Basic Legal Terms for Investors

When investors are entering financial markets, or are entrusting their money with an investment professional, they must be aware of the legal ramifications of their financial transactions. What may look like a good investment now may not seem so wonderful if you are unaware of your legal responsibilities. Let’s have a look at some of the most important and fundamental legal terms for investors.

  • Capital Gain or Capital Loss

These are the profits or losses, depending on your investment results, from the sale of an asset such as stocks or as your home. Most often, but not always, capital gains will be taxed, and your investment advisor should inform you accordingly.

  • Damages

Damages are money paid out to a an individual who has suffered investment losses unnecessarily, or who has been the victim of injury or loss as a result of an action by a third party.

  • Shareholder

Shareholders are people who have ownership of shares, or  in a limited company. They may be individuals or institutions, including corporations that legally owns one or more shares of stock in a public or private corporation.

  • Notary Public

This may come in very handy if you are dealing with a will, a trust, or are handling other legal documents. A notary public is authorized to witness documents, and is also a public officer constituted by law to serve the public in non-contentious matters such as estates, deeds, powers-of-attorney, and even occasionally foreign and international business.

  • Living Will

This is a legal document that clearly states an individual’s wishes should they become incapacitated or unable to perform certain duties.

  • Bankruptcy

This is an a process governed by state or federal law wherein an individual can no longer pay bills when due and payable. There are chapter 7 and chapter 13 bankruptcy actions. There is also chapter 11 bankruptcy which often referred to as a reorganization bankruptcy.

  • Collateral

Providing collateral is basically providing security or showing that you are good for something. It is the security you are obliged to put down on a loan and which you may have to give up in the event that you are unable repay the loan.

  • Liability

A liability is a duty or obligation for which investors or creditors are legally responsible.

Security Agreement

Security agreements are contracts which investors agree to give security as collateral for a loan in the event that the loan is not repaid.

  • Lien

A lien is also a charge over your property such as a mortgage, or against taxes owed.

  • Strict Liability

Strict liability states that even if there is no proof of negligence, you can still be found guilty of harm.

Limited Liability Company

A limited liability company is a business that has shareholders who are limited in liability to the contribution of the fully paid up share.

Promissory Note

A promissory note is a written document under which a person promises to pay another money on a given date and pursuant to specified terms set out in the promissory note.

Investment Bonds: An Introduction

A bond is a type of loan which an investor makes to a government, corporation, federal agency, or other entity or organization. Thus, bonds are often referred to as debt securities. The bond issuer, or the borrower, enters into a legal agreement to deliver interest to you, the bondholder. As a bond issuer, you also enter into an agreement to pay back the original sum loaned at the bond’s maturity date. This contract has certain conditions that may lead to repayment being made earlier.

Most bonds have a determined maturity date, that is, a set date wherein the bond must be paid back at its face or par value. Bonds are known as fixed-income securities as they pay you interest based on a regular interest rate, or the coupon rate, when the bond is issued. Investors may also note that analysts may interchangeably use the terms bond market and the fixed-income market.

Bond maturities can ride the spectrum from one day to 100 years, but most bond maturities have a range from one to 30 years. The years to maturity, or a bond’s term, is usually implemented when at its issue. The bond borrower completes his or her debt obligation when the bond comes to its maturity date, and the last interest payment and the original sum you loaned (the principal) are paid back to you.

Some bonds never reach their maturity. These are known as callable bonds, and allow the issuer to retire a bond before it matures. The bond’s prospectus and the indenture will detail the call provisions. Firms are required to provide more call information to investors who purchase municipal securities. Before purchasing a bond, investors should always check if the bond has a call provision, and understand how it will affect one’s investment strategy.

A bond’s coupon is the annual interest rate paid out on the issuer’s borrowed money, and is usually paid out semiannually. The coupon is always tied to a bond’s face or par value, and is quoted as a percentage of par. Accrued interest is the interest which compounds each day in between coupon payments. If you decide to sell a bond before its maturation date, or purchase a bond in the secondary market, you will usually get the bond between coupon payment dates. If you are selling, an investor is entitled to the price of the bond, plus the accrued interest that the bond has earned until the sale date.

Stocks: An Introduction for Investors

Stock are one of the most popular and well-known investments. With your investment in a stock, you purchase shares in a company, or equity shares. The ensuing success or failure of said company equals your return on investment. The better the company performs, then the better your returns.


An investor can increase his or her stock investment via dividends or capital gains. When a publicly-treaded company does well, they may allocate earnings to shareholders by issuing dividends, either in the form of cash or through the repurchase of more shares. Stocks which pay dividends are particularly popular for retirees looking to produce regular income. If the value of a stock increases above the purchase price, then you can sell your shares at a profit. Said profits are known as capital gains. Conversely, if the value of your stock drops, then you have incurred a capital loss.


Dividends and capital gains are both contingent on the performance of the company, and by the stock market in general, which is also affected by micro and macro economic factors. Rises and cuts in interest rates, for example, can affect the value of your stock. Performance in the market can also be related to natural disasters, political and social conflicts, and various energy markets.


The stock market often trades cyclically in unpredictable patterns. Highs and lows, or Bull and Bear Markets, change in a few months or even a couple of years. You may see short-term ups and downs as the stock’s price moves within a certain price range, and longer-term trends over months and years, in which that short-term price range itself moves up or down. This is known as the stock’s volatility. Many investors, therefore, also try to diversify their investments, either in different sectors in the stock market, in bonds, or other in other forms of investment.


When evaluating a stock, many investors look at the stock’s earnings. Every publicly traded company reports earnings to the SEC on a quarterly basis in an unaudited filing. You can also look at the firm’s current earnings-per-share, or EPS. This ratio is determined by dividing the company’s total earnings by the number of shares. EPS is one popular indication of a company’s current strength. You can also divide the current price of a stock by its EPS in order to determine the price-to-earnings ratio, or P/E multiple, the most commonly quoted measure of stock value.