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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Raider: Individual or corporation who purchases a controlling interest in a company's stock. The raider's purpose is to gain control of the target company and to instate new management. Accumulation of more than 5% of the target company's outstanding shares must be reported to the SEC, the exchange in which the target is listed, and the target itself.

Rally: A marked rise that follows a period of decline or sideways movement in the general level of the market or in individual securities.

Random Walk: A stock market theory that hypothesizes that past prices are of no use in forecasting future price movements. The theory maintains that prices move in a random pattern and that they are no more predictable than the walking pattern of a wandering person. This directly contradicts technical analysts' use of charts to forecast stock prices.

Range: A security's, or the general market's, highest and lowest price in which it has traded over a specified time--usually a rolling 52 week time period. In newspaper stock listings, a security's 52 week high and low price range is published. Technical analysts watch trading ranges carefully because they believe it is of great importance when a security breaks out of its trading range--high or low end.

Rate Of Return: 1) In common stock, the rate of return equals its dividend yield--calculated by dividing the annual dividend by the original purchase price. Rate of return may also refer to the total return, which is capital appreciation plus the dividend. 2) In fixed-income securities such as bonds and preferred stock, the rate of return equals the current yield, which is the coupon or dividend rate divided by the original purchase price.

Rating: The evaluation of credit risk of securities by an established rating service such as Moody's Investors Services, Standard & Poor's Corporation, Fitch Investors Service or Value Line Investment Survey.

Realized Profit (or Loss): Any profit or loss attributable to a security's sale or the transfer of title representing ownership of the security.

Real Rate Of Return: An investment's return that is adjusted for inflation.
Recession: As reflected in the gross national product, a decline in economic activity in at least two consecutive quarters.

Reclamation: The procedure whereby certificates, already delivered to settle a transaction, are returned because they are in non-deliverable form. The party who is affected by the bad delivery may recover any losses incurred.

Record Date: The date on which a shareholder must officially own a stock's shares in order to receive a company's declared dividend or, among other things, to vote on company issues.

Redemption: The repayment of the principal (par) amount of a debt security, or a preferred stock, at or before its maturity. Mutual fund shares are redeemed at net asset value when a shareholder liquidates their shares.

Redemption Price: 1) In bonds and preferred stocks, it is the call price. 2) In mutual funds, it is the net asset value.

Red Herring Prospectus: Industry jargon for a preliminary prospectus issued by underwriters or issuers to gauge interest in a prospective offering. It receives its name from the warning, printed in red, that information in the document is incomplete or subject to change before the issue.

Regional Stock Exchanges: National exchanges located around the United States that are registered with the SEC. When referring to a regional exchange, the NYSE is not included. Regional exchanges include Boston, Cincinnati, Midwest (Chicago), Pacific, and Philadelphia. These exchanges list regional issues and many issues that are also listed with the NYSE.

Register: The register of international business companies (IBCs) and exempt companies maintained by the Registrar of a foreign country, usually characterized as a “tax haven.”

Registered Company: A company that has issued securities in compliance with the registration requirements of the Securities Exchange Act of 1934.

Registered Options Principal (ROP): A brokerage firm employee who supervises registered representatives regarding their client's options account activities and their solicitation of new options clients.

Registered Representative (RR): A brokerage firm employee who acts as an account executive for clients. In a full brokerage house, a registered representative solicits clients' business and provides advice on when to buy and sell securities. For this advice, the RR may receive a percentage of the commission that is charged to the client for making such transactions. In a discount firm, a RR facilitates the execution of client orders. The RR does not solicit new customers or give investment advice.

Registered Security: 1) Stocks or bonds or other securities for which a registration statement has been filed with the SEC. 2) A securities certificate that is recorded in the name of the owner on the books of the issuer. Ownership of the security can only be transferred when the certificate is endorsed by the registered owner.

Registrar: The Registrar of Companies is a governmental body controlling the formation and renewal of companies created under their company act. In the US securities industry, it is an agency, usually a trust company or bank, who has the responsibility of keeping a record of the owners of a corporation's securities and the issuance of securities.

Reg D (Regulation D): Regulation D provides and exemption that makes it possible for some companies to avoid registering their securities and filing reports with the SEC, but they are still required to file a "Form D" after they first sell their securities. Form D is a brief notice that includes the names and addresses of the company’s owners and stock promoters. To find out whether a company has filed a Form D, call the SEC’s Public Reference Branch at (202) 942-8090 or send an email to publicinfo@sec.gov. If the company has not filed a Form D, they might not be in compliance with the federal securities laws.

Reg T (Regulation T): Federal Reserve Board regulation that governs the extension of credit to clients of broker-dealers. The rules specify the amount and type of credit that may be extended or must be maintained when clients purchase, carry, or trade eligible securities. It defines eligible securities and establishes initial margin requirements. Reg T does not cover the extension or maintenance of credit by a broker-dealer for clients who purchase or trade in exempt securities. Regulation T of the Federal Reserve Board is commonly abbreviated as Reg T.

Regular Way Delivery (Settlement): As of June 1995, the completion of securities transactions, unless otherwise specified, on the third business day following the transaction. Prior to June 1995, the industry standard was five business days following the transaction. To effect settlement, the securities sold are delivered to the buyer and payment is made to the seller. Regular way delivery for government securities and options is the next business day following the transaction.

Regulation D (Reg D): Regulation D provides and exemption that makes it possible for some companies to avoid registering their securities and filing reports with the SEC, but they are still required to file a "Form D" after they first sell their securities. Form D is a brief notice that includes the names and addresses of the company’s owners and stock promoters. To find out whether a company has filed a Form D, call the SEC’s Public Reference Branch at (202) 942-8090 or send an email to publicinfo@sec.gov. If the company has not filed a Form D, they might not be in compliance with the federal securities laws.

Regulation T (Reg T): Federal Reserve Board regulation that governs the extension of credit to clients of broker-dealers. The rules specify the amount and type of credit that may be extended or must be maintained when clients purchase, carry, or trade eligible securities. It defines eligible securities and establishes initial margin requirements. Reg T does not cover the extension or maintenance of credit by a broker-dealer for clients who purchase or trade in exempt securities. Regulation T of the Federal Reserve Board is commonly abbreviated as Reg T.

Reinvestment Privilege: Shareholders' right that allows them to reinvest their dividends to purchase additional shares in a mutual fund or a corporation, typically without any additional fees.

REIT: Real estate investment trusts, known as REITs, are entities that invest in different kinds of real estate or real estate related assets, including shopping centers, office buildings, hotels, and mortgages secured by real estate. There are basically three types of REITS:

• Equity REITS, the most common type of REIT, invest in or own real estate and make money for investors from the rents they collect;
• Mortgage REITS lend money to owners and developers or invest in financial instruments secured by mortgages on real estate; and
• Hybrid REITS are a combination of equity and mortgage REITS.

The Internal Revenue Code lists the conditions a company must meet to qualify as a REIT. For example, the company must pay 95% of its taxable income to shareholders every year. It must also invest at least 75% of its total assets in real estate and generate 75% or more of its gross income from investments in or mortgages on real property.

Relative Strength: In a rising market, the rate at which a security's price rises in relation to other securities. In a declining market, the rate at which a security's price drops in relation to other securities. Analysts contend that a security that holds its value in a down market will be a solid performer on the upside and vice versa.

Reorganization: 1) Financial restructuring of a corporation in bankruptcy. 2) A department within a brokerage firm that handles client's securities that are merging, being taken over, etc. The department is usually just called "Reorg".

Required Rate Of Return: Return that an investor requires before they are willing to earmark money for an investment that has a certain risk level. The expected return must be greater than the required return for the investment to be acceptable.

Research Department: A department within a brokerage firm, or other institutional investing organization, that analyzes securities and markets using both fundamental analysis and technical analysis. The analyst makes trading recommendations for firm accounts, institutions and retail clients (provided by their broker). If followed by many investors, an analyst's recommendations can have an impact on security prices.

Resistance Level: The upper limit of a security's trading range in which selling pressure tends to cause the price of a stock to decline. For example, if ABC's stock ranges between a low of $24 and a high of $36 per share, $24 is the support level and $36 is the resistance level. When a security breaks through the resistance level, technical analysts believe the security will reach new high prices.

Restricted Stock: Stock that is not registered under the Securities Exchange Act of 1933. Restricted stock is either purchased through a company's stock option plan, or a private placement. The investor is required to sign a letter agreeing that the purchase is for investment and not short term profit. The investor is required to hold the stock for two years before it can be sold. Sale of restricted stock is governed by SEC Rule 144.

Retail House: A brokerage firm that provides services to individual clients as opposed to institutions.

Retail Investor: An investor who buys and sells securities for their own behalf--not for an organization. Retail investors typically trade in much smaller quantities than institutional investors.

Retained Earnings: Net profits that have been reinvested back to the business after dividends are paid to stockholders--also called "earned surplus". Retained earnings are customarily an important component of stockholders' equity.

Retirement: In the securities industry, the term refers to the repayment of a debt obligation or the cancellation of securities that have been redeemed.

Return: Realized profit on capital investments or securities stated as an annual percentage rate.

Return On Equity (ROE): An amount, stated as a percentage, that informs common shareholders how effectively the funds invested are being utilized during a specific period. Trends can be found if current and prior periods are compared and if compared with industry composites, it shows whether or not the company is keeping up with its competitors. The rate is calculated by dividing net earnings by average stockholders' equity.

Revenue Reconciliation Act of 1995: Proposed changes to the Internal Revenue Code affecting foreign trust reporting, among other changes.

Reversal: As charted by technical analysts, a sustained change in direction of stock or commodity markets. This may either be a change from a rising market to a declining market or vice versa.

Reverse Split: Procedure whereby a corporation reduces the number of outstanding shares. The total market value of the shares remains the same after the reverse split, however, a share is worth more. A company, for example, executes a 1 for 2 split. An investor owning 1000 shares will deliver them to the issuer and they will receive half as many new shares--but the shares will have double the value of the original shares. Thus, the investor now has 500 shares with a value of $8, instead of 1000 at $4--that is, the investor shares are worth the same amount as before the split. Reverse splits may be used by corporations whose shares are selling at very low market prices. They believe that if the security's price is raised, it will attract more investors.

Revocable Trust: A trust in which any of its provisions can be changed, or the trust itself can be canceled at any time by the grantor. The grantor receives income from the assets. This contrasts with an irrevocable trust in which the trust cannot be amended or canceled and the assets are not subject to estate taxes.

Right: A certificate that evidences a shareholder's privilege to buy additional shares of new securities in proportion to the number of shares already owned. A company, when raising more funds by issuing new securities, may issue rights to its shareholders to give them the chance to buy additional shares before the general public. Because rights usually allow the stockholder to buy below the current market price, they ordinarily have a value of their own and are actively traded. Most rights are valid for a relatively short period. Failure to exercise or sell rights may result in monetary loss.

Rising Bottoms: A chart pattern that shows a rising trend in the low prices of a security. This signifies that the security's support levels are increasing. If rising bottoms are combined with ascending tops, a technical analyst would call the pattern bullish.

Risk: A measurable possibility of losing capital (or not gaining value). The chance that invested capital will drop in value can be caused by many factors including, inflation, interest rates, default, politics, liquidity, call provisions, etc.

Risk Averse: Said of an investor who, given the same return and different risk alternatives, will choose the security with the least amount of risk.

Risk/Reward Ratio: The greater the investment risk--the greater the expected return. The ratio places an investor's desire for capital preservation at one end of the scale and a desire to maximize returns at the other end.

Road Show: A series of meetings with potential investors in key cities, designed and performed by a company and its investment banker as the company prepares to go public.

ROE (Return On Equity): An amount, stated as a percentage, that informs common shareholders how effectively the funds invested are being utilized during a specific period. Trends can be found if current and prior periods are compared and if compared with industry composites, it shows whether or not the company is keeping up with its competitors. The rate is calculated by dividing net earnings by average stockholders' equity.

Roll Down: A process whereby one option position is closed and a new one with a lower exercise price is established.

Roll Forward: A process whereby one option position is closed and a new one with a later expiration date is established. If the new position also involves a lower exercise price, it is called a "roll-down and forward". If it involves a higher exercised price, it is called a "roll-up and forward."
Roll Up: A process whereby one option position is closed and a new one with a higher exercise price is established.

ROP (Registered Options Principal): A brokerage firm employee who supervises registered representatives regarding their client's options account activities and their solicitation of new options clients.

Round Lot: A standard unit of trading, or a multiple thereof, on a securities exchange. Generally, the unit of trading is 100 shares for stock and $1,000 or $5000 par value for bonds. In some inactive stocks, the unit of trading is 10 shares.

RR (Registered Representative): A brokerage firm employee who acts as an account executive for clients. In a full brokerage house, a registered representative solicits clients' business and provides advice on when to buy and sell securities. For this advice, the RR may receive a percentage of the commission that is charged to the client for making such transactions. In a discount firm, a RR facilitates the execution of client orders. The RR does not solicit new customers or give investment advice.

Rule 10b-21: Securities and Exchange Commission rule that prohibits covering a short position in a security with stock purchased out of a new offering of the security, if the short position was established between the filing of the registration statement and the beginning of the distribution of the offering.

Rule 10b-6: Securities and Exchange Commission rule that prohibits persons engaged in a distribution of securities from bidding for or purchasing those or similar securities until they have completed their participation in the distribution.

Rule 10b-6a: Securities and Exchange Commission rule that permits broker/dealers engaged in the distribution of a security to engage in "passive" market making transactions in the security being distributed without being in violation of the provisions of SEC Rule 10b-6.

Rule 13d: The Securities and Exchange Commission rule requiring disclosures by anyone acquiring a beneficial ownership of 5 percent or more in any equity security registered with the SEC.

Rule 144: Rule that stipulates the conditions in which an unregistered security may be sold by a broker. Specific documentation must be completed by the owner and presented to a broker before a sell order can be placed. Moreover, a letter security may not be sold for at least two years from the date of purchase. Thereupon, during any three month period, the following amounts may be sold:

  • If the corporation's securities are unlisted, 1% of the outstanding shares;
  • If the corporation's securities are listed, the greater of 1% of the amount outstanding or the average trading volume within the past four weeks.

Rule 15c3-1: Securities and Exchange Commission rule that requires broker/dealers maintain sufficient liquid assets to satisfy its net capital requirement.

Rule 15c3-3: Securities and Exchange Commission rule that ensures that the broker/dealer has possession or control of customers' securities, and properly segregates these securities from securities the firm owns. The rule also requires that the broker/dealer deposits customers' funds in a Special Reserve Bank Account.

Rule 17a-3: Securities and Exchange Commission rule that specifies the books and records related to the securities business that brokers and dealers have to make and keep current.

Rule 17a-4: Securities and Exchange Commission rule that specifies the time period that broker/dealers must preserve Rule 17a-3 records and other documents pertaining to the business.

Rule 19b-4: Securities and Exchange Commission rule that provides procedures that self-regulatory organizations (SRO’s) follow to propose rule changes to the SEC.

Rules Of Fair Practice: NASD rules that relate to a broker-dealer's conduct of business. In short, the basic rules are to:

  • Promote just and equitable principles of trade for the protection of investors;
  • Prevent fraud and manipulative practices;
  • Consult with government and investors on matters of common concern and;
  • Prevent excessive commissions and charges.

Rumortrage: A traders' term to describe the buying and selling of securities based on the rumor of a takeover.
Running Ahead: Situation that occurs when a broker places an order to buy or sell a security for their own account before placing a comparable order for a client. A broker, for example, places an order to buy XYZ when the firm's analyst makes a positive recommendation. Afterwards, the broker informs the client of the recommendation and places a buy order. By buying before the client, the broker is attempting to obtain a better price than the client's.

Runoff: The printing of closing prices on the ticker tape after the market has already closed. A runoff usually occurs in very heavy trading in which the tape has fallen behind.

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I welcome your comments, questions and suggestions.


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