and various state securities regulators. In other words,
brokers must be licensed.
Account Statement – a piece of paper that lists all the transactions that took place in an account as well as the holdings, interest and dividends paid and cash available or due. They usually issue once a month, but if an account is inactive, they may only issue once every three months. An account statement is an official record of the status and balance of an account on the date it is issued. It is important to review it and to challenge any error, preferably in writing and preferably immediately.
– this is a class of investor specifically defined in the
federal securities laws. The official definition says that an
accredited investor is one who either has a net worth of at least $1
million dollars (can be joint with a spouse) or must have earned at
least $200,000 in each of the two most recent years or had joint income
with a spouse of more than $300,000 in each of those years and has a
reasonable expectation of reaching the same income level in the current
year. Some types of investments, such as certain private
placements or certain limited partnerships, among others, require that
investors meet this standard under certain circumstances.
Accrual Bonds – these bonds do not provide periodic interest payments. They accrue the interest until the bonds mature. They provide a way to lock in interest rates. See Zero Coupon Bonds.
– an account that engages in many
transactions. Each brokerage firm may have its own benchmark.
Active accounts are likely to receive monthly account statements,
possible commission discounts, or other benefits such as access to free
streaming quotes. Accounts that have no activity for years may face
problems, such as the imposition of inactive fees, or even be viewed as
abandoned and the proceeds sent to the state.
Adjustable Rate Preferred Stock – less volatile prices than fixed rate preferred stock, ARPS is a type of preferred stock with an adjustable dividend. The dividend often adjusts quarterly based on changes in some money market rate, like a Treasury bill rate. These are also called floating rate or variable rate preferred.
Adjusted Basis – Capital gains and losses are measured from the difference between the price paid on purchase and the price received on sale. The purchase price is called the basis. Basis gets adjusted to account for commissions and stock splits. See “Basis”. Consult your accountant.
Advance – simply meaning a rise in price, as “the market advanced 100 points today.”
Affidavit – a declared voluntary written (printed) statement of facts sworn to by the person making the declaration, under oath taken in front of a person authorized to administer oaths, such as a notary public. In some circumstances (but not in all circumstances) an affidavit may be admitted into evidence in a securities arbitration case.
Affiliate – companies are deemed affiliated when (a) both are subsidiaries of a common parent company or (b) when one owns less than a majority of the voting stock of the other. Each state has its own laws relating to corporations and the definition of affiliate may be a matter of statute that differs from state to state. Various statutes, such as The Investment Company Act of 1940, the Federal Reserve Act and others, have specific definitions and usages of the term.
Afghanis – the units of currency of Afghanistan.
After-Hours Trading – securities can trade after (or before) the regular trading hours of organized exchanges. Dramatic news, positive or negative, often triggers a high volume of such trading.
Aftermarket – After a security is originally issued, such as a stock in an initial public offering (IPO), the securities trade on the various exchanges based on perceived pluses and minuses affecting the issuer of the securities. This trading is called aftermarket, or secondary market, trading. So, if XYZ Corporation raises money in the primary market by selling its stock to the public for the first time in an IPO, after the IPO, XYZ stock then trades in the secondary, or aftermarket based on principles of supply and demand, which are affected by good news and bad news about XYZ Corporation. In other words, most stock transactions are aftermarket transactions.
Against the Box - The act of short selling securities you already own. This results in a neutral position where your gains in a stock are equal to the losses. For example, if you own 1000 shares of XYZ and you tell your broker to sell short 1000 shares of XYZ, you have shorted against the box. Alternatively, you can achieve the same effect by buying a put option on the stock, which may or may not be less expensive than "shorting against the box". The primary rationale for shorting against the box is to delay a taxable event. Let's say that you have a big gain on your XYZ shares, and believe XYZ has peaked for the foreseeable future and you want to sell. However, the tax on the gain this year may leave you under-withheld for the year and perhaps subject to penalties. Or you are projecting lower personal income next year, putting you in a lower bracket and it would be beneficial to take the gain next year. The “box” is where the securities are located physically for safekeeping. Always consult your accountant for changes in tax laws that relate to such strategies.
Agency transaction – transactions at a brokerage firm are either agency transactions or principal transactions. In an agency transaction, the broker acts as a middleman between the buyer and seller, and takes a commission for the service. The broker takes no financial risk is such a transaction, all such risk being for the account of the client.
Aggregate Exercise Price - The strike price of an option (either a put or a call) times the number of underlying securities in the option contract (usually 100 shares per contract). When calculating the aggregate exercise price, the price, called the “premium”, paid or received on contracts (at 100 shares per option contract, equating to 1000 shares) of XYZ at $50 would have an aggregate exercise price of $50,000 if exercised before the option contract expires. In common parlance the phrase “option contract” is shortened to either option or contract. (“I bought ten call contracts” is the same as saying “I bought ten call options.”)
Air Pocket Stock – a stock that has an abrupt drop in price following the announcement of bad news or poor earnings results. Shareholders rush to sell and few buyers can be found. Likened to an airplane dropping in an air pocket.
Alligator Spread – When a broker arranges a position consisting of a combination of put options and call options that collectively create commissions so high that it is almost impossible to turn a profit for the client regardless of which direction the underlying security moves. The term originates from the idea of the spread "eating the investor alive." This is related to the concept of “churning”.
All or None – An instruction to a broker. For example, if you want to buy 1,000 shares of XYZ Corporation at a limit price of $50.00 per share, and you give an “all or none” instruction, no part of the order will be filled unless it can all be filled. Without an all or none instruction, the order can be filled piecemeal - every time the price reaches $50 or below, shares will be purchased until the whole order is filled.
American Arbitration Association (AAA)– Founded in 1926, the AAA is a private company offering a wide range of alternate dispute resolution services, including education and training, publications and mediation, arbitration, elections and other out-of-court settlement techniques. The AAA - with 34 offices in the United States and Europe and 59 cooperative agreements with arbitral institutions in 41 countries - provides a forum for the hearing of disputes, case administration, tested rules and procedures, and a roster of neutrals to hear and resolve cases.
Securities arbitrations are conducted pursuant to the AAA’s Commercial Arbitration Rules and Mediation Procedures (Including Procedures for Large, Complex Commercial Disputes) and its Supplementary Procedures for Securities Arbitration.
Brokerage firms in the past used to include a AAA forum option in the arbitration agreement clauses of their customer agreements, but in recent years this option has largely been eliminated, and most securities arbitrations are held at NASD. While the fees charged by NASD for arbitration are high, with member firms being charged a surcharge, fees at AAA can be very high because, in addition to filing fees, it imposes a maintenance fee related to the length of time the case is pending.
Arbitrage –also know as riskless arbitrage, describes the simultaneous purchase and sale of a security trading on different markets or exchanges in order to take advantage of small price differentials / discrepancies that may exist as a result of certain market inefficiencies. Inefficiencies can result from untimely reporting of transactions or exchange rates, if the two markets are in different countries. For example, an investor buys a stock in the United States and sells (or shorts) it in Europe, when the price has not adjusted for foreign exchange. While distinct from “Risk Arbitrage” and “Index Arbitrage”, all forms of arbitrage involve taking advantage of small, rather evanescent price discrepancies.
Arbitration – is an alternative to suing in court when you have a dispute, usually over money. NASD administers most securities arbitration in the United States. Whether you are bringing a claim or defending a claim, NASD will charge fees for their services. You can be represented by a lawyer and each side gets to present its side of the story to an arbitration panel, which can award money or deny claims by issuing an arbitration award. Arbitration is available for disputes between customers and brokers, and also between or among brokers and brokerage firms. NASD Arbitration is governed by a set of rules called the Code of Arbitration Procedure.
Ask – the lowest round lot price at which a dealer or market maker will sell a security. The ask price (also known as the "offer" [or “offering”] price) will almost always be higher than the bid price. If the bid and the ask are identical, the market is said to “locked” for that brief moment. Market makers make money on the difference between the bid price and the ask price. That difference is called the "spread". The term is flexible in that it can be expressed as the “asked price” or the “asking price” or the “ask price” or simply the “ask.” If XYZ Corp. is currently trading, an inquiry to a broker about a quote could generate a statement like: “$49.78 by $49.84, last $49.79,” meaning the bid is $49.78, the ask is $49.84 and the last trade was $49.79 per share.
Ask yield - The return an investor would receive on a United States Treasury security if he or she paid the ask price.
Auction Rate Preferred Stock – ARPS is a type of floating or adjustable-rate preferred security whose dividend yield is determined in a Dutch auction process, held in short term regular intervals, typically every seven or 28 days, by corporate or institutional bidders. The rate thus established is fixed until it is reset at the next auction. ARPS is issued by closed end mutual funds to create leverage and thereby boost yield. A Dutch auction is where one seller offers a product at a high price, which is reduced by the bids of many buyers until a price attractive to enough buyers is reached. (The U.S. Department of the Treasury uses this system to sell its debt obligations.) If no bidders emerge, the auction is said to “fail”. This failure is not, however a default on the security being auctioned. The majority of closed-end fund ARPS carries a AAA credit rating due to asset coverage and other maintenance requirements imposed by credit rating agencies, with which a closed-end fund must comply in order to maintain a favorable credit rating for its ARPS. Under the Investment Company Act of 1940, closed-end funds are subject to additional restrictions, including a requirement that the market value of the assets of the underlying closed-end fund exceed the amount of ARPS outstanding by at least two times.
Average Daily Volume – is exactly what the term suggests: the cumulative number of shares traded in a given time period, divided by the number of trading sessions in that period. One million shares traded over a ten-day period is an average daily volume of one hundred thousand shares. Time periods used for calculating average daily volume vary, although monthly and annual average daily volume figures are fairly common. Technical analysts compare current daily volume to average daily volume in an effort to glean useful patterns. Stocks tend to trade at greater than average daily volume in sessions preceding known future events, such as earnings announcements and dividend declarations. In the absence of known future corporate actions, strong average daily volume can be interpreted to mean that an unforeseen event is imminent. Large companies tend to trade at higher average daily volume than smaller companies. If volume is too low, it may be difficult (or impossible) to close out a long position.
Award – Unlike courtroom litigation, which can result in a judgment, securities industry arbitrations result in an “Award”. The Award, signed by members of the Panel of Arbitrators (or the sole Arbitrator in a “small claim” arbitration) has no strictly legal enforceability. If the Award is against a brokerage industry member firm (or person associated with a member), the enforceability is derived from the threat of license revocation for failure to comply with the Award within 30 days. The arbitration statutes of most states, as well as the Federal Arbitration Act, have provisions to permit certain efforts to “vacate” an Award. The ability to vacate an Award is limited to very narrow circumstances, and hence most such efforts fail. Once a court confirms an Award, it becomes an enforceable judgment.