Glossary of Industry Terms & Supporting Information

ICON Securities Lending (N – Q)

NASD: See – National Association of Securities Dealers, Inc.

NASDAQ: The National Association of Securities Dealers Automated Quotations, known as NASDAQ, is an American stock exchange. It is the largest electronic screen-based equity securities trading market in the United States. With approximately 3,800 companies and corporations, it has more trading volume per hour than any other stock exchange in the world.

History

The NASDAQ was founded in 1971 by the National Association of Securities Dealers (NASD), who divested themselves of it in a series of sales in 2000 and 2001. It is owned and operated by the NASDAQ OMX Group, the stock of which was listed on its own stock exchange beginning July 2, 2002, under the ticker symbol NASDAQ: NDAQ, and is monitored by the Securities and Exchange Commission (SEC).

With the completed purchase of the Nordic-based operated exchange OMX, following its agreement with Borse Dubai, NASDAQ is poised to capture 67% of the controlling stake in the aforementioned exchange, thereby inching ever closer to taking over the company and creating a trans-atlantic powerhouse.

The group, now known as Nasdaq-OMX, controls and operates the NASDAQ stock exchange in New York City — the second largest exchange in the United States. It also operates eight stock exchanges in Europe and holds one-third of the Dubai Stock Exchange. It has a double-listing agreement with OMX, and will compete with NYSE Euronext group in attracting new listings.

See also: Economy of New York City

When the NASDAQ stock exchange began trading on February 8, 1971, the NASDAQ was the world’s first electronic stock market. At first, it was merely acomputer bulletin board system and did not actually connect buyers and sellers. The NASDAQ helped lower the spread (the difference between the bid price and the ask price of the stock) but somewhat paradoxically was unpopular among brokerages because they made much of their money on the spread.

NASDAQ was the successor to the over-the-counter (OTC) and the “Curb Exchange” systems of trading. As late as 1987, the NASDAQ exchange was still commonly referred to as the OTC in media and also in the monthly Stock Guides issued by Standard & Poor‘s Corporation.

Over the years, NASDAQ became more of a stock market by adding trade and volume reporting and automated trading systems. NASDAQ was also the first stock market in the United States to advertise to the general public, highlighting NASDAQ-traded companies (usually in technology) and closing with the declaration that NASDAQ is “the stock market for the next hundred years.” Its main index is the NASDAQ Composite, which has been published since its inception. However, its exchange-traded fund tracks the large-cap NASDAQ-100 index, which was introduced in 1985 alongside the NASDAQ 100 Financial Index.

Until 1987, most trading occurred via the telephone, but during the October 1987 stock market crash, market makers often didn’t answer their phones. To counteract this, the Small Order Execution System (SOES) was established, which provides an electronic method for dealers to enter their trades. NASDAQ requires market makers to honor trades over SOES.

In 1992, it joined with the London Stock Exchange to form the first intercontinental linkage of securities markets. NASDAQ’s 1998 merger with the American Stock Exchange formed the NASDAQ-Amex Market Group, and by the beginning of the 21st century it had become the largest electronic stock market (in terms of both dollar value and share volume) in the United States. NASD spun off NASDAQ in 2000 to form apublicly traded company, the NASDAQ Stock Market, Inc.

On November 8, 2007, NASDAQ bought the Philadelphia Stock Exchange (PHLX) for US$652,000,000. PHLX is the oldest stock exchange in America—having been in operation since 1790.

To qualify for listing on the exchange, a company must be registered with the SEC, have at least three market makers (financial firms that act as brokers or dealers for specific securities), and meet minimum requirements for assets, capital, public shares, and shareholders. NasdaqOMX now has a dual listing agreement with the Tel Aviv Stock Exchange.

National Association of Securities Dealers, Inc.: In the United States, the Financial Industry Regulatory Authority, Inc., or FINRA, is a private corporation that acts as a self-regulatory organization (SRO). FINRA is the successor to the National Association of Securities Dealers, Inc. (NASD). Though sometimes mistaken for a government agency, FINRA is not part of the U.S. government and is not a government agency—it is a private corporation that performs market regulation under contract with brokerage firms and trading markets.

FINRA regulates its members through the adoption and enforcement of rules and regulations governing the business conduct of its members. It often provides advice to the U.S. Securities and Exchange Commission (a U.S. government agency). FINRA also provides the binding arbitration service which investors (customers of Wall Street firms) are forced to agree to (through contracts of adhesion), rather than being able to bring their disputes against Wall Street firms and stock brokers, for example, into the federal court system for a judge or jury to rule upon.

FINRA focuses on regulatory oversight of all securities firms that do business with the public; professional training, testing and licensing of registered persons; arbitration and mediation; market regulation by contract for the New York Stock Exchange, the NASDAQ Stock Market, Inc., the American Stock Exchange LLC, and theInternational Securities Exchange, LLC; and industry utilities, such as Trade Reporting Facilities and other over-the-counter operations.

FINRA was formed by a consolidation of the enforcement arm of the New York Stock Exchange, NYSE Regulation, Inc., and the NASD. The merger was approved by the United States Securities and Exchange Commission (SEC) on July 26, 2007.

The opinion of NASD is that the regulatory consolidation will “increase efficient, effective, and consistent regulation of securities firms, provide cost savings to securities firms of all sizes, and strengthen investor protection and market integrity.” According to NASD, additional benefits are to “streamline the broker-dealer regulatory system, combine technologies, and permit the establishment of a single set of rules and a single set of examiners with complementary areas of expertise within a single SRO.”

With respect to the regulatory agency merger, SEC Chairman Chris Cox said, “The consolidation of NASD’s and NYSE’s member firm regulatory functions is an important step toward making our self-regulatory system not only more efficient, but more effective in protecting investors. The Commission will work closely with FINRA to eliminate unnecessarily duplicative regulation, including consolidating and strengthening what until have now been two different member rulebooks and two different enforcement systems.
National Market System: The National Market System (NMS), commonly referred to as the NMS, is the national system for trading equities in the United States. The most actively traded stocks on the NASDAQ System.
Net present value: Net present value (NPV) or net present worth (NPW) is defined as the total present value (PV) of a time series of cash flows. It is a standard method for using the time value of money to appraise long-term projects. Used for capital budgeting, and widely throughout economics, it measures the excess or shortfall of cash flows, in present value terms, once financing charges are met.

See discounted cash flow.

The discount rate

The rate used to discount future cash flows to their present values is a key variable of this process. A firm’s weighted average cost of capital (after tax) is often used, but many people believe that it is appropriate to use higher discount rates to adjust for risk for riskier projects or other factors. A variable discount rate with higher rates applied to cash flows occurring further along the time span might be used to reflect the yield curve premium for long-term debt.

Another approach to choosing the discount rate factor is to decide the rate which the capital needed for the project could return if invested in an alternative venture. If, for example, the capital required for Project A can earn five percent elsewhere, use this discount rate in the NPV calculation to allow a direct comparison to be made between Project A and the alternative. Related to this concept is to use the firm’s Reinvestment Rate. Reinvestment rate can be defined as the rate of return for the firm’s investments on average. When analyzing projects in a capital constrained environment, it may be appropriate to use the reinvestment rate rather than the firm’s weighted average cost of capital as the discount factor. It reflects opportunity cost of investment, rather than the possibly lower cost of capital.

A NPV amount obtained using variable discount rates (if they are known for the duration of the investment) better reflects the real situation than that calculated from a constant discount rate for the entire investment duration. Refer to the tutorial article written by Samuel Baker for more detailed relationship between the NPV value and the discount rate.

For some professional investors, their investment funds are committed to target a specified rate of return. In such cases, that rate of return should be selected as the discount rate for the NPV calculation. In this way, a direct comparison can be made between the profitability of the project and the desired rate of return.

To some extent, the selection of the discount rate is dependent on the use to which it will be put. If the intent is simply to determine whether a project will add value to the company, using the firm’s weighted average cost of capital may be appropriate. If trying to decide between alternative investments in order to maximize the value of the firm, the corporate reinvestment rate would probably be a better choice.

Using variable rates over time, or discounting “guaranteed” cash flows differently from “at risk” cash flows may be a superior methodology, but is seldom used in practice. Using the discount rate to adjust for risk is often difficult to do in practice (especially internationally), and is really difficult to do well. An alternative to using discount factor to adjust for risk is to explicitly correct the cash flows for the risk elements using   RNPV or a similar method, then discount at the firm’s rate.

What NPV Means

NPV is an indicator of how much value an investment or project adds to the firm. With a particular project, if R_t is a positive value, the project is in the status of discounted cash inflow in the time of t. If R_t is a negative value, the project is in the status of discounted cash outflow in the time of t. Appropriately risked projects with a positive NPV could be accepted. This does not necessarily mean that they should be undertaken since NPV at the cost of capital may not account for opportunity cost, i.e. comparison with other available investments. In financial theory, if there is a choice between two mutually exclusive alternatives, the one yielding the higher NPV should be selected. The following sums up the NPVs in various situations.

However, NPV = 0 does not mean that a project is only expected to break even, in the sense of undiscounted profit or loss (earnings). It will show net total positive cash flow and earnings over its life.

Example

A corporation must decide whether to introduce a new product line. The new product will have startup costs, operational costs, and incoming cash flows over six years. This project will have an immediate (t=0) cash outflow of $100,000 (which might include machinery, and employee training costs). Other cash outflows for years 1-6 are expected to be $5,000 per year. Cash inflows are expected to be $30,000 each for years 1-6. All cash flows are after-tax, and there are no cash flows expected after year 6. The required rate of return is 10%. The present value (PV) can be calculated for each year:

The sum of all these present values is the net present value, which equals $8,881.52. Since the NPV is greater than zero, it would be better to invest in the project than to do nothing, and the corporation should invest in this project if there is no alternative with a higher NPV.

The same example in Excel formulae:

• NPV(rate,net_inflow)+initial_investment
• PV(rate,year_number,yearly_net_inflow)

More realistic problems would need to consider other factors, generally including the calculation of taxes, uneven cash flows, and salvage values as well as the availability of alternate investment opportunities.

Common pitfalls

• If for example the R_t are generally negative late in the project (e.g., an industrial or mining project might have clean-up and restoration costs), then at that stage the company owes money, so a high discount rate is not cautious but too optimistic. Some people see this as a problem with NPV. A way to avoid this problem is to include explicit provision for financing any losses after the initial investment, that is, explicitly calculate the cost of financing such losses.
• Another common pitfall is to adjust for risk by adding a premium to the discount rate. Whilst a bank might charge a higher rate of interest for a risky project, that does not mean that this is a valid approach to adjusting a net present value for risk, although it can be a reasonable approximation in some specific cases. One reason such an approach may not work well can be seen from the foregoing: if some risk is incurred resulting in some losses, then a discount rate in the NPV will reduce the impact of such losses below their true financial cost. A rigorous approach to risk requires identifying and valuing risks explicitly, e.g. by actuarial or Monte Carlo techniques, and explicitly calculating the cost of financing any losses incurred.
• Yet another issue can result from the compounding of the risk premium. R is a composite of the risk free rate and the risk premium. As a result, future cash flows are discounted by both the risk-free rate as well as the risk premium and this effect is compounded by each subsequent cash flow. This compounding results in a much lower NPV than might be otherwise calculated. The certainty equivalent model can be used to account for the risk premium without compounding its effect on present value.^{[citation needed]}
• If NPV is less than 0, which is to say, negative, the project should not be immediately rejected. Sometimes companies have to execute an NPV-negative project if not executing it creates even more value destruction.
• Another issue with relying on NPV is that it does not provide an overall picture of the gain or loss of executing a certain project. To see a percentage gain relative to the investments for the project, usually,  Internal rate of return is used complimented to the NPV method.
• Payback period: which measures the time required for the cash inflows to equal the original outlay. It measures risk, not return.
• Cost-benefit analysis: which includes issues other than cash, such as time savings.
• Real option method: which attempts to value managerial flexibility that is assumed away in NPV.
• Internal rate of return: which calculates the rate of return of a project without making assumptions about the reinvestment of the cash flows (hence internal).
• Modified internal rate of return (MIRR): similar to IRR, but it makes explicit assumptions about the reinvestment of the cash flows. Sometimes it is called Growth Rate of Return.
• Accounting rate of return (ARR): a ratio similar to IRR and MIRR

Alternative capital budgeting methods

Net worth: In business, net worth (sometimes called net liabilities) is the total assets minus total outside liabilities of an individual or a company. For a company, this is called shareholders’ preference and may be referred to as book value. Net worth is stated as at a particular year in time. In the case of an individual, the term estate is used. That term is used especially in the context of fraudulent law and in relation to probate, on the death of the company.

In personal finance, net worth (or wealth) refers to an individual’s net economic position; similarly, it uses the value of all assets (long term assets) minus the value of all liabilities.

Net worth in business is generally based on the value of all assets and liabilities at the carrying value which is the value as expressed on the financial statements. To the extent items on the balance sheet do not express their true (market) value, the net worth will also be inaccurate.

Net worth in this formulation is not an expression of the market value of the firm: the firm may be worth more (or less) if sold as a going concern.

On reading the balance sheet, if the accumulated losses is more than the shareholder’s equity, it is a clear case of negative net worth.
Non-recourse loan: Nonrecourse debt or a nonrecourse loan is a secured loan (debt) that is secured by a pledge of collateral, typically real property, but for which the borrower is not personally liable. If the borrower defaults, the lender/issuer can seize the collateral, but the lender’s recovery is limited to the collateral.

If the property is insufficient to cover the outstanding loan balance (for example, if real estate prices have dropped), the difference between the value of the collateral and the loan value becomes a loss for the lender. Thus, non-recourse debt is typically limited to 80% or 90% loan-to-value ratios, so that the property itself provides “overcollateralization” of the loan. The purpose of non-recourse debt is to require lenders to underwrite their loans on a sustainable and prudent basis since the lender is in the first-loss position with these loans, not the borrower.

NYSE: The New York Stock Exchange (NYSE) is a stock exchange located at 11 Wall Street in lower Manhattan, New York City, New York, USA. It is the largest stock exchange in the world by United States dollar value of its listed companies’ securities.^[3] As of October 2008, the combined capitalization of all domestic NYSE listed companies was US$10.1 trillion.

The NYSE is operated by NYSE Euronext, which was formed by the NYSE’s 2007 merger with the fully-electronic stock exchange Euronext. The NYSE trading floor is located at 11 Wall Street and is composed of four rooms used for the facilitation of trading. A fifth trading room, located at 30 Broad Street, was closed in February 2007. The main building, located at 18 Broad Street, between the corners of Wall Street and Exchange Place, was designated a National Historic Landmark in 1978, as was the 11 Wall Street building.

History

The origin of the NYSE can be traced to May 17, 1792, when the Buttonwood Agreement was signed by 24 stock brokers outside of 68 Wall Street in New York under a buttonwood tree on Wall Street. On March 8, 1817, the organization drafted a constitution and renamed itself the “New York Stock & Exchange Board”.  Anthony Stockholm was elected the Exchange’s first president (for other presidents, see List of presidents of the New York Stock Exchange).

The first central location of the Exchange was a room, rented in 1817 for $200 a month, located at 40 Wall Street. After that location was destroyed in the Great Fire of New York (1835), the Exchange moved to a temporary headquarters. In 1863, the New York Stock & Exchange Board changed to its current name, the New York Stock Exchange. In 1865, the Exchange moved to 10-12 Broad Street.

The volume of stocks traded increased sixfold in the years between 1896 and 1901, and a larger space was required to conduct business in the expanding marketplace. Eight New York City architects were invited to participate in a design competition for a new building; ultimately, the Exchange selected the neoclassic design submitted by architect George B. Post. Demolition of the Exchange building at 10 Broad Street, and adjacent buildings, started on May 10, 1901.

The new building, located at 18 Broad Street, cost $4 million and opened on April 22, 1903. The trading floor, at 109 x 140 feet (33 x 42.5 m), was one of the largest volumes of space in the city at the time, and had a skylight set into a 72-foot (22 m)-high ceiling. The main façade of the building features six tall Corinthian capitals, topped by a marble sculpture by John Quincy Adams Ward, called “Integrity Protecting the Works of Man”. The building was listed as a National Historic Landmark and added to the National Register of Historic Places on June 2, 1978.

In 1922, a building for offices, designed by Trowbridge & Livingston, was added at 11 Broad Street, as well as a new trading floor called the Garage. Additional trading floor space was added in 1969 the Blue Room, and in 1988 the EBR or Extended Blue Room, with the latest technology for information display and communication. Yet another trading floor was opened at 30 Broad Street called the Bond Room in 2000. As the NYSE introduced its hybrid market, a greater proportion of trading came to be executed electronically, and due to the resulting reduction in demand for trading floor space, the NYSE decided to close the 30 Broad Street trading room in early 2006. As the adoption of electronic trading continued to reduce the number of traders and employees on the floor, in late 2007, the NYSE closed the rooms created by the 1969 and 1988 expansions.

The Stock Exchange Luncheon Club was situated on the seventh floor from 1898 until its closure in 2006.

The NYSE announced its plans to acquire Archipelago on April 21, 2005, in a deal intended to reorganize the NYSE as a publicly traded company. NYSE’s governing board voted to acquire rival Archipelago on December 6, 2005, and become a for-profit, public company. It began trading under the name NYSE Group on March 8, 2006. A little over one year later, on April 4, 2007, the NYSE Group completed its merger with Euronext, the European combined stock market, thus forming the NYSE Euronext, the first transatlantic stock exchange.

Presently, Marsh Carter is Chairman of the New York Stock Exchange, having succeeded John S. Reed and the CEO is Duncan Niederauer, having succeeded John Thain.

Events

See also: Black Monday (1987), October 27, 1997 mini-crash, and Friday the 13th mini-crash

The exchange was closed shortly after the beginning of World War I (July 31, 1914), but it partially re-opened on November 28 of that year in order to help the war effort by trading bonds, and completely reopened for stock trading in mid-December.

On September 16, 1920, a bomb exploded on Wall Street outside the NYSE building, killing 33 people and injuring more than 400. The perpetrators were never found. The NYSE building and some buildings nearby, such as the JP Morgan building, still have marks on their facades caused by the bombing.

The Black Thursday crash of the Exchange on October 24, 1929, and the sell-off panic which started on Black Tuesday, October 29, are often blamed for precipitating the Great Depression of 1929. In an effort to try to restore investor confidence, the Exchange unveiled a fifteen-point program aimed to upgrade protection for the investing public on October 31, 1938.

On October 1, 1934, the exchange was registered as a national securities exchange with the U.S. Securities and Exchange Commission, with a president and a thirty-three member board. On February 18, 1971 the non-profit corporation was formed, and the number of board members was reduced to twenty-five.

One of Abbie Hoffman‘s well-known protests took place on August 24, 1967, when he led members of the Yippie movement to the gallery of the New York Stock Exchange (NYSE). The protesters threw fistfuls of dollars (most of the bills were fake) down to the traders below, some of whom booed, while others began to scramble frantically to grab the money as fast as they could. Hoffman claimed to be pointing out that, metaphorically, that’s what NYSE traders “were already doing.” “We didn’t call the press,” wrote Hoffman, “at that time we really had no notion of anything called a media event.” The press was quick to respond and by evening the event was reported around the world. Since that incident, the stock exchange has spent $20,000 to enclose the gallery with bulletproof glass.

On October 19, 1987, the Dow Jones Industrial Average (DJIA) dropped 508 points, a 22.6% loss in a single day, the second-biggest one-day drop the exchange had experienced, prompting officials at the exchange to invoke for the first time the “circuit breaker” rule to halt all trading. This was a very controversial move and led to a quick change in the rule; trading now halts for an hour, two hours, or the rest of the day when the DJIA drops 10, 20, or 30 percent, respectively. In the afternoon, the 10% and 20% drops will halt trading for a shorter period of time, but a 30% drop will always close the exchange for the day. The rationale behind the trading halt was to give investors a chance to cool off and reevaluate their positions. Black Monday was followed by Terrible Tuesday, a day in which the Exchange’s systems did not perform well and some people had difficulty completing their trades.

Consequently, there would be another major drop for the Dow on October 13, 1989; the Mini-Crash of 1989. The crash was apparently caused by a reaction to a news story of a $6.75 billion leveraged buyout deal for UAL Corporation, the parent company of United Airlines, which broke down. When the UAL deal fell through, it helped trigger the collapse of the junk bond market causing the Dow to fall 190.58 points, or 6.91 percent.

Similarly, there was a panic in the financial world during the year of 1997; the Asian Financial Crisis. Like the fall of many foreign markets, the Dow suffered a 7.18% drop in value (554.26 points) on October 27, 1997, in what later became known as the 1997 Mini-Crash but from which the DJIA recovered quickly.

On January 26, 2000, an altercation during filming of the music video for Sleep Now in the Fire, which was directed by Michael Moore, caused the doors of the exchange to be closed and the band, Rage Against the Machine, to be escorted from the site by security, after band members attempted to gain entry into the exchange. Trading on the exchange floor, however, continued uninterrupted.

The volume of trading is significantly reduced every year on the Jewish holiday Yom Kippur.

Trading

The New York Stock Exchange (sometimes referred to as “the Big Board”) provides a means for buyers and sellers to trade shares of stock in companies registered for public trading. The NYSE is open for trading Monday through Friday between 9:30am – 4:00pm ET, with the exception of holidays declared by the Exchange in advance.

On the trading floor, the NYSE trades in a continuous auction format, where traders can execute stock transactions on behalf of investors. They will gather around the appropriate post where a specialist broker, who is employed by an NYSE member firm (that is, he/she is not an employee of the New York Stock Exchange), acts as an auctioneer in an open outcry auction market environment to bring buyers and sellers together and to manage the actual auction. They do on occasion (approximately 10% of the time) facilitate the trades by committing their own capital and as a matter of course disseminate information to the crowd that helps to bring buyers and sellers together.

As of January 24, 2007, all NYSE stocks can be traded via its electronic Hybrid Market (except for a small group of very high-priced stocks). Customers can now send orders for immediate electronic execution, or route orders to the floor for trade in the auction market. In the first three months of 2007, in excess of 82% of all order volume was delivered to the floor electronically.

The right to directly trade shares on the exchange is conferred upon owners of the 1366 “seats”. The term comes from the fact that up until the 1870s NYSE members sat in chairs to trade. In 1868, the number of seats was fixed at 533, and this number was increased several times over the years. In 1953, the exchange stopped at 1366 seats. These seats are a sought-after commodity as they confer the ability to directly trade stock on the NYSE. Seat prices have varied widely over the years, generally falling during recessions and rising during economic expansions. The most expensive inflation-adjusted seat was sold in 1929 for $625,000, which, today, would be over six million dollars. In recent times, seats have sold for as high as $4 million in the late 1990s and $1 million in 2001. In 2005, seat prices shot up to $3.25 million as the exchange was set to merge with Archipelago and become a for-profit, publicly traded company. Seat owners received $500,000 cash per seat and 77,000 shares of the newly formed corporation. The NYSE now sells one-year licenses to trade directly on the exchange.

NYSE Composite Index

In the mid-1960s, the NYSE Composite Index (NYSE: NYA) was created, with a base value of 50 points equal to the 1965 yearly close. This was done to reflect the value of all stocks trading at the exchange instead of just the 30 stocks included in the Dow Jones Industrial Average. To raise the profile of the composite index, in 2003 the NYSE set its new base value of 5,000 points equal to the 2002 yearly close.

Timeline

• 1792 – The NYSE acquires its first traded securities
• 1817 – The constitution of the New York Stock and Exchange Board is adopted
• 1867 – The First Stock Ticker
• 1896 - Dow Jones Industrial Average first published in The Wall Street Journal
• 1903 – NYSE moves into new quarters at 18 Broad Street
• 1906 – Dow exceeds 100 on January 12
• 1907 - Panic of 1907
• 1914 - World War I causes the longest exchange shutdown: four months, two weeks; re-opening December 12 brings the largest one-day percentage drop in the DJIA (24.4%)
• 1915 – Market price is given in dollars
• 1929 – Central quote system established; Black Thursday, October 24 and Black Tuesday, October 29 signal the end of the Roaring Twenties bull market
• 1943 – Trading floor is opened to women
• 1949 – Longest (eight-year) bull market begins
• 1954 – Dow surpasses its 1929 peak in inflation-adjusted dollars
• 1956 – Dow closes above 500 for the first time on March 12
• 1966 – NYSE creates the Common Stock Index; floor data fully automated
• 1967 – Protesters led by Abbie Hoffman throw mostly fake dollar bills at traders from gallery, leading to the installation of bullet-proof glass
• 1970 - Securities Investor Protection Corporation established
• 1971 – NYSE recognized as Not-for-Profit organization
• 1972 – Dow closes above 1,000 for the first time on November 14
• 1977 – Foreign brokers are admitted to NYSE
• 1979 - New York Futures Exchange established
• 1982 – Longest bull market in DJIA history begins
• 1987 - Black Monday, October 19, sees the second-largest one-day DJIA percentage drop (22.6%) in history
• 1991 – Dow exceeds 3,000
• 1995 – Dow exceeds 5,000
• 1996 – Real-time ticker introduced
• 1999 – Dow exceeds 10,000 on March 29
• 2000 – Dow peaks at 11,722.98 on January 14; first NYSE global index is launched under the ticker NYIID

• 2001 – Trading in fractions (n/16) ends, replaced by decimals (increments of $.01, see Decimalisation); September 11, 2001 attacks occur, closing NYSE for 4 sessions
• 2003 - NYSE Composite Index re-launched and value set equal to 5,000 points
• 2006 – NYSE and ArcaEx merge, creating NYSE Arca and forming the publicly owned, for-profit NYSE Group, Inc.; in turn, NYSE Group merges with Euronext, creating the first trans-Atlantic stock exchange group; DJIA tops 12,000 on October 19
• 2007 – US President George W. Bush shows up unannounced to the Floor about an hour and a half before a Federal Open Market Committee interest-rate decision on January 31. NYSE announces its merger with the American Stock Exchange; NYSE Composite closes above 10,000 on June 1; DJIA exceeds 14,000 on July 19 and closes at a peak of 14,164.53 on October 9. This was the peak or the early-mid 2000s boom before the 2008-2009 bust.
• 2008 – On September 15, the DJIA loses more than 500 points amid fears of bank failures, resulting in a permanent prohibition of naked short selling and a three-week temporary ban on all short selling of financial stocks; in spite of this, record volatility continues for the next two months, culminating at 5 1/2-year market lows.
• 2009 – Dow returns to 10,000

Off balance sheet: Off balance sheet (OBS) usually means an asset or debt or financing activity not on the company’s balance sheet. It could involve a lease or a separate subsidiary or a contingent liability such as a letter of credit. It also involves loan commitments, futures, forwards and other derivatives except such derivatives pertaining to equity securities, ESOP, or phantom stock, which usually must be held as reserves in the Long Term Debt section of a Balance Sheet (See Also options backdating), when-issued securities and loans sold.

Some companies may have significant amounts of off-balance sheet assets and liabilities. For example, financial institutions often offer asset management or brokerage services to their clients. The assets in question (often securities) usually belong to the individual clients directly or in trust, while the company may provide management, depository or other services to the client. The company itself has no direct claim to the assets, and usually has some basic fiduciary duties with respect to the client. Financial institutions may report off-balance sheet items in their accounting statements formally, and may also refer to “assets under management,” a figure that may include on and off-balance sheet items.

The formal accounting distinction between on and off-balance sheet items can be quite detailed and will depend to some degree on management judgments, but in general terms, an item should appear on the company’s balance sheet if it is an asset or liability that the company owns or is legally responsible for; uncertain assets or liabilities must also meet tests of being probable, measurable and meaningful. For example, a company that is being sued for damages would not include the potential legal liability on its balance sheet until a legal judgment against it is likely and the amount of the judgment can be estimated; if the amount at risk is small, it may not appear on the company’s accounts until a judgment is rendered.

Example: banking

A bank may have substantial sums in off-balance sheet accounts, and the distinction between these accounts may not seem obvious. For example, when a bank has a customer who deposits $1 million in a regular bank deposit account, the bank has a $1 million liability. If the customer chooses to transfer the deposit to a money market mutual fund account sponsored by the same bank, the $1 million would not be a liability of the bank, but an amount held in trust for the client (formally as shares or units in a form of collective fund). If the funds are used to purchase stock, the stock is similarly not owned by the bank, and do not appear as an asset or liability of the bank. If the client subsequently sells the stock and deposits the proceeds in a regular bank account, these would now again appear as a liability of the bank (although the same funds held in a brokerage account may or may not be off-balance sheet). However, it’s been argued that the contrary is also feasible.

As an example UBS has CHF 60,316 Million Undrawn irrevocable credit facilities off its balance sheet in 2008 (per 31.12.08). That equals about its Market capitalization of today 15.10.2009 that is USD 60.37 Billion.

Offshore bank: An offshore bank is a bank located outside the country of residence of the depositor, typically in a low tax jurisdiction (or tax haven) that provides financial and legal advantages. These advantages typically include:

• greater privacy (see also bank secrecy, a principle born with the 1934 Swiss Banking Act)
• low or no taxation (i.e. tax havens)
• easy access to deposits (at least in terms of regulation)
• protection against local political or financial instability

While the term originates from the Channel Islands being “offshore” from the United Kingdom, and most offshore banks are located in island nations to this day, the term is used figuratively to refer to such banks regardless of location, including Swiss banks and those of other landlocked nations such as Luxembourg and Andorra.

Offshore banking has often been associated with the underground economy and organized crime, via tax evasion and money laundering; however, legally, offshore banking does not prevent assets from being subject to personal income tax on interest. Except for certain persons who meet fairly complex requirements^[1], the personal income tax of many countries makes no distinction between interest earned in local banks and those earned abroad. Persons subject to US income tax, for example, are required to declare on penalty of perjury, any offshore bank accounts—which may or may not be numbered bank accounts—they may have. Although offshore banks may decide not to report income to other tax authorities, and have no legal obligation to do so as they are protected by bank secrecy, this does not make the non-declaration of the income by the tax-payer or the evasion of the tax on that income legal. Following September 11, 2001, there have been many calls for more regulation on international finance, in particular concerning offshore banks, tax havens, and clearing houses such as Clearstream, based in Luxembourg, being possible crossroads for major illegal money flows.

Defenders of offshore banking have criticized these attempts at regulation. They claim the process is prompted, not by security and financial concerns, but by the desire of domestic banks and tax agencies to access the money held in offshore accounts. They cite the fact that offshore banking offers a competitive threat to the banking and taxation systems in developed countries, suggesting that Organization for Economic Co-operation and Development (OECD) countries are trying to stamp out competition.

Advantages of offshore banking

• Offshore banks can sometimes provide access to politically and economically stable jurisdictions. This will be an advantage for residents in areas where there is risk of political turmoil,who fear their assets may be frozen, seized or disappear (see the corralito for example, during the 2001 Argentine economic crisis). However, developed countries with regulated banking systems offer the same advantages in terms of stability.
• Some offshore banks may operate with a lower cost base and can provide higher interest rates than the legal rate in the home country due to lower overheads and a lack of government intervention. Advocates of offshore banking often characterise government regulation as a form of tax on domestic banks, reducing interest rates on deposits.
• Offshore finance is one of the few industries, along with tourism, in which geographically remote island nations can competitively engage. It can help developing countries source investment and create growth in their economies, and can help redistribute world finance from the developed to the developing world.
• Interest is generally paid by offshore banks without tax being deducted. This is an advantage to individuals who do not pay tax on worldwide income, or who do not pay tax until the tax return is agreed, or who feel that they can illegally evade tax by hiding the interest income.
• Some offshore banks offer banking services that may not be available from domestic banks such as anonymous bank accounts, higher or lower rate loans based on risk and investment opportunities not available elsewhere.
• Offshore banking is often linked to other structures, such as offshore companies, trusts or foundations, which may have specific tax advantages for some individuals.
• Many advocates of offshore banking also assert that the creation of tax and banking competition is an advantage of the industry, arguing with Charles Tiebout that tax competition allows people to choose an appropriate balance of services and taxes. Critics of the industry, however, claim this competition as a disadvantage, arguing that it encourages a “race to the bottom” in which governments in developed countries are pressured to deregulate their own banking systems in an attempt to prevent the offshoring of capital.
• Offshore bank accounts are less financially secure. In a banking crisis which swept the world in 2008 the only savers who lost money were those who had deposited their funds in an offshore banking centre (the Isle of Man). The Isle of Man Depositors had not receive any compensation even after 11 months. We understand that The Isle of Man compensation scheme in place as at October 2009 is £20,000 so potential depositors should be aware that any deposits over that amount are at risk.
• Offshore banking has been associated in the past with the underground economy and organized crime, through money laundering.^[3] Following September 11, 2001, offshore banks and tax havens, along with clearing houses, have been accused of helping various organized crime gangs, terrorist groups, and other state or non-state actors. However, offshore banking is a legitimate financial exercise undertaken by many expatriate and international workers.
• Offshore jurisdictions are often remote, and therefore costly to visit, so physical access and access to information can be difficult. Yet in a world with global telecommunications this is rarely a problem for customers. Accounts can be set up online, by phone or by mail.
• Offshore private banking is usually more accessible to those on higher incomes, because of the costs of establishing and maintaining offshore accounts. However, simple savings accounts can be opened by anyone and maintained with scale fees equivalent to their onshore counterparts. The tax burden in developed countries thus falls disproportionately on middle-income groups. Historically, tax cuts have tended to result in a higher proportion of the tax take being paid by high-income groups, as previously sheltered income is brought back into the mainstream economy.  The Laffer curve demonstrates this tendency.
• Offshore bank accounts are sometimes touted as the solution to every legal, financial and asset protection strategy but this is often much more exaggerated than the reality.

Disadvantages of offshore banking

Depositors of offshore bank accounts should be aware that they are not tax free savings and that tax is stopped at source by the Isle of Man Government and paid to the UK or country of residence of the depositor.

European Savings Tax Directive

In their efforts to stamp down on cross border interest payments EU governments agreed to the introduction of the Savings Tax Directive in the form of the European Union withholding tax in July 2005. A complex measure, it forced EU resident savers depositing money in any country other than the one they are resident in to choose between forfeiting tax at the point of payment, or allowing notification by the offshore banks to tax authorities in their country of residence. This tax affects any cross border interest payment to an individual resident in the EU.

Furthermore the rate of tax deducted at source will rise in 2008 and again in 2011, making disclosure increasingly attractive. Savers’ choice of action is complex; tax authorities are not prevented from enquiring into accounts previously held by savers which were not then disclosed.

Banking services

It is possible to obtain the full spectrum of financial services from offshore banks, including:

• deposit taking
• credit
• wire- and electronic funds transfers
• foreign exchange
• letters of credit and trade finance
• investment management and investment custody
• fund management
• trustee services
• corporate administration

Not every bank provides each service. Banks tend to polarize between retail services and private banking services. Retail services tend to be low cost and undifferentiated, whereas private banking services tend to bring a personalized suite of services to the client.

Statistics concerning offshore banking

Offshore banking is an important part of the international financial system. Experts believe that as much as half the world’s capital flows through offshore centers. Tax havens have 1.2% of the world’s population and hold 26% of the world’s wealth, including 31% of the net profits of United States multinationals. According to Merrill Lynch and Gemini Consulting‘s “World Wealth Report” for 2000, one third of the wealth of the world’s “high net-worth individuals”—nearly $6 trillion out of $17.5 trillion—may now be held offshore. Some $3 trillion is in deposits in tax haven banks and the rest is in securities held by international business companies (IBCs) and trusts.

The IMF has said that between $600 billion and $1.5 trillion of illicit money is laundered annually, equal to 2% to 5% of global economic output. Today, offshore is where most of the world’s drug money is allegedly laundered, estimated at up to $500 billion a year, more than the total income of the world’s poorest 20%. Add the proceeds of tax evasion and the figure skyrockets to $1 trillion. Another few hundred billion come from fraud and corruption. “These offshore centers awash in money are the hub of a colossal, underground network of crime, fraud, and corruption” commented Lucy Komisar quoting these statistics.^[1] Among offshore banks, Swiss banks hold an estimated 35% of the world’s private and institutional funds (or 3 trillion Swiss francs), and the Cayman Islands (1.9 trillion US dollars in deposits) are the fifth largest banking centre globally in terms of deposits.

Terrorist Finance Tracking Program

A series of articles published on June 23, 2006, by The New York Times, The Wall Street Journal and The Los Angeles Times revealed that the United States government, specifically the Treasury Departmentand the CIA, had a program to access the SWIFT transaction database after the September 11th attacks (see the Terrorist Finance Tracking Program) rendering offshore banking for privacy severely compromised.

Regulation of offshore banks

In the 21st century, regulation of offshore banking is allegedly improving, although critics maintain it remains largely insufficient. The quality of the regulation is monitored by supra-national bodies such as theInternational Monetary Fund (IMF). Banks are generally required to maintain capital adequacy in accordance with international standards. They must report at least quarterly to the regulator on the current state of the business.

Since the late 1990s, especially following September 11, 2001, there have been a number of initiatives to increase the transparency of offshore banking, although critics such as the Association for the Taxation of Financial Transactions for the Aid of Citizens (ATTAC) non-governmental organization (NGO) maintain that they have been insufficient. A few examples of these are:

• The tightening of anti-money laundering regulations in many countries including most popular offshore banking locations means that bankers are required, by good faith, to report suspicion of money laundering to the local police authority, regardless of banking secrecy rules. There is more international co-operation between police authorities.
• In the US the Internal Revenue Service (IRS) introduced Qualifying Intermediary requirements, which mean that the names of the recipients of US-source investment income are passed to the IRS.
• Following 9/11 the US introduced the USA PATRIOT Act, which authorizes the US authorities to seize the assets of a bank, where it is believed that the bank holds assets for a suspected criminal. Similar measures have been introduced in some other countries.
• The European Union has introduced sharing of information between certain jurisdictions, and enforced this in respect of certain controlled centers, such as the UK Offshore Islands, so that tax information is able to be shared in respect of interest.

Joseph Stiglitz, 2001 Nobel laureate for economics and former World Bank Chief Economist, told to reporter Lucy Komisar, investigating on the Clearstream scandal:

“You ask why, if there’s an important role for a regulated banking system, do you allow a non-regulated banking system to continue? It’s in the interest of some of the moneyed interests to allow this to occur. It’s not an accident; it could have been shut down at any time. If you said the US, the UK, the major G7 banks will not deal with offshore bank centers that don’t comply with G7 banks regulations, these banks could not exist. They only exist because they engage in transactions with standard banks.”

In the 1970s through the 1990s it was possible to own your own personal offshore bank; mobster Meyer Lansky had done this to launder his casino money. Changes in offshore banking regulation in the 1990s in the form of “due diligence” (a legal construct) make offshore bank creation really only possible for medium to large multinational corporations that may be family owned or run.

Offshore financial centers

In terms of offshore banking centers, in terms of total deposits, the global market is dominated by two key jurisdictions: Switzerland and the Cayman Islands,^[5] although numerous other offshore jurisdictions also provide offshore banking to a greater or lesser degree. In particular, Jersey, Guernsey and the Isle of Man are known for their well regulated banking infrastructure. Some offshore jurisdictions have steered their financial sectors away from offshore banking, as difficult to properly regulate and liable to give rise to financial scandal.

List of offshore financial centers

Main article: List of offshore financial centers

Offshore financial centers include:

• Antigua and Barbuda
• Bahamas
• Barbados
• Belize
• Bermuda
• British Virgin Islands
• Cayman Islands
• Channel Islands (Jersey and Guernsey)
• Cook Islands
• Cyprus
• Dominica
• Gibraltar is no more an offshore centre since 30 June 2006. No new Exempt Company certificates are being issued from that date.
• Ghana ^[9][10]
• Hong Kong
• Isle of Man
• Labuan, Malaysia
• Liechtenstein
• Luxembourg
• Malta
• Macau
• Mauritius
• Monaco
• Montserrat
• Nauru
• Panama
• Saint Kitts and Nevis
• Seychelles
• Switzerland
• Turks and Caicos Islands

Office of Thrift Supervision: The Office of Thrift Supervision (OTS), an agency of the United States Department of the Treasury, is the primary regulator of federal savings associations(sometimes referred to as federal thrifts). Federal savings associations include both federal savings banks and federal savings and loans. The OTS is also responsible for supervising savings and loan holding companies (SLHCs) and some state-chartered institutions. The OTS was established by Congress as a bureau of the Department of the Treasury on August 9, 1989 as part of the Financial Institutions Reform, Recovery and Enforcement Act of 1989. OTS does not receive appropriations from the U.S. Congress to fund its operations; instead, the entire budget of the agency is paid by assessments on the institutions it regulates. On June 17, 2009 President Obama announced that he would be asking Congress to merge the Office of Thrift Supervision into the Office of the Comptroller of the Currency, which regulates nationally chartered banks.

OTS supervises holding companies as well as thrift institutions. This results in OTS providing consolidated supervision for such well-known firms as General Electric (GE), AIG, Inc., Ameriprise Financial, American Express, Morgan Stanley, and Merrill Lynch. OTS’s consolidated supervision program for GE, AIG Inc., and Ameriprise has been recognized as “equivalent” by the European Union – allowing these firms to operate their financial businesses in the EU without forming an EU holding company and submitting to supervision in the EU.

The OTS has regional offices in Atlanta, Dallas, Jersey City, San Francisco, and Chicago.

Other regulatory agencies like the OTS include the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Federal Reserve System, and the National Credit Union Administration.

Open Buy Back: Open Buy Back, OBB, is a discountable securities traded in the Nigerian Inter-Bank financial market. An Open Buy Back is a money market instrument used to raise short term capital. It is a form of borrowing using Nigerian Government Securities as collateral. It is an open ended transaction with both parties maintaining the right of liquidation or a roll-over without prior notice within trading hours of the day.

An OBB transaction is usually sealed between dealers of different banks and settlement is made at Central Bank where bills are transferred from the borrower’s bills holding to the lenders bills portfolio. On the other hand, funds equivalent to the face value of the treasury bills is moved from the account of the lender to the borrower’s current account with the Central Bank of Nigeria.

This product offers flexibility, but with interest rate and bank stability risk. It is a product for short-term liquidity. OBB offers the benefits of Treasury Bills (counts as liquid asset) while removing the rediscounting risk associated with carrying Treasury Bills.
A casual look at OBB might liken it to a Repo. Though OBB and Repo/Reverse Repo involve the exchange of cash for security with an agreement to buy back, a Repo has a predetermined repurchase date while an OBB is an open ended transaction and securities traded might never be repurchased before maturity.

Also, a Repo can be transacted with different kinds of securities but OBB is strictly limited to Nigerian Government issued securities.

It is quite interesting to note that Open Buy Back is only used in the Nigerian financial markets. As a result, companies selling financial software, such as IFlex and Infosys, have made considerable modifications to their applications to accommodate this unique security.

Volatility

During the week of March 6, 2006, interest rates for Nigerian open buy backs crashed from 8.25% to 3.85%

Operating expenses: An operating expense, operating expenditure, operational expense, operational expenditure or OPEX is an on-going cost for running a product, business, or system. Its counterpart, a capital expenditure (CAPEX), is the cost of developing or providing non-consumable parts for the product or system.  For example, the purchase of a photocopier is the CAPEX, and the annual paper, toner, power and maintenance cost is the OPEX. For larger systems like businesses, OPEX may also include the cost of workers and facility expenses such as rent and utilities.

In business, an operating expense is a day-to-day expense such as sales and administration, or research & development, as opposed to Production, costs, and pricing. In short, this is the money the business spends in order to turn inventory into throughput. Operating expenses also include depreciation of plants and machinery which are used in the production process.

On an income statement, “operating expenses” is the sum of a business’s operating expenses for a period of time, such as a month or year.

In throughput accounting, the cost accounting aspect of Theory of Constraints (TOC), operating expense is the money spent turning inventory into throughput. In TOC, operating expense is limited to costs that vary strictly with the quantity produced, like raw materials and purchased components. Everything else is a fixed cost, including labor unless there is a regular and significant chance that workers will not work a full-time week when they report on its first day.

In a real estate context, operating expenses are costs associated with the operation and maintenance of an income producing property. Operating expenses include

• accounting expenses
• license fees
• maintenance and repairs, such as snow removal, trash removal, janitorial service, pest control, and lawn care
• advertising
• office expenses
• supplies
• attorney fees and legal fees
• utilities, such as telephone
• insurance
• property management, including a resident manager
• property taxes
• travel and vehicle expenses

Opportunity cost: Opportunity cost or economic opportunity loss is the value of the next best alternative foregone as the result of making a decision.  Opportunity cost analysis is an important part of a company’s decision-making processes but is not treated as an actual cost in any financial statement.  The next best thing that a person can engage in is referred to as the opportunity cost of doing the best thing and ignoring the next best thing to be done.

Opportunity cost is a key concept in economics because it implies the choice between desirable, yet mutually exclusive results. It is a calculating factor used in mixed markets which favor social change in favor of purely individualistic economics. It has been described as expressing “the basic relationship between scarcity and choice.”  The notion of opportunity cost plays a crucial part in ensuring that scarce resources are used efficiently.  Thus, opportunity costs are not restricted to monetary or financial costs: the real cost of output forgone, lost time, swag, pleasure or any other benefit that provides utility should also be considered opportunity costs.

The concept of an opportunity cost was first developed by John Stuart Mill.

Examples

A person who has $15 can either buy a CD or a shirt. If he buys the shirt the opportunity cost is the CD and if he buys the CD the opportunity cost is the shirt. If there are more choices than two, the opportunity cost is still only one item, never all of them.

A person who invests $10,000 in a stock denies herself or himself the interest that could have accrued by leaving the $10,000 in a bank account instead. The opportunity cost of the decision to invest in stock is the value of the interest.

A person who sells stock for $10,000 denies himself or herself the opportunity to sell the stock for a higher price in the future, inheriting an opportunity cost equal to future price minus sale price.

An organization that invests $1 million in acquiring a new asset instead of spending that money on maintaining its existing asset portfolio incurs the increased risk of failure of its existing assets. The opportunity cost of the decision to acquire a new asset is the financial security that comes from the organization’s spending the money on maintaining its existing asset portfolio.

If a city decides to build a hospital on vacant land it owns, the opportunity cost is the value of the benefits forgone of the next best thing that might have been done with the land and construction funds instead. In building the hospital, the city has forgone the opportunity to build a sports center on that land, or a parking lot, or the ability to sell the land to reduce the city’s debt, since those uses tend to be mutually exclusive. Also included in the opportunity cost would be what investments or purchases the private sector would have voluntarily made if it had not been taxed to build the hospital. The total opportunity costs of such an action can never be known with certainty, and are sometimes called “hidden costs” or “hidden losses” as what has been prevented from being produced cannot be seen or known. Even the possibility of inaction is a lost opportunity. In this example, to preserve the scenery as-is for neighboring areas, perhaps including areas that it itself owns.

Opportunity cost is assessed in not only monetary or material terms, but also in terms of anything which is of value. For example, a person who desires to watch each of two television programs being broadcast simultaneously, and does not have the means to make a recording of one, can watch only one of the desired programs. Therefore, the opportunity cost of watching Dallas could be enjoying Dynasty. In a restaurant situation, the opportunity cost of eating steak could be trying the salmon. For the diner, the opportunity cost of ordering both meals could be twofold – the extra $20 to buy the second meal, and his reputation with his peers, as he may be thought gluttonous or extravagant for ordering two meals. A family might decide to use a short period of vacation time to visit Disneyland rather than doing household improvements. The opportunity cost of having happier children could therefore be a remodeled bathroom.

Evaluation

The consideration of opportunity costs is one of the key differences between the concepts of economic cost and accounting cost. Assessing opportunity costs is fundamental to assessing the true cost of any course of action. In the case where there is no explicit accounting or monetary cost (price) attached to a course of action, or the explicit accounting or monetary cost is low, then, ignoring opportunity costs may produce the illusion that its benefits cost nothing at all. The unseen opportunity costs then become the implicit hidden costs of that course of action.

Note that opportunity cost is not the sum of the available alternatives when those alternatives are, in turn, mutually exclusive to each other. The opportunity cost of the city’s decision to build the hospital on its vacant land is the loss of the land for a sporting center, or the inability to use the land for a parking lot, or the money which could have been made from selling the land, as use for any one of those purposes would preclude the possibility to implement any of the others.

However, most opportunities are difficult to compare. Opportunity cost has been seen as the foundation of the marginal theory of value as well as the theory of time and money.

In some cases it may be possible to have more of everything by making different choices; for instance, when an economy is within its production possibility frontier. In microeconomic models this is unusual, because individuals are assumed to maximize utility, but it is a feature of Keynesian macroeconomics. In these circumstances opportunity cost is a less useful concept.

OTC Bulletin Board (OTCBB): The OTC Bulletin Board or OTCBB is an electronic quotation system in the United States that displays real-time quotes, last-sale prices, and volume information for many over-the-counter (OTC) equity securities that are not listed on the NASDAQ stock exchange or a national securities exchange. Broker-dealers who subscribe to the system can use the OTCBB to look up prices or enter quotes for OTC securities.

Although the NASD oversees the OTCBB, the OTCBB is not part of the NASDAQ stock exchange. According to the SEC, “fraudsters often claim or imply that an OTCBB company is a Nasdaq company to mislead investors into thinking that the company is bigger than it is.”

Companies quoted on the OTCBB must be fully reporting (i.e. current with all required SEC filings) but have no market capitalization, minimum share price, corporate governance or other requirements to be quoted. Companies which have been “de-listed” from stock exchanges for falling below minimum capitalization, minimum share price or other requirements often end up being quoted on the OTCBB.

Stock of non-reporting companies (those without current SEC filings) may be quoted in the Pink Sheets. Most OTCBB companies are dually quoted, meaning they are quoted on both the OTCBB and the Pink Sheets.

Stocks traded in OTC markets such as the OTCBB or Pink Sheets are usually thinly traded microcap or penny stocks and are generally avoided by both retail and institutional investors due to fear that share prices are easily manipulated and there exists a potential for fraud. The SEC issues stern warnings to investors to beware of common fraud and manipulation schemes. As such, most companies choose to list on more established exchanges such as the AMEX, NYSE, or NASDAQ once eligible.
OTC market: Over-the-counter (OTC) trading is to trade financial instruments such as stocks, bonds, commodities or derivatives directly between two parties. It is contrasted with exchange trading, which occurs via facilities constructed for the purpose of trading (i.e., exchanges), such as futures exchanges or stock exchanges.

OTC-traded stocks

In the U.S., over-the-counter trading in stock is carried out by market makers that make markets in OTCBB and Pink Sheets securities using inter-dealer quotation services such as Pink Quote (operated by Pink OTC Markets) and the OTC Bulletin Board (OTCBB). OTC stocks are not usually listed or traded on any stock exchanges, though exchange listed stocks can be traded OTC on the third market. Although stocks quoted on the OTCBB must comply with U.S. Securities and Exchange Commission (SEC) reporting requirements, other OTC stocks, such as those stocks categorized as Pink Sheets securities, have no reporting requirements, while those stocks categorized as OTCQX have met alternative disclosure guidelines through Pink OTC Markets.

OTC market statistics

Data provided by Pink Sheets:

• Securities quoted exclusively on Pink Sheets – 5,019
• Securities dually quoted on Pink Sheets and OTCBB – 3,445
• Securities quoted exclusively on OTCBB – 130

Total OTC securities – 5,149

OTC contracts

An over-the-counter contract is a bilateral contract in which two parties agree on how a particular trade or agreement is to be settled in the future. It is usually from an investment bank to its clients directly. Forwards and swaps are prime examples of such contracts. It is mostly done via the computer or the telephone. For derivatives, these agreements are usually governed by an International Swaps and Derivatives Association agreement.

This segment of the OTC market is occasionally referred to as the “Fourth Market.”

The NYMEX has created a clearing mechanism for a slate of commonly traded OTC energy derivatives which allows counterparties of many bilateral OTC transactions to mutually agree to transfer the trade to ClearPort, the exchange’s clearing house, thus eliminating credit and performance risk of the initial OTC transaction counterparts.

Out-of-the-money: In finance, moneyness is a measure of the degree to which a derivative is likely to have positive monetary value at its expiration, in the risk-neutral measure. It can be measured in percentage probability, or in standard deviations.

Intrinsic value and time value

The intrinsic value (or “monetary value”) of an option is the value of exercising it now. Thus if the current (spot) price of the underlying security is above the agreed (strike) price, a call has positive intrinsic value (and is called “in the money”), while a put has zero intrinsic value.

The time value of an option is a function of the option value less the intrinsic value. It equates to uncertainty in the form of investor hope. It is also viewed as the value of not exercising the option immediately. In the case of a European option, you cannot choose to exercise it at any time, so the time value can be negative; for an American option if the time value is never negative, you exercise it: this yields a boundary condition.

ATM: At-the-money

An option is at-the-money if the strike price is the same as the spot price of the underlying security on which the option is written. An at-the-money option has no intrinsic value, only time value.

ITM: In-the-money

An in-the-money option has positive intrinsic value as well as time value. A call option is in-the-money when the strike price is below the spot price. A put option is in-the-money when the strike price is above the spot price.

OTM: Out-of-the-money

An out-of-the-money option has no intrinsic value. A call option is out-of-the-money when the strike price is above the spot price of the underlying security. A put option is out-of-the-money when the strike price is below the spot price.

Spot versus forward

Assets can have a forward price (a price for delivery in future) as well as a spot price. One can also talk about moneyness with respect to the forward price: thus one talks about ATMF, “ATM Forward”, and so forth. For instance, if the spot price for USD/JPY is 120, and the forward price one year hence is 110, then a call struck at 110 is ATMF but not ATM.

Which are used?

Buying an ITM option is effectively lending money in the amount of the intrinsic value. Further, an ITM call can be replicated by entering a forward and buying an OTM put (and conversely). Consequently, ATM and OTM options are the main traded ones.

Example

Suppose the current stock price of IBM is $100. A call or put option with a strike of $100 is at-the-money. A call option with a strike of $80 is in-the-money (100 – 80 = 20 > 0). A put option with a strike at $80 is out-of-the-money (80 – 100 = –20 < 0). Conversely, a call option with a $120 strike is out-of-the-money and a put option with a $120 strike is in-the-money.

When one uses the Black-Scholes model to value the option, one may define moneyness quantitatively. If we define the moneyness (of a call) as

where d₁ and d₂ are the standard Black-Scholes parameters then

where T is the time to expiry.

In other words, it is the number of standard deviations the current price is above the ATMF price.

This choice of parameterisation means that the moneyness is zero when the forward price of the underlying, discounted at the risk-free rate, equals the strike price. Such an option is often referred to as at-the-money-forward. Moneyness is measured in standard deviations from this point, with a positive value meaning an in-the-money call option and a negative value meaning an out-of-the-money call option (with signs reversed for a put option).

One can also measure it as a percent, via ?(m), where ? is the standard normal cumulative distribution function; thus a moneyness of 0 yields a 50% probability of expiring ITM, while a moneyness of 1 yields an approximately 84% probability of expiring ITM.

Beware that (percentage) moneyness is close to but different from Delta:  instead of ?(m), for a call (conversely for a put).

Thus a 25 Delta call option has approximately (but not exactly) 25% moneyness.

Note that r is the risk-free rate, not the expected return on the underlying.

Par value: Par value, in finance and accounting, means stated value or face value. From this comes the expressions at par (at the par value), over par (over par value) and under par (under par value).

The term “par value” has several meanings depending on context and geography.

Stock

Par value stock) has no relation to market value and, as a concept, is somewhat archaic. The par value of a stock was the share price upon initial offering; the issuing company promised not to issue further shares below par value, so investors could be confident that no one else was receiving a more favorable issue price. Thus, Par Value is a nominal value of a security which is determined by an issuing company as a minimum price. This was far more important in unregulated equity markets than in the regulated markets that exist today.

Par value also has bookkeeping purposes. It allows the company to put a de minimis value for the stock on the company’s financial statement.

Many common stocks issued today do not have par values; those that do (usually only in jurisdictions where par values are required by law) have extremely low par values (often the smallest unit of currency in circulation), for example a penny par value on a stock issued at USD$25/share. Most states do not allow a company to issue stock below par value.

No-par stocks have no par value printed on its certificates. Instead of par value, some U.S. states allow no-par stocks to have a stated value, set by the board of directors of the corporation, which serves the same purpose as par value in setting the minimum legal capital that the corporation must have after paying any dividends or buying back its stock.

Preferred stock par value remains relevant, and tends to reflect issue price. Dividends on preferred stocks are calculated as a percentage of par value.

Also, par value still matters for a callable common stock: the call price is usually either par value or a small fixed percentage over par value.

In the United States, it is legal for a corporation to issue “watered” shares below par value. However, the purchasers of “watered” shares incur an accounting liability to the corporation for the difference between the par value and the price they paid. Today, in many jurisdictions, par values are no longer required for common stocks.

Bonds

In the U.S. bond markets, the Par Value (as stated on the face of the bond) is the amount that the issuing firm is to pay to the bond holder at the maturity date. The present value of the Par Value plus thepresent value of annuity of the interest payments equal the bond price.

A bond is worth its par value when the price is equal to the face value. When a bond is worth less than its par value, it is priced at a discount; conversely when a bond is valued above its par value, the bond is priced at a premium.

The practice of pricing in price per hundreds largely grew out of the practice of pricing British government bonds, which were (and still are today) denominated in units of 100 pounds Sterling. These notes, originally sold in physical form having gilt-edges and therefore known as “Gilts”, are priced in similar form as US debt instruments, but are priced relative to their face value of 100 pounds Sterling. There is no subsequent shift of the decimal point applied in the pricing of such debt instruments as in the US. In the United Kingdom bond markets, par value is when the price per 100 Pounds Sterling note or bond is equal to the face value.

A par value of 100.00 for a note or bond means only that the note or bond is selling for the face value paid upon maturity of the note or bond. It can (and does) have different absolute values per Note or Bond depending on the conventions of the particular market and country in which such par value is quoted

Currency

The term “at par” is also used when two currencies are exchanged at equal value (for instance, in 1964, Trinidad and Tobago switched from British West Indies dollar to the new Trinidad and Tobago dollar, and that switch was “at par”, meaning that the Central Bank of Trinidad and Tobago replaced each old dollar with a new). Another more recent example is the 1:1 (at par) exchange rate between USD and CHF in 2008.
Parity: Principle of parity is a legal concept used in codecision procedure disabling one European institution from making decision without obtaining assent of the other institution engaged in the procedure. An option trading for exactly its intrinsic value is said to be trading at parity.

Parity price: The purchasing power parity (PPP) theory uses the long-term equilibrium exchange rate of two currencies to equalize their purchasing power. Developed by Gustav Cassel in 1918, it is based on the law of one price: the theory states that, in ideally efficient markets, identical goods should have only one price.­­

This purchasing power SEM rate equalizes the purchasing power of different currencies in their home countries for a given basket of goods.. Using a PPP basis is arguably more useful when comparing differences in living standards on the whole between nations because PPP takes into account the relative cost of living and the inflation rates of different countries, rather than just a nominal gross domestic product (GDP) comparison. The best-known and most-used purchasing power parity exchange rate is the Geary-Khamis dollar(the “international dollar”).

PPP exchange rate (the “real exchange rate“) fluctuations are mostly due to market exchange rate movements. Aside from this volatility, consistent deviations of the market and PPP exchange rates are observed, for example (market exchange rate) prices of non-traded goods and services are usually lower where incomes are lower. (A U.S. dollar exchanged and spent in India will buy more haircuts than a ­­dollar spent in the United States). PPP takes into account this lower cost of living and adjusts for it as though all income was spent locally. In other words, PPP is the amount of a certain basket of basic goods which can be bought in the given country with the money it produces.

There can be marked differences between PPP and market exchange rates.  For example, the World Bank’s World Development Indicators 2005 estimated that in 2003, one United States dollar was equivalent to about 1.8 Chinese yuan by purchasing power parity  — considerably different from the nominal exchange rate that put one dollar equal to 7.6 yuan. This discrepancy has large implications; for instance, GDP per capita in the People’s Republic of China is about US$1,800 while on a PPP basis it is about US$7,204. This is frequently used to assert that China is the world’s second-largest economy, but such a calculation would only be valid under the PPP theory. At the other extreme, Japan’s nominal GDP per capita is around US$37,600, but its PPP figure is only US$30,615.  For convertible securities, the price level at which their exchange value equals that of the common stock.

Penny stocks: In the United States, a penny stock is a common stock that trades for less than five dollars a share and are traded over the counter (OTC) through quotation services such as the OTC Bulletin Board or the Pink Sheets. Although a penny stock is said to be “thinly traded,” share volumes traded daily can be in the hundreds of millions for a sub-penny stock. Legitimate information on penny stock companies can be difficult to find and a stock can be easily manipulated.

Definition

In the U.S. financial markets, the term penny stock commonly refers to any stock trading outside one of the major exchanges (NYSE, NASDAQ, or AMEX), and is often considered pejorative. However, the official SEC definition of a penny stock is a low-priced, speculative security of a very small company, regardless of market capitalization or whether it trades on a securitized exchange (like NYSE or NASDAQ) or an “over the counter” listing service, such as the OTCBB or Pink Sheets. The terms penny stock, microcap stock, small caps, and nano caps are sometimes all used interchangeably, however per the SEC definition, penny stock status is determined by share price, not market capitalization or listing service. A penny stock is typically listed for below $5 per share (traditionally one dollar but defined as five by the SEC).

In the UK markets, a penny stock, or penny shares, as they are more commonly called, generally refer to a stock and shares in small cap companies, defined as being companies with a market capitalization of less than £100 million and/or a share price of less than £1 with a bid/offer spread greater than 10%. In the UK Penny Shares are covered by a standard regulatory risk warning issued by the Financial Services Authority (FSA).

High-risk investments

Many new investors are lured to the appeal of a penny stock due to the low price and perceived potential for rapid growth, which can appear to be occurring if the stock is being promoted. However, severe loss can occur and many penny stocks lose all of their value in the long term. Accordingly, the SEC warns that penny stocks are high risk investments and new investors should be aware of the risks involved. These risks include limited liquidity, lack of financial reporting, and fraud.

Sudden changes in demand or supply of penny stock can lead to volatility in the stock price up or down. A lack of liquidity can also make it extremely difficult to sell a stock, particularly if there are no buyers that day. This can also make the stock extremely difficult to short. Lack of liquidity and volatility also makes penny stocks much more vulnerable to manipulation.

Secondly, unlike NASDAQ or the NYSE, there are only minimal requirements for a stock to be quoted on the OTCBB, namely that they make their filings with the SEC on time.  In fact, companies that fail to meet minimum standards on one of the broader exchanges and are delisted often relist on the OTCBB or the Pink Sheets.

Furthermore, a stock trading on the Pink Sheets (recognizable with a .PK suffix) has little to no regulatory or listing requirements whatsoever, at least compared to major markets. There are no minimum accounting standards, change in notification of ownership of shares, and reported other material changes affecting the financial viability of a company, all of which are designed to protect shareholders.

The SEC notes most of the same about Internet message boards, where fraudsters claiming to be unbiased investors who’ve carefully done their due diligence may in fact be company insiders, and that a single person or a small team can create the appearance of a huge interest in a stock simply by creating a huge number of aliases, while banning the most vocal or perceptive critics of these offerings.

Penny stock fraud

Main article: Microcap stock fraud

Penny stocks are often relentlessly promoted as part of illegal pump and dump schemes. The SEC explains how it works:

“A company’s web site may feature a glowing press release about its financial health or some new product or innovation. Newsletters that purport to offer unbiased recommendations may suddenly tout the company as the latest “hot” stock. Messages in chat rooms and bulletin board postings may urge you to buy the stock quickly or to sell before the price goes down. Or you may even hear the company mentioned by a radio or TV analyst. Unwitting investors then purchase the stock in droves, creating high demand and pumping up the price. But when the fraudsters behind the scheme sell their shares at the peak and stop hyping the stock, the price plummets, and investors lose their money. Fraudsters frequently use this ploy with small, thinly traded companies because it’s easier to manipulate a stock when there’s little or no information available about the company.”

There are all sorts of variations of the classic pump and dump, from short-and-distort to selling chop stocks — the last being a scam in which shares are acquired for pennies under Regulation S and then illegally sold to overseas or domestic retail investors. Other features of the typical penny stock scam include spam e-mails and junk faxes that tout ludicrous and fraudulent claims, crooked newsletter writers who promote a stock for a fee, message boards swarming with “buy now!!!” postings about a stock from anonymous, paid posters, fake or misleading press releases issued by the company, or boiler rooms full of cold-callers targeting naive, elderly, or foreign buyers all in attempt to drive up the share price while the insiders sell.

A more recent outbreak of penny stock fraud is far more brazen, and is based mostly overseas. Organized crime gangs in Eastern Europe and Asia will acquire a large number of shares of a moribund penny stock. Then, using passwords and logins to electronic brokerages, such as E*Trade, stolen at public computer terminals in hotels and elsewhere, they will then use the hijacked customer accounts to buy up shares, while at the same time selling their own shares, draining the customer accounts and leaving their victims holding thousands of shares of worthless penny stocks.

While not all stocks listed on the Pink Sheets or the OTCBB are fraudulent, one Business Week article estimated that chop stocks alone “make up perhaps half the 85 million-share daily volume of the OTC Bulletin Board.”

Internet spam

Many Internet users have been exposed to e-mail spam promoting penny stocks. According to a study conducted at Oxford, 15% of all spam was related to penny stock fraud. According to the study, “People who responded to the ‘pump and dump’ scam lost 8% of their investment in two days. Conversely, the spammers who buy low-priced stock before sending the e-mails, typically see a return of between 4.9% and 6% when they sell.”

Pension fund: A pension fund is a pool of assets forming an independent legal entity that are bought with the contributions to a pension plan for the exclusive purpose of financing pension plan benefits.

Pension funds are important shareholders of listed and private companies. They are especially important to the stock market where large institutional investors like the Ontario Teachers’ Pension Plan dominate. The largest 300 pension funds collectively hold about $6 trillion in assets.  In January 2008, The Economist reported that Morgan Stanley estimates that pension funds worldwide hold over US$20 trillion in assets, the largest for any category of investor ahead of mutual funds, insurance companies, currency reserves, sovereign wealth funds, hedge funds, or private equity.

Classifications

Open vs. closed pension funds

Open pension funds support at least one pension plan with no restriction on membership while closed pension funds support only pension plans that are limited to certain employees.^[3]

Closed pension funds are further subclassified into:

• Single employer pension funds
• Multi-employer pension funds
• Related member pension funds
• Individual pension funds

Public vs. private pension funds

A public pension fund is one that is regulated under public sector law while a private pension fund is regulated under private sector law. In certain countries the distinction between public or government pension funds and private pension funds may be difficult to assess.

Examples

This list is incomplete; you can help by expanding it.

Australia

See main article, Superannuation in Australia

Government

• Public Sector Supperannuation Scheme (for federal civil servants)
• Commonwealth Supperannuation Scheme (older scheme for federal civil servants)
• State Super (for New South Wales state civil servants)
• The Retail Employees Superannuation Trust (Australia’s largest superannuation fund by membership)^[4]
• ANZ Australian Staff Superannuation Scheme (for employees of ANZ Bank)
• Caisse de dépôt et placement du Québec
• Canada Pension Plan
• Alberta Investment Management
• Ontario Teachers’ Pension Plan (union-controlled)
• Hospitals of Ontario Pension Plan (HOOPP)
• OMERS Administration Corporation (OMERS)
• Chile pension system
• National Council for Social Security Fund [1] (???????????)
• Mandatory Provident Fund
• Stichting Pensioenfonds ABP (ABP)
• Stichting Pensioenfonds Zorg en Welzijn (PFZW, formerly PGGM)
• The Government Pension Fund – Global (Statens pensjonsfond – Utland)
• The Government Pension Fund – Norway (Statens pensjonsfond – Norge)
• Central Provident Fund
• California Public Employees’ Retirement System (CalPERS)
• California State Teachers’ Retirement System (CalSTRS)
• Federal Retirement Thrift Investment Board
• Fire and Police Pension Association of Colorado (FPPA)
• Illinois Municipal Retirement Fund
• Kansas City Public School Retirement System (KCPSRS)
• Kansas Public Employees Retirement System (KPERS)
• Minnesota Public Employees’ Retirement Association (MNPERA)
• Minnesota Teachers’ Retirement Association (MNTRA)
• New York State Teachers’ Retirement System (NYSTRS)
• Retirement Systems of Alabama
• Teacher Retirement System of Texas (TRS of Texas)
• the general organization for social insurance

Private

Canada

Government

Private

Chile

China

Hong Kong

The Netherlands

Norway

Singapore

[edit]United States

Government

Saudi Arabia

Greece

Government

• Public Employees Pension Fund [2]
• TAPILTAT

Private

Performance bond: A performance bond is a surety bond issued by an insurance company or a bank to guarantee satisfactory completion of a project by a contractor.

For example, a contractor may cause a performance bond to be issued in favor of a client for whom the contractor is constructing a building. If the contractor fails to construct the building according to the specifications laid out by the contract (most often due to the bankruptcy of the contractor), the client is guaranteed compensation for any monetary loss up to the amount of the performance bond.

Performance bonds are commonly used in the construction and development of real property, where an owner or investor may require the developer to assure that contractors or project managers procure such bonds in order to guarantee that the value of the work will not be lost in the case of an unfortunate event (such as insolvency of the contractor). In other cases a performance bond may be requested to be issued in other large contracts besides civil construction projects.

The term is also used to denote a collateral deposit of “good faith money”, intended to secure a futures contract, commonly known as margin.

Performance bonds are generally issued as part of a ‘Performance and Payment Bond’, where a Payment Bond guarantees that the contractor will pay the labor and material costs they are obliged to.
Performance bonds have been around since 2,750 BC and, more recently, the Romans developed laws of surety around 150 AD, the principles of which still exist.

Personal finance: Personal finance is the application of the principles of finance to the monetary decisions of an individual or family unit. It addresses the ways in which individuals or families obtain, budget, save, and spend monetary resources over time, taking into account various financial risks and future life events. Components of personal finance might include checking and savings accounts, credit cards and consumer loans, investments in the stock market, retirement plans, social security benefits, insurance policies, and income tax management.

Personal financial planning

A key component of personal finance is financial planning, a dynamic process that requires regular monitoring and reevaluation. In general, it has five steps:

1. Assessment: One’s personal financial situation can be assessed by compiling simplified versions of financial balance sheets and income statements. A personal balance sheet lists the values of personal assets (e.g., car, house, clothes, stocks, bank account), along with personal liabilities (e.g., credit card debt, bank loan, mortgage). A personal income statement lists personal income and expenses.
2. Setting goals: Two examples are “retire at age 65 with a personal net worth of $1,000,000″ and “buy a house in 3 years paying a monthly mortgage servicing cost that is no more than 25% of my gross income”. It is not uncommon to have several goals, some short term and some long term. Setting financial goals helps direct financial planning.
3. Creating a plan: The financial plan details how to accomplish your goals. It could include, for example, reducing unnecessary expenses, increasing one’s employment income, or investing in the stock market.
4. Execution: Execution of one’s personal financial plan often requires discipline and perseverance. Many people obtain assistance from professionals such as accountants, financial planners, investment advisers, and lawyers.
5. Monitoring and reassessment: As time passes, one’s personal financial plan must be monitored for possible adjustments or reassessments.

Typical goals most adults have are paying off credit card and or student loan debt, retirement, college costs for children, medical expenses, and estate planning.

The six key areas of personal financial planning, as suggested by the Financial Planning Standards Board, are:

1 – Financial Position: this area is concerned with understanding the personal resources available by examining net worth and household cash flow. Net worth is a person’s balance sheet, calculated by adding up all assets under that person’s control, minus all liabilities of the household, at one point in time. Household cash flow totals up all the expected sources of income within a year, minus all expected expenses within the same year. From this analysis, the financial planner can determine to what degree and in what time the personal goals can be accomplished.

2 – Adequate Protection: the analysis of how to protect a household from unforeseen risks. These risks can be divided into liability, property, death, disability, health and long term care. Some of these risks may be self-insurable, while most will require the purchase of an insurance contract. Determining how much insurance to get, at the most cost effective terms requires knowledge of the market for personal insurance. Business owners, professionals, athletes and entertainers require specialized insurance professionals to adequately protect themselves. Since insurance also enjoys some tax benefits, utilizing insurance investment products may be a critical piece of the overall investment planning.

3 – Tax Planning: typically the income tax is the single largest expense in a household. Managing taxes is not a question of if you will pay taxes, but when and how much. Government gives many incentives in the form of tax deductions and credits, which can be used to reduce the lifetime tax burden. Most modern governments use a progressive tax. Typically, as your income grows, you pay a higher marginal rate of tax. Understanding how to take advantage of the myriad tax breaks when planning your personal finances can make a significant impact upon your success.

4 – Investment and Accumulation Goals: planning how to accumulate enough money to acquire items with a high price is what most people consider to be financial planning. The major reasons to accumulate assets is for the following: a – purchasing a house b – purchasing a car c – starting a business d – paying for education expenses e – accumulating money for retirement, to generate a stream of income to cover lifestyle expenses.

Achieving these goals requires projecting what they will cost, and when you need to withdraw funds. A major risk to the household in achieving their accumulation goal is the rate of price increases over time, or inflation. Using net present value calculators, the financial planner will suggest a combination of asset earmarking and regular savings to be invested in a variety of investments. In order to overcome the rate of inflation, the investment portfolio has to get a higher rate of return, which typically will subject the portfolio to a number of risks. Managing these portfolio risks is most often accomplished using asset allocation, which seeks to diversify investment risk and opportunity. This asset allocation will prescribe a percentage allocation to be invested in stocks, bonds, cash and alternative investments. The allocation should also take into consideration the personal risk profile of every investor, since risk attitudes vary from person to person.

5 – Retirement Planning: retirement planning is the process of understanding how much it costs to live at retirement, and coming up with a plan to distribute assets to meet any income shortfall.

6 – Estate Planning: involves planning for the disposition of your asset when you die. Typically, there is a tax due to the state or federal government at your death. Avoiding these taxes means that more of your assets will be distributed to your heirs. You can leave your assets to family, friends or charitable groups.

Pink sheets: Pink Quote, informally known as the Pink Sheets, is an electronic quotation system operated by Pink OTC Markets that displays quotes from broker-dealers for many over-the-counter (OTC) securities. These securities tend to be inactively traded stocks, including penny stocks and those with a narrow geographic interest.

Market makers and other brokers can use Pink Quote to publish their bid and ask quotation prices. Starting in 1913, and prior to the creation of the electronic system in 2000, these quotes were printed on pink colored paper by the National Quotation Bureau. The term Pink Sheets is also used to refer to a market tier within the current Pink Quote system.

The Pink Sheets is not a stock exchange. To be quoted in the Pink Sheets, companies do not need to fulfill any requirements (e.g. filing financial statements with the SEC). With the exception of foreign issuers, mostly represented by ADRs, the companies quoted in the Pink Sheets tend to be closely held, extremely small, or thinly traded. Most do not meet the minimum U.S. listing requirements for trading on a stock exchange such as the New York Stock Exchange. Many of these companies do not file periodic reports or audited financial statements with the SEC, making it very difficult for investors to find reliable, unbiased information about those companies.

For these reasons the SEC views companies listed on Pink Sheets as “among the most risky investments” and advises potential investors to heavily research the companies in which they plan to invest.

Buying Pink Sheets shares is supposed to be difficult. Broker-dealers are enjoined to weed out unsophisticated investors who may get an e-mail or word-of-mouth tip about a small stock. Many Pink Sheets stocks may only be registered for sale in one state so that the only way to purchase the stock is to make a DRIP/business/unsolicited/accredited or other sophisticated form of investment. Many registered representatives do not even know how or if they can sell them.

Preferred stock: Also called preferred shares or preference shares, is typically a ‘higher ranking’ stock than common stock, and its terms are negotiated between the corporation and the investor.

Preferred stock usually carries no voting rights, but may carry priority over common stock in the payment of dividends and upon liquidation. Preferred stock may carry a dividend that is paid out prior to any dividends being paid to common stock holders. Preferred stock may have a convertibility feature into common stock. Preferred stockholders will be paid out in assets before common stockholders and after debt holders in bankruptcy. Terms of the preferred stock are stated in a “Certificate of Designation”.
Prime rate: Prime rate, or Prime Lending Rate, is a term applied in many countries to a reference interest rate used by banks. The term originally indicated the rate of interest at which banks lent to favored customers, i.e., those with high credibility, though this is no longer always the case. Some variable interest rates may be expressed as a percentage above or below prime rate. The interest rate banks charge their best customers.
Principal: In commercial law, a principal is a person–legal or natural–who authorizes an agent to act to create one or more legal relationships with a third party. This branch of law is called agency and relies on the common law proposition qui facit per alium, facit per se (Latin “he who acts through another, acts personally”).

It is a parallel concept to vicarious liability and strict liability (in which one person is held liable for the acts or omissions of another) in criminal law or torts.
Principal stockholder: In general, a mutual shareholder or stockholder is an individual or company (including a corporation) that legally owns one or more shares of stock in a joint stock company. A company’s shareholders collectively own that company. Thus, the typical goal of such companies is to enhance shareholder value.  The principal stockholder is any person or entity owning ten percent or more of the common stock of the corporation.

Stockholders are granted special privileges depending on the class of stock. These rights may include:

• The right to vote on matters such as elections to the board of directors. Usually, stockholders have one vote per share owned, but sometimes this is not the case.^{[citation needed]}
• The right to propose shareholder resolutions.
• The right to share in distributions of the company’s income.
• The right to purchase new shares issued by the company.
• The right to a company’s assets during a liquidation of the company.

However, stockholder’s rights to a company’s assets are subordinate to the rights of the company’s creditors. This means that stockholders typically receive nothing if a company is liquidated after bankruptcy (if the company had had enough to pay its creditors, it would not have entered bankruptcy, although a stock may have value after a bankruptcy if there is the possibility that the debts of the company will be restructured.

Stockholders or shareholders are considered by some to be a partial subset of stakeholders, which may include anyone who has a direct or indirect equity interest in the business entity or someone with even a non-pecuniary interest in a non-profit organization. Thus it might be common to call volunteer contributors to an association stakeholders, even though they are not shareholders.

Although directors and officers of a company are bound by fiduciary duties to act in the best interest of the shareholders, the shareholders themselves normally do not have such duties towards each other.

However, in a few unusual cases, some courts have been willing to imply such a duty between shareholders. For example, in California, majority shareholders of closely held corporations have a duty to not destroy the value of the shares held by minority shareholders.

Shareholders play an important role in raising capital for organizations. So these figures pose a great opportunity for all those who are looking for a lucrative option to invest money. Companies typically provide all the necessary proofs to shareholders to show that they are investing at a right place. For example, fair and reliable audit figures from income statement and balance sheet are used as evidence of overall performance for the benefit of shareholders.
Private placement: A private placement (or non-public offering) is a funding round of securities which are sold without a initial public offering, usually to a small number of chosen private investors.^[1] In the United States, although these placements are subject to the Securities Act of 1933, the securities offered do not have to be registered with the Securities and Exchange Commission if the issuance of the securities conforms to an exemption from registrations as set forth in the Securities Act of 1933 and SEC rules promulgated thereunder. Private placements may typically consist of stocks, shares of common stock or preferred stock or other forms of membership interests, warrants or promissory notes (including convertible promissory notes), and purchasers are often institutional investors such as banks, insurance companies or pension funds.

Privately held company: The term privately held company refers to the ownership of a business company in two different ways: first, referring to ownership by non-governmental organizations; and second, referring to ownership of the company’s stock by a relatively small number of holders who do not trade the stock publicly on the stock market. Less ambiguous terms for a privately held company are unquoted company and unlisted company.

Though less visible than their publicly traded counterparts, private companies have a major importance in the world’s economy. In 2008, the 441 private companies accounted for $1.8 trillion and employed 6.2 million people, according to Forbes. In 2005, the 339 companies on Forbes‘ survey of closely held U.S. businesses sold a trillion dollars’ worth of goods and services and employed 4 million people. In 2004, the Forbes’ count of privately held U.S. businesses with at least $1 billion in revenue was 305.

KPMG, Koch Industries, Bechtel, Cargill, Chrysler, PricewaterhouseCoopers, Flying J, Ernst & Young, Publix, Deloitte & Touche and Mars are among the largest privately held companies in the United States. IKEA, Victorinox, and Bosch are examples of Europe’s largest privately held companies.

State ownership vs. private ownership

In the broadest sense, the term privately held company refers to any business not owned by the state. This usage is often found in former Communist countries to differentiate from former state-owned enterprises,^{[citation needed]} but it may be used anywhere when contrasting to a state-owned company.

In the United States, the term privately held company is more often used to describe for-profit enterprises whose shares are not traded on the stock market.

Ownership of stock

In countries with public trading markets, a privately held business company is generally taken to mean one whose ownership shares or interests are not publicly traded. Often, privately held companies are owned by the company founders and/or their families and heirs or by a small group of investors. Sometimes employees also hold shares of private companies. Most small businesses are privately held. In the United States a few notable large corporations, such as Koch Industries, HEB, Cargill, Swagelok, Wegmans, Kohler, Mars, and Bechtel are privately held, as are large professional services firms, such as accounting and law firms.

Subsidiaries and joint ventures of publicly traded companies (for example, General Motors‘ Saturn Corporation), unless shares in the subsidiary itself are traded directly, share characteristics of both privately held companies and publicly traded companies. Such companies are usually subject to the same reporting requirements as privately held companies, but their assets, liabilities and activities are also included in the reports of their parent companies, as required by the accountancy and securities industry rules relating to groups of companies.

Form of organization

See also: Types of business entity

Private companies may be called corporations, limited companies, limited liability companies, or other names, depending on where and how they are organized. In the United States, but not generally in the United Kingdom, the term is also extended to partnerships, sole proprietorships or business trusts. Each of these categories may have additional requirements and restrictions that may impact reporting requirements, income tax liabilities, governmental obligations, employee relations, marketing opportunities, and other business decisions.

In many countries, there are forms of organization which are restricted to and are commonly used by private companies, for example the private company limited by shares in the United Kingdom (abbreviatedLtd) and the proprietary limited company (abbreviated Pty Ltd) in Australia.

Reporting obligations and restrictions

Privately held companies generally have fewer or less comprehensive reporting requirements for transparency, via annual reports, etc. than do publicly traded companies. For example, in the United States, unlike in Europe, private companies are not generally required to publish their financial statements. In Australia, Part 2E of the Corporations Act 2001 requires that public companies file certain documents relating to their annual general meeting with the Australian Securities and Investments Commission, while there is no similar requirement for private companies.

Private companies also sometimes have restrictions on how many shareholders they may have. For example, the U.S. Securities Exchange Act of 1934, section 12(g), limits a private company, generally, to fewer than 500 shareholders, and the U.S. Investment Company Act of 1940, requires registration of investment companies that have more than 100 holders. In Australia, section 113 of the Corporations Act 2001 limits a private company to fifty non-employee shareholders.

Promissory note: A promissory note, referred to as a note payable in accounting, or commonly as just a “note”, is a contract where one party (the maker or issuer) makes an unconditional promise in writing to pay a sum of money to the other (the payee), either at a fixed or determinable future time or on demand of the payee, under specific terms. They differ from IOUs in that they contain a specific promise to pay, rather than simply acknowledging that a debt exists.

Overview

The terms of a note typically include the principal amount, the interest rate if any, the parties, the date, the terms of repayment (which could include interest) and the maturity date. Sometimes, provisions are included concerning the payee’s rights in the event of a default, which may include foreclosure of the maker’s assets. Demand promissory notes are notes that do not carry a specific maturity date, but are due on demand of the lender. Usually the lender will only give the borrower a few days notice before the payment is due. For loans between individuals, writing and signing a promissory note are often instrumental for tax and record keeping. In the United States, a promissory note that meets certain conditions is a negotiable instrument regulated by article 3 of the Uniform Commercial Code. Negotiable promissory notes are used extensively in combination with mortgages in the financing of real estate transactions. Promissory notes, or commercial papers, are also issued to provide capital to businesses.

Historically, promissory notes have acted as a form of privately issued currency. In many jurisdictions today, bearer negotiable promissory notes are illegal because they can act as an alternative currency.

Publicly-traded company: A publicly-traded company is a company that has permission to offer its registered securities (stock, bonds, etc.) for sale to the general public, typically through a stock exchange, or occasionally a company whose stock is traded over the counter (OTC) via market makers who use non-exchange quotation services.

Securities of a public company

Usually, the securities of a public company are owned by many investors while the shares of a private company are owned by relatively few shareholders. A company with many shareholders is not necessarily a public company. In the United States, in some instances, companies with over 500 shareholders may be required to report under the Securities Exchange Act of 1934; companies that report under the 1934 Act are generally deemed public companies. The first company to issue shares is thought to be the Dutch East India Company in 1601.

Advantages

It is able to raise funds and capital through the sale of its securities. This is the reason why public corporations are so important: prior to their existence, it was very difficult to obtain large amounts of capital for private enterprises.

In addition to being able to easily raise capital, public companies may issue their securities as compensation for those that provide services to the company, such as their directors, officers, and employees.

In comparison, private companies may also issue their securities as compensation for services, but the recipients of those securities often have difficulty selling them on the open market. Securities from a public company typically have an established fair market value at any given time as determined by the price the security is sold for on the stock exchange where the security is traded.

The financial media and city analysts will be able to access additional information about the business.

Disadvantages

Private companies have several advantages over public companies. A private company has no requirement to publicly disclose much, if any financial information; such information could be useful to competitors. For example, public companies in the United States are required by the SEC to submit an annual Form 10-K containing a comprehensive detail of a company’s performance. Private companies do not file form 10-Ks; they leak less information to competitors, and they tend to be under less pressure to meet quarterly projections for sales and profits — and thus may be better placed to make good decisions for the long-run.

Public companies are also required to spend more for certified public accountants and other bureaucratic paperwork required of all public companies under government regulations. For example, the Sarbanes-Oxley Act in the United States does not apply to private companies. The wealth and income of the owners remains relatively unknown by the public.

Stockholders

In the US, the Securities and Exchange Commission requires that firms whose stock is traded publicly report their major stockholders each year. The reports identify all institutional shareholders (primarily, firms owning stock in other companies), all company officials who own shares in their firm, and any individual or institution owning more than 5% of the firm’s stock.

General Trend

The norm is for new companies, which are typically small, to be privately owned. After a number of years, if a company has grown significantly and is profitable, or has promising prospects, there is often an initial public offering which converts the private company into a public company or an acquisition of a company by public company.

Yet, some companies choose to remain private for a long period of time after maturity into a profitable company. Investment banking firm Goldman Sachs and shipping services provider United Parcel Service (UPS) are examples of profitable companies which remained private for many years after maturing into profitable companies.

Privatization

Less common, but not unknown, is for a public company to buy out its shareholders and become private. This is typically done through a leveraged buyout and occurs when the buyers believe the securities have been undervalued by investors. Public companies can also become private by having all of their shares purchased by an individual or small group of investors, or by another company that is private.

In addition, one publicly-owned company may be purchased by one or more publicly-owned company(ies), with the bought-out company either becoming a subsidiary or joint venture of the purchaser(s) or ceasing to exist as a separate entity, its former shareholders receiving either cash, shares in the purchasing company or a combination of both. When the compensation in question is primarily shares then the deal is often considered a merger. Subsidiaries and joint ventures can also be created de novo – this often happens in the financial sector. Subsidiaries and joint ventures of public companies are not generally considered to be private companies (even though they themselves are not publicly traded) and are generally subject to the same reporting requirements as publicly-traded companies. Finally, shares in subsidiaries and joint ventures can be (re)-offered to the public at any time – firms that are sold in this manner are called spin-outs.

Most industrialized jurisdictions have enacted laws and regulations that detail the steps that prospective owners (public or private) must undertake if they wish to take over a publicly-traded corporation. This often entails the would-be buyer(s) making a formal offer for each share of the company to shareholders. Normally some form of supermajority is required for this sort of the offer to be approved, but once it happens then usually all shareholders are compelled to sell at the agreed-upon price and the company either becomes a subsidiary, ceases to exist or becomes private.

Trading and valuation

The shares of a public company are often traded on a stock exchange. The value or “size” of a public company is called its market capitalization, a term which is often shortened to “market cap”. This is calculated as the number of shares outstanding (as opposed to authorized but not necessarily issued) times the price per share. For example, a company with two million shares outstanding and a price per share of US$ 40 would have a market capitalization of US$80 million. However, a company’s market capitalization should not be confused with the fair market value of the company as a whole since the price per share are influenced by other factors such as the volume of shares traded.

For example, if all shareholders were to simultaneously try to sell their shares in the open market, this would immediately create downward pressure on the price for which the share is traded unless there were an equal number of buyers willing to purchase the security at the price the sellers demand. So, sellers would have to either reduce their price or choose not to sell. Thus, the number of trades in a given period of time, commonly referred to as the “volume” is important when determining how well a company’s market capitalization reflects true fair market value of the company as a whole. The higher the volume, the more the fair market value of the company is likely to be reflected by its market capitalization.

Another example of the impact of volume on the accuracy of market capitalization is when a company has little or no trading activity and the market price is simply the price at which the most recent trade took place, which could be days or weeks ago. This occurs when there are no buyers willing to purchase the securities at the price being offered by the sellers and there are no sellers willing to sell at the price the buyers are willing to pay. While this is rare when the company is traded on a major stock exchange, it is not uncommon when shares are traded over-the-counter (OTC). Since individual buyers and sellers need to incorporate news about the company into their purchasing decisions, a security with an imbalance of buyers or sellers may not feel the full effects of recent news.

Quasi-contract: A quasi-contract, also called an implied-in-law contract, is a legal substitute for a contract. A quasi-contract is a contract that should have been formed, even though in actuality it was not. It is used when a court wishes to create an obligation upon a non-contracting party to avoid injustice and to ensure fairness. It is invoked in circumstances of unjust enrichment.

Generally an actual or implied-in-fact contract is required for the defendant to be liable for services rendered, and a person who provides a service uninvited is an officious intermeddler who is not entitled to compensation. “Would-be plaintiffs cannot deliver unordered goods or services and demand payment for the benefit…A corollary is that one who does have an enforceable contract is bound by the contract’s terms: subject to a few controversial exceptions, she cannot sue for restitution of the value of benefits conferred…”  However, in many jurisdictions under certain circumstances plaintiffs may be entitled to restitution under quasi-contract (as with the example of Oklahoma below).

Quasi-contracts are defined to be “the lawful and purely voluntary acts of a man, from which there results any obligation whatever to a third person, and sometime a reciprocal obligation between the parties.”  It “is not legitimately done, but the terms are accepted and followed as if there is a legitimate contract