gross income (AGI). Total income less nontaxable income and adjustments.
Agency Auction Market. A market designed to allow
brokers, acting as agents on behalf of their customers, to participate in the auction of a
stock in an effort to get the best possible price for the customer. Specialists are
assigned to oversee the auction, and to smooth out short term fluctuations in the
Allowable itemized deductions. Certain
non-business (personal) expenses deductible from AGI. These expenses include medical
expense, state and local taxes, interest expenses, charitable contributions, non business
casualty and their losses, work related moving expenses and other miscellaneous expenses.
Allowable personal exemptions. An inflation
adjusted amount deductible from AGI for an individual and each dependent. In 1995 the
personal exemption is $2,500. For higher income taxpayers these exemptions are phased out
to the extent their AGI exceeds a certain threshold based on filing status.
Alternative minimum tax (AMT). A method of
calculating income tax which modifies AGI for adjustments and tax preferences. This is
designed to ensure that individuals, trusts and estates benefiting from tax preferences do
not escape all federal tax liabilities. Taxpayers must calculate their taxes both ways and
pay the greater of the two taxes.
Annual savings needed. A term used in the
Education Planning and Retirement Analysis sections indicating the amount of money needed
to be saved every year to accumulate sufficient assets to achieve a specific goal.
Asset allocation. The mix of investment classes-
cash, equities and fixed income- for an investor's portfolio. The appropriate balance is
based on the anticipated return and relative risk of each asset category as well as the
investor's personal factors such as risk tolerance, age and current investment profile.
Bargain element. The difference between the
current market price of a stock and the exercise price of an option on that stock.
Beneficiary. A person designated to receive income
or assets from a will, trust or beneficiary designated property such as life insurance.
Cash/cash equivalent. Investments offering maximum
liquidity with little or no risk of decreasing in value.
Credit Exemption. (See Unified
Custodian. An adult entrusted with the control and
guardianship of property for a minor child.
Dealer Market. A market where dealers
establish bids and offers, and where most trading is conducted through them.
Defined benefit plan. A retirement which defines
the specific benefit (pension) an employee receives at retirement. Typically, the benefit
is based on salary history and the number of years of service with the employer.
Defined contribution plan. A retirement plan which defines
the contribution made each year (usually a percentage of pay) to a retirement plan. The
amount paid out to the employee at retirement is based on the market value of the invested
funds at that time.
Depth. A measurement of how much price
change has occurred and how much volume accompanied that change. Deep markets have a lot
of volume (relative to the stock's average volume) for a give price change, while thin
markets will show little volume on a price change.
Disclaimer Provision. A provision of a will that
allows a potential beneficiary to refuse acceptance of a bequest under the terms of a will
or trust. For federal tax purposes, a person who disclaims is regarded as never having
received the bequest (as if the beneficiary predeceased the testator). The result of the
disclaimer is to pass assets to the next recipients (e.g., children) under the will or
Diversification. Investing in multiple investments
to limit risk. The concept of "not putting all your eggs in one basket".
Dividend reinvestment plans. An investment plan
allowing shareholders to automatically reinvest cash dividends and capital gain
distributions into more stock rather than receive cash. While reinvested dividends may be
taxable as if they were paid out, transaction costs are generally reduced on the share
Dollar cost averaging. A risk reduction technique
for investing in equities where the investor buys a fixed dollar amount of securities at
regular time intervals. In effect the investor is able to buy more shares when the price
is low and fewer shares when the price is high.
Durable power of attorney. A legal document
granting authority to an individual to conduct legal business on another person's behalf.
This authority is not affected by subsequent disability.
Effective tax rate. A term used in the plan
indicating the percentage of every dollar actually paid in taxes. It is calculated by
adding together the state and federal income tax and dividing the result by total gross
ESOP (Employee Stock Ownership Plan). A defined
contribution plan investing primarily in the stock of the employer.
Estate Tax. Taxes due at death.
Executor/Executrix. A person or institution named
to carry out the provisions and instructions of a will.
FICA (Federal Insurance Contributions Act). Taxes
supporting Social Security.
Floor broker. A NYSE member executing
orders as an agent for a customer. They may work for a brokerage firm (a "house
broker"), or they may work on commission (a "two dollar" broker).
Gift tax. A tax imposed on the donor for gifts in
excess of $10,000 per person, per year. The tax is levied on gifts to individuals other
than a spouse. A U.S. citizen may gift up to $100,000 per year to a non-citizen spouse.
Gross Estate. The total value of all property
owned (or vested interest held) by a descendent at the time of death. This includes (but
is not limited to life insurance, the present value of pension survivor benefits and
nonvested compensation awards.
Guardian. The individual appointed to manage the
property of a minor or an adult legally judged to be incompetent.
Heir. Someone who is entitled to receive another
person's property upon that person's death.
Incentive compensation awards. A type of employee
benefit which ties to performance or longevity goals to financial reward.
Incentive stock options (ISOs). Compensatory
rights to purchase stock at a specific price for a specific time period. They are granted
to an employee by an employer and meet the IRS requirements for a special tax treatment.
Intestate. A condition occurring when an
individual dies without a written, valid will. State law determines how the descendant's
property is distributed.
Investable assets. A term used in this plan to
identify the sum of the portfolio assets plus the retirement assets excluding total other
Investment assets. A term used in this plan to
identify the sum of the portfolio assets and the retirement assets (including other assets
such as real estate).
Irrevocable Trust. (see Trust)
Joint tenancy with right of survivorship (JTWROS).
Co-ownership of property by two or more people in which the survivor(s) automatically
assume ownership of a descendant's interest. Assets owned JTWROS are not subject to
probate because they do not pass through the will.
Liability. A financial obligation or debt.
Liquidity. A measure of how easily a
customer can buy (or sell) a given amount of stock without affecting the stock's price. In
liquid stocks, the customer can easily buy or sell large amounts close to the last sale.
Living trust. (see Trust)
Liquidity. The ability to convert assets into cash
quickly and easily.
Lump sum invested today. A term used in the
education section identifying the amount of money you need to invest today using the
college after-tax investment rate to fund all of the college cost.
Marginal tax bracket. The rate at which an
individual's next dollar of income is taxed.
Market Capitalization. The value of a
company's share price multiplied by the number of shares outstanding.
Marital deduction. The portion of a descendant's
estate that may be given to the surviving spouse without the assets being subject to
federal estate taxes. Currently, there is an unlimited marital deduction and therefore no
estate or gift taxes on qualified property transferred between U.S. citizen spouses, both
during their lifetimes, as well as death.
Nonqualified stock options. Compensatory rights to
purchase stock at a specified price, for a specific time period which do not meet IRS
requirements for special tax treatment. No income is recognized at the time of the grant.
However, at the time of exercise, the difference between the fair market value and the
exercise price becomes taxable compensation.
Orders. There are many different types
of orders setting conditions on how they should be executed:
- Market - an order to buy (or sell) shares
at whatever price the current market will allow. This order guarantees execution, but at
an undetermined price. For example, an order to buy 1000 shares at the market could buy
300 at 23 1/4, and 700 at 23 3/8.
- Limit - an order which can only be
executed at a certain price. This type of order may not be executed if the stock does not
trade at the limit price, or if there are many other orders entered ahead.
- Stop - an order to be executed only when
the price rises (of falls) to a specified level. For example, Sell 500 shares 22 1/2 Stop.
If the last sale is 25 3/4, this order will not be executed until the price touches 22
- All or None - this order wouldn't be executed until the
entire order can be filled.
- GTC - Good 'Till Canceled. This order
remains on the book until executed or canceled by the customer
- Day - this order is good only for the day
it is entered.
Option. The right to buy or sell an
underlying security at a specific price before a specific time. The specific price is
called the strike price. The specific time is the expiration date. A call option is the
right to buy and the put is the right to sell the underlying security at the strike price
before the expiration date.
Portfolio Assets. A term used in this plan to
identify the sum of the following investment categories: cash and cash equivalents,
equities, fixed income and other investments (such as real estate) and incentive
Pour-Over Provision. A provision of a will which
states that any undesignated assets remaining in the estate at death will pass or
"pour over" into an existing trust.
Probate. The court controlled process of carrying
out the instructions in an individual's will. If there is no will, all property without a
beneficiary designation goes through the probate process and is distributed by the judge
according to state law.
Probate estate. Property distributed under the
direction of the probate court. Property which is owned jointly (with rights of
survivorship) or property that passes by beneficiary designation (such as life insurance,
trusts and retirement plans) are not part of the probate estate.
Quote. The best bid and offer, and how
many shares can be bought or sold at those prices. For example:
23 1/2 - 23 3/4, 500 x 1000. This is announced
"twenty three and a half bid, offered at three quarters. Five hundred by one
thousand." This quote, established by the specialist after each sale, gives a
snapshot of current supply and demand. The specialist must honor these quotes, and may not
allow a trade to occur outside their boundaries.
Retirement assets. A term used in this plan to identify all
the assets listed under retirement plans on the Financial Foundation Profile.
Second-to-die life insurance. Life insurance which
provides coverage for two lives (typically a husband and wife) and pays the benefit at the
Self-employment income. Compensation earned by
unincorporated business people such as sole proprietors, independent contractors and
active business partners.
Share averaging. A risk reduction technique for
investing in equities. Shares are accumulated over a period of time by buying a set number
of shares at fixed intervals of time regardless of price.
Stepped-up basis. The cost basis of assets owned
at death or, if permitted and elected by the executor, the fair market value six months
after the date of death.
Stop. An order is "stopped"
when the specialist doesn't execute the order, but guarantees it a price while trying to
get a better price for the customer. A buy order could be stopped at 18 5/8, while trying
to get a better price of 18 1/2. In no case once a stop has been granted, can the
execution be at a worse price than the stop price. The specialist can only stop an order
if he feels the customer will probably get a better price.
Tax Bracket. The range of taxable incomes taxed at
a certain rate defined in IRS tax tables. Brackets are expressed by their marginal tax
rate and are inflation adjusted every year.
Tax credit. A permitted dollar-for-dollar
reduction of the tax liability.
Taxable equivalent yield. The return a taxable
investment must earn to provide the same after-tax return as a tax-free investment.
Taxable estate. Gross estate less debt and final
expenses. Final expenses may include executor, attorney, appraiser and accountant fees, in
addition to any probate costs.
Taxable income. Adjusted gross income less
allowable itemized deductions and personal deductions.
Tenancy in Common. Joint ownership without the
right of survivorship. The descendant's interest could be given or willed to another
Testamentary Trust. (see Trust)
Tick. The tick represents the direction
of price change. A plus tick indicates a trade at a higher price than the previous trade.
A minus tick is a trade at a lower price. Short sales may only take place on a plus tick.
Specialists are generally expected to buy on minus ticks and sell on plus ticks.
Total Gross Income. Total income less nontaxable
Total household income. A term used in this plan
to identify total income from all sources including all taxable and nontaxable items.
Trader. Someone who is more interested
in short term price changes, as opposed to an investor more interested in longer term
Trust. A legal document or
entity created by an individual (grantor). The grantor, through the trust agreement,
determines how, what and by whom property will be managed and used for the benefit of the
- Irrevocable Trust. A trust agreement that once
executed cannot be changed.
- Living Trust. A trust created during an
individual's lifetime in which the trustee holds property for the benefit of another. The
trust is flexible and can be established for a limited time period, last until the
occurrence or the nonoccurrence of a specific event, or it may continue after death. A
living trust can be used to avoid probate, to increase a family's privacy or to handle
special family needs.
- Testamentary Trust. A trust established by the
terms of a will or to take effect at the grantor's death. It is usually revocable until it
is put into effect at which time it becomes an irrevocable trust.
- 2503 (b) Trust. An irrevocable trust used as a
vehicle for gifting to minors. This trust requires current distribution of income to the
trust beneficiary. The trust governs when, if ever, the principal must be distributed to
- 2503 (c) Trust. An irrevocable trust used as a
vehicle for gifting to minors. Income may be retained and taxed to the trust rather than
being distributed and taxed to the trust beneficiary. In general, principal must be
distributed to the trust beneficiary at age 21.
Trustee. A person or institution with the legal
capacity to receive and hold title to property held in trust for the benefit of another.
UGMA/UTMA ACCOUNTS. Custodial accounts funded with
gifts given to minors through the Uniform Gift to Minor Act/Uniform Transfer to Minors
Umbrella policy. A type of liability insurance
covering losses in excess of other standard insurance coverage.
Underwriter. The brokerage firm
responsible for handling all the details required for a company to sell shares to the
public for the first time. They examine the company to determine its approximate value,
they line up investors for the deal, and they take care of all the paperwork required by
Unified credit. A tax credit
applied against an individual's gift or estate taxes. This dollar-for-dollar credit can be
used to offset up to $192,800 in federal estate and gift taxes. This credit is equal to
the federal estate tax due on a taxable estate of $600,000.
Will. A legal document used to transfer property
to one's heirs.