Glossary


A

Active		A security eligible for the OTC Bulletin Board^Ž (OTCBB) that meets the frequency of quotation requirement or the so-called "piggyback" exception. Once the frequency of quotation or piggyback exception has been satisfied, authorized participants may register on-line in a security. As long as the security remains active, any participant may quote the security without a Form 211 submission.

American Depositary Receipt (ADR)		A U.S. security that is a repackaged foreign security. A U.S. bank creates an ADR based on evidence of ownership of a specified number of shares in the foreign security, while the underlying shares are held in a depositary in the issuing company's home country. U.S. investors may buy shares in the foreign company in the form of an ADR. The certificate, transfer, and settlement practices for ADRs are identical to those for U.S. securities. U.S. investors often prefer ADRs over the direct purchase of foreign shares because of the ready availability of price information, lower transaction costs, and timely dividend distribution. Additionally, some U.S. investment institutions are not permitted to invest in non-U.S. securities, but may invest in ADRs.

Ask (Offer) Price		The price at which a market maker is willing to sell a security.

Audit Committee		A committee or equivalent body established by and amongst the board of directors of an issuer for the purpose of overseeing the accounting and financial reporting processes of the issuer and audits of the financial statements of the issuer.

B

Best Ask		The lowest quoted offer of all competing Market Makers to sell a particular stock at any given time.

Best Bid		The highest quoted bid of all competing Market Makers to buy a particular stock at any given time.

Best Execution		NASD Rule 2320 The obligation of Market Makers, broker/dealers, and others to execute customer orders at the best price available at the time the trade is entered.

Bid (or Buy) Price		The price at which a Market Maker is willing to buy a security.

Bid Tick Rule		An NASD rule prohibiting a short sale transaction when the current best bid in a security is less than the previous best bid. That is, when it is on a "down-tick." The bid tick rule does not apply to the OTCBB.

Block Trade		A purchase or sale of a large quantity of stock, generally, 10,000 shares or more. For purposes of NASD Rule 6541 regarding Limit Order Protection, a block trade is defined as one for 10,000 shares or more, and greater than $20,000 in value.

Blue-Sky Laws		State laws that require issuers of securities to register their offerings with the state before they can be sold to its residents. Most blue-sky laws include provisions relating to fraudulent activities and the licensing of securities professionals. Each state has a regulatory agency that administers the law -- typically known as the State Securities Commissioner. NASDAQ National Market securities, subject to higher qualifications standards, are exempted from registration requirements under most states' blue-sky laws as are those listed on exchanges. OTCBB issuers are not exempt from Blue Sky registration requirements.

Broker		An individual or firm who acts as an intermediary between a buyer and seller, usually charging a commission.

Broker/Dealer		FINRA member firms that act as securities dealers or brokers, or perform both functions.

C

Clearing		The process of reporting a trade to ACT for comparison of the details of the transaction between brokers prior to final settlement; the final exchange of securities for cash on delivery. Clearing operations, such as the National Securities Clearing Corporation (NSCC), facilitate the validation, delivery, and settlement of securities transactions. Trades are either reported by the broker to the clearing corporation directly or through a third party, usually another brokerage firm if a broker does not have a direct relationship with a clearing corporation.

Common Stock		A class of securities representing ownership and control in a corporation and that may pay dividends as well as appreciate in value.

CUSIP Number		A unique nine-character alpha/numeric code assigned to a security by Standard & Poor's Corporation, which appears on the face of each certificate. The primary use of the number is to expedite the clearance and settlement process. CUSIP stands for Committee on Uniform Security Identification Procedures. The telephone number for the CUSIP Service Bureau is (212) 438-6565.

D

Dealer		Any person or company in the business of buying and selling securities for his or her own account, through a broker or otherwise.

Depositary Bank		When a company decides to issue American Depositary Receipts, it appoints an authorized depositary, normally part of a large U.S. banking institution or trust company.

Depth of Market		The number of shares of a security that can be bought or sold at the bid and ask prices near the inside market without causing a dramatic change in price.

Direct Participation Program (DPP)		An investment program enabling investors to directly participate in the cash flow and tax benefits of the partnership invested in by the investor, typically a form of passive investment. Also called a Limited Partnership.

E

EDGAR		Electronic Data Gathering, Analysis, and Retrieval (EDGAR) is an electronic system developed by the Securities and Exchange Commission (SEC). EDGAR permits companies to electronically file documents required for securities offerings and ongoing disclosure obligations with the SEC. EDGAR became fully operational mid-1995.

Eligible		A security for which one or more Market Makers has received clearance to quote the issue on the OTCBB in the last 30 days. Securities receive eligible status if they are cleared following the filing of a Form 211 or a 15c2-11 Exemption Form. A frequency of quotation test (see also "active") is administered during the eligible period. Until the test is satisfied, any other Market Maker that wishes to quote the issue must also submit a completed Form 211.

Equity		The ownership interest of stockholders in a company.

F

Federal Reserve System		A federal government institution created by Congress to administer the nation's credit and monetary policies. Among other things, the Board of Governors of the Federal Reserve System sets the initial amount of credit that broker/dealers (as well as other lenders) may extend to customers to purchase securities.

FINRA		Financial Industry Regulatory Authority. The largest self-regulatory organization for the securities industry in the United States. FINRA is responsible for the regulation of NASDAQ and the over-the-counter securities markets.

Firm Quotation		The requirement that a Market Maker execute an order from another broker/dealer at its displayed price for the normal unit of trading, or for its displayed size, whichever is greater.

Float		Defined as total shares outstanding less any shares held by officers, directors or beneficial owners of 10% or more. Also called publicly held shares.

H

Held		A situation where a security is temporarily not available for trading or subject to a trade halt. Market Makers are not allowed to display quotes of held securities.

I

Indicative		A quote that is non-firm. All quotes displayed by Market Makers in OTCBB issues are required to be firm, with the exception of DPPs which are limited to indicative quotes only.

Individual Investor		A person who buys or sells securities for his or her own account. The individual investor is also called a retail investor or retail shareholder.

Ineligible		Securities not quoted on the OTCBB. A Form 211 and two copies of the issuer's information must be filed with the FINRA OTC Compliance Unit no less than three business days prior to the publication on the OTCBB in order to obtain clearance that will grant the security OTCBB-eligible status.

Initial Public Offering (IPO)		A company's first sale of stock to the public. Companies making an IPO are seeking outside equity capital and a public market for their stock. IPOs are not conducted on the OTCBB, which is for seasoned securities only.

Inside Market		The highest bid and the lowest ask (offer) prices among all Market Makers competing in a NASDAQ security; the best bid and ask prices for a security.

Institutional Investor		A bank, mutual fund, pension fund, or other corporate entity that trades securities in large volumes.

L

Level I, II, III Subscriptions		Trading firms interested in participating in the OTCBB or The NASDAQ Stock Market^SM choose between the following three subscription levels, depending on the functionality required: viewing market information, reporting trades, or entering quotes on NASDAQ and OTCBB stocks. Level I Subscription Level I disseminates OTCBB and NASDAQ quote data worldwide through a variety of participating market data vendors. Level II Subscription Level II allows for querying and order-entry of trades on The NASDAQ Stock Market by FINRA member firms through either a NASDAQ Workstation or a private trading service device. Subscribers can: Enter and execute orders in all NASDAQ automated services. Access NASDAQ and OTCBB information. View: daily statistical and index-related information; share and dollar volume leaders, net gainers and losers;and high, low and closing values for the NASDAQ Composite^SM Index, the NASDAQ-100 Index^Ž, the NASDAQ-Financial Index and NASDAQ-listed securities. Report trades in NASDAQ Global, Global Select, the NASDAQ Capital Market, and OTCBB stocks within 90 seconds of execution. Level III Subscription Level III provides all the functionality of a Level II subscription, plus the capability to enter quotations for individual securities through a NASDAQ Workstation. Subscribers can: Enter, retrieve, monitor, and adjust quotations in response to changing market conditions for both OTCBB and NASDAQ securities. Enter and execute orders in all NASDAQ automated services. Report, compare, and clear trades through automated services.

Limit Order		A Limit Order is an order to buy or sell a stock at a customer specified price.

Limit Order Display		The Limit Order Display Rule (SEC Order Handling Rules) requires a market maker that receives a customer limit order priced at or better than its current quote and that does not immediately execute the order, to display the order to the entire marketplace. Alternatively, the Market Maker can choose to send the order to another Market Maker or ECN for display. There is no limit order display rule on the OTCBB.

Limit Order Protection (Manning)		The Limit Order Protection Rule, FIINRA Rule 6541, prohibits member firms from "trading ahead" of customer limit orders that a member accepts. Members handling customer limit orders are prohibited from trading at prices equal or superior to that of the customer limit order without also executing that order at the limit price.

Liquidity		The liquidity of a stock is the ease with which the market can absorb volume buying or selling without dramatic fluctuation in price.

Locked or Crossed Quotations		A temporary condition, normally associated with fast-moving, active markets, where the ask price of one Market Maker in a given security is the same or lower than the bid price of another Market Maker, thereby producing locked or crossed quotations, respectively. Trading continues to occur.

M

Manning		See Limit Order Protection

Margin		An account in which a customer purchases securities on credit extended by a broker/dealer. Rules of the Federal Reserve Board and FINRA govern margin accounts.

Market Makers		One of the major differences between The NASDAQ Stock Market and other major markets in the U.S. is NASDAQ's structure of competing Market Makers. Market Makers are NASDAQ member firms that use their own capital, research, retail and/or systems resources to represent a stock and compete with each other to buy and sell the stocks they represent. Each Market Maker competes for customer order flow by displaying buy and sell quotations for a guaranteed number of shares. Once an order is received, the Market Maker will immediately purchase for or sell from its own inventory, or seek the other side of the trade until it is executed, often in a matter of seconds.

Market Order		A Market Order is an order to buy or sell a stock at the market's current best displayed price.

Minimum Quote Size Requirements		NASD Rule 6650The minimum size at which a market maker is permitted to display bid or offers in the BBX. The minimum size required depends on the price of the stock. For example, all quotes on the OTCBB priced under $0.50 have a minimum quote size of 5,000 shares.

N

Naked Shorting		The illegal practice of short selling shares that haven't been borrowed or do not exist at all.

FINRA Regulation		An independent subsidiary of FINRA that regulates the activities of broker/dealers in the over-the-counter industry and The NASDAQ Stock Market. FINRA Regulation carries out its regulatory responsibilities through education, examinations, market surveillance, registration of securities personnel, advertising and underwriting reviews, disciplinary actions for rule violations, investigation of customer complaints, and forums to resolve disputes. FINRA Regulation also regulates the sale of mutual funds, direct participation programs, and variable annuities.

The NASDAQ Stock Market		The NASDAQ Stock Market^SM is a major national stock exchange in NASDAQ-listed securities. NASDAQ uses computers and telecommunications for the trading and surveillance of thousands of securities. NASDAQ is built on a unique system of competing Market Makers that list specific prices for the sale or purchase of securities. NASDAQ also is unique in its use of a flexible computer-based trading system that enables people to trade by computer from wherever they are located. The OTCBB is separate and distinct from NASDAQ. Unlike NASDAQ listed companies, OTCBB issuers have no minimum listing requirements, maintenance requirements, or reporting obligations to NASDAQ, or FINRA.


NBB		Non-Bulletin Board. OTC securities that are not quoted on the OTCBB. NBB securities may or may not be quoted on the Pink Sheets. Also called other-OTC.

No Clearing		A trade that is sent to ACT to satisfy trade reporting requirements only, but is not sent to clearing. (See clearing.)

O

Over-the-Counter (OTC)		Securities that are not listed and traded on a national securities exchange.

OTCBB		An electronic quotation medium for unlisted, over-the-counter securities. The OTC Bulletin Board allows Market Makers to display firm prices for domestic securities, foreign securities, and ADRs that can be updated on a real-time basis. The service also permits the display of non-firm prices for DPPs, unpriced indications of interest, and telephone numbers for participating Market Makers.

Other-OTC		OTC securities that are not quoted on the OTCBB. Other-OTC securities may or may not be quoted on the Pink Sheets. Also called Non-Bulletin Board (NBB).

P

Penny Stock		Penny Stocks are, generally speaking, those securities that are not listed on a national securities exchange and are priced under $5. There are exclusions for securities of issuers that have net tangible assets greater than $2 million if they have been in operation at least three years or greater than $5 million if in operation less than three years. Securities of issuers with average revenue of at least $6 million for the last three years are also not considered penny stocks. For a complete definition of a Penny Stock, see SEC Rule 3a51-1. OTCBB securities are considered penny stocks unless they qualify for one of the exclusions.

Penny Stock Rules		SEC Rule 15g-9, known as the Penny Stock Rules, is designed to prevent deceptive or manipulative practices. It provides that a broker cannot sell a Penny Stock to any person unless it has approved that person's account for penny stock transactions and the broker/dealer has received in writing from customer agreement to the transaction. Approving an account includes, among other things, reviewing the customer's financial data and determining the customer's suitability, including the capability to evaluate the risks of trading in penny stocks. Some types of transactions in penny stocks are exempt from these rules. Exempt transactions include those with an established customer (a customer of more than one year or one who has made at least three separate penny stock purchases) and transactions in which the customer is an institutional investor.

Pink Sheets		The Pink Sheets is a privately owned company whose Electronic Quotation Service provides an Internet-based, real-time quotation service for OTC equities and bonds. The Pink Sheets are not owned or operated by The NASDAQ Stock Market, Inc. or FINRA.

PORTAL^SM		The PORTAL Market, operated by The NASDAQ Stock Market, Inc., facilitates the listing of unregistered securities eligible to be resold pursuant to SEC Rule 144A. PORTAL provides regulatory review of securities in connection with the clearance and settlement thereof via the Depository Trust Company (DTC).

Preferred Stock		A security that usually pays a fixed dividend and gives the holder a prior claim on corporate earnings and assets over holders of common stock.

Proxy		Written power of attorney given by a shareholder of a corporation, authorizing someone to vote on his or her behalf at corporate meetings.

Proxy Statement		Material information required by the Securities and Exchange Commission to be given to a corporation's stockholders as a prerequisite to solicitation of votes. It is required for any issuer subject to the provisions of the Securities Exchange Act of 1934.

Public Float		The portion of a company's outstanding shares that is in the hands of public investors; shares not held by company officers, directors, or investors who hold a controlling interest in the company.

R

Round Lot Share Holders		Shareholders who own 100 or more shares of an issue.

S

Sarbanes-Oxley Act of 2002		An Act of Congress passed in 2002 to improve quality and transparency in financial reporting and independent audits and accounting services for public companies, to create a Public Company Accounting Oversight Board, to enhance the standard setting process for accounting practices, to strengthen the independence of firms that audit public companies, to increase corporate responsibility and the usefulness of corporate financial disclosure, to protect the objectivity and independence of securities analysts, to improve Securities and Exchange Commission resources and oversight, and for other purposes.

Securities and Exchange Commission (SEC)		The primary agency responsible for administering federal securities laws. These include the Securities Act of 1933, the Securities Exchange Act of 1934, the Public Utility Holding Act of 1935, the Trust Indenture Act of 1939, the Investment Company Act of 1940, the Investment Advisers Act of 1940, and the Securities Investors Protection Act of 1970. Of all these pieces of legislation, the 1933 Act and 1934 Act are the most significant for issuers of securities and broker/dealers. The 1933 Act is a disclosure statute that requires issuers to provide investors with facts about securities to be sold. The 1934 Act regulates securities markets and the business of securities brokers and dealers.

Settlement		The conclusion of a securities transaction; a broker/dealer buying securities pays for them; a selling broker delivers the securities to the buyer's broker.

Short Interest		The total number of shares of a security that have been sold short that have not been repurchased to settle short positions in the market (covered). Currently there is no requirement that Market Participants report their short positions in OTCBB securities to FINRA.

Short Sale		Short selling is the selling of a security that the seller does not own, or any sale that is completed by the delivery of a security borrowed by the seller. Such sales are made in anticipation of a decline in the price of the security to enable the seller to cover the sale with a purchase at a later date, at a lower price, and thus at a profit. Short sellers assume the risk that they will be able to buy the stock at a more favorable price than the price at which they sold short.

Spread		The difference between the price at which a Market Maker is willing to buy a security, called a bid price, and the price at which the Market Maker is willing to sell it, called an ask price. The spread narrows or widens according to the supply and demand for the security being traded.

T

Transfer Agent		An agent that maintains records of stock and bond owners in order to cancel and issue certificates, and resolve problems arising from lost, destroyed, or stolen certificates. A corporation usually appoints a commercial bank, although it may also serve as its own transfer agent.

V

Volatility		The degree of price fluctuation for a given asset, rate, or index. Usually expressed as a variance or standard deviation.

Volume		Amount of trading activity, expressed in shares or dollars, experienced by a single security or the entire market within a specified period.