Ability To Pay
The present and future capacity of a municipal bond issuer to generate enough tax revenue to meet its liabilities. To determine a municipality's ability to pay, all factors concerned with property values and municipal income are considered.

See: Municipal Bond

Absorbed
An issue is absorbed when it has been entirely sold to the public.

See: Issue

Absorption Point
During market trading, securities are absorbed when there are corresponding orders to buy and sell. When further absorption is impossible without an adjustment in price, the security has reached its absorption point.

See: Undigested Securities

Abusive Tax Shelter
A limited partnership is classified as an abusive tax shelter by the Internal Revenue Service when it determines that the limited partnership is claiming illegal tax deductions. This usually occurs when the limited partnership values its property beyond the fair market value. If these tax deductions are denied by the IRS, investors must pay back taxes, severe penalties and interest charges.

See: Fair Market Value

Acceleration Clause
A clause frequently contained within an indenture agreement and other contracts. It stipulates that if certain default events should occur, the unpaid balance will become due and payable. Examples of the type of events are insolvency and failure to meet principal, interest or sinking fund payments.

See: Indenture; Insolvency

Account
When a brokerage firm obtains a client, an account must be opened in the name of the client. The account will reflect activities of the client such as the buying and selling of securities.

See: Registered Representative

Account Executive (AE)
An employee of a brokerage firm who must pass specified tests and must be registered with the National Association of Securities Dealers (NASD) before he or she may solicit or accept orders from clients.

An account executive working for a full service brokerage firm generally provide their clients with advice, placement of orders and has the legal powers of an agent. In a discount brokerage firm, an account executive generally provides the client with customer service and handles the purchase and sale of securities on an unsolicited basis. Because account executives at discount brokerage firms usually do not provide advice for their clients, the commissions charged for the purchase and sale of securities are customarily much lower.

See: Broker; NASD; Registered Representative

Accounts Payable
The amount owed to creditors for goods and services. Analysts look at a company's relationship of accounts payable to purchases for indications of sound financial management.

See: Accounts Receivable

Accounts Receivable
A component of a corporation's current assets that consists of money owed to the corporation for services or merchandise it sold to customers. It is a key factor in examining a corporation's "liquidity"--its capacity to meet current obligations without receiving additional revenues.

See: Accounts Receivable Turnover Ratio; Asset; Balance Sheet; Liquidity

Accounts Receivable Financing
If a corporation is in need of short term financing, it may try to obtain accounts receivable financing. If obtained, the corporation's accounts receivable is used as collateral for working capital advances.

See: Working Capital

Accounts Receivable Turnover Ratio
A ratio that denotes how many times a corporation's receivable portfolio has been collected during an accounting period. The ratio is calculated by dividing total credit by accounts receivable.

See: Accounts Receivable

Account Statement
A statement that includes all transactions, positions and open orders and indicates the status of a client's account with a brokerage firm. Statements are required to be issued at least quarterly for all accounts. However, statements for active accounts are often provided on a monthly basis.

See: Account

Accredited Investor
A person or institution deemed capable of understanding and affording the financial risks associated with the acquisition of unregistered securities. The SEC recognizes the following parties as accredited: 1. An individual who, alone or with a spouse, has a net worth of over $1 million. 2. An individual who had income in excess of $200,000 in each of the past two years (or with a spouse, in excess of $300,000 in each of the past two years) and has a reasonable expectation of doing as well in the current year. 3. A financial institution such as a bank, broker/dealer, insurance company, or business development company. 4. Any director, officer, or general partner of the issuer. 5. A trust or business partnership (with assets in excess of $5 million) that wasn't formed for the purposed of acquiring the unregistered securities. 6. Any entity wholly owned by accredited investors.

SEC Regulation D stipulates that a maximum of 35 non-accredited investors are allowed to invest money into a Private Placement in order for the Private Placement to qualify for the safe-harbor exemption from registration. An issuer of a private placement will try to acquire accredited investors to raise a greater amount of capital than would be possible if only 35 investors of less affluence could contribute.

See: Affiliated Person

Accretion
A method of adjusting the tax cost basis of a bond bought at an original issue discount in equal amounts over the life of the bond. For tax purposes, the annual accretion is treated as interest.

See: Original Issue Discount

Accrual Basis
An accounting method in which income and expense items are credited as they are incurred or earned, although they may not have been received or actually paid in cash. Cash Basis accounting is an alternative method.

Accrued Interest
When a bond or other fixed income security is sold, the buyer pays the seller the price of the bond plus accrued interest. To calculate the amount of accrued interest due to the seller, multiply the number of days that have elapsed since the last payment by the coupon rate. The recipient of the accrued interest is taxed at ordinary income rates.

The buyer's expenditure is only temporary. When the next interest payment on the bond is due, the purchaser will receive the entire amount. Part of the payment is for the current holder's status as a creditor and part restitution for the earlier payment to the former bondholder.

See: Coupon Rate

Accrued Market Discount
An increase in a discount bond's market value as it approaches its maturity date. The increase is not due to the decline of market interest rates.

See: Discount Bond; Maturity Date

Accumulated Dividend
A dividend due to stockholders of cumulative preferred stock that has not been paid to them. Until the dividend is paid, it is carried on the corporation's books as a liability.

See: Cumulative Preferred Stock

Accumulation
With respect to mutual funds, accumulation is when a fixed dollar amount is invested regularly and any capital gains and dividends are reinvested back into the fund.

In regard to other types of investments, accumulation occurs when an organization (or individual) purchases a large number of shares in a controlled method. This is done in order to avoid driving up the price of the investment. It may take weeks or months to complete an organization's accumulation program.

See: Dollar Cost Averaging; Mutual Funds

Accumulation Account
The sponsor of a Unit Investment Trust uses an accumulation account to deposit securities it has acquired. These securities will eventually become part of the trust itself.

See: Unit Investment Trust

Accumulation Area
The price range of a security that indicates buyers are willing to purchase the security at its current price. Technical analysts detect accumulation areas when a security does not fall below a specific price. Technicians advise buying securities that have attained their accumulation area because the securities are likely to draw more buying interest.

See: Distribution Area; On Balance Volume; Resistance Level; Support Level; Technical Analysis; Vertical Line Charts

Acid Test Ratio
A ratio that tests a corporation's liquidity. It is a stricter test than if the current ratio is used. The ratio is calculated by dividing the sum of cash, cash equivalents, accounts receivable and notes receivable by the total current liabilities.

See: Current Ratio; Quick Asset Ratio

Acknowledgment
Authentication of a signature on a brokerage document to ensure it is valid and has been sanctioned by an authorized individual. Acknowledgment, for example, is needed when a client wishes to transfer an account from one broker to another.

Acquisition
The act of one corporation acquiring a controlling interest in another corporation. In an "unfriendly" takeover, the buying corporation may offer incentives to stockholders such as offering a price well above the current market value.

See: Merger; Takeover

Across The Board
Movement, up or down, in the stock market that affects nearly all stocks in the same direction. That is, nearly all stocks are gainers (or losers).

Acting In Concert
More than one investor who work in concert to achieve an investment objective. A group of investors who wish to take over a company may act in concert to buy up the company's stock. This is legal as long as proper notification is made to the SEC. However, if the group is acting in concert to manipulate a stock's price for their own gain, it would be considered an illegal act.

Active Bond
Corporate debt instruments that trade frequently on the floor of the NYSE are classified as active and are assigned certain privileges. Included are substantial issues of established corporations and most convertible bonds.

See: Convertible Bond

Active Bond Crowd
New York Stock Exchange members who are responsible for the heaviest volume of bond trading. Investors who trade bonds in the active crowd usually tend to get better prices for their securities than in the inactive market. (The spreads between bid and asked prices are wider.)

A cabinet crowd, which deals in bonds that are infrequently traded, is the opposite of an active crowd.

See: Cabinet Crowd

Active Box
Securities held by a brokerage firm that meet specific qualifications are used as collateral for securing brokers' loans or customers' margin positions. They are held in safekeeping for clients of a broker/dealer or for the broker/dealer itself in a physical location known as the "open box" or "active box".

See: Broker-Dealer

Active Market
An active market occurs when a security, or the exchange as a whole, experiences heavy trading volume. The spread between the securities bid and asked price is usually narrower in an active market than in an inactive market.

See: Asked Price; Spread

Actuals
A physical commodity that, when traded, results in the delivery of the actual commodity to the buyer when the contract expires. When actuals are traded, most options and futures contracts are closed out before the contracts expire. Thus, these transaction tend not to end in the actual delivery of the commodity. Examples of actuals are commodities such as oil and gold.

See: Futures Contract; Options