Dictionary of Financial Terms  
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Terms
 
Baby bond

Back-end load

Balanced fund

Barbell strategy

Basis point

Bearer bond

Benchmark

Beneficiary

Bid

Big Board

Block trade

Blue sky laws

Bond

Bond rating

Book value

Bottom fishing

Bourse

Breakout

Broker

Brokerage account

Brokerage window

Buy and hold

   Baccalaureate bond

Balance of trade

Bankruptcy

Basis

Bear market

Bellwether

Beneficial owner

Beta

Bid and ask

Blind trust

Blue chip stock

Boiler room

Bond fund

Bond swap

Book-entry security

Bottom-up investing

Brady bond

Breakpoint

Broker/Dealer

Brokerage firm

Bull market

Buyback
 
 
Definitions
 
 
Baby bond
Bonds whose par values are less than $1,000 are often described as baby bonds, or, in the case of municipal bonds, as mini-munis. Small companies that may not be able to attract institutional investors, such as banks and mutual fund companies, may offer smaller-denomination bonds to raise cash from individual investors. Some municipalities also use baby bonds to foster involvement in government activities by making it possible for more people to invest.
 
 
 
Baccalaureate bond
These tax-free zero coupon bonds are issued by some states and are designed specifically to help families meet college tuition costs. They're usually sold in small denominations, so that you can buy several, with staggered maturity dates, so that they come due to meet a tuition payment schedule. In some states, baccalaureate bond holders receive a a small tuition discount if they use the bonds to pay for attending an in-state school.
 
 
 
Back-end load
Some mutual funds impose a load, or sales charge, when you sell shares in the fund. That's called a back-end load, or a contingent deferred sales load. Typically, the charge, which is a percentage of the value of the assets you have in the fund, applies only during the first few years you own your shares. In most cases, too, the percentage you pay declines each year during that period and then is dropped.

Shares in back-end load funds are sometimes described as Class B shares to distinguish them from front-end load funds, which are known as Class A shares, and level-load funds, called Class C shares.
 
 
 
Balance of trade
The difference between the value of a country's imports and exports during a specific period of time is called the balance of trade. If a country exports more than it imports, it has a surplus, or favorable balance of trade. A trade deficit, or unfavorable balance, occurs when a country imports more than it exports.
 
 
 
Balanced fund
Balanced funds are mutual funds that invest in a combination of common stock, preferred stock, and bonds to meet their dual investment goal of seeking a strong return while minimizing risk. In a surging stock market, a balanced fund is unlikely to perform as well as a fund invested solely in stocks. But in a downturn, it may to produce a stronger return than a stock fund, since losses in its equity investments may be offset by a stronger performance in its fixed-income investments. Balanced funds also generally produce more income than straight stock funds.
 
 
 
Bankruptcy
When you file a petition of bankruptcy, you acknowledge that you are insolvent, or unable to pay your debts. If you file for Chapter 7, or liquidation bankruptcy, most of your assets are sold to repay the debts. A court-appointed trustee oversees settling creditor claims, which are usually not repaid in full. However, some debts are not reduced by a declaration of bankruptcy, including past due federal income taxes, alimony, and higher-education loans.

With Chapter 11 bankruptcy, also called reorganization bankruptcy, you work with the court and your creditors to set up a plan to pay off some or all of the debt over a specific period of time, such as three to five years. Similarly, when you hear that a company is reorganizing or is "in Chapter 11," it means it has filed for bankruptcy.

While bankruptcy damages your credit rating and exposes your finances to public scrutiny, it can be a way to get out from under the burden of debt and make a new financial start. It may also be a way to hold on to your home, even in a Chapter 7 bankruptcy, since you are not required to liquidate your home or a car you need to get to work.
 
 
 
Barbell strategy
When you use a barbell strategy you buy bonds with widely separated maturity dates, some short-term and others long-term, but none with intermediate terms. That buying pattern creates the shape that gives the strategy its name.

For example, you might buy a portfolio of bonds, with some that mature within a year or two and an equal number that mature in 30 years. When the shorter-term bonds come due, you continue the strategy by replacing them with other short-term bonds. Its a different approach from laddering your bond investment, so that your bonds mature in a rolling pattern every few years.

The goal of a barbell strategy is to earn more interest than intermediate-term bonds would provide without taking more risk. You may find it especially appealing in periods when youre not sure whether interest rates are going down which might be a reason to buy long-term bonds or going up which might be a reason to buy short-term bonds. Instead, you balance your interest-rate risk by buying some of each maturity.

 
 
 
Basis
Basis is the total cost of buying an investment or other asset, including the price, commissions, and other charges. If you sell the asset, you subtract the basis from the selling price to determine your capital gain or capital loss. If you give the asset away and the recipient sells it, the basis is the same amount that you would have used had you sold. But if you leave the asset in your will, the person receives it at a step up in basis, which means the basis of the asset is reset to its market value as of the time of your death. When your investment is in real estate, basis is generally described as cost basis.
 
 
 
Basis point
Yields on bonds, notes, and other fixed-income investments fluctuate regularly, typically changing only within hundredths of a percentage point. These small variations are measured in basis points, or gradations of 0.01%, or one-hundredth of a percent, with 100 basis points equaling 1%. For example, when the yield on a bond changes from 6.72% to 6.65%, it has dropped seven basis points.

The term is also used to describe small changes in the interest rates charged for mortgages or other loans, and to indicate your percentage of ownership in certain kinds of investments, where each basis point equals 0.01% of the whole investment.
 
 
 
Bear market
A bear market is sometimes described as a period of falling securities prices and sometimes, more specifically, as the point at which prices have fallen 20% or more from a high. A bear market in stocks is triggered by investors selling off shares because they anticipate worsening economic conditions and falling profits. A bear market in bonds is usually brought on by rising interest rates.
 
 
 
Bearer bond
Unlike most bonds issued in the US since 1983, which are registered electronically, a bearer bond is a certificate that states the security's par value and the rate at which its interest will be paid. The bond may come with detachable coupons that must be presented to the issuer to receive the interest payments, which explains why a bond's interest rate is often referred to as its coupon rate.

A bearer bond isn't registered, and there's no record of ownership, which means it can be sold or redeemed by the person or organization that holds it. Similarly, whoever presents a coupon is entitled to an interest payment.
 
 
 
Bellwether
A market bellwether is a security whose changing price is considered a signal that the market is changing direction. It gets its name from the whether, or castrated ram, that walks at the head of a shepherds flock. The distinctive tone of the bell around the whether's neck signals the flocks position. There's not an official list of these trend setters, or market barometers, and they do change as the overall markets and the fortunes of individual companies change.
 
 
 
Benchmark
Originally a benchmark was a surveyor's mark indicating a specific height above sea level. But it has come to have a much broader meaning in the world of investing.

A stock market benchmark, for example, is an index or average whose movement is considered a general indicator of the direction of the overall market, against which investors and financial professionals often gauge their market expectations and judge the performance of individual stocks or market sectors. For example, the Standard & Poor's 500-stock Index (S&P 500) and the Dow Jones Industrial Average (DJIA) are the most widely followed benchmarks, or indicators, of the US market. There are also benchmarks for international markets, and for other types of investments such as bonds, mutual funds, and commodities.

In a somewhat different way, the changing yield on the 10-year US Treasury bond is also considered a benchmark of investor attitudes. For example, a lower yield is an indication that investors are putting money into bonds, driving up the price, possibly because they expect stock prices to drop.
 
 
 
Beneficial owner
When you own stocks in street name, the brokerage firm has title to the stocks but you are the beneficial owner, or the person who actually benefits from owning the stock. The same is true when a bank or other custodian actually owns the mutual funds in your retirement account, but the assets are yours.
 
 
 
Beneficiary
A beneficiary is the person or organization who receives assets that are held in your name in a retirement plan, or are paid on your behalf by an insurance company, after your death. If you have established a trust, the beneficiary you name receives the assets of the trust.

A life insurance policy pays your beneficiary the face value of your policy minus any loans you haven't repaid when you die. A retirement plan pays your beneficiary the accumulated assets or requires the beneficiary to withdraw assets either as a lump sum or over a period of time, depending on the way the plan is set up.

You may name any person or institution or several people and institutions as beneficiary of a trust or life insurance policy. Some retirement plans require that you name your spouse as beneficiary unless you get his or her written permission to name someone else.

 
 
 
Beta
Beta is a measure of an investment's relative volatility. The higher the beta, the more sharply the value of the investment can be expected to fluctuate in relation to a market index. For example, Standard & Poor's 500-stock Index (S&P 500) has a beta coefficient (or base) of 1. That means if the S&P 500 moves 2% in either direction, a stock with a beta of 1 would also move 2%. Under the same market conditions, however, a stock with a beta of 1.5 would move 3% (2% increase x 1.5 beta = 0.03, or 3%). But a stock with a beta lower than 1 would be expected to be more stable in price and move less.

Betas as low as 0.5 and as high as 4 are fairly common, depending on the sector and size of the company. However, in recent years, a number of experts have disputed the validity of assigning and using a beta value as an accurate predictor of stock performance.
 
 
 
Bid
The bid is the price a market maker or broker is willing to pay for a security, such as a stock or bond, at a particular time. In the real estate market, a bid is the amount a buyer offers to pay for a property.
 
 
 
Bid and ask
Bid and ask is better known as a quotation or quote. Bid is the price a market maker or broker offers to pay for a security, and ask is the price at which a market maker or dealer offers to sell. The difference between the two prices is called the spread.
 
 
 
Big Board
The Big Board is the nickname of the New York Stock Exchange (NYSE), the oldest and largest stock exchange in the US and the largest in the world. Common and preferred stock, bonds, warrants, and rights are all traded on the Big Board, which dates back to 1792.
 
 
 
Blind trust
When a third party, such as an investment adviser or other trustee, has complete control of the assets held in a trust, it is called a blind trust. Elected officials often set up blind trusts to reassure the public that political decisions are not being made for personal financial benefit, since the officials have given up control over how their investments are being managed, or even what those investments are.
 
 
 
Block trade
When at least 10,000 shares of stock or bonds valued at $200,000 or more are bought or sold in a single transaction, it is called a block trade. Institutional investors, including mutual funds and pension funds, typically trade in this volume, and most individual investors do not.
 
 
 
Blue chip stock
Blue chip stocks are the common stock of large, well-regarded US companies. Blue chips, which take their name from the most valuable poker chips and in the UK are known as alpha stocks, have a reputation for quality products and services and a long-established record of earning profits and paying dividends regardless of the economic climate. Mutual funds that invest in blue chip stocks are known as blue chip funds.
 
 
 
Blue sky laws
Blue sky laws require companies that sell stock, mutual funds, and other financial products to register new issues with the appropriate public agency and provide financial details of each offering in writing so that investors have the information they need to make informed buy and sell decisions. These are state rather than federal laws, and owe their origin at least in legend to an frustrated judge who equated the value of a worthless stock offering to a patch of blue sky.
 
 
 
Boiler room
A boiler room is a stock brokerage firm that uses aggressive tactics to sell risky, and sometimes falsified, stocks to willing investors. Boiler rooms often use sales methods that violate NASD rules requiring brokers to recommend investments that appropriate to each investors portfolio.

For example, a broker working in a boiler room might try to sell very speculative stock to retired investors whose portfolios cannot tolerate such high risk. Many boiler room brokers may also try to create investor interest in companies that don't actually exist in order to profit from the sale of fraudulent shares.

 
 
 
Bond
Bonds are debt securities issued by corporations and governments. Bonds are, in fact, loans that you and other investors make to the issuers in return for the promise of being paid interest, usually but not always at a fixed rate. The issuer also promises to repay the debt on time and in full. Because most bonds pay interest on a regular basis, they are also described as fixed-income investments.
 
 
 
Bond fund
Bond mutual funds invest in bonds to produce income. Unlike individual bonds, bond funds have no fixed maturity date and no guaranteed interest rate. Nor do they promise to return your principal. Their appeal is that you can usually invest a much smaller amount of money than you would need to buy a portfolio of bonds on your own, making it easier to diversify your fixed-income investments.

There is a great variety of bond funds, each with a specific investment strategy. For example, some funds invest in long-term, and others in short-term, bonds. Some buy government bonds, while others buy corporate bonds or municipal bonds. Finally, some buy investment-grade bonds, while others focus on high-yield bonds. In other words, you could buy a long-term, investment-grade municipal bond fund, a short-term, high-yield corporate bond fund-or almost any other combination.
 
 
 
Bond rating
Independent agencies, such as Standard & Poor's (S&P) and Moody's Investors Service, assess the likelihood that bond issuers whether corporations or governments  are likely to default on their loans or interest payments. Ratings systems differ from one agency to another but usually have at least 10 categories, ranging from a high of AAA (or Aaa) to a low of D. Bonds ranked BBB (or Baa) or higher are considered investment-grade bonds.

Rating a bond — a key to the code:

Moody's S&P's Meaning
Aaa AAA Best Quality
Aa AA High Quality
A A High to medium quality
Baa BBB Medium Quality
Ba BB Some speculative element
B B At risk of default
Caa CCC Poor quality
Ca CC Highly speculative quality
C C Lowest-rated
. D In default
 

 
 
 
Bond swap
In a bond swap, you buy one bond and sell another at the same time. You might do a swap for several reasons, such as selling one bond at a loss at year's end to get a tax write-off while buying another to keep the same portion of your portfolio allocated to bonds. You might also sell a bond with a lower rating to buy one with a higher rating, or you might sell a bond that's close to its maturity date so you can put the money into a bond that won't mature for several years.
 
 
 
Book value
Book value is the net asset value (NAV) of a company's stocks and bonds. Finding the NAV involves subtracting the company's short- and long-term liabilities from its assets to find net assets, and then dividing by the number of shares of common stock, preferred stock, or bonds to get the NAV per share or per bond.

Book value is sometimes cited as a way of determining whether a company's assets cover its outstanding obligations and equity issues. Further, some investors and analysts look at the price of a stock in relation to its book value, which is provided in the company's annual report, to help identify undervalued stocks. Other investors discount the relevance of this information.
 
 
 
Book-entry security
Book-entry securities are electronic versions of stock and bond certificates. Instead of printing a certificate and mailing it to you, the issuing company records the details of your purchase in its computer files. When you sell the security, the records are updated, deleting you as an owner and adding the purchaser. That means you don't have to keep track of paper documents, and they can't be lost or stolen. The Depository Trust & Clearing Corporation (DTCC) acts as a clearinghouse for book-entry securities.
 
 
 
Bottom fishing
Investors using a bottom-fishing strategy look for stocks that they consider undervalued because the prices are low. The logic of bottom fishing is that stock prices sometimes fall further than a company's actual financial situation warrants, especially in the aftermath of bad news, and can rebound dramatically, providing a healthy profit.
 
 
 
Bottom-up investing
When you use a bottom-up investing strategy, you focus on the potential of individual stocks, bonds, and other investments. Using this approach, for example, means you pay less attention to the economy as a whole, or to the prospects of the industry a company is in, than you do to the company itself.

In making decisions based on bottom-up investing, you read research reports, examine the company's financial stability, and evaluate what you know about its products and services in great detail.
 
 
 
Bourse
Bourse is the French term for a stock exchange, meaning, literally, purse. The national stock market of France, a totally electronic market, is known as the Paris Bourse. The term is used throughout Europe and worldwide as a synonym for stock exchange, though it generally isn't used in the US.
 
 
 
Brady bond
These bonds of Latin American countries, named for former US Secretary of the Treasury Nicholas Brady, are issued in US dollars and backed by US Treasury zero coupon bonds. The bonds were originally issued in exchange for commercial bank loans that were in default, and their changing prices in the secondary market reflect the level of confidence investors have in the economies of the issuing nations.
 
 
 
Breakout
Stock prices fluctuate constantly, but each stock typically moves within a fairly narrow range. That means the stocks average price changes gradually, if at all. But sometimes a stocks price breaks out of its limits, and jumps or tumbles suddenly. Usually the breakout is fueled by a particular event. The company may realize a commercial success, such as a drug company discovering a new cure. Or a breakout may reflect a financial development, such as a new alliance with a successful partner.
 
 
 
Breakpoint
Mutual funds that charge a percentage of the amount you invest as a front-end load, or sales charge, when you buy shares may reduce that percentage if you make a large investment. The dollar amount at which the reduction applies is known as a breakpoint.

In most cases, the first breakpoint is $25,000, with further reductions for each additional $25,000 or $50,000 purchase. For example, if the standard load were 5.5%, it might drop to 5.25% at $25,000, to 5% at $50,000, and perhaps to as low as 2.5% with an investment of $250,000.

In calculating breakpoints, some fund companies will combine the value of all of your investments in the mutual funds they offer. So, for example, if you had $45,000 invested in various funds and added $5,000 to one of them, you might qualify for the reduced sales charge because the total value of your investment reached the breakpoint of $50,000.
 
 
 
Broker
A stock broker works for a brokerage firm, and acts as an agent, handling client orders to buy or sell stocks, bonds, commodities, and options in return for a commission. Brokers are licensed in the state where they work and must be registered on the exchange or market where they work. They must also pass a uniform examination administered by the National Association of Securities Dealers (NASD). Many brokers provide a range of investor services, including financial planning and advice on specific buy and sell decisions.

A real estate broker represents the seller in a real estate transaction and receives a commission on the sale. A mortgage or insurance broker acts as an intermediary to find the best mortgage or insurance policy for his or her client and also receives a commission.
 
 
 
Broker/Dealer
Broker/dealers have a dual financial role. As brokers, they act on buy and sell orders from clients. As dealers, they buy and sell securities for their brokerage firm's account. The securities a firm owns may be sold to the firm's clients, sometimes at a more favorable price than if those securities had to be purchased in the open market. They may also be sold to other firms wanting to fulfill a client's buy order. Or the securities a dealer buys may become part of the firm's own investment portfolio.
 
 
 
Brokerage account
To buy and sell securities through a broker/dealer or other financial services firm, you establish an account, generally known as a brokerage account, with that firm.

In a traditional full-service brokerage firm, a registered representative or account executive who works for the firm handles your buy and sell instructions and often provides investment advice. If your account is with a discount firm, you are more likely to give your orders to the person who answers the telephone when you call. And if your account is with an online firm, you give orders and get confirmations electronically.

In all three cases, the firm provides updated information on your investment activity and portfolio value, and handles the required paperwork. And in some cases, your brokerage account may be part of a larger package of financial services known as an asset management account.
 
 
 
Brokerage firm
Brokerage firms are licensed by the Securities and Exchange Commission (SEC) to buy and sell securities for clients and for their own accounts. When a brokerage firm sells securities it owns, it is said to be acting as a principal in that transaction.

Firms frequently maintain research departments for their own and their clients' benefit, and increasingly they provide a range of financial products and services, including financial planning, asset management, and educational programs. Online brokerage firms, discount brokerage firms, and some traditional full-service brokerage firms encourage customers to trade electronically and provide a wealth of investment information on their websites.
 
 
 
Brokerage window
A 401(k) account that permits its plan participants to buy and sell investments through a designated brokerage account is said to offer a brokerage window. While the percentage of plans offering windows is increasing, not all financial experts approve of giving participants so wide a choice.
 
 
 
Bull market
A prolonged period when stock prices as a whole are moving upward is called a bull market, although the rate at which those increases occur can vary widely from bull market to bull market. So can the length of time a bull market lasts. Well-known bull markets began in 1923, 1949, 1982, and 1990.
 
 
 
Buy and hold
Buy and hold investors take a long-term view of investing, keeping a bond from date of issue to date of maturity and holding onto shares of a stock through bull and bear markets. Advocates of this approach claim that it is the only effective way to realize long-term goals.
 
 
 
Buyback
When a company purchases shares of its own publicly traded stock or its own bonds in the open market, it's called a buyback. The most common reason a company buys back its stock is to make the stock more attractive to investors by increasing its earnings per share. While the actual earnings stay the same, the earnings per share increase because the number of shares has been reduced.

Companies may also buy back shares to pay for acquisitions that are financed with stock swaps, to make stocks available for employee stock option plans, to decrease the risk of a hostile takeover by reducing the number of shares available for sale, or to discourage short-term trading in its stock by driving the price of the outstanding shares upward.

Companies may buy back bonds when they are selling at discount, which is typically the result of rising interest rates. By paying less than par in the open market, the company is able to reduce the cost of redeeming the bonds when they come due.
 
 

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