Financial Glossary W
Waiver of premium
If you have a waiver of premium provision in your long-term care or disability insurance policy, you may qualify to stop paying premiums once you’ve begun collecting benefits.A waiver of premium provision increases the cost of your insurance but means that you won’t be left without coverage if you are no longer able to pay the premiums.
Corporations may issue warrants that allow you to buy a company’s stock at a fixed price during a specific period of time, often 10 or 15 years, though sometimes there is no expiration date. Warrants are generally issued as an incentive to investors to accept bonds or preferred stocks that will be paying a lower rate of interest or dividends than would otherwise be paid. How attractive the warrants are — and so how effective they are as an incentive to purchase — generally depends on the growth potential of the issuing company. The brighter the outlook, the more attractive the warrant becomes.When a warrant is issued, the exercise price is above the current market price. For example, a warrant on a stock currently trading at $15 a share might guarantee you the right to buy the stock at $30 a share within the next 10 years. If the price goes above $30, you can exercise, or use, your warrant to purchase the stock, and either hold it in your portfolio or resell at a profit. If the price of the stock falls over the life of the warrant, however, the warrant becomes worthless. Warrants are listed with a “wt” following the stock symbol and traded independently of the underlying stock. For example, if you own warrants to purchase a stock at $30 a share that is currently trading for $40 a share, your warrants would theoretically be worth a minimum of $10 a share, or their intrinsic value.
When you purchase and then sell or sell and then repurchase the same security or a substantially similar security within 30 days, the double transaction is called a wash sale. As an individual investor, you can’t use any capital losses that the sale produces to offset capital gains from selling other securities in your portfolio.For example, if you sold 200 shares of an underperforming stock on December 15 intending to use the loss on that sale to offset gains on other sales, your offset would be invalid if you repurchased the stock before the following January 15. But if you repurchased on January 16, the offset would be valid. In fact, avoiding wash sales is an important part of tax planning.In a broader use of the term, purchasing and then quickly reselling a security may be described as a wash sale, whether the transaction is part of an innocent trading strategy or a pump-and-dump scheme.
A weather derivative is a futures contract — or options on that futures contract — where the underlying commodity is a weather index.These derivatives work much the same way that interest-rate or stock index futures and options do, by creating a tradable commodity out of something that is relatively intangible. Analysts look at historical weather patterns — temperature, rainfall and other things — develop averages, and quantify the risk that weather will deviate from the average. Corporations use weather derivatives to hedge their risk that bad weather will cause a financial loss. For a cereal company, bad weather might be a drought, which would cause wheat prices to go up. For a home heating company, it could be warm days in November, which could lower demand for home heating oil. And for an amusement park it could be rain.The cereal company and the amusement park might buy futures contracts with an underlying weather index based on rainfall. The home heating company might want contracts based on a temperature index.Weather derivatives are different from insurance, because they’re linked to common weather events, like dry seasons, or a warm autumn, that affect particular businesses. Insurance is still required to protect against major weather events, like tornadoes, hurricanes, and floods.You can buy weather derivatives as an individual, but you’ll want to consider the trading costs carefully to ensure that your risk of loss is worth the expense.
Weighted stock index
In weighted stock indexes, price changes in some stocks have a much greater impact than price changes in others in computing the direction of the overall index. By contrast, in an unweighted index, prices changes in all the stocks have an equal impact.A price weighted index, such as the Dow Jones Industrial Average (DJIA), is affected more by the changing prices of higher-priced securities than by changes in the prices of lower-priced securities. Similarly, a market capitalization weighted index, such as the NASDAQ Composite Index, gives more weight to price changes in securities with the highest market values, calculated by multiplying the current price per share by the number of outstanding or floating shares. A capitalization weighted index may also be called a market value weighted index. The theory behind weighting is that price changes in the largest or most expensive securities have a greater impact on the overall economy than price changes in smaller-cap or less expensive stocks. However, some critics argue that strong market performance by the biggest or most expensive stocks can drive an index up, masking stagnant or even declining prices in large segments of the market, and providing a skewed view of the economy.
A whisper number is an unofficial earnings estimate for a particular company that a stock analyst shares with clients to supplement the official published estimate. If the company reports earnings in line with the official estimate when the whisper number has been higher, the stock price may fall anyway since investors were expecting something better. The same is true in reverse. If earnings fall short of official expectations but meet a lower whisper number, the stock price may go up.
A corporation that is the target of a hostile takeover sometimes seeks out a white knight that comes to the rescue by making an offer to acquire the target company in a friendly takeover that suits the needs and goals of the target’s management and board.The hostile acquirer is called a black knight, and if the white knight is outbid by a third potential acquirer, who is both less friendly than the white knight and more friendly than the black knight, the third bidder is called a gray knight.
Whole life insurance
A whole life insurance policy is a type of permanent insurance that provides a guaranteed death benefit and has fixed premiums. This traditional life insurance is sometimes also known as straight life insurance or cash value insurance.With a whole life policy, a portion of your premium pays for the insurance and the rest accumulates tax deferred in a cash value account. You may be able to borrow against the cash value, but any amount that you haven’t repaid when you die reduces the death benefit.If you end the policy, you get the cash surrender value back, which is the cash value minus fees and expenses. However, ending the policy means you no longer have life insurance and no death benefit will be paid at your death.
A will is a legal document you use to transfer assets you have accumulated during your lifetime to the people and institutions you want to have them after your death. The will also names an executor — the person or people who will carry out your wishes. You can leave your assets directly to your heirs, or you can use your will to establish one or more trusts to receive the assets and distribute them at some point in the future.The danger of dying without a will is that a court in the state where you live will decide what happens to your assets. Their decision may not be what you would have chosen, and their deliberations can create a delay in settling your estate.
National brokerage firms with multiple branches were, in the past, linked by private telephone or other telecommunications networks that enabled them to transmit important news about the financial markets almost instantaneously. Because of these lines, or wires, the firms became known as wire houses.Although the Internet now makes it possible for all firms — and even individual investors — to have access to high-speed electronic data, the largest brokerage firms are still referred to as wire houses because of the technological edge they once enjoyed.
When brokerage firm orders to buy and sell were handled manually, the back office of the firm was called the wire room. People who worked there received the buy or sell orders that came in from brokers and transmitted them to the firm’s trading department or floor traders for execution. The wire room also received notifications when the transactions were completed and sent those notifications back to the brokers who took the orders. However, as electronic systems increasingly handle these communications, wire rooms have essentially disappeared.
A withdrawal is money you take out of your banking, brokerage firm, or other accounts. If you withdraw from tax-deferred retirement accounts before you turn 59 1/2, you may owe a 10% early withdrawal penalty plus any income tax that’s due on the amount. In everyday usage, the term withdrawal is used interchangeably with distribution to describe money you take from your tax-deferred accounts, though distribution is actually the correct term.
Withholding is the amount that employers subtract from their employees’ gross pay for a variety of taxes and benefits, including Social Security and Medicare taxes, federal and state income taxes, health insurance premiums, retirement savings, education savings, or flexible spending plan contributions, union dues, or prepaid transportation.Contributions to tax-deferred savings plans are withheld from your pretax income, as are amounts you put into tax-free flexible spending and prepaid transportation accounts. Those amounts reduce the taxable salary that your employer reports to the IRS.
Working capital is the money that allows a corporation to function by providing cash to pay the bills and keep operations humming. One way to evaluate working capital is the extent to which current assets, which can be readily turned into cash, exceed current liabilities, which must be paid within one year. Some working capital is provided by earnings, but corporations can also get infusions of working capital by borrowing money, issuing bonds, and selling stock.
Formally known as the International Bank for Reconstruction and Development (IBRD), the World Bank was established in 1944 to aid Europe and Asia after the devastation of World War II. To fulfill its current roles of providing financing for developing countries and making interest-free and low-interest long-term loans to poor nations, the World Bank raises money by issuing bonds to individuals, institutions, and governments in more than 100 countries.
US-based mutual funds that invest in securities from a number of countries, including the US, are known as world funds or global funds. Unlike international funds that buy only in overseas markets, world funds may keep as much as 75% of their investment portfolio in US stocks or bonds.Because world fund managers can choose from many markets, they are often able to invest in those companies providing the strongest performance in any given period.
World Trade Organization (WTO)
The WTO was formed in 1995 to enforce the regulations established by the General Agreement on Tariffs and Trade (GATT) and several other international trade agreements. Composed of representatives from 150 nations and observers from additional nations, it regulates international trade with the goal of helping it to flow as smoothly and freely as possible. Advocates praise the WTO for helping to create an increasingly global economy and bringing prosperity to developing nations through increased trade. Critics, however, assert that industrialized nations such the US, Canada, and the countries of the European Union have used the WTO to open trade with developing nations while disregarding these nations’ environmental and labor-related practices.
A wrap account is a professionally managed investment plan in which all expenses, including brokerage commissions, management fees, and administrative costs, are wrapped into a single annual charge, usually amounting to 2% to 3% of the value of the assets in the account.Wrap accounts combine the services of a professional money manager, who chooses a personalized portfolio of stocks, bonds, mutual funds, and other investments, and a brokerage firm, which takes care of the trading and recordkeeping on the account.
In the options market, a writer is someone who sells put or call options, an activity known as writing a call or writing a put. Unlike the buyer, or holder, of an option, who can exercise an option or let it expire, as the writer you must meet the terms of the contract if the option is exercised and assigned to you. You collect a premium for selling the option, which may provide a profit if the option expires worthless, and you always have the right, before exercise, to buy an offsetting contract and end your obligation to buy or sell.
Last Updated: December 26th, 2014