Key Investment Terms
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American Depositary Receipt (ADR)
A U.S. security that is a repackaged foreign security. A U.S. bank creates an ADR based on evidence of ownership of a specified number of shares in the foreign security, while the underlying shares are held in a depositary in the issuing company's home country. U.S. investors may buy shares in the foreign company in the form of an ADR. The certificate, transfer, and settlement practices for ADRs are identical to those for U.S. securities. U.S. investors often prefer ADRs over the direct purchase of foreign shares because of the ready availability of price information, lower transaction costs, and timely dividend distribution. Additionally, some U.S. investment institutions are not permitted to invest in non-U.S. securities, but may invest in ADRs.
Ask (Offer) Price
The price at which a market maker is willing to sell a security.
A committee or equivalent body established by and amongst the board of directors of an issuer for the purpose of overseeing the accounting and financial reporting processes of the issuer and audits of the financial statements of the issuer.
Automated Confirmation Transaction ServiceSM ACTSM
ACT is an automated service that speeds the post-execution steps of price and volume reporting and comparison and clearing of pre-negotiated trades completed in NASDAQ® and OTC (including OTCBB) securities. ACT handles transactions negotiated over the phone or executed through any of NASDAQ's automated trading services.
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The illegal practice of attempting to push the price of a stock lower by taking large short positions and spreading unfavorable rumors about the target firm.
The lowest quoted offer of all competing Market Makers to sell a particular stock at any given time.
The highest quoted bid of all competing Market Makers to buy a particular stock at any given time.
NASD Rule 2320 The obligation of Market Makers, broker/dealers, and others to execute customer orders at the best price available at the time the trade is entered.
Bid (or Buy) Price
The price at which a Market Maker is willing to buy a security.
Bid Tick Rule
An NASD rule prohibiting a short sale transaction when the current best bid in a security is less than the previous best bid. That is, when it is on a "down-tick." The bid tick rule does not apply to the OTCBB.
Requests for information sent out by the Securities and Exchange Commission to market makers. They provide the SEC with detailed information about trades performed by a firm and its clients. The information includes the security's name, the date traded, price, transaction size, and a list of the parties involved.
A purchase or sale of a large quantity of stock, generally, 10,000 shares or more. For purposes of NASD Rule 6541 regarding Limit Order Protection, a block trade is defined as one for 10,000 shares or more, and greater than $20,000 in value.
State laws that require issuers of securities to register their offerings with the state before they can be sold to its residents. Most blue-sky laws include provisions relating to fraudulent activities and the licensing of securities professionals. Each state has a regulatory agency that administers the law -- typically known as the State Securities Commissioner. NASDAQ National Market securities, subject to higher qualifications standards, are exempted from registration requirements under most states' blue-sky laws as are those listed on exchanges. OTCBB issuers are not exempt from Blue Sky registration requirements.
An individual or firm who acts as an intermediary between a buyer and seller, usually charging a commission.
NASD member firms that act as securities dealers or brokers, or perform both functions.
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The process of reporting a trade to ACT for comparison of the details of the transaction between brokers prior to final settlement; the final exchange of securities for cash on delivery. Clearing operations, such as the National Securities Clearing Corporation (NSCC), facilitate the validation, delivery, and settlement of securities transactions. Trades are either reported by the broker to the clearing corporation directly or through a third party, usually another brokerage firm if a broker does not have a direct relationship with a clearing corporation.
A class of securities representing ownership and control in a corporation and that may pay dividends as well as appreciate in value.
A unique nine-character alpha/numeric code assigned to a security by Standard & Poor's Corporation, which appears on the face of each certificate. The primary use of the number is to expedite the clearance and settlement process. CUSIP stands for Committee on Uniform Security Identification Procedures. The telephone number for the CUSIP Service Bureau is (212) 438-6565.
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Any person or company in the business of buying and selling securities for his or her own account, through a broker or otherwise.
When a company decides to issue American Depositary Receipts, it appoints an authorized depositary, normally part of a large U.S. banking institution or trust company.
Depth of Market
The number of shares of a security that can be bought or sold at the bid and ask prices near the inside market without causing a dramatic change in price.
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Electronic Data Gathering, Analysis, and Retrieval (EDGAR) is an electronic system developed by the Securities and Exchange Commission (SEC). EDGAR permits companies to electronically file documents required for securities offerings and ongoing disclosure obligations with the SEC. EDGAR became fully operational mid-1995.
The ownership interest of stockholders in a company.
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Federal Reserve System
A federal government institution created by Congress to administer the nation's credit and monetary policies. Among other things, the Board of Governors of the Federal Reserve System sets the initial amount of credit that broker/dealers (as well as other lenders) may extend to customers to purchase securities.
The requirement that a Market Maker execute an order from another broker/dealer at its displayed price for the normal unit of trading, or for its displayed size, whichever is greater.
Defined as total shares outstanding less any shares held by officers, directors or beneficial owners of 10% or more. Also called publicly held shares.
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A situation where a security is temporarily not available for trading or subject to a trade halt. Market Makers are not allowed to display quotes of held securities.
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A person who buys or sells securities for his or her own account. The individual investor is also called a retail investor or retail shareholder.
Initial Public Offering (IPO)
A company's first sale of stock to the public. Companies making an IPO are seeking outside equity capital and a public market for their stock.
The highest bid and the lowest ask (offer) prices among all Market Makers competing in a NASDAQ security; the best bid and ask prices for a security.
A bank, mutual fund, pension fund, or other corporate entity that trades securities in large volumes.
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A Limit Order is an order to buy or sell a stock at a customer specified price.
Limit Order Display
The Limit Order Display Rule (SEC Order Handling Rules) requires a market maker that receives a customer limit order priced at or better than its current quote and that does not immediately execute the order, to display the order to the entire marketplace. Alternatively, the Market Maker can choose to send the order to another Market Maker or ECN for display. There is no limit order display rule on the OTCBB.
Limit Order Protection (Manning)
The Limit Order Protection Rule, NASD Rule 6541, prohibits member firms from "trading ahead" of customer limit orders that a member accepts. Members handling customer limit orders are prohibited from trading at prices equal or superior to that of the customer limit order without also executing that order at the limit price.
The liquidity of a stock is the ease with which the market can absorb volume buying or selling without dramatic fluctuation in price.
Locked or Crossed Quotations
A temporary condition, normally associated with fast-moving, active markets, where the ask price of one Market Maker in a given security is the same or lower than the bid price of another Market Maker, thereby producing locked or crossed quotations, respectively. Trading continues to occur.
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An account in which a customer purchases securities on credit extended by a broker/dealer. Rules of the Federal Reserve Board and NASD govern margin accounts.
One of the major differences between The NASDAQ Stock Market and other major markets in the U.S. is NASDAQ's structure of competing Market Makers. (There are approximately 250 member firms that act as OTCBB Market Makers). Market Makers are NASD member firms that use their own capital, research, retail and/or systems resources to represent a stock and compete with each other to buy and sell the stocks they represent. Each Market Maker competes for customer order flow by displaying buy and sell quotations for a guaranteed number of shares. Once an order is received, the Market Maker will immediately purchase for or sell from its own inventory, or seek the other side of the trade until it is executed, often in a matter of seconds.
A Market Order is an order to buy or sell a stock at the market's current best displayed price.
Minimum Quote Size Requirements
NASD Rule 6750. The minimum size at which a market maker is permitted to display bid or offers in the BBX. The minimum size required depends on the price of the stock. For example, all quotes on the OTCBB priced under $0.50 have a minimum quote size of 5,000 shares.
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The illegal practice of short selling shares that haven't been borrowed or do not exist at all. Ordinarily, traders must borrow a stock, or determine that it can be borrowed, before they sell it short. However, some professional investors and hedge funds take advantage of loopholes in the rules to sell shares without making any attempt to borrow the stock.
National Association of Securities Dealers. The largest self-regulatory organization for the securities industry in the United States. NASD is responsible for the operation and regulation of NASDAQ and the over-the-counter securities markets; it is the parent company of NASD Regulation, Inc. and The NASDAQ Stock Market, Inc.
An independent subsidiary of the NASD that regulates the activities of broker/dealers in the over-the-counter industry and The NASDAQ Stock Market. NASD Regulation carries out its regulatory responsibilities through education, examinations, market surveillance, registration of securities personnel, advertising and underwriting reviews, disciplinary actions for rule violations, investigation of customer complaints, and forums to resolve disputes. NASD Regulation also regulates the sale of mutual funds, direct participation programs, and variable annuities.
The NASDAQ Stock Market
The NASDAQ Stock MarketSM is a major national and international stock market that uses computers and telecommunications for the trading and surveillance of thousands of securities. The NASDAQ Stock Market is built on a unique system of competing Market Makers that list specific prices for the sale or purchase of securities. The NASDAQ Stock Market also is unique in its use of a flexible computer-based trading system that enables people to trade by computer from wherever they are located. The OTCBB is separate and distinct from The NASDAQ Stock Market. Unlike NASDAQ listed companies, OTCBB issuers have no minimum listing requirements, maintenance requirements, or reporting obligations to The NASDAQ Stock Market, Inc., or the NASD.
NASDAQ Workstation II
A computerized trading tool for Market Makers, brokers, and institutions, comprised of a personal computer and NASDAQ-developed software that provides access to all NASDAQ markets, including the OTCBB, the NASDAQ National Market, The NASDAQ SmallCapSM Market, PORTALSM, and the NASDAQ International Service.
A trade that is sent to ACT to satisfy trade reporting requirements only, but is not sent to clearing. (See clearing.)
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Securities that are not listed and traded on a national securities exchange or The NASDAQ Stock Market.
An electronic quotation medium for unlisted, non-NASDAQ, over-the-counter securities. The OTC Bulletin Board allows Market Makers to display firm prices for domestic securities, foreign securities, and ADRs that can be updated on a real-time basis. The service also permits the display of non-firm prices for DPPs, unpriced indications of interest, and telephone numbers for participating Market Makers.
OTC securities that are not quoted on the OTCBB. Other-OTC securities may or may not be quoted on the Pink Sheets. Also called Non-Bulletin Board (NBB).
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Penny Stocks are, generally speaking, those securities that are not listed on either NASDAQ or a national securities exchange and are priced under $5. There are exclusions for securities of issuers that have net tangible assets greater than $2 million if they have been in operation at least three years or greater than $5 million if in operation less than three years. Securities of issuers with average revenue of at least $6 million for the last three years are also not considered penny stocks. For a complete definition of a Penny Stock, see SEC Rule 3a51-1. OTCBB securities are considered penny stocks unless they qualify for one of the exclusions.
Penny Stock Rules
SEC Rule 15g-9, known as the Penny Stock Rules, is designed to prevent deceptive or manipulative practices. It provides that a broker cannot sell a Penny Stock to any person unless it has approved that person's account for penny stock transactions and the broker/dealer has received in writing from customer agreement to the transaction. Approving an account includes, among other things, reviewing the customer's financial data and determining the customer's suitability, including the capability to evaluate the risks of trading in penny stocks. Some types of transactions in penny stocks are exempt from these rules. Exempt transactions include those with an established customer (a customer of more than one year or one who has made at least three separate penny stock purchases) and transactions in which the customer is an institutional investor.
The Pink Sheets is a privately owned company whose Electronic Quotation Service provides an Internet-based, real-time quotation service for OTC equities and bonds. The Pink Sheets are not owned or operated by The NASDAQ Stock Market, Inc. or the NASD.
The PORTAL Market, operated by The NASDAQ Stock Market, Inc., facilitates the listing of unregistered securities eligible to be resold pursuant to SEC Rule 144A. PORTAL provides regulatory review of securities in connection with the clearance and settlement thereof via the Depository Trust Company (DTC).
A security that usually pays a fixed dividend and gives the holder a prior claim on corporate earnings and assets over holders of common stock.
Written power of attorney given by a shareholder of a corporation, authorizing someone to vote on his or her behalf at corporate meetings.
Material information required by the Securities and Exchange Commission to be given to a corporation's stockholders as a prerequisite to solicitation of votes. It is required for any issuer subject to the provisions of the Securities Exchange Act of 1934.
The portion of a company's outstanding shares that is in the hands of public investors; shares not held by company officers, directors, or investors who hold a controlling interest in the company.
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Round Lot Share Holders
Shareholders who own 100 or more shares of an issue.
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Sarbanes-Oxley Act of 2002
An Act of Congress passed in 2002 to improve quality and transparency in financial reporting and independent audits and accounting services for public companies, to create a Public Company Accounting Oversight Board, to enhance the standard setting process for accounting practices, to strengthen the independence of firms that audit public companies, to increase corporate responsibility and the usefulness of corporate financial disclosure, to protect the objectivity and independence of securities analysts, to improve Securities and Exchange Commission resources and oversight, and for other purposes.
Securities and Exchange Commission (SEC)
The primary agency responsible for administering federal securities laws. These include the Securities Act of 1933, the Securities Exchange Act of 1934, the Public Utility Holding Act of 1935, the Trust Indenture Act of 1939, the Investment Company Act of 1940, the Investment Advisers Act of 1940, and the Securities Investors Protection Act of 1970. Of all these pieces of legislation, the 1933 Act and 1934 Act are the most significant for issuers of securities and broker/dealers. The 1933 Act is a disclosure statute that requires issuers to provide investors with facts about securities to be sold. The 1934 Act regulates securities markets and the business of securities brokers and dealers.
The conclusion of a securities transaction; a broker/dealer buying securities pays for them; a selling broker delivers the securities to the buyer's broker.
The total number of shares of a security that have been sold short that have not been repurchased to settle short positions in the market (covered). Currently there is no requirement that Market Participants report their short positions in OTCBB securities to the NASD.
Short selling is the selling of a security that the seller does not own, or any sale that is completed by the delivery of a security borrowed by the seller. Such sales are made in anticipation of a decline in the price of the security to enable the seller to cover the sale with a purchase at a later date, at a lower price, and thus at a profit. Short sellers assume the risk that they will be able to buy the stock at a more favorable price than the price at which they sold short. The payoff to selling short is the opposite of a long position. This is an advanced trading strategy with many unique risks and pitfalls. Novice investors are advised to avoid short sales as this strategy includes unlimited losses. A share price can only fall to zero but there is no limit to the amount it can rise.
The difference between the price at which a Market Maker is willing to buy a security, called a bid price, and the price at which the Market Maker is willing to sell it, called an ask price. The spread narrows or widens according to the supply and demand for the security being traded.
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An agent that maintains records of stock and bond owners in order to cancel and issue certificates, and resolve problems arising from lost, destroyed, or stolen certificates. A corporation usually appoints a commercial bank, although it may also serve as its own transfer agent.
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The degree of price fluctuation for a given asset, rate, or index. Usually expressed as a variance or standard deviation.
Amount of trading activity, expressed in shares or dollars, experienced by a single security or the entire market within a specified period.