Series 7 Glossary: Key Terms Explained in Plain English

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Accredited investor: An investor meeting SEC wealth, income or credential tests (for individuals: net worth over $1 million excluding primary residence, income over $200,000/$300,000, or a Series 7, 65 or 82 license).
Accrued interest: Interest earned since the last payment date, paid by a bond buyer to the seller.
ACATS: The Automated Customer Account Transfer Service, used to move accounts between firms.
ADR (American depositary receipt): A receipt issued by a U.S. bank representing shares of a foreign company.
AIR (assumed interest rate): The rate used to set the number of annuity units at annuitization; payments rise or fall as actual returns exceed or trail it.
Alternative minimum tax (AMT): A parallel tax calculation that adds back certain preference items, such as interest on private activity municipal bonds.

Basis point: One one-hundredth of one percent (0.01%).
Best efforts: An underwriting in which the underwriter acts as agent and the issuer bears the risk of unsold securities.
Beta: A measure of a security's volatility relative to the overall market.
Breakpoint: A purchase level at which a mutual fund's front-end sales charge is reduced.

Callable: A feature allowing the issuer to redeem a bond or preferred stock before maturity.
Churning: Excessive trading in an account to generate commissions.
CMO (collateralized mortgage obligation): A mortgage-backed security divided into tranches with different payment priorities and risks.
Cooling-off period: The period of at least 20 days between filing a registration statement and its effective date.
Correspondence: Written communications to 25 or fewer retail investors within 30 days.
Credit spread: The yield difference between a bond and a comparable Treasury.
Cumulative preferred: Preferred stock whose missed dividends accumulate and must be paid before common dividends.
Current yield: Annual interest or dividends divided by the market price.

Debenture: An unsecured bond backed only by the issuer's general credit.
Direct participation program (DPP): An investment, typically a limited partnership, that passes income and losses through to investors.
Discretion: Authority to choose the asset, action or amount of a trade without the customer's specific approval.
Duration: A measure of a bond's price sensitivity to interest-rate changes, expressed in years.

EMMA: The MSRB's Electronic Municipal Market Access website.
Ex-dividend date: The first date on which a buyer is not entitled to a declared dividend; the same day as the record date under T+1 settlement.

Firm commitment: An underwriting in which the underwriter buys the entire issue and bears the risk of unsold securities.
Form CRS: The client relationship summary broker-dealers must deliver to retail investors.
Front running: Trading ahead of a customer's order to profit from the expected price movement.

General obligation (GO) bond: A municipal bond backed by the issuer's full faith, credit and taxing power.

Indication of interest: A non-binding expression of interest in a new issue, taken during the cooling-off period.
Intrinsic value: The amount by which an option is in the money.

Letter of intent (LOI): A non-binding pledge to invest enough in a fund family within 13 months to qualify for a breakpoint.
Liquidity risk: The risk that an investment cannot be sold quickly without a significant price concession.

Market maker: A dealer that continuously quotes bids and offers in a security.
Markup: The difference between the prevailing market price and the price a dealer charges a customer.
MSRB: The Municipal Securities Rulemaking Board, which writes rules for municipal securities dealers and municipal advisors.
Municipal note: A short-term municipal obligation, such as a TAN, RAN, BAN or GAN.

OCC: The Options Clearing Corporation, which issues and guarantees listed options.
Official statement: The disclosure document for a municipal bond offering.

Parity: The price at which a convertible security and the underlying common stock are equal in value.
Passive income: Income from limited partnerships and other businesses in which the investor does not materially participate.
Premium (option): The price paid by an option buyer to the seller.
Prepayment risk: The risk that mortgage borrowers repay early when rates fall.
Preliminary prospectus (red herring): The disclosure document used during the cooling-off period; omits the final price.
Prospectus: The disclosure document for a registered securities offering.

Regulation Best Interest (Reg BI): The SEC standard requiring broker-dealers to act in a retail customer's best interest when making recommendations.
Regulation T: The Federal Reserve rule governing credit extended by broker-dealers; sets 50% initial margin.
REIT: A real estate investment trust; must distribute at least 90% of taxable income.
Restricted person: Under FINRA Rule 5130, a person prohibited from buying equity IPOs, such as broker-dealer employees.
Retail communication: Written communications distributed to more than 25 retail investors within 30 days.
Revenue bond: A municipal bond backed by the revenue of a specific facility.
Rights offering: An offer to existing shareholders to buy new shares, usually below market, in proportion to their holdings.

SAR: A suspicious activity report, filed with FinCEN for suspicious transactions of $5,000 or more.
Selling away: Selling securities outside the scope of one's employment without the firm's approval.
SIPC: The Securities Investor Protection Corporation, which protects customers of failed broker-dealers up to $500,000 ($250,000 cash).
SMA (special memorandum account): A line of credit created by excess equity in a margin account.
Spread (options): The simultaneous purchase and sale of options of the same type with different strikes or expirations.
Straddle: A call and a put with the same strike and expiration, both bought or both sold.
Systematic risk: Market-wide risk that cannot be eliminated by diversification.

T+1: Regular-way settlement one business day after the trade date.
Tax-equivalent yield: The taxable yield needed to equal a tax-exempt yield after taxes.
Time value: The portion of an option's premium above its intrinsic value.
TIPS: Treasury Inflation-Protected Securities, whose principal adjusts with the CPI.
Trusted contact person: An adult the firm may contact about a customer's welfare or possible financial exploitation.

UGMA/UTMA: State laws governing custodial accounts for minors.
Unsystematic risk: Risk specific to a company or industry that can be reduced by diversification.

Wash sale: A loss sale followed by a purchase of substantially identical securities within 30 days before or after; the loss is disallowed and added to the new basis.

Yield to maturity (YTM): The total annualized return on a bond held to maturity.

Zero-coupon bond: A bond issued at a deep discount that pays no periodic interest and matures at par.