ExpertGlossary

The investments a variable annuity's separate account fund, a mutual fund, or other fund makes are considered the fund's underlying investments.

The value of a single share or unit of the fund is based on the combined value of all of its underlying investments, minus fees and expenses, divided by the number of outstanding shares or units.

In some cases, when the item underlying a derivative investment is a security, such as the individual stock underlying an equity options contract, it is also called an underlying investment.

However, when the underlying item is a consumable commodity, such as corn, or a financial product, such as an equity index, it is called the underlying product, the underlying instrument, or sometimes simply the underlying.

Any stock that trades at a lower price than the issuing company's reputation, earnings outlook, or financial situation would seem to merit is considered undervalued.

Undervaluation may occur when investors lose interest in a company perhaps because it hasn't kept pace with its competitors, or if there are management problems.

Some investors concentrate on identifying and investing in undervalued stocks, sometimes called simply value stocks, drawn by their bargain prices and the expectation of recovery.

You're underwater when your employee stock options are out-of-the-money and so currently worthless.

For example, if you have options to buy your company stock at a strike price of $50, and the stock is currently trading at $30, you're $20 underwater on each option. You can see how the next step may be drowning - financially speaking, of course.

The term underwater is also used to describe situations where the principals are unable to meet their financial obligations.

For example, if an investor is unable to meet margin calls on a margin account that has lost a considerable amount of money, the account is said to be underwater. Similarly a firm that is having financial difficulty is described as underwater.

When you own less of a security, an asset class, or a subclass than your target asset allocation calls for, you are said to be underweighted in that security, asset class, or subclass.

For example, if you have decided to invest 30% of your portfolio in fixed-income investments, but your fixed-income holdings account for only 10% of your portfolio, you are underweighted in fixed income.

In another use of the term, a securities analyst might recommend underweighting a particular security, which you might reasonably interpret as advice to sell.

An underwriter, typically an investment banker, buys an entire new securities issue from the company or government offering it, and resells the issue as individual stocks or bonds to the public.

Part of the underwriter's job is to weigh the risks involved in taking on the financial responsibility of finding buyers against the profit to be made on the difference between the price paid for the issue and the amount it will generate.

Typically, a number of bankers join forces as a purchase group, or syndicate, to spread the risk around and to reach the widest possible market.

Insurance policies also need an underwriter. In this case, the term refers to a company that is willing to take the risk of insuring your life, property, income, or health in return for a premium, or payment.

Underwriting means insuring.

An insurance company underwrites your policy when it agrees to take the risk of insuring your life or covering your medical expenses in exchange for the premium you pay.

An investment bank underwrites an initial public offering (IPO) or a bond issue when it buys the shares or bonds from the issuer and takes the risk of having to sell them to individual or institutional investors to recover its investment.