Financial Investigations Glossary
By: Bill E. Branscum
Copyright 2001

This is a glossary of terms that are, for the most part, unique to the world of financial investigations, or terms that have a different meaning than that which is commonly understood when they are used in this context.

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Haircut: Industry term for the valuation of securities used to calculate a broker/dealer's net capital. The haircut will change depending on the class of a security, its market risk, and the time to maturity. The haircut may fluctuate from 0% to 30% (common for equity securities) to 100% for fail positions (securities with past due delivery) that have prospect of settlement.

Half Life: Point in time when the principal on a mortgage backed security (issued or guaranteed by the Government National Mortgage Association, the Federal National Mortgage Association, or the Federal Home Loan Mortgage Association) has been repaid. It is presumed that the security has a half life of 12 years. However, depending on interest rate trends, specific mortgage pools can have longer or shorter half lives. If interest rates rise, homeowners will hold onto their mortgages longer than predicted, and half lives will rise. If interest rates fall, more homeowners will refinance their mortgages. Thus, principal will be paid off more quickly, and half lives will drop.

Half Stock: A common or preferred stock that has a $50 par value. The usual standard is a $100 par value.

Hammering The Market: Intense selling by investors who believe stock prices are inflated. Also, speculators anticipating a market drop will sell short, and are said to be hammering the market.

Hard Dollars: Customers' payments for services rendered by a brokerage firm. For example, a customer's payment to a broker for a financial plan produced for them. Conversely, with soft dollars, a broker is compensated by commissions received if he places any of the trades specified in that financial plan.
Head And Shoulders Pattern: A technical trading pattern used to chart stock price trends. It resembles the head and shoulders outline of a person. In a head and shoulders top formation, the stock reaches one plateau (the left shoulder), then goes higher (the top of the head), and then drops back to the plateau again (the right shoulder). The head and shoulders top pattern signifies the reversal of an upward trend--prices should be falling. A head and shoulders bottom pattern signifies the reversal of a downward trend--prices should be rising.

Heavy Market: A market that has falling prices due to a larger supply of offers to sell than bids to buy.

Hedge Clause: A disclaimer used in market letters, research reports, or other printed materials relating to the evaluation of investments. Its intent is to exonerate the writer from responsibility for the information's accuracy.

Hedge Fund: "Hedge fund" is a general, non-legal term that was originally used to describe a type of private, unregistered investment pool that employed sophisticated hedging and arbitrage techniques to trade in the corporate equity markets. Hedge funds generally rely on Sections 3(c)(1) and 3(c)(7) of the Investment Company Act of 1940 to avoid registration and regulation as investment companies as well as Section 4(2) and Rule 506 of Regulation D of the Securities Act of 1933 to avoid having to register with the SEC. To qualify, they represent that they only accept financially sophisticated investors and do not publicly offer their securities.
It is the fact that they are private, and exempt from registration, that makes them attractive to con artists. In many cases, the principals fraudulently represent themselves to be dealing exclusively with sophisticated investors and publicly advertise as well – even legitimate hedge funds are subject to the antifraud provisions of the federal securities laws. See the David Mobley (Maricopa) case under Case Studies for a classic example of a con artists “Hedge Fund” operation.

Hedging: The use of almost opposite direction securities, instruments, or futures contracts as a method of attempting to reduce market risk. A perfect hedge is one that eliminates the prospects of any future gains or losses. Investors frequently try to hedge against inflation by purchasing assets (e.g., gold) that will rise in value faster than inflation.

Hemline Theory: Capricious idea that stock prices move in the same direction as women's dress hemlines. Short dresses and skirts are considered bullish signs that stock prices will rise. Longer dresses and skirts are considered bearish signs that stock prices will decline. Notwithstanding that it is occasionally correct, the hemline theory has endured more as wishful thinking than serious market analysis.

High Flyer: Very speculative and high priced stock that moves up and down sharply over a short time span.

High Grade Bond: Bond rated "AAA" or "AA" by Moody's or Standard & Poor's rating services.
High Net Worth (HNW) Person: An individual with more than $1,000,000 in liquid assets to manage.
High Premium Convertible Debenture: A long term bond that has a high premium common stock conversion feature and offers a competitive interest rate. Premium refers to the difference between the convertible bond's market value and the value at which it is convertible into common stock. The "Kicker" (convertibility to stock) is designed as an inflation hedge.

Highs: In daily trading, stocks that have reached new high prices for the current 52 week time period. To identify stock market trends, technical analysts observe the ratio between new highs and new lows.

High-Tech Stock: Companies whose business is in high technology fields such as biotechnology, computers and robotics. High-tech companies that are successful may have above average earnings growth and volatile stock prices.

High Yield Bond: Bond that has ratings of BB or lower and pays higher yields to offset its greater risk.

Historical Trading Range: Price range that a security has traded since going public. Technical analysts perceive the top of a historical range as the resistance level and the bottom as the support level. It is deemed as significant if a security breaks above the resistance level or below the support level. Analysts usually interpret this to mean that the security will reach new highs or lows and thus, its historical trading range expands.

Historical Yield: Yield provided by a mutual fund, typically a money market fund, over a specific time period.

Hit the Bid: Seller's acceptance of the highest price offered for a stock. For example, if a stock's ask price is $24 1/4 and the current bid price is $24, sellers will hit the bid if they accept $24 a share.

HNW (High Net Worth) Person: An individual with more than $1,000,000 in liquid assets to manage.

Holder: The owner of a security.

Holder of Record: Owner of a company's securities that is recorded on the books of the issuing company or its transfer agent as of a specific date--called the "record date." For example, dividend and stock splits always specify whether they are payable to holders as of the record date.

Holding Period: Length of time an asset is held by its owner. It determines whether a gain or loss is considered short term or long term.

Home Run: Large gains obtained by an investor in a short time period. For example, an investor who aims to hit a home run may look for possible takeover candidates as most takeover bids result in sudden price rises. Such investing strategies are intrinsically more risky than the strategy of holding for the long term.

Homestead Exemption: State or federal bankruptcy laws that protect one's residence from confiscation by a judgment creditor or loss in a personal bankruptcy.

Horizontal Price Movement: A security's price movement within a narrow range over extended time periods--also called "sideways price movement."

Horizontal Spread: Options strategy--also known as a "calendar spread"--that includes buying and selling the same number of options contracts with the same exercise price, but with maturity dates that are different. The investor hopes to profit by price moves in the underlying security.

Hot Issue: A new security issue that trades at an immediate premium above its fixed public offering price. In other words, the secondary market price on the initial sale date is above the new issue's offering price. It is caused by great public demand for more shares than are available.

Hot Money: Investment funds seeking high yields that are short term. Borrowers enticing hot money should be ready to lose it when another borrower offers a higher rate.

Hot Stock: 1) Newly issued stock that rapidly rises in price. 2) Stock that has been stolen.

House: 1) Firm or individual, as a broker-dealer, engaged in the securities business and/or investment banking and related services. 2) Nickname for the London Stock Exchange.

House Account: Account that is managed by a brokerage firm's main office or by an executive of the firm and not one that is normally handled by a salesperson in the territory. Normally, salespeople do not receive commissions from house accounts, even though the accounts may be in their region.

House Call: Brokerage firm notification that a client's margin account equity is below the firm's maintenance level. Once the equity declines below that point, the client must deposit additional funds or securities. If the client fails to deliver the required margin, securities in the account will be liquidated to cover the call. Normally, house call limits are higher than the limits set by the National Association of Securities Dealers (NASD) and the exchanges with jurisdiction over these rules.

House Maintenance Requirement: Brokerage house rules that are internally set in regard to a client's margin account. The required equity level should be maintained by client. Normally, house call requirements are higher than those set by the National Association of Securities Dealers (NASD) and the exchanges with jurisdiction over these rules.

House Rules: Securities industry term for an individual brokerage firm's internal rules, policies and procedures regarding the opening and management of clients' accounts and the clients' activities in such accounts.
Hulbert Rating: Ratings of different investment advisory newsletters that are published by "Hulbert Financial Digest." The "Digest" ranks the performance of the newsletters by totaling the profits and losses that would have been incurred if one followed the individual newsletter's recommendations.

Hung Up: Term describes the position of an investor whose security's value has declined below the purchase price.

Hybrid Annuity: Annuity offered by an insurance company that permits investors to combine the benefits of both fixed and variable annuities--also called "combination annuity." The amount placed in the fixed portion will provide a specified rate of return while the variable portion offers a chance for higher returns (and risks) through the investment in securities.

HYIP (High Yield Investment Program):

Hypothecation: Pledging of securities to a brokerage firm as collateral for margin loans made to purchase securities or to cover short sales.

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I welcome your comments, questions and suggestions.

© Copyright 2002 - Bill E. Branscum. All Rights Reserved.