Glossary of Selected Terms
Arbitrage: Simultaneous purchase and sale of the same stock, bond, currency, or commodity in different places for a profit. An item is bought generally at a lower price in one market and sold at a higher price in another, making sure that the price differential in both markets exceeds the transaction costs.
Bear Market: A market for investments in which price trends are generally downward.
Blue Chip Stock: Security of a nationally known company that has a long record of profit, growth, uninterrupted dividend payments, quality management, and good products.
"Blue Sky" Statutes: State securities laws. The name is derived from a state court decision that described a particular securities offering as having "no more substance than the blue sky above."
Bond: A long-term debt instrument issued by a corporation or government entity in return for a loan; the issuer promises to pay the bondholder interest at a specified rate for a specified time period, and then to repay the loan at the expiration of the bond period.
Bull Market: A market for investments in which price trends are generally upward.
Churning: Excessive trading in a customer's account intended only to increase a broker/dealer's profits, in disregard of the customer's best interests.
Credit Default Swap: A credit derivative contract between two parties, where the buyer makes periodic payments to the seller over an agreed maturity period of the swap, in exchange for the seller's commitment to a payoff if a third party defaults. Intended for use as insurance against default on credit asset, but also often used for speculation.
Derivative: A financial contract, the value of which is based on or "derived" from one or more underlying assets or indexes of asset values. The most common types of derivatives are futures contracts, forward contracts, options (puts and calls), and swaps. Derivatives have generally been used as instruments to hedge risk, but they are also used for speculation. For additional information, see Rena S. Miller, Introduction to Financial Services: Derivatives (Congressional Research Service, Feb. 3, 2015, https://www.crsreports.com/download?hash=5ed3d2b5266d57ebe99bb00df00e57a77897772baa3904756e44e6a323198e67.
EDGAR: The SEC's free public database of corporate information, allowing research of a public company's financial information and operations through registration statements, prospectuses and periodic reports filed on Forms 10-K, 10-Q, and 8-K.
Futures: Contracts to buy or sell a specific amount of some product (stocks, bonds, or commodities) at a specific price on a specific date in the future.
Margin: The percentage of the full price paid for a security purchased through a credit (or margin) account with a broker/dealer.The security is pledged as collateral for the balance owed to the broker. The Federal Reserve Board regulates permissible margins on purchases of securities; minimum maintenance balances required in margin accounts are set by the Exchanges.
Mortgage-Backed Security: A type of pass-through security, secured by homeowners' mortgages bundled together and sold in shares, that became a commonly-used investment vehicle in the late 20th Century.
No-Action Letters: Entities may request "no-action" letters from the SEC to clarify whether a particular product, service, or action would constitute a violation of federal securities laws. "No-action" letters analyze particular fact situations, discuss applicable laws and rules, clarifies the legality of certain activities, and in appropriate circumstances indicates that SEC staff would not recommend initiation of an enforcement action against the entity.
Offering: A new distribution of shares offered to the public, also known as a public offering.
Option: A contract that gives the holder of the option the right to buy (call option) or sell (put option) a fixed amount of a security at a specific price anytime before the stated expiration date. If the holder does not exercise the option by the stated date, the option expires and the price paid for the option (the premium) is forfeited.
Over-the-Counter Market: The market for securities that are not listed on an Exchange.
Pass-Through Security: A debt obligation (often a note secured by a mortgage), purchased by an intermediary, which is then packaged or "pooled" into a new financial product backed by the underlying security and sold in the open market.
Penny Stocks: Speculative equity securities (excluding options and investment company shares) with prices under $5 per share. Penny stocks usually do not meet the listing requirements for NASDAQ or the Exchanges, and their sale through broker/dealers is subject to special rules.
Price to Earnings Ratio: The ratio of the price of a common stock to its earnings per share, used to measure its profitability.
Prospectus: The disclosure document for an offering registered with the SEC, issued on the effective date, when the offering is released.
Securities Investor's Protection Corporation (SIPC): Organization that insures customers in the event of the bankruptcy of a brokerage firm, much the same way the FDIC insures customers of banks. The SIPC is a nonprofit corporation, not an agency of the U.S. government, supported by NASD-required assessments from virtually all brokerage firms.
Security: Generic term for a debt, an ownership interest, or a related right such as bonds, stocks, and similar documents, which provides an interest in or a claim against an enterprise and its resources.
Self-Regulatory Organizations (SROs): Private organizations owned and operated by their members and to whom the SEC delegates much of its authority to oversee both securities markets and participants in those markets. The SEC must approve all rules made by the SROs.
Short: In options, the position of the writer of an option. In securities, the position of a seller of stock he does not own, but hopes to buy later if necessary.
(definitions taken from the Center for Futures Education SecuritiesGlossary.com.
Securities Regulation, Louis Loss (5th ed. 2014) (KF1439 .L6) (two-vol. set); available on LexisNexis (FEDSEC;LOSS). The print edition is updated twice a year, while the database is updated only annually
Treatise on the Law of Securities Regulation, Thomas Lee Hazen (7th ed. 2016) (KF1439 .H39) (multi-vol. set); part of West's Practitioner Treatise Series.
Soderquist on Corporate Law and Practice, Linda O. Smiddy (4th ed. 2012) (KF1414 .S 622) (looseleaf); part of Practising Law Institute's Corporate and Securities Law Library).
Bromberg and Lowenfels on Securities Fraud, Alan Bromberg & Lewis D. Lowenfels (2d ed. 1994) (KF1070 .B7) (six-vol.looseleaf); in-depth analysis with extensive bibliography of cases, law review articles, and American Law Reports (ALR) annotations.
Broker-Dealer Operations and Regulation Under Securities and Commodities Laws, Jerry W. Markham (2d ed. 2002) (KF1071 .M36) (multi-vol. looseleaf); a practice-oriented, step-by-step guide to transactional work and securities litigation, with checklists, sample documents, and expert advice.
Broker-Dealer Regulation, Clifford E. Kirsch (2d ed. 2011) (KF1071 .B76) (looseleaf); part of Practicing Law Institute’s Corporate and Securities Law Library.
Investment Adviser Regulation: A Step-by-Step Guide to Compliance and the Law, Clifford E. Kirsch (3d ed. 2011) (KF1072 .K572); also in PLI's Corporate and Securities Law Library.
For additional titles, click here.
A vital service to the public in helping to prevent fraud against small investors and to make investment professionals accountable when customers are harmed, and excellent training for law students in securities law:
Pace Investor Rights Clinic Podcast: Modest Means New Yorkers Have Pro Bono Advocate in Wall Street Disputes (December 21, 2012).