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Glossary


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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 baby 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

Baccalaureate bonds are tax-free zero coupon bonds issued by certain states specifically to help families accumulate assets to meet college tuition costs. The bonds are usually sold in small denominations, so that you can buy several, with maturity dates that correspond with the dates that tuition payments are due. In some states, baccalaureate bondholders receive 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 back-end load, or a contingent deferred sales charge, if you sell shares in the fund during the first six or seven years after you purchase them. The charge is a percentage of the value of the assets you’re selling. The percentage typically declines each year the charge applies and then is dropped. However, the annual asset-based management fee is higher on back-end load funds, also known as Class B shares, than on front-end load funds, where you pay the sales charge at the time you purchase.


Back-up withholding

Back-up withholding is triggered when a bank, brokerage firm, or other institution pays interest, dividends, or other income that must be reported on IRS Form 1099 to a payee who does not provide a tax identification number (TIN), typically a Social Security number, or provides an incorrect number.While income that’s reported on Form 1099 is not normally subject to withholding, in this instance, the payer must withhold 28% of the gross amount as income tax. You can avoid back-up withholding in most cases by providing a correct TIN using IRS form W-9. But if the IRS determines you have underreported your investment income, it may require back-up withholding even if the payer has your TIN.


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.


Balance sheet

A balance sheet is a statement of a company’s financial position at a particular moment in time. This financial report shows the two sides of a company’s financial situation — what it owns and what it owes. What the company owns, called its assets, is always equal to the combined value of what the company owes, called its liabilities, and the value of its shareholders’ equity. Expressed as an equation, a company’s balance sheets shows assets = liabilities + shareholder value. If the company were to dissolve, then its debts would be paid, and any assets that remained would be distributed to the shareholders as their equity. Bankruptcy occurs in situations where there is nothing left to distribute to the shareholders, and the company balance sheet is in fact unbalanced because the company owes more than it owns.


Balanced fund

Balanced funds are mutual funds that invest in a portfolio of common stocks, preferred stocks, and bonds to meet their investment goal of seeking a strong return while moderating risk. Balanced funds generally produce more income than stock funds, though their total return may be less than stock fund returns in a strong stock market. In a flat or falling stock market, however, disappointing returns on equity investments may be offset by a stronger performance from a balanced fund's fixed-income investments. Balanced funds are sometimes described as a type of asset allocation fund, which provides the oportunity to spread your money among asset classes with one investment.


Balloon mortgage

With a balloon mortgage, you make monthly payments over the mortgage term, which is typically five, seven, or ten years, and a final installment, or balloon payment, that is significantly larger than the usual monthly payments. In some cases, you pay only interest on the loan during the mortgage term, and the entire principal is due in the balloon payment. Many balloon mortgages offer a conversion feature that lets you extend the loan at a new interest rate. For instance, some balloon mortgages convert to a 30-year fixed-rate mortgage at the end of their original term.You might choose a balloon mortgage if you anticipate being able to refinance at a favorable rate at the end of the term or if you’re confident you’ll have enough money to pay off the loan in a lump sum. But you may risk losing your home when the balloon payment is due if you can afford to buy the home only because of the comparatively smaller monthly payments that may be available with a balloon mortgage.


Bankruptcy

Bankruptcy means being insolvent, or unable to pay your debts. In that case, you can file a bankruptcy petition to seek a legal resolution. Chapter 7 bankruptcy, which allows you to discharge your unsecured debts but may result in your losing your home, car, or other secured debt, is available only to those whose earn less than the median for their state or qualify because of special circumstances.With Chapter 11 bankruptcy, also called reorganization bankruptcy, you work with the court and your creditors to repay debt over three to five years.However, some debts are not reduced by a declaration of bankruptcy, including past due federal income taxes, alimony, and higher-education loans. Similarly, when you hear that a company is reorganizing or is "in Chapter 11," it means it has filed for bankruptcy.


Barbell strategy

When you use a barbell strategy you invest equivalent amounts in short-term and long-term bonds, creating the shape that gives the strategy its name. The goal is to earn more interest than intermediate-term bonds would provide without taking more risk. 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 replace them with other short-term bonds. It’s a different approach from laddering your bond investment, often with a portfolio of intermediate-term bonds, so that your bonds mature in a rolling pattern every few years.


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 your basis from the selling price to determine your capital gain or capital loss. If you give the asset away, the recipient’s basis is the same amount as yours. But if you leave an asset to a beneficiary in your will, the person receives the asset 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 called cost basis.


Basis point

Yields on bonds, notes, and other fixed-income investments fluctuate regularly, typically changing only a few 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 7 basis points.Similarly, small changes in the interest rates charged for mortgages or other loans are reported in basis points, as are the fees you pay on various investment products, such as annuities and mutual funds. For example, if the average management fee is 1.4%, you might hear it expressed as 140 basis points. Your percentage of ownership in certain kinds of investments may also be stated in basis points, and in this case each basis point equals 0.01% of the whole investment.


Basis price

When you sell a security, such as a stock or bond, or real estate, the price you use to calculate your capital gains is known as your basis price. In the case of a security, it includes the purchase price plus any commissions you paid to buy or sell. For real estate, it includes purchase price, certain closing costs at purchase and sale, and the costs of qualifying improvements to the property.


Bear market

A bear market is sometimes described as a period of falling securities prices and sometimes, more specifically, as a market where prices have fallen 20% or more from the most recent high. A bear market in stocks is triggered when investors sell off shares, generally because they anticipate worsening economic conditions and falling corporate profits. A bear market in bonds is usually the result of rising interest rates, which prompts investors to sell off older bonds paying lower rates.


Bear spread

A bear spread is an options strategy that you use when you anticipate a decline in the price of the underlying instrument, such as a stock or an index. As in any spread, you purchase one option and write another on the same underlying item. Both options are identical except for one element, such as the strike price or the expiration date.For example, with a vertical bear call spread, you buy a call with a higher strike price and sell a call with a lower strike price. With a vertical bear put, you buy a put at a higher price and sell a put at a lower price. In either case, if you’re right about the behavior of the underlying instrument — for example, if a stock whose price you expect to fall does lose value — you could have a net profit. If you’re wrong, you could have a net loss cushioned by the income from the sale of one of the legs of the spread.


Bearer bond

A bearer bond is a certificate that states the security's par value, the rate at which interest will be paid, and the name of the bond's owner. In the past, bearer bonds came with detachable coupons that had to be presented to the issuer to receive the interest payments. That practice explains why a bond's interest rate is often referred to as its coupon rate.Unlike most bonds issued in the United States since 1983, which are registered electronically, a bearer bond isn't registered, and there's no record of ownership. This means it can be sold or redeemed by the person or organization that holds it.


Bearer form

When securities are issued as paper certificates and the issuing corporation has no record of the owner, the securities are in bearer form. The bearer, or holder, of the certificate is considered the owner, and when ownership changes hands a physical transfer of the certificate is required. The securities may have attached coupons, which the holder must present or send in to the issuer or issuer’s agent — typically a bank or brokerage firm — to receive interest or dividend payments. Bearer securities are rare in the United States today because of the convenience, simplicity, and added security of electronic registration, known as book entry form. When book entry securities are traded, records of ownership are electronically updated, and the buyer’s and seller’s brokerage accounts are automatically debited and credited, similar to when you pay bills online.


Behavioral finance

Behavioral finance combines psychology and economics to explain why and how investors act and to analyze how that behavior affects the market. Behavioral finance theorists point to the market phenomenon of hot stocks and bubbles, from the Dutch tulip bulb mania that caused a market crash in the 17th century to the more recent examples of junk bonds in the 1980s and Internet stocks in the 1990s, to validate their position that market prices can be affected by the irrational behavior of investors.Behavioral finance is in conflict with the perspective of efficient market theory, which maintains that market prices are based on rational foundations, like the fundamental financial health and performance of a company.


Beige Book

Beige book is the colloquial name for the Federal report that is formally titled Summary of Commentary on Current Economic Conditions by Federal Reserve District. The Beige Book is prepared eight times per year by the Federal Reserve Board, in preparation for the Federal Open Market Committee (FOMC) meetings, at which its members discuss the state of the economy and determine whether any changes ought to be made to the discount rate and whether the money supply should be tightened or loosened.The report is based on information provided by each Federal Reserve Bank on its particular district and includes opinion and analysis from economists, bank directors, business people, and other market experts in each district. Economic forecasters use the Beige Book to predict whether and how the Fed will act after the FOMC meeting.


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 wether, or castrated ram, that walks at the head of a shepherd’s flock. The distinctive tone of the bell around the wether’s neck signals the flock’s 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

An investment benchmark is a standard against which the performance of an individual security or group of securities is measured. For example, the average annual performance of a class of securities over time is a benchmark against which current performance of members of that class and the class itself is measured. When the benchmark is an index tracking a specific segment of the market, the changing value of the index not only measures the strength or weakness of its segment but is the standard against which the performance of individual investments within the segment are measured.For example, the Standard & Poor's 500 Index (S&P 500) and the Dow Jones Industrial Average (DJIA) are the most widely followed benchmarks, or indicators, of the US market for large-company stocks and the funds that invest in those stocks.There are other indexes that serve as benchmarks for both broader and narrower segments of the US equities markets, of international markets, and of other types of investments such as bonds, mutual funds, and commodities. Individual investors and financial professionals often gauge their market expectations and judge the performance of individual investments or market sectors against the appropriate benchmarks. In a somewhat different way, the changing yield on the 10-year US Treasury bond is 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. Conversely, a higher yield indicates investors are putting their money elsewhere.Originally the term benchmark was a surveyor's mark indicating a specific height above sea level.


Beneficial owner

When your stocks are registered 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.


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. An annuity contract pays the beneficiary the accumulated assets as dictated by the terms of the contract. A retirement plan, such as an IRA or 401(k), pays your beneficiary the value of the accumulated assets or requires the beneficiary to withdraw assets either as a lump sum or over a period of time, depending on the plan. Some retirement plans require that you name your spouse as beneficiary or obtain written permission to name someone else.You may name any person or institution — or several people and institutions — as beneficiary or contingent beneficiary of a trust, a retirement plan, annuity contract, or life insurance policy. A contingent beneficiary is one who inherits the assets if the primary beneficiary has died or chooses not to accept them.


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, there has been a lively debate about 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 stock exchange in the United States and the one with the largest trading floor.Common and preferred stock, bonds, exchange traded funds, warrants, rights. and other investment products are all traded on the Big Board, which dates back to 1792.


Blind pool

If the general partner of a limited partnership does not say which investments the partnership will make, the investment is known as a blind pool. In a blind pool equipment leasing partnership, for example, you don’t know what type of equipment the partnership is planning to acquire for leasing, and in a blind pool real estate investment trust (REIT), you don’t know which properties the partnership will purchase.When you invest in a blind pool limited partnership, your evaluation of the partnership’s prospects is based on the investment track record of the general partner. In contrast, in a specified pool limited partnership, you can assess the partnership’s prospects on a more concrete analysis of the costs and projected revenues. However, there is no evidence that the average performance of blind pools differs significantly from the performance of comparable specified pool partnerships.


Blind trust

A blind trust is created when a third party, such as an investment adviser or other trustee, assumes complete control of the assets held in a trust. Elected officials often set up blind trusts to reassure the public that political decisions are not being made for personal financial benefit.


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 stock is the common stock of a large, well-regarded US company. The companies in that informal category are collectively known as blue chips companies. Blue chips have a long-established record of earning profits and paying dividends regardless of the economic climate. They take their name from the most valuable poker chips. In the United Kingdom, in contrast, comparable firms are called alpha companies.


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.They must also 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 a frustrated judge who equated the value of a worthless stock offering to a patch of blue sky.


Boiler room

A boiler room is a location used by con artists to contact potential victims out-of-the-blue — an approach known as cold calling — in an attempt to sell high-risk investments that may or may not be legitimate. Boiler room scammers typically use high-pressure tactics to close an immediate sale and are unwilling to provide written information about either the investment they are pushing or themselves.


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, over the loan term. The issuer also promises to repay the loan principal at maturity, on time and in full. Because most bonds pay interest on a regular basis, they are also described as fixed-income investments. While the term bond is used generically to describe all debt securities, bonds are specifically long-term investments, with maturities longer than ten years.


Bond fund

A bond mutual fund sells shares in the fund to investors and uses the money it raises to invest in a portfolio of bonds to meet its investment objective — typically to provide regular income. The appeal of bond funds is that you can usually invest a much smaller amount of money than you would need to buy a portfolio of bonds, making it easier to diversify your fixed-income investments.Unlike individual bonds, however, bond funds have no maturity date and no guaranteed interest rate because their portfolios aren't fixed. Also unlike individual bonds, they don't promise to return your principal. You can choose among a variety of bond funds with different investment strategies and levels of risk. 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.


Bond rating

Independent agencies, such as Standard & Poor's (S&P) and Moody's Investors Service, assess the likelihood that bond issuers 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.


Bond swap

In a bond swap, you buy one bond and sell another at the same time. For example, you might sell 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 may also sell a bond with a lower rating to buy one with a higher rating, or sell a bond that's close to maturity so you can buy 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. Then you'd divide the net assets 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 stocks, bonds, and similar investments whose ownership is recorded electronically rather than in certificate form. When you sell the security, the records are updated, deleting you as an owner and adding the purchaser. This 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. Bottom-fishing investors hope the stock will rebound dramatically and provide 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.If your investing method is bottom up, 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. 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 stock’s average price changes gradually, if at all. But sometimes a stock’s 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 for a major disease. Or a breakout may reflect a financial development, such as a new alliance with a successful partner.


Breakpoint

A breakpoint is the level at which your account balance in a mutual fund company or the size of a new investment in the company's funds qualifies you to pay a reduced sales charge.Fund companies that charge a percentage of the amount you invest as a front-end load, or sales charge, may offer this cost saving. They are not required to do so, but if they do use breakpoints, they must ensure that all clients who qualify get the discount.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. Other companies count the investments of all of the members of your household or give you credit for purchases you intend to make in the future.


Broker

A broker acts as an agent or intermediary for a buyer and a seller. The buyer, seller, and broker may all be individuals, or one or more may be a business or other institution. For example, a stockbroker works for a brokerage firm, and handles client orders to buy or sell stocks, bonds, commodities, and options in return for a commission or asset-based fee. Stockbrokers must pass a uniform examination administered by the NASD and must register with the Securities and Exchange Commission (SEC). A floor broker handles buy and sell orders on the floor of a securities or commodities exchange. A real estate broker represents the seller in a real estate transaction and receives a commission on the sale. If as a real estate buyer you hire someone to represent your interests, that person is known as a buyer’s agent. A mortgage or insurance broker acts as an intermediary in finding a mortgage or insurance policy for his or her client and also receives a commission.


Broker-dealer

A broker-dealer (B/D) is a license granted by the Securities and Exchange Commission (SEC) that entitles the licensee to buy and sell securities for its clients’ accounts. The firm may also act as principal, or dealer, trading securities for its own inventory. Some broker-dealers act in both capacities, depending on the circumstances of the trade or the type of security being traded. For example, your order to purchase a particular security might be filled from the firm’s inventory. That’s perfectly legal, though you must be notified that it has occurred. B/Ds range in size from independent one-person offices to large brokerage firms.


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 full-service brokerage firm, a registered representative or account executive 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, also known as broker-dealers, 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. They may also provide a range of financial products and services, including financial planning, asset management, and educational programs.Brokerage firms come in all sizes, from one- or two-person offices to huge firms with offices around the world. They are sometimes differentialed as full-service or discount firms, based on pricing structure and client relationships.Some brokerage firms exist entirely online, and nearly all firms offer you the option of placing orders electronically rather than over the telephone. In most cases, trading electronically is substantially less expensive than giving buy and sell orders by phone.


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. Any securities trades you authorize for your account are made through this brokerage account. Transaction fees are subtracted as those orders are executed.


Bucket shop

A bucket shop is an illegal brokerage firm, whose salespeople pose as legitimate brokers and attempt to sell you securities. Typically, a bucket shop broker doesn’t actually purchase the securities you agree to buy and that you pay for. Rather the con artists pocket your money and move on, disappearing before you realize you have been scammed.


Budget

A budget is a written record of income and expenses during a specific time frame, typically a year. You use a budget as a spending plan to allocate your income to cover your expenses and to track how closely your actual expenditures line up with what you had planned to spend. An essential part of personal budgeting is creating an emergency fund, which you can use to cover unexpected expenses. You also want to budget a percentage of your income for saving and investing, just as you budget for food, housing, and clothing.Businesses and governments also create budgets to govern their expenditures for a fiscal year — though like individuals they make regular adjustments to reflect financial reality. And like individuals, businesses and governments can find themselves in trouble if their spending outpaces their income.


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 gains occur can vary widely from bull market to bull market. The duration of a bull market, the severity of the falling market that follows, and the time that elapses until the next upturn are also different each time. Well-known bull markets began in 1923, 1949, 1982, and 1990.


Bull spread

A bull spread is an options strategy that you use when you anticipate an increase in the price of the underlying instrument, such as a stock or an index. As in any spread, you purchase one option and write another on the same underlying item. Both options are identical except for one element, such as the strike price or the expiration date.For example, with a vertical bull call spread, you buy a call with a lower strike price and sell a call with a higher strike price. With a vertical bull put, you buy a put at a lower price and sell a put at a higher price.In either case, if you’re right about the behavior of the underlying instrument, you could have a net profit. For example, you would make money if a stock whose price you expect to increase does gain value. If you’re wrong, you could have a net loss cushioned by the income from the sale of one of the legs of the spread.


Buy down

When you make an up-front cash payment to reduce your monthly payments on a mortgage loan, it’s called a buy down. In a temporary buy down, your payments during the buy-down period are calculated at a lower interest rate than the actual rate on your loan, which makes the payments smaller.For example, if you prepay $6,000, your rate might be reduced by a total of six percentage points, or one percent for each thousand dollars, spread over three years. Instead of an 8% rate in the first year, it would be 5%. In the second year, it would be 6%, and in the third year 7%. On a $100,000 loan with a 30-year term, a reduction from 8% to 5% would reduce your monthly payments in the first year from about $734 to about $535.The extra cash you prepaid would be used to make up the difference between the amounts due calculated at the lower rates and the actual cost of borrowing — in this case about $200 a month in the first year. Then, in the fourth year, you would begin to pay at the actual loan rate and your payments would increase. In a permanent buy down, which is less common, your rate might be reduced by about 0.25% for each thousand dollars, or point, you prepaid, but the reduction would last for the life of the loan.You might choose to do a buy down if you had extra cash at the time you were ready to buy, but a smaller income than would normally allow you to qualify to buy the home you want. In most cases, lenders require that your housing costs be no more than 28% of your income. You might be able to reach that level if your initial payments were less at the time of purchase. In other cases, a home builder who is having trouble selling new properties might offer buy downs through a local lender to encourage reluctant buyers to take advantage of lower payments in the first years they own their homes.


Buy side

Institutional money managers, such as mutual funds, pension funds, and endowments, are the buy side of Wall Street. Buy-side institutions use proprietary research to make investments for the portfolios they manage and don’t interact with or make recommendations to individual investors. In contrast, sell-side institutions such as brokerage firms act as agents for individual investors when they buy and sell securities, and make their research available to their clients.


Buy-and-hold

Buy-and-hold investors take a long-term view of investing, generally keeping a bond from date of issue to date of maturity and holding onto shares of a stock through bull and bear markets. Among the advantages of following a buy-and-hold strategy are increased opportunity for your assets to compound and reduced trading costs. Among the risks are continuing to hold investments that are no longer living up to reasonable expectations.


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 or to make stocks available for employee stock option plans. They may also want to decrease the risk of a hostile takeover by reducing the number of shares for sale, or to discourage short-term trading by driving up the share price.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.


Buyer's agent

A buyer's agent represents a buyer in a real estate transaction, negotiating with the seller's agent for a lower price or a contract with more favorable terms. A real estate agent or broker, on the other hand, represents the seller. Although that agent customarily shows the property to prospective buyers, his or her primary obligation is to the seller.


Bylaws

Bylaws are the self-imposed rules governing an incorporated company. The bylaws cover details such as the structure of the company, what the company’s goals are, and how often shareholders meet.They also explain the voting process and how officers, committees, and board members are chosen. A company can put almost any provisions in its bylaws, as long as the rules don’t break federal or local law.


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