Glossary of Terms
These are some of the most frequently used terms in the U.S. securities industry, listed alphabetically.
Alternative Trading System (ATS)
A trading system that brings orders into the Nasdaq market. See also Electronic Communications
Network (ECN).
American Depositary Receipt (ADR)
An ADR is a U.S. security, created by a U.S. bank, which is a repackaged form of a non-U.S. security.
The ADR itself acts as evidence of ownership of a specified number of shares of the non-U.S.
security, while the underlying shares are held in a depositary in the issuing company’s home country.
U.S. investors may buy shares in the non-U.S. company in the form of an ADR. The certificate,
transfer, and settlement practices for ADRs are identical to those for U.S. securities.
Amivest liquidity ratio
A type of liquidity measurement which calculates the dollar value of trading associated with a one
percent change in price. The Amivest liquidity ratio represents the ability of the market in a particular
security to absorb a reasonable amount of trading without significant fluctuations in price. A high
value means that large amounts of stock can be traded with little change in price.
assets
Any possessions that have value in an exchange.
auction market
Auction markets, like The American Stock Exchange and the New York Stock Exchange, are stock
exchanges where buyers and sellers meet through an intermediary, called a Specialist. A Specialist
operates in a centralized location or “floor,” and primarily matches incoming orders to buy and sell
each stock.
best-efforts underwriting
When an investment bank undertakes to try to sell a company’s shares as best it can, but without any
up-front financial commitment.
bid/ask spread
The difference between the price at which a Market Maker is willing to buy a security (bid) and the
price at which the firm is willing to sell it (ask).
block trade
A purchase or sale of stock in a large quantity, generally 10,000 shares or $200,000 (or more).
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blue-sky laws
State laws requiring issuers of securities to register their offering with the state before it can be sold to
its residents. Most blue-sky laws include provisions relating to fraudulent activities and the licensing
of people selling securities. Securities listed on The Nasdaq National Market, which are subject to
higher qualifications standards, are exempted by federal law from registration requirements under
state blue-sky laws, as are those listed on some national securities exchanges.
bring-down comfort letter
The update to the comfort letter issued as a condition of closing an IPO offering. The bring-down
letter reaffirms the detailed comfort letter issued when the offering becomes effective.
broker
An individual or firm who acts as an intermediary between a buyer and seller, usually charging a
commission.
capital commitment
The financial investment of Market Makers in maintaining inventories of the stocks in which they
make markets.
circuit breaker
A procedure that temporarily halts trading on all U.S. stock markets when the Dow Jones Industrial
Average falls below a certain point-decline threshold. The pause is designed to allow time for the
markets to absorb the news that precipitated the decline. The point-decline thresholds at which
trading is halted change every quarter, so that those thresholds may accurately reflect the current
market. The thresholds are percentage-based levels of 10%, 20%, and 30% declines in the Dow.
The actual numerical points are determined based on the state of the market each calendar quarter.
co-manager
See “co-underwriter.”
comfort letter
A letter provided by a company’s independent auditors detailing procedures performed at the request
of the underwriters. The letter supplements the underwriters’ due diligence review.
co-underwriter
Almost all public offerings are co-managed by a co-underwriter, or one of a team of investment
bankers who assumes the risk of bringing a new securities issue to market.
common stock
A class of securities representing ownership and control in a corporation that may pay dividends, as
well as appreciate in value.
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corporate financing review
A service of NASDR that ensures that the underwriting terms, conditions and fees of public
companies are fair and in the interests of the issuing company and its investors.
corporate governance standards
The standards relating to the internal organization of public companies.
cost of capital
The rate that a company must pay for its capital or the minimum return that is required to maintain
the market value of a company’s common stock. Cost of capital reflects the market’s perception of the
risk associated with a company’s common stock.
CUSIP number
A unique nine-character alphanumeric code assigned to a security by Standard & Poor’s Corporation,
which appears on the face of each share certificate. The number is used to speed up the clearance and
settlement process. CUSIP stands for Committee on Uniform Security Identification Procedures.
dealer
Any person or company in the business of buying and selling securities for his or her own account,
through a broker or otherwise.
decimalization
Quoting in decimals (dollars and cents) makes securities pricing easier to understand and market
information more accessible to investors.
depositary bank
When a company decides to issue American Depositary Receipts (ADRs), it appoints an authorized
depositary bank to administer the ADR program; normally part of a large U.S. banking institution or
trust company.
distribution capability
An investment banker/underwriter’s ability to sell shares.
dividend
Distributions to stockholders of cash or stock declared by the company’s board of directors.
dividend notification
A requirement that companies notify the Uniform Practice Department of The Nasdaq Stock Market
at least ten days in advance of the record date of a stock dividend, so that Nasdaq can set the
ex-dividend date (date on which the seller will take the dividend).
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Glossary of Terms
downtick
A transaction executed at a price lower than the preceding transaction in that security, or a new quote
registered at a lower price than the preceding quote in that security.
due diligence
A thorough investigation of a company that is preparing to go public, undertaken by the company’s
underwriter and accounting firm.
excess spread policy
The NASD requirement that prohibits Market Makers from entering quotations on Nasdaq that
would exceed the prescribed maximum allowable spread.
EDGAR
The SEC requires all public companies (except foreign companies and companies with less than $10
million in assets and 500 shareholders) to file registration statements, periodic reports, and other
forms electronically through EDGAR (Electronic Data Gathering, Analysis, and Retrieval system.)
EDGAR performs automated collection, validation, indexing, acceptance, and forwarding of
submissions by companies and others who are required by law to file forms with the U.S. Securities
and Exchange Commission (SEC).
Electronic Communications Network (ECN)
Trading system which brings additional customer orders to the market, but does not commit capital.
To trade on Nasdaq, ECNs must be certified with the SEC and registered with Nasdaq and NASDR.
As Nasdaq market participants, ECNs display either one-sided or two-sided quotes, which reflect
actual orders, and provide institutions and Market Makers with an anonymous way to enter orders
for stock into the marketplace.
equity
The ownership interest of stockholders in a company. Also, the excess of the market value of
securities over debit balances in a margin account.
exchange
An organized marketplace in which stocks, common stock equivalents, and bonds are traded by
members of the exchange, acting both as brokers and dealers/traders. Through exchanges, brokers
and dealers meet to execute orders from institutional and individual investors and to buy and sell
securities. Also known as a stock exchange.
financial printer
An experienced printer familiar with SEC regulations governing the graphic presentation of a prospectus.
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firm commitment underwriting
When an investment bank commits its capital by buying a company’s securities outright, becoming
the owner of all securities that are not resold to the public.
firm quotation
The NASD requirement that a Market Maker who receives an order from another broker/dealer execute
the order at its displayed price and size. Minimum quotation size requirements are fixed by rule.
Form F-1
An SEC form registering the securities of a non-U.S. company to be issued as part of a public offering.
Other SEC forms may be used as part of a non-U.S. offering but the Form F-1 is the most common.
Form 6-K
The SEC’s form for non-U.S. issuers to make periodic reports.
Form 20-F
An SEC registration statement and annual report form filed by non-U.S. companies. The 20-F can be
used to satisfy 34 Act registration for seasoned securities when they enter the U.S. market, and also
serves as the annual filing for all non-U.S. companies listed in the U.S.
GAAP (Generally Accepted Accounting Principals)
Rules, conventions, standards, and procedures that are widely accepted among financial accountants.
Since 1973, GAAP doctrine has been established by the Financial Accounting Standards Board
(FASB), an independent, self-regulating organization.
green shoe
A provision in an underwriting agreement which states that if there is exceptional public demand for
a company’s securities, an issuer will authorize additional shares for distribution by the syndicate.
haircut
A deduction in the market value of securities being held by brokerage firms, when those securities are
being used to calculate their net capital. The haircut prevents firms from overvaluing stocks in order
to inflate their own net worth. The size of a haircut varies with the type of security held.
initial public offering (IPO)
A company’s first sale of stock to the public. Companies seeking outside equity capital and a public
market for their stock will make an initial public offering.
inside quote
The highest bid and lowest offer prices among all competing Market Makers in a Nasdaq security.
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Glossary of Terms
investment banking, securities business
The business carried on by a broker or dealer; a business that deals in government or municipal
securities; a business that underwrites or distributes securities issues; a business that buys or sells
securities for itself or on the account of others. The definition does not include banks or bank
departments.
last-sale reporting
A notification to The Nasdaq Stock Market of the price and number of shares involved in a
transaction in a Nasdaq security. This notification must be made within 90 seconds of the execution
of an order.
letter of intent
A letter that formalizes the relationship between an underwriter and a company preparing to go
public. The letter of intent outlines the underwriter fees, ranges for stock prices, and other terms of
the underwriter’s agreement.
liquidity
The liquidity of a stock is the ease with which it can be bought and sold on the market, without
dramatic fluctuation in price.
liquidity ratio
A measure of the trading volume of a security associated with a one percent change in its price. The
higher the ratio, the more shares that can be traded with little change in price. (See “Amivest
Liquidity Ratio.”)
listing and maintenance agreement
A written contract between a securities market and an issuing company. In it, the issuing company
agrees to meet and maintain the market’s qualitative and quantitative listing standards.
market capitalization
The price of a stock multiplied by the total number of shares outstanding. Also, the market’s total
valuation of a public company.
Market Makers
The NASD member firms which buy and sell Nasdaq securities at prices they display on Nasdaq
screens. Each firm that becomes a Market Maker registers with the NASD and follows various NASD
operational and regulatory obligations.
Market Surveillance
The department responsible for monitoring, investigating and deterring unfair or illegal trading
practices on Nasdaq.
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material news
News released by a public company that might reasonably be expected to affect the value of a
company’s securities or influence investors’ decisions. Material news includes information regarding
corporate events of an unusual nature, news of tender offers, unusually good or bad earnings reports,
and a stock split or stock dividend.
National Association of Securities Dealers (NASD)
The largest self-regulatory organization for the securities industry in the United States. NASD is
responsible for the regulation of Nasdaq and the over-the-counter securities markets; it is the parent
company of NASD Regulation, Inc., and an affiliate owner of The Nasdaq Stock Market, Inc.
NASD Regulation, Inc. (NASDR)
An independent subsidiary of the NASD that regulates the activities of broker/dealers in The Nasdaq
Stock Market and the over-the-counter industry. NASDR carries out its regulatory responsibilities
through education, examinations, market surveillance, registration of securities personnel, advertising
and underwriting reviews, disciplinary actions that violate rules, investigation of customer
complaints, and forums to resolve disputes. NASDR also regulates the sale of mutual funds, direct
participation programs, and variable annuities.
National Securities Clearing Corporation (NSCC)
A securities clearing agency formed in 1977 by the merger of the National Clearing Corporation,
owned by the NASD, and the clearing facilities of the New York Stock Exchange and The American
Stock Exchange. It is a medium through which transactions in the participants’ markets are cleared
and settled.
net capital rule
The SEC requires that all broker/dealers maintain no more than a 15 to 1 ratio between indebtedness
and liquid assets. Indebtedness includes money owed to the firm, margin loans, and commitments to
purchase securities. Liquid assets include cash, and assets that are easily converted to cash.
net tangible assets
An accounting term defined as stockholders’ equity minus goodwill.
new issue
Securities being offered to the public for the first time, subject to the rules of the SEC.
newspaper listings
The stock price coverage given to securities in newspapers, dependent upon the market on which the
company’s stock trades, the size of the company, and the level of trading activity in the company’s stock.
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Glossary of Terms
Order-Entry Firm
A type of broker/dealer that enters customer orders in the Nasdaq system. These firms have the
ability to access bid and ask quotes for Market Makers and securities listed on Nasdaq. Order-entry
firms add to the market’s liquidity by bringing additional orders into Nasdaq. However, they differ
from Market Makers in that they do not commit capital or maintain price quotations in Nasdaq
securities.
price/earnings ratio
The price of a share of a stock divided by earnings per share, usually calculated using the latest year’s
earnings. The price to earnings ratio is also called the multiple.
Primex Auction System
An auction-format digital trading system being integrated into the Nasdaq market. Primex is
expected to provide investors and Market Makers with a unique trading platform that offers
opportunity for price improvement when trading Nasdaq and exchange-listed stocks.
prospectus
A formal written offer to sell securities that sets forth the plan for a proposed business enterprise, or
the facts concerning an existing one that an investor needs to make an informed decision.
proxy
Written power of attorney given by a shareholder of a corporation, authorizing someone to vote on
his or her behalf at corporate meetings.
proxy statement
Material information required by the SEC to be given to a corporation’s stockholders as a prerequisite
to solicitation of votes. It is required for any issuer subject to the provisions of the Securities
Exchange Act of 1934.
public float
The portion of a company’s free float of shares traded in the market — that is, the outstanding shares
not held by company officers, directors or investors who hold a controlling interest in the company.
qualified institutional investor
An institutional investor permitted under SEC rulings to trade privately placed securities with other
qualified institutional investors without registering the securities with the SEC. A qualified
institutional investor must have at least $100 million under management.
quarterly report (Form 10-Q)
A report, required by the SEC of publicly held companies, filed quarterly, that provides unaudited
financial information and other selected material.
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record date
The date on which the records of a company are closed for the purpose of determining the
stockholders to whom dividends, proxies, etc. are to be sent.
red herring prospectus
Industry jargon for a preliminary prospectus issued by underwriters or issuers to gauge interest in a
prospective offering. The red herring prospectus receives its name from the warning, printed in red,
that information in the document is incomplete or subject to change before the issue.
registered representative
Another name for a stockbroker. It reflects the requirement that all stockbrokers be registered with
the NASD. An applicant for registration is required to pass an exam given by the NASD, testing
knowledge of investments and related laws. The pre-registration process includes an investigation of
the applicant’s past.
Regulation Fair Disclosure
Regulation Fair Disclosure, which went into effect on October 23, 2000, provides that when an issuer
discloses material nonpublic information to certain securities market professionals and security
holders, it must make public disclosure of that information.
road show
A series of meetings with potential investors in key cities, designed and performed by a company and
its investment banker as the company prepares to go public.
secondary offering
A registered offering of a large block of a security that has been previously issued to the public. The
blocks being offered may have been held by large investors or institutions, and proceeds of the sale go
to those holders, not the issuing company. Also called secondary distribution.
securities analyst
An individual who does investment research and makes recommendations to buy, sell, or hold. Most
analysts specialize in a single industry or business sector.
Securities and Exchange Commission (SEC)
The principal U.S. securities industry regulatory body, established by the Securities Exchange Act of
1934. It administers U.S. legislation designed to protect investors against malpractice in the securities
market — principally the Securities Act of 1933, and the Securities Exchange Act of 1934.
settlement
The conclusion of a securities transaction; a broker/dealer buying securities pays for them; a selling
broker delivers the securities to the buyer’s broker.
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Glossary of Terms
settlement date
The date specified for delivery of securities and funds between securities firms, usually three business
days after the trade date or the date of execution of an order.
spread
The difference between the bid (the price at which a Market Maker will buy a security) and the ask
(the price at which a Market Maker will sell a security). The spread narrows or widens according to
the supply and demand for the security being traded.
stock dividend
Payment of a corporate dividend in the form of stock rather than cash. The stock dividend may be
additional shares in the company, or it may be shares in a subsidiary being spun off to shareholders.
Stock dividends are often used to conserve cash needed to operate the business. Unlike cash
dividends, stock dividends are not taxed until sold.
stock symbol
A unique letter symbol assigned to a security (i.e., MSFT = Microsoft).
SuperMontage
A new trading system that is expected to lead to even greater transparency and better execution
quality in the Nasdaq market. With SuperMontage, the Nasdaq Workstation II™ will show
aggregate size of the best bid/offer of each security on Nasdaq—plus aggregate size one and two
price levels away.
syndicate
A group of investment banking firms formed to conduct an underwriting of a new security issue.
syndicate manager
An underwriting firm which forms a syndicate to distribute a security issue to the public.
The manager allocates the securities among the other firms but is usually responsible for the largest
portion of the issue.
trading halt
The temporary suspension of trading a security while news from the issuer is being distributed.
A trading halt gives investors time to consider the news and make decisions to buy, sell or hold stock.
Trading halts may also be instituted by the SEC on regulatory grounds.
transfer agent
An agent who maintains records of stock and bond owners to cancel and issue certificates, and
resolve problems arising from lost, destroyed, or stolen certificates.
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two-sided market
An obligation imposed by the NASD, requiring all Nasdaq Market Makers to display firm bids and
firm asks throughout market hours in each security in which they make a market.
underwriter
An investment banker who assumes the risk of bringing a new securities issue to market. The
underwriter will buy the issue from the issuer and guarantee sale of a certain number of shares to
investors; this is firm-commitment underwriting. To spread the risk of purchasing the issue, the
underwriter often will form a syndicate (underwriting group, purchase group) among other
investment firms. If the investment firm is unwilling to buy the issue outright, other underwriting
firms may be used.
underwriting spread
The difference between what an underwriter pays for a securities issue and the price at which he
offers it to the public.
uptick
A transaction at a price higher than the preceding transaction in that security.
venture capital
A source of financing for start-up companies or others embarking on new or turnaround ventures
that entail some investment risk but offer the potential for above average future profits.
volatility
The degree of price fluctuation for a given asset, rate, or index. Usually expressed as a variance or
standard deviation.
yield
In general, a return on an investor’s capital investment. For bonds, the coupon rate of interest divided
by the purchase price, called current yield. Also, the rate of return on a bond, taking into account the
total of annual interest payments, the purchase price, the redemption value, and the amount of time
remaining until maturity.
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