ADR: See Alternative Dispute Resolution.
Alpha: A measure of performance on a risk-adjusted basis
Alternative Dispute Resolution: Processes and techniques that act as a means for disagreeing parties to resolve their dispute short of court litigation. Sometimes referred to as “ADR.”
Annuity: A financial product that is designed to accept and grow funds from an individual and then pay out a stream of payments to the individual at a later point in time.
Arbitration: A form of alternative dispute resolution (“ADR”) where the parties to a dispute refer their disagreement to one or more persons (“Arbitrators”) by whose decision they agree to be bound.
Arbitration Award: A determination on the merits by an arbitration tribunal in an arbitration. Sometimes referred to as an “Award.”
Arbitrator: An independent person or body officially appointed to settle a dispute.
Beta: A measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole
Blue Sky Law: A state law that regulates the offering and sale of securities to protect the public from fraud.
Boiler Room: A brokerage firm that uses high-pressure tactics to peddle speculative and/or fraudulent securities to investors.
Bond: A debt investment in which an investor loans money to an entity that borrows the funds for a defined period of time at a fixed interest rate.
Central Registration Depository: The securities industry online registration and licensing database maintained by FINRA. Also referred to as the “CRD.”
CFTC: See U.S. Commodity Futures Trading Commission.
Churning: Excessive trading by a broker in a client’s account for the purpose of generating commissions and fees.
Claimant: See Plaintiff. In arbitration, the plaintiff is typically referred to as the “Claimant.”
Class Action: A form of lawsuit in which one or several persons sue on behalf of a larger group of persons.
Closed-End Fund: A mutual fund that raises a fixed amount of capital through an initial public offering (“IPO”) of a set number of shares. The net asset value (“NAV”) of a closed-end fund fluctuates according to market forces (i.e., supply and demand) as well as the changing values of the securities in the fund’s holdings.
Commodity: A basic good used in commerce that is interchangeable with other goods of the same type.
Complainant: See Plaintiff.
CRD: See Central Registration Depository.
Defendant: The party accused of committing a wrong in a lawsuit. Also sometimes referred to as a “Respondent.”
Delta: The ratio comparing the change in the price of the underlying asset to the corresponding change in the price of a derivative.
Derivative: A security whose price is dependent upon or “derived” from one or more underlying assets.
Discovery: The pre-trial phase of a lawsuit or arbitration in which each party can obtain evidence from the opposing party, through the rules of the forum in which the lawsuit or arbitration is brought, by means of requests for answers to interrogatories, requests for production of documents, requests for admissions, and depositions. Discovery can be obtained from non-parties by means of subpoenas.
ETF: See Exchange-Traded Fund.
Exchange-Traded Fund: A security often referred to by its acronym, “ETF,” that tracks an index, a commodity, or a basket of assets like an index fund, but which trades like a stock on an exchange. ETFs experience price changes throughout the day as they are bought and sold.
Fiduciary: A legal or ethical relationship of trust between two or more parties. Typically, a fiduciary prudently takes care of money for another person.
Financial Industry Regulatory Authority, Inc.: A private corporationoften referred to by its acronym, “FINRA,” which acts as a self-regulatory organization for the securities industry. FINRA was formed in 2007 when the National Association of Securities Dealers (“NASD”) was combined with the regulation committee of the New York Stock Exchange (“NYSE”). FINRA is the largest independent regulator of securities firms doing business with the public in the United States and oversees approximately 4,200 brokerage firms, 62,300 branch offices, and 633,000 brokers.
FINRA: See Financial Industry Regulatory Authority, Inc.
Form RE-3: A form required to be submitted by brokerage firms to report disciplinary action, litigation, arbitration, and complaints against the firms and their associated persons.
Form U4: The form used by registered representatives of broker-dealers and investment advisors to register with FINRA and the states.
Form U5: The form used by registered representatives of broker-dealers and investment advisors to terminate their registration in a particular jurisdiction.
Front Running: The practice of a broker trading an investment based on information from his firm’s analyst department before his or her clients have been given the information.
Futures: A financial contract obligating the buyer to purchase an asset (or the seller to sell an asset), such as a physical commodity or a financial instrument, at a predetermined future date and price.
Gamma: The rate of change for delta with respect to the underlying asset’s price.
Hedge: An investment or strategy used to reduce the risk of adverse price movements in an asset.
IAR: See Investment Advisory Representative.
Initial Public Offering: The first sale of stock by a private company to the public. Also sometimes referred to as an “IPO.”
Investment Advisors Act of 1940: A piece of legislation passed in 1940 that, among other things, defined the role and responsibilities of an investment advisor. Also sometimes referred as “the ’40 Act.”
Investment Advisory Representative: A person who works for an investment advisory company and whose main responsibility is to provide investment-related advice. Sometimes referred to as an “IAR.”
IPO: See Initial Public Offering.
Know Your Customer: A standard form in the investment industry that ensures investment advisors know detailed information about their clients, including, among other things, their objectives, risk tolerance, investment knowledge, and financial position.
KYC: See Know Your Customer.
Litigation: A law suit brought in a court of law in which a plaintiff demands a legal or equitable remedy for damages incurred as a result of a defendant’s actions.
Leverage: The use of various financial instruments or borrowed capital, such as margin, to increase the potential return of an investment.
Margin: Borrowed money that is used to purchase securities.
Mark to Market: The accounting act of recording the price or value of a security, portfolio or account to reflect its current market value rather than its book value.
Mark-Up: The difference between an investment’s lowest current offering price among dealers and the higher price a dealer charges a customer. Mark-ups occur when dealers act as principals (buying and selling securities from their own accounts, at their own risk), as opposed to brokers (receiving a fee for facilitating a transaction).
Mediation: A form of alternative dispute resolution (“ADR”) where a third party assists parties to a dispute to negotiate a settlement among themselves.
Mediator: A person who attempts to help parties involved in a dispute negotiate a settlement among themselves.
Modern Portfolio Theory: A theory on how risk-averse investors can construct portfolios to optimize or maximize expected return based on a given level of market risk, emphasizing that risk is an inherent part of higher reward.
Mutual Fund: An investment vehicle that is made up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments, and similar assets. Mutual funds are operated by money managers, who invest the fund’s capital and attempt to produce capital gains and income for the fund’s investors.
NASD: See National Association of Securities Dealers.
National Association of Securities Dealers: A private corporation often referred to by its acronym, “NASD,” which acted as a self-regulatory organization for the securities industry prior to 2007. In 2007, NASD combined with the regulation committee of the New York Stock Exchange (“NYSE”) to form the Financial Industry Regulatory Authority, Inc. (“FINRA”).
National Futures Association: The independent self-regulatory organization for the U.S. futures market. Also sometimes referred to as the “NFA.”
NAV: See Net Asset Value.
Net Asset Value: A mutual fund’s price per share or exchange-traded fund’s (“ETF”) per-share value. In both cases, the per-share dollar amount of the fund is calculated by dividing the total value of all the securities in its portfolio, less any liabilities, by the number of fund shares outstanding.
NFA: See National Futures Association.
Open-End Fund: A mutual fund that issues and redeems shares on demand, whenever investors put money into the fund or take it out. The more investors buy a particular open-end fund, the more shares there will be. There is no limit to the number of shares an open-end fund can issue. Nor is the value of each individual share affected by the number outstanding, since net asset value (“NAV”) is determined solely by the change in prices of the stocks or bonds the fund owns, not the size of the fund itself.
Option: A financial product that represents a contract sold by one party (option writer) to another party (option holder). The contract offers the buyer the right — but not the obligation — to buy (call) or sell (put) a security or other financial asset at an agreed-upon price (the strike price) during a certain period of time or on a specific date (exercise date).
Painting the Tape: A form of market manipulation whereby market players attempt to influence the price of a security by buying and/or selling it among themselves so as to create the appearance of substantial trading activity in the security.
Penny Stock: A stock that trades at a relatively low price and market capitalization, usually outside of the major market exchanges.
Plaintiff: The party who initiates a lawsuit. Also sometimes referred to as a “claimant” or “complainant.”
Ponzi Scheme: A fraudulent investment operation that pays returns to its investors from their own money or the money paid by subsequent investors, rather than from profit earned by the individual or organization running the operation.
Pump and Dump: A scheme that attempts to boost the price of a stock through recommendations based on false, misleading, or greatly exaggerated statements. The perpetrators of the scheme, who already have an established position in the company’s stock, sell their positions after the hype has led to a higher share price.
R-Squared: A statistical measure that represents the percentage of a fund or security’s movements that can be explained by movements in a benchmark index.
Real Estate Investment Trust: A security that sells like a stock on the major exchanges and invests in real estate directly, either through properties or mortgages. Also sometimes referred to as a “REIT.”
Registered Investment Advisor: An advisor or firm engaged in the investment advisory business and registered either with the U.S. Securities and Exchange Commission (“SEC”) or state securities authorities.
Registered Representative: A person who works for a brokerage company that is licensed by the U.S. Securities and Exchange Commission (“SEC”) and acts as an investment advisor for clients trading investments such as stocks, bonds, and mutual funds.
REIT: See Real Estate Investment Trust.
Respondent: See Defendant. In arbitration, the defendant is typically referred to as the “Respondent.”
Rho: The rate of change between an option portfolio’s value and the interest rate, or sensitivity to the interest rate.
SEC: See U.S. Securities and Exchange Commission.
Secondary Offering: The issuance of new stock for public sale from a company that has already made its initial public offering (“IPO”).
Securities Act of 1933: A federal piece of legislation enacted as a result of the market crash of 1929. The legislation had two main goals: (1) to ensure more transparency in financial statements so investors can make informed decisions about investments, and (2) to establish laws against misrepresentation and fraudulent activities in the securities markets. Also sometimes referred to as “the Securities Act” or “the ’33 Act.”
Securities Exchange Act of 1934: A federal piece of legislation created to provide governance of securities transactions on the secondary market (after issue) and regulate the exchanges and broker-dealers in order to protect the investing public. Also sometimes referred to as “the Exchange Act” or “the ’34 Act.”
Security: A financial instrument that represents: an ownership position in a publicly-traded corporation (stock), a creditor relationship with governmental body or a corporation (bond), or rights to ownership as represented by an option. A security is a fungible, negotiable financial instrument that represents some type of financial value.
Selling Away: When a broker solicits an investor to purchase securities not held or offered by his brokerage firm.
Sharpe Ratio: A ratio developed by Nobel laureate William F. Sharpe to measure risk-adjusted performance. The Sharpe ratio is calculated by subtracting the risk-free rate — such as that of the 10-year U.S. Treasury bond — from the rate of return for a portfolio and dividing the result by the standard deviation of the portfolio returns.
Solicited Trade: An investment transaction (e.g., to buy or sell) initiated by a+ financial advisor.
Standard Deviation: A measure of the dispersion of a set of data from its mean. Standard deviation is also known as historical volatility and is used by investors as a gauge for the amount of expected volatility.
Stock: A type of security that signifies ownership in a corporation and represents a claim on part of the corporation’s assets and earnings
Suitability: The requirement that an investment or investment strategy meets the objectives and means of an investor.
Tenants In Common: The co-owners of an undivided interest in real property. Tenants in common each own a separate and undivided interest in the same real property and each has an equal right to the possession and use of the property. Upon the death of one tenant, his or her undivided interest passes to heirs through a probate proceeding; the interest does not pass to another tenant in common unless the surviving co-owner is an heir or a purchaser. Also sometimes referred to as a “TIC.”
Theta: The rate of change between an option portfolio and time, or time sensitivity.
TIC: See Tenants In Common.
Twisting: The act of inducing or attempt to induce a life insurance policy owner to drop an existing insurance policy and to take another policy that is substantially the same for the purpose of generating commissions and fees.
Unsolicited Trade: An investment transaction (e.g., to buy or sell) initiated by an investor.
U.S. Commodity Futures Trading Commission: An independent U.S. federal agency established by the Commodity Futures Trading Commission Act of 1974 to regulate the commodity futures and options markets Also sometimes referred to as the “CFTC.”
U.S. Securities and Exchange Commission: A government commission created by Congress to regulate the securities markets and protect investors. Also sometimes referred to as the “SEC.”
Vega: The rate of change between an option portfolio’s value and the underlying asset’s volatility – in other words, sensitivity to volatility.