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Glossary


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Uncovered option

An uncovered option, also known as a naked option, is an option that is not backed by another position. For example, if you sell a call option without owning the stock that you would have to deliver if the option holder exercised, the call is uncovered. Similarly, if you sell an uncovered put, you don’t have adequate cash in reserve to fulfill your obligation to purchase the underlying instrument at exercise.Writing uncovered contracts can put you at significant risk despite the premium you collect when you open the position. For example, if a naked call option were exercised and assigned to you, you would have to buy the underlying instrument at its market price to be able to meet the terms of the contract. Because of the potential risk, your brokerage firm may restrict your right to write uncovered positions or may require you to trade these options in a margin account.


Underlying instrument

An underlying instrument is a security, such as a stock, a commodity, or other type of financial product, such as a stock index, whose value determines the value of a derivative investment or product. For example, if you own a stock option, the stock you have the right to buy or sell according to the terms of that option is the option's underlying instrument. Underlying instruments may also be called underlying products, underlying interest, or sometimes the underlying investment.


Underlying investment

The investments a variable annuity’s separate account fund, a mutual fund, or other fund makes are considered the fund’s underlying investments. The value of a single share or unit of the fund is based on the combined value of all of its underlying investments, minus fees and expenses, divided by the number of outstanding shares or units.In some cases, when the item underlying a derivative investment is a security, such as the individual stock underlying an equity options contract, it is also called an underlying investment. However, when the underlying item is a consumable commodity, such as corn, or a financial product, such as an equity index, it is called the underlying product, the underlying instrument, or sometimes simply the underlying.


Undervaluation

Any stock that trades at a lower price than the issuing company's reputation, earnings outlook, or financial situation would seem to merit is considered undervalued. Undervaluation may occur when investors lose interest in a company perhaps because it hasn't kept pace with its competitors, or if there are management problems. Some investors concentrate on identifying and investing in undervalued stocks, sometimes called simply value stocks, drawn by their bargain prices and the expectation of recovery.


Underwater

You’re underwater when your employee stock options are out-of-the-money and so currently worthless. For example, if you have options to buy your company stock at a strike price of $50, and the stock is currently trading at $30, you’re $20 underwater on each option. You can see how the next step may be drowning — financially speaking, of course.The term underwater is also used to describe situations where the principals are unable to meet their financial obligations. For example, if an investor is unable to meet margin calls on a margin account that has lost a considerable amount of money, the account is said to be underwater. Similarly a firm that is having financial difficulty is described as underwater.


Underweighted

When you own less of a security, an asset class, or a subclass than your target asset allocation calls for, you are said to be underweighted in that security, asset class, or subclass.For example, if you have decided to invest 30% of your portfolio in fixed-income investments, but your fixed-income holdings account for only 10% of your portfolio, you are underweighted in fixed income.In another use of the term, a securities analyst might recommend underweighting a particular security, which you might reasonably interpret as advice to sell.


Underwriter

An underwriter, typically an investment banker, buys an entire new securities issue from the company or government offering it, and resells the issue as individual stocks or bonds to the public.Part of the underwriter's job is to weigh the risks involved in taking on the financial responsibility of finding buyers against the profit to be made on the difference between the price paid for the issue and the amount it will generate. Typically, a number of bankers join forces as a purchase group, or syndicate, to spread the risk around and to reach the widest possible market.Insurance policies also need an underwriter. In this case, the term refers to a company that is willing to take the risk of insuring your life, property, income, or health in return for a premium, or payment.


Underwriting

Underwriting means insuring. An insurance company underwrites your policy when it agrees to take the risk of insuring your life or covering your medical expenses in exchange for the premium you pay. An investment bank underwrites an initial public offering (IPO) or a bond issue when it buys the shares or bonds from the issuer and takes the risk of having to sell them to individual or institutional investors to recover its investment.


Uniform Gifts to Minors Act (UGMA)

Under the UGMA, you as an adult can set up a custodial account for a minor and put assets such as cash, securities, and mutual funds into it. You pay no fees or charges to set up the account, and there is no limit on the amount you can put into it. To avoid owing potential gift tax, however, you may want to limit what you add each year to an amount that qualifies for the annual gift tax exclusion. One advantage of an UGMA custodial account is that you can transfer to it assets that you expect to increase in value. That way, any capital gains occur in the account, and you avoid potential estate taxes that might have been due had you owned the asset at your death. If you sell an asset in the account, taxable capital gains are calculated at the beneficiary's capital gains tax rate provided he or she is 18 or older. Taxable capital gains are calculated at the parents’ rate if the child is younger than 18.One potential disadvantage of a custodial account is that any gift to the account is irrevocable. The assets become the property of the beneficiary from the moment they go into the account, even though as a minor he or she cannot legally control activity in the account or take money out. At majority, which occurs at 18 or 21 depending on the state, the beneficiary may use the assets as he or she wishes.In addition, if you are both the donor and the custodian, and die while the beneficiary is still a minor, the assets are considered part of your estate. That could make your estate's value large enough to be vulnerable to estate taxes.


Uniform Transfers to Minors Act (UTMA)

The UTMA allows you as an adult to set up a custodial account for a minor, who owns any assets placed in the account, although he or she can't legally control the account until reaching the age of majority. The UTMA is similar to the Uniform Gifts to Minors Act (UGMA) in many respects, but you can use an UTMA to gift assets in addition to cash and securities, including real estate, fine art, antiques, patents, and royalties.You may choose to transfer assets that you expect to increase in value into the UTMA account. That way, any capital gains occur in the account, and you avoid potential estate taxes that might have been due had you owned the asset at your death. If you sell an asset in the account, taxable gain is figured at the beneficiary's capital gains tax rate provided he or she is 18 or older. Taxable capital gains above a certain limit that Congress sets each year are calculated at the parents’ rate if the child is younger than 18.One potential disadvantage of a custodial account is that any gift to the account is irrevocable. The assets become the property of the beneficiary from the moment they go into the account, even though as a minor he or she cannot legally control activity in the account or take money out. At majority, which occurs at 18, 21, or 25 depending on the state, the beneficiary may use the assets as he or she wishes. To avoid owing potential gift tax, you may want to limit what you add each year to an amount that qualifies for the annual gift tax exclusion. In addition, if you are both the donor and the custodian, and die while the beneficiary is still a minor, the assets are considered part of your estate. That could make your estate's value large enough to be vulnerable to estate taxes.


Unit investment trust (UIT)

A UIT may be a fixed portfolio of bonds with specific maturity dates, a portfolio of income-producing stocks, or a portfolio of all of the securities included in a particular index. Examples of the latter include the DIAMONDs Trust (DIA), which mirrors the composition of the Dow Jones Industrial Average (DJIA), and Standard & Poor's Depositary Receipts (SPDR), which mirrors the Standard & Poor's 500-stock Index (S&P 500). Index UITs are also described as exchange traded funds (ETFs).UITs resemble mutual funds in the sense that they offer the opportunity to diversify your portfolio without having to purchase a number of separate securities. You buy units, rather than shares, of the trust, usually through a broker. However, UITs trade more like stocks than mutual funds in the sense that you sell in the secondary market rather than redeeming your holding by selling your units back to the issuing fund. Further, the price of a UIT fluctuates constantly throughout the trading day, just as the price of an individual stock does, rather than being repriced only once a day, after the close of trading. As a result some UITs, though not index-based UITs such as DIAMONDS or SPDRs, trade at prices higher or lower than their net asset value (NAV). One additional difference is that many UITs have maturity dates, when the trust expires, while mutual funds do not. A fund may be closed for other reasons, but not because of a predetermined expiration date.


Unit of trading

When you buy stocks, bonds, options and commodities futures, it's typical to buy in a particular volume or a particular dollar value, called a round lot or a unit of trading. For example, stocks are usually traded in lots of 100 shares, or multiples of 100 shares, and bonds in multiples of $1,000. For some preferred stocks, known as ten-share traders, the unit of trading is ten shares. Any variation from the standard unit of trading is known as an odd lot.


Unit trust

The category of investment known as a mutual fund in the US is called a unit trust in other parts of the world.


Universal life insurance

Universal life insurance is a type of permanent insurance that offers flexible premiums and a flexible death benefit. Your tax-deferred cash value account accumulates at least the guaranteed rate of interest, but may accumulate at a higher rate if market rates are higher than the guaranteed rate. You can use the money in your cash value account to pay premiums if there’s enough available. And you can also increase the amount of the death benefit without having to qualify for the additional protection. This alternative allows you to build inflation protection into your insurance. As with other permanent policies, you may be able to borrow against your cash value account, though any outstanding loan reduces your death benefit. You also get a portion of the cash value back, minus fees and expenses, if you end the policy. However, universal life is a more complex product than straight life and the premiums are higher for a comparable death benefit.


Universe

In the world of investments, the word universe refers to a specific group or category of investments that share certain characteristics. A universe might be the stocks that are included in a particular index, the stocks evaluated by a particular analytical service, or all of the stocks in a particular industry.


Unlisted security

A security, such as a stock, is unlisted when it does not meet the listing requirements or pay the listing fee of any of the organized exchanges or markets. Unlisted stock may be traded over-the-counter (OTC), however, and its price and volume may be tracked in the Pink Sheets or on the OTC Bulletin Board (OTCBB). In most cases, unlisted stocks are thinly traded because they do not get much attention from the media or financial analysts, and are judged too risky for many investors.


Unrealized gain

If you own an investment that has increased in value, your gain is unrealized until you sell and take your profit. In most cases, the value continues to change as long as you own the investment, either increasing your unrealized gain or creating an unrealized loss.You owe no income or capital gains tax on unrealized gains, sometimes known as paper profits, though you typically compute the value of your investment portfolio based on current — and unrealized — values.


Unrealized loss

If the market price of a security you own drops below the amount you paid for it, you have an unrealized loss. The loss remains unrealized as long as you don't sell the security while the price is down. In a volatile market, of course, an unrealized loss can become an unrealized gain, and vice versa, at any time.One reason you might choose to sell at a loss, other than needing cash at that moment, is to prevent further losses in a security that seems headed for a still-lower price.You might also sell to create a capital loss, which you could use to offset capital gains.


Unsecured bond

When a bond isn't backed by collateral or security of some kind, such as a mortgage, that can be used to repay the bondholders if the bond issuer defaults, the bond is described as unsecured. However, most unsecured bonds pose limited risk of default, since the companies that issue them are usually financially sound. Unsecured bonds are also known as debentures.


Uptick

An uptick is the smallest possible incremental increase in a security's price, which, for stocks, is one cent. So when there's an uptick in a stock selling at $20.25 cents, the new price is $20.26 cents.


US savings bond

The US government issues two types of savings bonds: Series EE and Series I. You buy electronic Series EE bonds through a Treasury Direct account for face value and paper Series EE for half their face value. You earn a fixed rate of interest for the 30-year term of these bonds, and they are guaranteed to double in value in 20 years. Series EE bonds issued before May 2005 earn interest at variable rates set twice a year.Series I bonds are sold at face value and earn a real rate of return that’s guaranteed to exceed the rate of inflation during the term of the bond. Existing Series HH bonds earn interest to maturity, but no new Series HH bonds are being issued.The biggest difference between savings bonds and US Treasury issues is that there’s no secondary market for savings bonds since they cannot be traded among investors. You buy them in your own name or as a gift for someone else and redeem them by turning them back to the government, usually through a bank or other financial intermediary.The interest on US savings bonds is exempt from state and local taxes and is federally tax deferred until the bonds are cashed in. At that point, the interest may be tax exempt if you use the bond proceeds to pay qualified higher education expenses, provided that your adjusted gross income (AGI) falls in the range set by federal guidelines and you meet the other conditions to qualify.


US Treasury bond

US Treasury bonds are long-term government debt securities, typically issued with 30-year terms. New bonds are sold at a par value of $1,000, and existing bonds trade in the secondary market at prices that fluctuate to reflect changing demand. These bonds, sometimes referred to as long bonds, are often used as a benchmark for market interest rates.While interest on US Treasury bonds is federally taxable, it is exempt from state and local taxes. Treasury bonds are considered among the world’s the most secure investments, since they are backed by the full faith and credit of the US federal government.


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