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.
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, amortization, wash sales, etc.
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.
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.
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.
Ex-Dividend Date. See X-Dividend Date.
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.
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.
Non-qualified annuities. Annuity contracts which are not part of an IRS-qualified employee retirement plan or tax-sheltered 403(b) plan.
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.
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." 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.
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.
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.
Tax Lot. The acquisition price and date of purchase for each separate purchase of an investment.
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.
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.
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.
X-Dividend Date. The X-dividend date is 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.