Financial words commonly used in discussing cost basis are explained below.
Accretion. Accretion is the gradual increase in the cost basis of a bond over time as the discount is written off.
ADR (American Depositary Receipt). An ADR is a negotiable US security representing ownership of publicly traded shares in a non-US corporation. ADRs are quoted and traded in US dollars in the US securities market. The dividends, if any, are paid to investors in US dollars. ADRs facilitate the purchase, holding and sale of non-US securities by US investors.
ADS (American Depository Share). An ADR is the actual physical certificate while an American Depositary Share (ADS) is the actual share that trades on American stock exchanges. An ADR can represent any number of ADSs. The term "ADR" is often used to mean both the certificates and the securities themselves. The full legal title of the ADS will state the number of ordinary shares that each ADS represents when the ADS ratio is not equal to one.
Amortization. Amortization is the gradual decrease in the cost basis of a bond over time as the premium is written down. The term is also frequently used for bond discount accretion.
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Basis. Basis is the cost, for tax purposes, of an investment. In a simple case, it is the amount that you paid for the investment, the acquisition cost. It is the amount that should be reported in column (e) of Schedule D for Capital Gains and Losses. In other cases, the original cost must be adjusted for factors such as spinoffs, splits, claim checks, stepup in basis, depreciation, amortization, wash sales, etc.
Basis Point. A basis point is 1/100 of one percentage point or 0.0001. It is commonly used to express the expense ratio of a mutual fund (e.g. 0.17% is 0.0017 is 17 basis points, the operating expense ratio of the Vanguard S&P 500 Index Fund Investor Shares.) It is also used in the bond market to describe comparative yields (e.g 3.60% is 10 basis points higher than 3.50%.) The use of the term basis in this context has no relation to tax basis or cost basis.
Bifurcated Average Cost. Bifurcated average cost is an entirely new concept that was developed in response to the IRS requirement that brokers and mutual fund sponsors keep track of the cost basis of mutual funds. All shares purchased after the effective date of January 1, 2012, are considered "covered" under the new law. The trade lots (meaning purchase dates and amounts) of all your mutual fund purchases are separated into buckets of covered and non-covered shares and average cost is calculated separately for each bucket.
Blank Check Company. A blank check company is typically a very small development stage company that has no specific business plan or purpose but plans to merge with or acquire a company to be identified in the future.
Capital Asset Almost everything you own and use for personal or investment purposes is a capital asset. Capital assets include a home, household furnishings and stocks and bonds held in a personal account.
Cash in Lieu. This is the amount of cash that is paid by a corporation to a shareholder instead of ('in lieu of") issuing a fraction of a share of stock that the shareholder is otherwise entitled to receive. The corporation issues only whole shares of stock and then cash for the piece left over. The amount of cash paid is determined by the market value per share of the stock on the trading day that the issuance takes place.
Cash to Boot. The amount of cash that a buyer pays in addition to shares of stock in a cash and stock merger. It is called cash "to boot" because the seller receives cash as a bonus in addition to shares of stock in the acquiring company.
Corporate Actions. Actions taken by a corporation to reorganize the financial structure of the business. Some corporate actions such as spin-offs, stock splits, stock dividends, split-offs, split-ups, etc. can affect your cost basis. Often referred to as "reorgs" for short. Broker/dealers have entire divisions called "reorg departments" devoted to the processing of and accounting for these actions.
Cost Basis. The amount that should be declared as "Cost or Other Basis" in Column E of Schedule D Capital Gains and Losses on Form 1040 U.S. Individual Income Tax Return. The original purchase price must be adjusted for various factors as explained in the pages of this website.
Coupon. The rate of interest stated in the description of a bond. The coupon rate times the par value of the bond is the actual cash interest payment that the holder of the bond will receive on each interest payment date. In earlier times before physical bond certificates were phased out, the coupon for each interest payment was attached to the physical bond certificate. To collect the interest payment, the owner of the bond would cut off the coupon and present it to a bank or intermediary to receive the interest payment. Thus, the term "coupon clipper" was born to refer to someone living on their interest income. Most large bond issues today are in book entry form, not in physical certificate form.
CUSIP refers to the Committee on Uniform Securities Identification Procedures which devised a unique identifier for all securities consisting of nine characters (letters and numbers.) The last character is a check digit and is sometimes omitted. Stock symbols may be used again for another corporation when a stock is no longer traded, but the CUSIP is unique and is not reassigned.
dba. Abbreviation for "doing business as." Sometimes used when a corporation's legal name is different from the brand name in the marketplace that the company is known by.
Demutualization. Demutualization is the process of changing the legal entity of a business from a mutual form of ownership to a stock form of ownership. For insurance companies organized as mutuals, the policyholders are the owners of the business and share in dividends or rebates when the business is profitable. For insurance companies organized under the stock form of ownership, the owners of the stock receive the dividends.
Discount. Discount is the difference when the purchase price of a bond is lower than its par value.
Double-Exempt Bond. A bond which is exempt from both Federal income taxes and state income taxes for the state in which you live. Some states exempt almost all state and municipal bonds issued within their state from state income taxes, while others specify that only bond issued by certain state agencies are exempt.
Due Bill. A stock trades with a "due bill" when the trade date for stock undergoing a corporate split or reorganization action is after the record date but before the payable date. With a "due bill" the purchaser of the stock will receive the split shares on the payable date. A "due bill" overrides the normal rule that the seller who was the owner on the record date will receive the split shares when they are paid.
ETF. Short name for exchange-traded fund. An ETF is a portfolio of assets with shares that trade like a stock throughout the trading day on stock exchanges. The ETF is managed to achieve results close to a stock market, sector, commodity, or bond index. Examples of ETF's are: Standard & Poor's 500 Depository Receipts (NYSE:SPY) Standard & Poor's Mid-Cap Depository Receipts (NYSE:MDY) Further information is available at: http://en.wikipedia.org/wiki/Exchange-traded_fund
ETP. Short name for exchange-traded product. It is a relatively new investment vehicle for investing in commodities and commodity futures without opening a futures account. The Teucrium Corn Fund (NYSE symbol CORN) is an example of an ETP.
Ex-Dividend Date. Also called X-Dividend Date. The day that falls two business days before the record date for a dividend payment. It is basically the trade date by which you have to buy a stock in order to qualify for the upcoming dividend. When a dividend is quite large (over 25% of the market price of the stock), the stock exchange can change the ex-dividend date to be the first business day following the payable date so that the stock will trade with a "due bill" for the period between the record date and the payable date.
Fixed Annuity. An investment contract issued by an insurance company that promises to pay a fixed rate of interest on the sums deposited. The interest rate can be changed after the initial guaranteed rate period is over.
f/k/a. Abbreviation for "formerly known as." This terminology is used after a corporation has a legal name change to remind investors of the former corporate name.
LBO. A leveraged buy-out is referred to as an LBO. It describes a takeover of control of a company (usually by management or by private equity) where funding for the cash purchase price is raised by debt financing using the assets of the target company as collateral.
Morris Trust. A corporate reorganization action where the part of the business that is to be retained is spun off to the shareholders and the parent is merged into another entity (the buyer), all on a tax-free basis. Also called a Regular Morris Trust to distinguish it from a Reverse morris Trust.
n/k/a. Abbreviation for "now known as" after a corporate name change.
Non-qualified annuities. Annuity contracts which are not part of an IRS-qualified employee retirement plan or tax-sheltered 403(b) plan.
Notice of Guaranteed Delivery. A special form to notify the tender offer agent that shares will be submitted within the eligible period. This form is used when shares are not immediately available, such as when a stock option must be exercised in order to collect the shares before they can be delivered.
OID or Original Issue Discount. This is the amount that the actual purchase price of a bond is below the par value of the bond at the time it is first offered to the public for sale.
Par Value. This is the amount that a bond or note will pay at maturity. It is a number that is usually expressed in even thousands for a bond. For a mortgage-backed security or GNMA, it is usually an odd number because of principal repayments.
Payable Date. The date on which a corporation pays a dividend. The stockholders who will receive the dividend on the payable date is determined by the record date (see below.)
Payment in Kind "PIK" Dividends. PIK dividends are those paid in form of a security (common stock, preferred stock, or corporate debt) instead of in cash. Usually the PIK dividend is taxable income and the security received is similar to a dividend reinvestment. PIK also refers to "payable in kind."
PIK. See "payment in kind."
Premium. Premium is the difference when the price of a bond is higher than its par value.
Price (of a bond). The price of a bond is usually quoted in terms of $100, even though the bond denomination is in $1,000's. For instance, a price of 95 for one bond of $1,000 is equivalent to a total purchase price of $950.
Protect Period. The period after expiration of a tender offer during which shares can still be submitted under a valid Notice of Guaranteed Delivery.
Record Date. The date which determines who will receive a declared dividend. A "snapshot" is taken of the official shareholder list maintained by the transfer agent on the record date. Anyone who owns stock on that day will receive the declared dividend, even if they sell the stock before the payable date.
Reverse Cash Merger. A two-step merger that enables electing shareholders to receive securities on a tax-free basis and the non-electing shareholders to receive cash. An example of this was the National Starch merger into Unilever.
Reverse LBO. A reversal of a previous leveraged buyout is referred to as a reverse LBO. It describes the sale of private equity interest or paydown of debt incurred for the previous leveraged buyout, usually by raising cash through the reissuance of shares to the public in an initial public offering.
Reverse Merger. A reverse merger is one in which the target company being purchased is the surviving entity. This technique is often used when a non-publicly-traded company buys a publicly-traded corporation (either an operating business or a blank-check shell company) and becomes a publicly-traded company by merging into the target. It is considered a short-cut way to "go public."
Reverse Morris Trust. A corporate reorganization action where the part of the business that is to be sold is spun off to shareholders in a new company and immediately merged with the buyer in a stock merger, all on a tax-free basis.
Settlement Date. The date on which a trade settles and the official ownership of shares is transferred from the previous owner to the new owner on the transfer agent's shareholder rolls. The settlement date is currently three business days after the trade date for stocks, but in past decades it has been four or five business days. The new owner must pay for the shares by the settlement date.
Short-Form Merger. After a tender offer in which a certain percentage (specified by state law) of the outstanding shares have been purchased, the purchaser can complete the merger without holding a general shareholder meeting or vote. Theremaining shares of stock are thereby cancelled. The holder of any remaining shares is entitled to receive the same tender offer price (without interest and less any required withholding taxes) upon submission of the shares to the transfer agent.
Stepup. Stepup refers to the increase in the cost basis of an investment that is allowed at the time the owner passes away. The executor chooses to value all the assets in the estate as of the date of death or an alternate date six months later, depending on which is more advantageous. The unrealized gain in the investment asset is not currently taxed as a capital gain at the time of the estate, and the cost basis of the asset is "stepped up" to the market value declared in the estate tax return.
Symbol. The stock symbol for a company is between one and five letters. The single letter symbols are highly prized. In the past, symbols of one to three letters indicated that a corporate stock traded on the New York or American Stock Exchange, and a four letter symbol indicated it traded on the Nasdaq or over-the-counter markets. However, this is no longer true. Some companies transferring to the NYSE wish to keep their current four-letter symbol to avoid investor confusion, and they have been allowed to do so. Open-end mutual funds have five-letter symbols ending in X. Many foreign stocks which do not have registered ADS shares but trade in the U.S. on the "pink sheets" also have five letter symbols ending in Y or F.
Tax-Exempt. A tax-exempt bond is one issued by a state, municipality or other taxing district that is exempt from Federal income taxes. Although some Federal Agency bonds (such as TVA, FHLB, FFCB) are exempt from state income taxes, they are not generally referred to as tax-exempt bonds. They are called "state-tax-exempt" bonds.
Tax Loss Harvesting. Selling tax lots of a security which has an unrealized loss in order to realize the loss for tax purposes. This technique is often used to reduce the capital gain tax incurred when a large capital gain has been realized.
Tax Lot. The acquisition price, date of purchase, and number of shares for each separate purchase of an investment. All shares purchased on the same day can be combined into one tax lot.
Ticker. Back in the early days of the stock market, prices were transmitted by ticker tape machines which ejected long strips of paper tape with company names and trading prices on it. To conserve space on the ticker tape, unique abbreviations were assigned to listed companies, and these became known as "ticker symbols." (See discussion of symbols above.) The terms ticker and symbol are often used interchangeably.
Trade-Weighted Average Price. The total dollar value of shares traded divided by the total number of shares traded.
Unit Investment Trust (UIT). A UIT is a trust entity set up to hold a portfolio of stocks or bonds and distribute income and sales proceeds or principal repayments pro-rata to its holders until it is completely liquidated. It is not actively managed.
U.S. Holder. This term is used in the prospectus in describing the applicability of the opinion for the tax treatment of corporate actions. In general, it means a U.S. Citizen individual taxpayer. It does not include professional traders or entities such as corporations, non-grantor trusts, partnerships, multiple-member LLC's, etc. It also does not include holders who acquired their shares through stock options.
Variable Annuity. An investment contract issued by an insurance company that earns a variable return because it is invested in mutual funds.
Wash Sale. A wash sale is defined by the Internal Revenue Code as a sale that results in a loss and occurs thirty days before or after the re-purchase of the same security. The loss is not deductible for income tax purposes. The non-recognized loss must be added to the cost basis of the re-purchased security.
X-Dividend Date. The X-dividend date is normally two business days before the record date for a dividend payment. It is basically the trade date by which you have to buy a stock in order to qualify for the upcoming dividend. The X-dividend date can be changed by the stock exchange to the day after the payable date if a dividend exceeds 25% of the market price per share of the stock. The stock will then trade with a "due bill" attached for the interim period between the record date and the payable date.
Yield. The true rate of interest earned. The yield is a mathematical calculation that takes into account the interest coupon payments and any discount or premium paid at the time of purchase. The yield can be calculated to the date the bond comes due ("yield to maturity") or to the call date ("yield to call"). The lower of the two yields is used when describing a bond.