This
is a glossary of terms that are, for the most part, unique
to the world of financial investigations, or terms that have
a different meaning than that which is commonly understood
when they are used in this context.
Lapsed Option:
An option that has no value because it expired without being
exercised.
Last-In First-Out (LIFO):
A method used to determine the cost of goods sold. In making
this evaluation, the method assumes that company's newest
inventory (last in) is sold first (first out). When prices
are rising, a company using the LIFO method will have lower
gross profits and taxable income because the cost of goods
sold will be higher (the newest inventory was costlier to
produce).
Last Sale: The
most recent transaction in a specific security. In contrast,
the term "closing sale" is the final trade for a
security in a trading day.
Late Tape: A
delay is displaying price changes of securities. This usually
occurs on an especially heavy trading day. When the tape is
greater than five minutes late, the security's price is shown
without its first number. For example, a trade that occurred
at 43 1/8 will be displayed as 3 1/8.
Layered Trusts:
Trusts placed in series where the beneficiary of the first
trust is the second trust; used for privacy.
Layering: May be achieved
with numerous combinations of entities. For example, 100 percent
of the shares of an IBC being owned by the first trust, which
has as its sole beneficiary a second trust.
LBO (Leveraged Buyout): A
takeover of a corporation in which the acquirer uses borrowed
funds. The target firm's assets are commonly used to secure
the acquirer's loan. However, they may also use their own
assets as collateral. A company's management might also use
this technique to takeover their own company--that is, the
management takes the company from being publicly owned to
privately owned. In most LBOs, shareholders will receive a
premium above the security's current market value.
Leader: 1) Stock or group
of stocks that are spearheading a rising or declining market.
Institutions who want to demonstrate their own market leadership
may trade heavily in leaders. 2) A company's whose product
has a large market share.
Leading Indicators: Twelve
components of an index that forecast ups and downs in a business
cycle. The numbers, adjusted for inflation, are released monthly
by the US Commerce Department's Bureau of Economic Analysis.
Its full name is the "Composite Index of 12 Leading Indicators".
Some of the components are unemployment, new orders for consumer
goods and money supply (M-2).
Leg: 1) One part of a spread
option. A trader, for example, buys a call option and combines
it with another call option on the same underlying security
that has the same strike price and a different expiration
date. Each of the two options is a leg of the spread. Selling
one of the legs is termed "Legging Out." 2) A prolonged
stock market trend. A bull or bear market may have multiple
legs.
LEGAL: A New York Stock Exchange
computerized database that tracks member firm audits, customer
complaints and enforcement actions against member firms. LEGAL
is written in all capitals. However, it is not an acronym.
Legal Entity: Individuals
or organizations that can enter into a contract and may be
sued for not performing in accordance with the contract. A
minor is not a legal entity and cannot sign a contract.
Legal Investment: An investment
vehicle that a person with fiduciary responsibilities may
purchase. Each state has legal investment guidelines that
a fiduciary must follow. Investment grade bonds are an example
of a legal investment.
Legal List: A list of legal
investments that are selected by various states in which institutions
and fiduciaries, such as insurance companies and banks, may
invest. The list is usually comprised of high quality debt
and equity securities. Instead of a legal list, some states
apply the Prudent Man Rule--the security has to be one that
a reasonable man would invest in. In either case, both are
used to protect the money that individuals place with fiduciaries
and institutions.
Legal Opinion: Written opinion
by an attorney who attests to a municipal bond issue's legality--that
is, it is authorized and the interest's tax status is correct.
Legal Transfer: Securities
that require more documentation than just a stock or bond
power to transfer the certificates from the seller to the
buyer. Among others, these certificates may be registered
in the name of trusts, decedents, corporations, partnerships,
or investment clubs. A corporation who has sold a stock, for
example, would need to submit a corporate resolution with
a raised seal along with a stock power.
Legging Out: Closing one
side of a hedge position that leaves the other side as a long
or short position. A leg, according to Wall Street lingo,
is one side of a hedge transaction. A trader, for example,
has an option spread in which he bought an XYZ May 50 call
and a sold an XYZ July 65 call. If the XYZ May 50 call (one
side of the hedge) is closed (sold), the trader is legging
out. The trader is left with a short leg.
Letter Of Intent (LOI): 1)
A contract signed by a mutual fund shareholder that indicates
that the shareholder intends to invest at least a certain
amount of money, during a 13-month period, to qualify for
a reduced percentage sales charge. A letter of intent may
be backdated a maximum of 90 days. Any shares, bought before
the letter of intent was signed and within the 90 days, will
be adjusted to reflect the reduced sales charge. 2) A letter
of intent may also refer to a preliminary contract between
two parties negotiating a merger or an acquisition.
Letter of Wishes (LOW): Guidance
and a request to the trustee having no binding powers over
the trustee. There may be multiple letters. They must be carefully
drafted to avoid creating problems with the settlor or true
settlor in the case of a grantor trust becoming a co-trustee.
The trustee cannot be a "pawn" of the settlor or
there is basis for the argument that there never was a complete
renouncement of the assets. Sometimes referred to as a side
letter.
Letter Security: A security
that is not registered with the SEC and thus, cannot be sold
in the marketplace. The issues are sold under an investment
letter in which the purchaser states the purchase is for investment
purposes and not for resale. The certificates have a restrictive
legend that indicates they are not registered. Because the
investment letter is essential to the security's issuance,
this type of security is called either "letter security",
"letter stock", or "letter bond".
Letter Of Testamentary: A
court issued affidavit that appoints an executor for a decedent's
estate.
Level Debt Service: A stipulation
in a municipal charter stating that each year's interest and
principal payments on municipal debt must be relatively equal.
This attempts to make it easier to project the amount of tax
revenue needed to meet obligations.
Level I Service Of NASDAQ:
An electronic subscription service that provides the highest
bid and lowest offer on NASDAQ traded securities. Brokerage
firms use this service to give current quotes to its brokers
and clients.
Level II Service Of NASDAQ:
An electronic subscription service that identifies market
makers and provides their bids and offers on NASDAQ trade
securities. The service gives competitive information on NASDAQ
traded securities. It is only accessible to traders of NASD
members and institutional investors.
Level III Service Of NASDAQ:
An electronic subscription service that is accessible only
to registered market makers. It allows them to enter their
own bids and offers for securities in which they are registered.
In effect, Level III is an electronic marketplace.
Leveraged Buyout (LBO): A
takeover of a corporation in which the acquirer uses borrowed
funds. The target firm's assets are commonly used to secure
the acquirer's loan. However, they may also use their own
assets as collateral. A company's management might also use
this technique to takeover their own company--that is, the
management takes the company from being publicly owned to
privately owned. In most LBOs, shareholders will receive a
premium above the security's current market value.
Leveraged Company: A company
that has debt in its capital structure. A company whose capital
structure consists of more than one third debt is commonly
considered to be highly leveraged.
Leveraged Investment Company:
1) An open-end investment company or mutual fund that is allowed
to borrow capital from a lender. This provision must be stated
in its charter. 2) A dual-purpose investment company that
issues both income and capital shares. Holders of income shares
receive dividends and interest on investments. Holders of
capital shares receive all capital gains on investments. Essentially,
each class of shareholder leverages the other.
Levy: A seizure and sale
of property in debt collection especially an IRS seizure and
sale of property to collect a debt owed to the United States
Government 26 U.S.C. § 6331(b).
Liability: The claims by
creditors against a corporation or an individual. A corporation's
liabilities include accounts payable, wages payable, dividends
declared payable, accrued taxes payable, and long-term liabilities
(bank loans and debentures).
LIFO: A method used to determine
the cost of a good sold. In making this evaluation, the method
assumes that company's newest inventory (last in) is sold
first (first out). When prices are rising, a company using
the LIFO method will have lower gross profits and taxable
income because the cost of goods sold will be higher (the
newest inventory was costlier to produce).
Lift: Investment lingo used
to indicate a rise in securities prices as measured by the
Dow Jones Industrial Average or other market averages. A lift
is usually caused by good economic or business news.
Limited Company: Not an international
business company. May be a resident of the tax haven and is
set up under a special company act with a simpler body of
administrative laws.
Limited Discretion: An agreement
whereby a client allows their broker to make certain types
of transactions without first notifying the client. For example,
the broker will sell an option position that is about to expire
when it is in-the-money.
Limited Liability: Condition
in which an investor cannot lose more money than the amount
that was invested.
Limited Liability Company (LLC):
Consists of member owners and a manager, at a minimum. Similar
to a corporation that is taxed as a partnership or as an S-corporation.
More specifically, it combines the more favorable characteristics
of a corporation and a partnership. The LLC structure permits
the complete pass-through of tax advantages and operational
flexibility found in a partnership, operating in a corporate-style
structure, with limited liability as provided by the state's
laws.
Limited Partner: An investor
in a limited partnership who does not participate in the management
of the partnership and have limited liability.
Limited Partnership (LP):
Organization that consists of a general partner and limited
partners. The general partner manages one or more projects
for which the organization was formed. Limited partners invest
money into the project; their risk is usually limited to the
amount that they invested, and they do not have any day-to-day
responsibilities of running the partnership. Limited partners
typically receive income, capital gains, and tax benefits
while the general partner collects fees and a percentage of
capital gains and income. Common limited partnerships are
in real estate, oil and gas, and equipment leasing, but there
are other kinds of projects.
Limited Risk: When buying
options contracts, the amount of the premium paid. For example,
the buyer of a call option cannot lose more than the premium
even if the underlying security does not rise during the option's
life. A buyer of a put option also cannot lose more than the
premium even if the underlying security does not drop. Naked
(uncovered) put writers are limited to the strike price less
the option premium received. Naked call writers have unlimited
risk as the value of a security can infinitely increase.
Limit Order: An order that
instructs a broker to buy or sell a specified amount of a
security at a specified price or at a better price. In the
case of a buy, it will never be executed above the limit price.
Conversely, in a sell, the order will never be executed below
the limit price. If the limit price is not within the current
market quote, it is said to be "away from the market".
The order is entered on the specialist's book beneath any
similar orders received earlier. These similar orders are
said to be "shares ahead of you". Thus, the limit
order may not be executed immediately or only partially, or
not at all.
Limit Price: The price that
is set in a limit order. The price stipulates to the broker
to execute the order only at the limit price or better.
Limit Up, Limit Down: The maximum price that a commodity futures
contract is permitted to move in one trading day. In extraordinary
circumstances, a future may move limit up or limit down for
several days in a row.
Liquid Asset: Actual cash
or an investment vehicle that is easily converitble into cash
such as bank deposits and money market fund shares. A corporation's
liquid assets, in reference to its financial statement, are
cash, marketable securities, and accounts receivable.
Liquidate: The process of
selling securities or assets to obtain cash.
Liquidation: 1) Upon a brokerage
client's failure to meet a margin call, the closing of positions
within the account. If the position is long, the security
is sold. If the position is short, the security is bought.
2) The dissolution of a company in which its assets are sold
to pay its debts. Any remaining cash is distributed to its
shareholders.
Liquidity: The ability of
a stock to absorb a large amount of buying or selling without
substantial price movement. Institutional investors are inclined
to seek securities that have liquidity so that their trading
activity will not have an effect on the stock's market price.
Liquidity Ratio: A gauge
of a corporation's ability to meet short term obligations.
Listed Option: A call or
put option that has been authorized for trading on, and by,
a registered exchange. Its proper name is an "exchange-traded
option".
Listed Security: A stock
or bond that has been authorized for trading on, and by, a
registered exchange. Each stock exchange has different criteria
to determine a security's eligibility for listing.
Listing Requirements: Rules
of eligibility that a corporation must meet before its stock
can be listed for trading on an exchange. Each exchange has
different requirements--the New York Stock Exchange (NYSE)
being one of the stringent. Some of the NYSE's requirements
are that a corporation must have:
- At least 1,100,000 shares publicly held
with a minimum market value of $18 million;
- A minimum of 2,000 round lot shareholders
or a total of 2,200 shareholders and;
- A minimum pretax annual net income of
at least $2.5 million.
Living Trust: A trust established
between two or more individuals that are alive--also called
"living trust". The opposite is a testamentary trust,
which is effective when the individual who established the
trust dies. It is a revocable trust, for reduction of probate
costs and to expedite sale of assets upon death of grantor.
It provides no asset protection. See also Inter Vivos Trust.
LLP: Limited liability partnership.
A form of the LLC favored and used for professional associations,
such as accountants and attorneys.
LLLP: Limited liability limited
partnership. Intended to protect the general partners from
liability. Previously, the general partner was a corporation
to protect the principals from personal liability. Under the
LLLP, an individual could be a general partner and have limited
personal liability.
Load: Sales charge paid by
investors when purchasing shares of a load mutual fund or
units of an annuity--sometimes called "front-end load".
This contrasts with a back-end load which charges a fee when
the investor redeems their investment. A mutual fund that
does not charge a fee is called a "no-load" fund.
Load Mutual Fund: Mutual
fund that charges a fee when investors make purchases. This
fee (or "load" as it is called) is used primarily
to compensate salespeople selling the fund.
Load Spread Option: Process
used to allocate a contractual mutual fund's annual sales
charge. In a contractual plan, fund shares are accumulated
through periodic fixed payments. The maximum sales charge
is limited to 9% for the life of the contract. However, up
to 20% of any year's investment can be credited against the
sales charge as long as the total charge for the first four
years does not exceed 64% of one year's investment.
Loan: Transaction whereby
an owner of property (lender) grants another party (borrower)
to use the property for a specified length of time. The borrower
promises to return the property and, in most cases, pay a
fee (interest) for its use. When the property is cash, the
borrower signs a promissory note. A loan may be secured with
collateral or unsecured.
Loan Consent Agreement: An agreement that
is signed by a brokerage client as part of a their margin
account documentation. By signing the agreement, the client
agrees the broker-dealer may lend the securities.
Loan Value: The maximum amount
of credit that a lender may lend against collateral. For example,
at 50% of appraised value, a piece of property worth $500,000
has a loan value of $250,000. With respect to the brokerage
industry, Regulation T of the Federal Reserve Board stipulates
the maximum percentage of eligible securities that a brokerage
firm may lend to a margin account client.
Lock Box: 1) Process whereby
a firm's customers mail payments to a post office box. The
bank collects the checks from the lock box and deposits them
into the firm's account. The company is then notified of the
deposits either by telephone or electronically. 2) Service
provided by a bank in which they hold a customer's securities
and deposit any income or dividends received.
Locked In: 1) Lingo used
to indicate that a rate of return on an investment has been
guaranteed for a specific length of time. Examples of such
investments are certificate of deposits (CDs) and fixed rate
bonds. 2) Said of a security whose profits or yields have
been secured through use of a hedge. 3) Said about an investor
who does not sell a profitable security because the profit
would immediately be subject to capital gains tax.
Locked Market: A situation
that occurs in a highly competitive market in which a security's
bid and ask prices are the same. Once more buyers and sellers
submit their orders, the market will unlock.
LOI (Letter Of Intent): 1)
A contract signed by a mutual fund shareholder that indicates
that the shareholder intends to invest at least a certain
amount of money, during a 13-month period, to qualify for
a reduced percentage sales charge. A letter of intent may
be backdated a maximum of 90 days. Any shares, bought before
the letter of intent was signed and within the 90 days, will
be adjusted to reflect the reduced sales charge. 2) A letter
of intent may also refer to a preliminary contract between
two parties negotiating a merger or an acquisition.
Long: Brokerage lingo signifying
that an investor has ownership of a security. Ownership rights
entitle the investor to receive any income and dividends paid
by the security and, once sold, to profit or to lose money.
The owner also may transfer ownership of the security by sale
or by gift.
Long Bond: A bond maturing
in 10 or more years. Because an investor's money is tied up
for a long time, the bonds are riskier than shorter term bonds
of the same quality. Thus, they usually pay a higher yield.
Long Coupon: The first interest
payment on a bond that represents interest for more than six
months. A long coupon occurs when a bond's issuance date is
more than six months before the first scheduled payment. A
short coupon is interest covering less than six months.
Long Hedge: An option or
futures contract that is bought to protect against an investment
risk. For example, if interest rates are expected to decline,
a call option will be bought to lock in a fixed income security's
present yield.
Long Leg: The long part of
an option spread (the buying and selling of options within
the same class at the same time). In other words, the part
of the spread that is bought as opposed to written (sold).
For example, if a spread is composed of a long call option
and a short call option, the long call is the long leg.
Long Market Value: The dollar
value of the long positions within an investor's brokerage
account.
Long Position: Securities
owned by an investor that are held in a brokerage account.
Long Term: 1) Referring to
bonds--a bond with a maturity of ten years or longer. 2) Referring
to stocks--a stock which is held for a year or more by an
investor.
Long Term Debt: Liabilities
that are due to be repaid after more than one year. This is
inclusive of bonds and long-term loans.
Low: The lowest price per
share for a security during a period of time. When talking
about a security's low, it may be in regards to the "day's
low", the "annual low" or the "historical
low". The day's low is the lowest price that a security
reached during the current day's trading session. An annual
low is the security's lowest price over the past 52 weeks.
The historical low represents the security's lowest price
since the security came into existence.
LP (Limited Partnership):
Organization that consists of a general partner and limited
partners. The general partner manages one or more projects
for which the organization was formed. Limited partners invest
money into the project; their risk is usually limited to the
amount that they invested, and they do not have any day-to-day
responsibilities of running the partnership. Limited partners
typically receive income, capital gains, and tax benefits
while the general partner collects fees and a percentage of
capital gains and income. Common limited partnerships are
in real estate, oil and gas, and equipment leasing, but there
are other kinds of projects.
Lump-Sum Distribution: A
single payment of all funds to an owner of such accounts like
an IRA, a pension plan or a profit sharing plan.
I welcome
your comments,
questions and suggestions.
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