Dictionary of Finance and Investment Terms

Covers stocks and bonds, banking, corporate finance, tax laws, mutual funds, and more in accordance with federal income tax revisions.

Charts and graphs.

Preface

People retiring in the early years of the 21st century, the baby boom generation, have witnessed a revolution in the world of finance and investment. The forces of globalization assure that their children, face a future just as dynamic.

Deregulation of the securities, banking, and savings industries, starting in the 1970s, made a vast range of financial and investment products and services available to people at all economic levels. It also led to abuses and financial losses that required government intervention and a modernization of investor safeguards.

Merger mania in the "roaring 1980s" saw many of America's best-known corporations embroiled in hostile takeovers or leveraged buyouts financed by junk bonds, giving rise to defensive tactics known by such colorful names as the "poison pill," the "Pac-Man strategy," or the "white knight." Insider trading scandals were one result, but another was the innovation of investment techniques designed to capitalize on the profit opportunities created by corporate takeovers.

The 1990s brought corporate downsizing and restructuring, massive stock buybacks, strategic mergers on a global scale, and a prolonged bull market fueled by corporate profitability, low inflation, and sustained economic growth.

With globalization, the world's economies, more free of trade and economic barriers, have become more interdependent and in some ways more vulnerable. On the eve of the new millennium, floundering Asian economies and a recession in Japan threatened markets in the United States and challenged the confidence of a new European Monetary Union with its common currency, the Euro, and its promise of expanded financial markets.

Advanced communications systems have created both greater simplicity and greater complexity in the more unified world of finance and investment. By linking markets and processing massive information, these systems have given rise to investment vehicles, transactions, and methods of managing risk not previously imaginable.

The generation produced by the baby boomers must plan its personal finances in an economy offering less assurance of future financial security. The restructurings of the 1990s made corporations more efficient but took their human toll, just as the demographics that earlier created surpluses in the Social Security system became less favorable for future recipients. The enormous growth of 401(k) and individual retirement accounts, addresses this problem but also points to its gravity.

The introduction of Roth IRAs, the lowering of long-term capital gains tax rates, and other provisions of the Taxpayer Relief Act of 1997 and the IRS Restructuring and Reform Act of 1998, also recognize the increasing importance of self-reliance in personal financial planning.

This thoroughly revised Dictionary of Finance and Investment Terms covers the 20th century's major developments in investments, taxation, economics, consumer and corporate finance, and related fields. Adding a more comprehensive global dimension, it defines and clarifies the language that will be used in financial decision-making in the new millennium.

We wish especially to acknowledge Roberta Yafie, whose fact-checking and research went well beyond the call of duty; Mary Falcon, Barron's editor, who ably and patiently coordinated an immense amount of detail; and our original Barron's editor, Tom Hirsch. Suzanne and Jason Goodman, Katie and Annie Downes, and Nancy Weinberg all sacrificed unselfishly at different stages of the project and we thank them.

We also thank Accounting Today, American Association of Individual Investors, American Bankers Association, American Council of Life Insurance, American Express Company, American Institute of Certified Public Accountants, American Society of CLU & ChFC (Chartered Life Underwriters), American Stock Exchange, Associated Credit Bureaus, Bankers Trust Company, A.M. Best & Company, The Bond Buyer, Bond Market Association, Boston Stock Exchange, Chase Manhattan Bank NA, Chicago Board of Trade, Chicago Board Options Exchange, Chicago Mercantile Exchange, Cincinnati Stock Exchange, Coffee, Sugar & Cocoa Exchange, COMEX, Commodity Futures Trading Commission, Dow Jones & Company, Employee Benefit Research Institute, 'Me European Commission, Fannie Mae, Federal Energy Regulatory Commission, Federal Reserve Bank of New York, Federal Trade Commission, FINEX, Frank Russell Company, Futures Industry Association, Goldman Sachs & Company, Health Insurance Institute of America, Hulbert Financial Digest, IBC Organization, I/B/E/S Incorporated, Insurance Information Institute, Intermarket Management Incorporated, Internal Revenue Service, International Petroleum Exchange, International Swaps and Derivatives Association, Investment Management Consultants Association, Investment Program Association, J.P Morgan, Kansas City Board of Trade, Richard J. Kittrell, Esq/ Kittrell & Kittrell P.C., Liquidity Financial Corporation, Mercer and Company, Merrill Lynch, Minneapolis Grain Exchange, Montreal Exchange/Bourse de Montreal, Morgan Stanley Dean Witter, Morningstar, Mortgage Bankers Association, Municipal Bond Investors Assurance Corporation, National Association of Investors Corporation, National Association of Real Estate Investment Trusts, National Association of Realtors, National Association of Securities Dealers, National Association of Variable Annuities, National Credit Union Administration, New York Cotton Exchange, New York Futures Exchange, New York Life Insurance Company, New York Mercantile Exchange, New York Stock Exchange, Office of Thrift Supervision, Options Clearing Corporation, Options Institute, Pacific Exchange, Pension Benefit Guaranty Corporation, Philadelphia Stock Exchange, Prudential Securities, Salomon Smith Barney, Securities and Exchange Commission, Securities Industry Association, Standard & Poor's, Toronto Stock Exchange, Trimedia Incorporated, U.S. Department of Commerce, U.S. Department of Labor, Value Line Investment Survey, Vancouver Stock Exchange, Visa International, The Weiser Group, Wheat First Butcher Singer Incorporated, Wilshire Associates, Winnipeg Commodity Exchange, World Gold Council, Wrap Industry Association, and Zacks Investment Research.

John Downes
Jordan Elliot Goodman MONOPSONY situation in which one buyer dominates, forcing sellers to agree to the buyer's terms. For example, a tobacco grower may have no choice but to sell his tobacco to one cigarette company that is the only buyer for his product. The cigarette company therefore virtually controls the price at which it buys tobacco. The opposite of a monopsony is a MONOPOLY. MONTHLY COMPOUNDING OF INTEREST see COMPOUtradingND INTEREST. MONTHLY INVESTMENT PLAN plan whereby an investor puts a fixed dollar amount into a particular investment every month, thus building a position at advantageous prices by means of dollar cost averaging (see CONSTANT DOLLAR PLAN). MONTREAL EXCHANGE/BOURSE DE MONTREAL Canada's oldest stock exchange and second-largest in dollar value of trading. In 1996, the ME and its sister Canadian exchanges became the first in North America to introduce a decimal pricing system of trading abandon the old "pieces of eight" system. Stocks, bonds, futures and options are traded through a specialist system combined with automated systems, including the Electronic Order Book for registering market and limit orders; MORRE, an electronic order execution system; and Montreal Direct Access, which provides access to the Electronic Order Board through existing terminals for the trading desks of member firms. Futures trading is conducted by traditional open outcry. A system-to-system link between the Montreal Exchange (ME) and the BOSTON STOCK EXCHANGE (BSE) enables ME member firms to electronically route retail orders for U.S. securities directly to BSE for automatic execution and confirmation at the best prevailing price in the Intermarket Trading System. The Canadian Market Portfolio Index (XXM) tracks the market performance of the 25 highest capitalized stocks traded on at least two Canadian exchanges, and is the ME'S main index. Trading hours are 9:30 A.M. to 4 Pm. EST, Monday through Friday; extended sessions of 8:15 A.M. to 9:15 A.M., and 4:15 P.M. to 5:15 Pm., are offered. In addition, six sector indices track banking, forest products, industrial products, mining and minerals, oil and gas and utilities. In the derivatives market, the exchange trades 10-year Government of Canada bond futures (CGB) and options (OGB) and 3-3-month Canadian bankers' acceptance (BAX) futures and options (OBX); 1-month Canadian bankers' acceptance futures (BAR) and 5-year Government of Canada bond futures (CGF); equity options and long-term equity options; Canadian bond options; and LEAPS. Futures are traded from 8 A.M. to 3 P.M.; options, from 8:20 A.M. to 4 Pm. Settlement for securities is the third business day following the trade date; for futures and options, it is the day after a transaction by direct payment to the Canadian Derivatives Clearing Corporation. MOODY'S INVESTMENT GRADE rating assigned by MOODY'S INVESTORS SERVICE to certain municipal short-term debt securities, classified as MIG-1, 2, 3, and 4 to signify best, high, favorable, and adequate quality, respectively. All four are investment grade or bank quality. MOODY'S INVESTORS SERVICE headquartered with its parent company, Dun & Bradstreet, in downtown Manhattan, Moody's is one of the two best known bond rating agencies in the country, the other being Standard & Poor's. Moody's also rates commercial paper, preferred and common stocks, and municipal short-term issues. The six bound manuals it publishes annually, supplemented weekly or semiweekly, provide great detail on issuers and securities. The company also publishes the quarterly Moody's Handbook of Common Stocks, which charts more than 500 companies, showing industry group trends and company stock price performance. Also included are essential statistics for the past decade, an analysis of the company's financial background, recent financial developments, and the outlook. Moody's rates most of the publicly held corporate and municipal bonds and many Treasury and government agency issues, but does not usually rate privately placed bonds. MORAL OBLIGATION BOND tax-exempt bond issued by a municipality or a state financial intermediary and backed by the moral obligation pledge of a state government. (State financial intermediaries are organized by states to pool local debt issues into single bond issues, which can be used to tap larger investment markets.) Under a moral obligation pledge, a state government indicates its intent to appropriate funds in the future if the primary OBLIGOR, the municipality or intermediary, defaults. The state's obligation to honor the pledge is moral rather than legal because future legislatures cannot be legally obligated to appropriate the funds required. MORAL SUASION persuasion through influence rather than coercion, said of the efforts of the FEDERAL RESERVE BOARD to achieve member bank compliance with its general policy. From time to time, the Fed uses moral suasion to restrain credit or to expand it. MORGAN STANLEY CAPITAL INTERNATIONAL INDICES indices maintained and calculated by Morgan Stanley's Capital International group (MSCI) which track more than 45 equity markets throughout the world. The MSCI indices are market capitalization weighted and cover both developed and emerging markets. In addition to the country indices, MSCI also calculates aggregate indices for the world, Europe, North America, Asia, and Latin America. Most international mutual funds and other international institutional investors measure their performance against MSCI indices....

Contents

• Preface to the Fifth Edition ..... iv
• How to Use This Book Effectively ..... vi
• Terms ..... 1
• Abbreviations and Acronyms ..... 717