Financial Glossary
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12b-1 Marketing Fee
The percent of a mutual fund's assets used to defray marketing
and distribution expenses. The amount of the fee is stated in the
fund's prospectus. A true no-load fund has neither a sales charge
nor a 12b-1 fee.
Acquisition
The purchase of one company by another, or the attainment of
controlling interest through an accumulation of shares.
Adjusted Gross Income (AGI)
The amount of income, for an individual or a couple filing a
joint tax return, subject to federal income taxes. To determine AGI
subtract certain, qualified deductions, such as unreimbursed
business expenses or contributions to a traditional Individual
Retirement Account (IRA), from gross income, which generally
includes employment income, interest income, dividends, and capital
gains.
Aggressive Growth Fund
A mutual fund with the objective of achieving maximization of
long-term capital growth, rather than dividend income, by investing
in narrow market segments and small company stocks. Aggressive
growth funds are designed for maximum capital appreciation, and
generally invest funds in companies with high growth rates, and
usually are accompanied by a higher degree of risk. Mutual funds
are sold by prospectus; a prospectus contains complete information
on risks, fees and expenses, and should be read carefully before
investing.
American Depositary Receipt (ADR)
A receipt from a United States bank for shares of stock of a
foreign company. ADRs, which are traded in U.S. dollars on U.S.
markets, carry the same risks as the underlying foreign share.
American Stock Exchange (AMEX)
Located in downtown Manhattan, AMEX has the third highest volume
of trading of any stock exchange in the U.S. The bulk of trading on
the AMEX consists of index options and shares of small to
medium-sized companies.
Analyst
A professional who studies the performance of corporations and
industries, and evaluates securities. Analysts may specialize in a
company or an industry, and they generally work for analytic
organizations, or for financial institutions, such as brokerage
houses, mutual fund companies, or investment banks. The opinions of
an influential and respected analyst regarding a certain security
may have an impact on the market price.
Annual Report
Yearly record of a publicly-held company's financial condition.
It includes a description of the firm's operations, as well as
balance sheet, income statement, and cash flow statement
information. Securities and Exchange Commission (SEC) rules require
that it be distributed to all shareholders.
Annuity
A long-term contract sold by life insurance companies that
guarantees payments, fixed or variable, to the purchaser in regular
intervals through annuitization. During the accumulation phase,
fixed annuities offer consistent, predictable returns; whereas,
variable annuities provide fluctuating returns based on the
performance of an investment portfolio. Payments are usually
scheduled to begin at a future time, such as retirement, but in
certain cases may begin immediately. Annuities provide tax-deferred
earnings during the accumulation phase, with taxes due upon
distribution. Distributions prior to age 59 1/2 may be subject to
an additional 10% federal tax penalty.
Asset
Property with a cash value, such as real estate, equipment,
savings, and investments.
Asset Allocation
The process of dividing investments among different asset
classes, such as stocks, bonds, and cash reserves. The goal of
asset allocation is to optimize the risk/reward tradeoff based on
specific situations and goals of the investor and/or the mutual
fund. Many financial advisors believe that the mix of asset classes
has a greater impact on long-term portfolio results than does the
performance of any individual investment.
Asset Class
Categories of investments. The three main asset classes are
stocks, bonds, and cash reserves.
Automatic Reinvestment
A prearranged investment plan that automatically deposits mutual
fund and stock dividends back into a stock to purchase additional
shares.
Balanced Fund
A mutual fund investing in both stocks and bonds in which the
main objective is the preservation of capital with moderate income
growth, and a secondary consideration is capital gains. Balanced
funds are one of the most conservative mutual funds investing in
common stock. Mutual funds are sold by prospectus; a prospectus
contains complete information on risks, fees and expenses, and
should be read carefully before investing.
Basis Point
Measures the variation in yields, which often fluctuate in very
small increments. One basis point is equal to .01%; therefore, 100
basis points are equal to 1%. For example, a yield that has
increased from 5.46% to 5.58% has increased 12 basis points.
Bear Market
An extended period of declining prices, usually by 20%, in the
financial markets. A prolonged downturn of general economic
activity is often the catalyst for a bear market in stocks;
whereas, rising interest rates are typically responsible for a bear
market in bonds.
Beneficiary
A person or entity named in a life insurance policy, a qualified
retirement plan, or an annuity, or one who is eligible by the terms
of such a policy or plan, to receive benefits upon the death of the
insured or the plan participant.
Beta
A measure of a security's price fluctuations (volatility)
relative to an appropriate market index. For example, the Standard
& Poor's 500 Stock Index (S&P 500) has a beta of 1. Stocks
with betas greater than 1 are subject to more rapid and extreme
price fluctuations than the market. Conversely, price fluctuations
for stocks with betas less than 1 are less frequent and smaller
than the market. Conservative investors generally seek lower beta
securities, while aggressive investors seek higher betas.
Bid and Ask Price
The highest price a prospective buyer offers to pay for a
security is a bid. The ask price is the lowest price a seller is
offering. A quotation reflects both prices, and the difference
between the bid and the asked price is called the spread.
Blue Chip Stock
The common stock of a company with a reputation for quality
products, services, and management, and a long history of earnings
growth and dividend payments. Examples of blue chip companies
include General Electric, International Business Machines (IBM),
and DuPont.
Bond
A debt security issued by a corporation, government, or
government agency obligating the issuer to pay interest at
pre-determined intervals and repay the principal at maturity. Every
bond has a set face value, also known as a par value, which names
the amount of money the bondholder will receive when the bond
reaches the date of maturity. The face value will never change, but
the market value of a bond may fluctuate. If a bondholder sells a
bond before its date of maturity, he or she may receive more or
less than the face value.
Bond Fund
A mutual fund investing in bonds issued by the U.S. government,
municipalities, or corporations. Bond funds usually emphasize
interest income rather than growth. Unlike bonds purchased by an
individual investor, bond funds do not guarantee an interest rate,
a maturity date, or a return of principal. Mutual funds are sold by
prospectus; a prospectus contains complete information on risks,
fees and expenses, and should be read carefully before
investing.
Broker
A professional who mediates between the buyer and seller during
the trading of services or property, such as securities, real
estate, or commodities. In return for services, the broker
generally receives a commission.
Bull Market
An extended period of rising prices, usually by 20% in financial
markets. Opposite of a bear market. A high volume of trading often
occurs in a bull market, which generally lasts over an extended
period.
Buy-and-Hold
An investment strategy that advocates holding securities for the
long term, while ignoring short-term price fluctuations. Unlike
market timing investors, who actively buy and sell securities,
hoping to turn quick profits on short-term price fluctuations,
investors who buy and hold securities hope for substantial gains
over time, and may take years to accumulate shares in a company, or
they may wait years for a bond to reach maturity.
Call Option
A contract, for which a premium is generally paid, that grants
the holder the right to buy a fixed number of shares of a certain
stock, at a predetermined rate (the strike price), for a certain
length of time. Because an option allows the holder to buy shares
at a set price, the holder may be able to buy shares at less than
the market value, if the market price of the shares rises above the
set price. If stock prices remain the same or decrease, the holder,
who is not obligated to purchase shares, can let the option expire.
Options involve risk and are not suitable for all investors.
Callable Bond
A debt security that grants the issuer the right to redeem the
bond before it reaches maturity as outlined in a prospectus, which
generally lists the first date it may be called. A bond is
generally at risk of being called if interest rates fall
significantly, and the market value of the bond falls below the par
value.
Capital Appreciation
The increase in value of a security. For example, a stock
purchased at $20 per share, but now worth $25, has appreciated $5
per share, which equals a 25% return on capital.
Capital Gain
The amount by which an asset's selling price exceeds its initial
purchase price. A realized capital gain is an investment that has
been sold at a profit. An unrealized capital gain is an investment
that hasn't been sold yet but would result in a profit if sold.
Capital gain is often used to mean realized capital gain.
Capital Gains Distribution
A payment to investment company shareholders of profits realized
on the sale of its securities. Equity funds usually pay out these
amounts once a year, typically in December, while bond funds often
include capital gains in their monthly distributions.
Capital Gains Tax
Tax on profits from the sale of securities, or fixed assets,
such as land, buildings, equipment, and furniture.
Capital Growth Fund
Also called a growth fund. A mutual fund with the objective of
providing long-term capital gains and high potential future income,
rather than current income. Capital growth funds are more
aggressive than common stock funds, generally investing in more
speculative issues.
Capital Loss
A decrease in the value of an investment or an asset from its
purchase price.
Certificate of Deposit (CD)
An agreement with a bank that promises a fixed interest rate on
funds deposited for a specified period of time. CDs typically earn
compound interest, and are issued in denominations ranging from
$100 to $100,000 with maturities ranging from a few weeks to
several years. There may be a penalty if funds are withdrawn before
maturity. The Federal Deposit Insurance Corporation (FDIC) insures
each depositor up to $100,000.
Certified Financial Planner™ (CFP®) Designation
A professional who has successfully passed the exams of the
Institute of Certified Financial Planners, earning certification as
a financial advisor. Areas of expertise generally include banking,
investments, retirement, estate planning, insurance, and taxes.
Certified Public Accountant (CPA)
An accountant licensed by the state in which he or she works.
Duties generally include auditing, accounting, and filing tax
returns.
Closed-End Fund
A fund with a fixed number of shares outstanding, and one that
does not redeem shares the way a typical mutual fund does. Such
funds are often listed on a major stock exchange and trade like
other securities. Unlike a typical mutual fund, a closed-end fund's
share price can trade above or below its net asset value (NAV).
Commission
A fee charged by a broker for his/her services in facilitating a
transaction, such as buying or selling of securities or real
estate, based either on the dollar amount of the trade, the
transaction, or the number of shares traded.
Commodities
Bulk goods, such as cotton and metals, commonly used to produce
consumer goods, and traded on a commodities exchange. The tools of
trade, such as currency, may also be considered commodities, and
prices are generally determined by supply and demand.
Common Stock
A security representing partial ownership, also called equity,
in a corporation, and which entitles shareholders to participate in
stockholder meetings and to vote for the board of directors.
Compounding
The process of applying investment growth not only to the
original investment, but also to income and gains reinvested in
prior periods. For example, if you earn compound interest on
savings, you earn interest on the accumulated interest. If you earn
simple interest on savings, you earn interest based only on the
principal amount. Suppose you earn simple interest at 4.5% on
$10,000 for 25 years. The interest earned over 25 years would be
$11,257.40-the future value of your savings would be $21,257.40.
However, if you earn compound daily interest at 4.5%, on $10,000
for 25 years, the interest earned would be $20,822.82-the future
value would be $30,822.82.
Consumer Price Index (CPI)
A measure of inflation calculated monthly by the U.S. Bureau of
Labor Statistics. The CPI tracks price changes in basic goods and
services, such as housing, health care, food, transportation, and
electricity.
Corporate Bond
A debt security issued by a corporation obligating the issuer to
pay interest periodically and repay the principal at maturity.
Corporate bonds generally feature higher interest rates because of
the possible default risk, and the interest earned is often
taxable.
Correction
Reverse movement, usually downward, in the price of an
individual stock, bond, commodity, or index, bringing them more in
line with their underlying fundamental values. If prices have been
rising on the market as a whole, and then fall dramatically, this
is known as a correction with an upward trend.
Credit Rating
Formal evaluation of a company's ability to pay interest and
repay principal on borrowed money, as published by a credit rating
agency or service. Also, from a personal investor perspective, a
published ranking, based on detailed financial analysis by a credit
bureau, of one's financial history, specifically as it relates to
one's ability to meet debt obligations. The highest rating is
usually AAA and the lowest is D. Lenders use this information to
decide whether to approve a loan.
Day Trader
An individual who buys and sells investments in the same day,
generally trying to capitalize on and profit from quick price
changes in the short term.
Derivative
A financial instrument whose characteristics and value depend
upon the value of an underlying instrument or asset, typically a
commodity, bond, equity, or currency. Examples are futures and
options.
Discount Broker
A brokerage firm that buys and sells securities at lower rates
than a full service broker. Discount brokers generally do not offer
all the services of full service brokers, such as research and
advice.
Diversification
A portfolio strategy for managing the risk of investing in a
single industry/market sector or a small number of companies, by
spreading the risk over several industries/market sectors or a
larger number of companies, which are unlikely to all move in the
same direction.
Dividend
A taxable payment declared by a company's board of directors and
given to its shareholders out of the company's current or retained
earnings. Usually quarterly and generally given as cash (cash
dividend), but it can also take the form of stock (stock dividend)
or other property.
Dividend Reinvestment Plan (DRIP)
A company arrangement that automatically reinvests a
shareholder's dividends into more shares of the company's stock.
Because investors may buy shares directly from the company,
brokerage fees are limited. In addition, DRIPs provide shareholders
with the opportunity to regularly purchase shares and take
advantage of dollar cost averaging.
Dividend Yield
The annual percentage return of a dividend-paying stock. To
calculate the current yield, divide the dividend received on each
share by the share's current market price. For example, a stock
with a share price of $40 that pays a dividend of $1 per share will
have a dividend yield of 2.5%. The dividend yield does not reflect
a return based on an original investment.
Dollar Cost Averaging
A method of investing a fixed dollar amount in securities at set
intervals, regardless of market prices. With this approach, an
investor buys more shares when prices are low, and fewer shares
when prices are high. This generally results in a lower average
cost per share than if the investor had purchased a constant number
of shares at the same periodic intervals. Using dollar cost
averaging does not assure a profit and does not protect against a
loss in a declining market.
Dow Jones Industrial Average (DJIA)
The price-weighted average of 30 actively traded blue chip
stocks. Commonly referred to as "the Dow," this average is widely
used to measure the performance of U.S. financial markets.
Emerging Market Funds
A mutual fund investing primarily in developing countries that
are becoming industrialized. Emerging market funds tend to be
highly volatile. Mutual funds are sold by prospectus; a prospectus
contains complete information on risks, fees and expenses, and
should be read carefully before investing. (F) International
investing involves special risks not found in domestic investing,
including increased political, social and economic instability.
Investing in emerging markets can be riskier than investing in
well-established foreign markets.
Employee Stock Ownership Plan (ESOP)
An employer-sponsored program that encourages employees to
purchase shares of their company. An ESOP may be part of a bonus or
retirement package, and it may allow employee-shareholders to
participate in management of the company.
Equity
Ownership, such as stock in a company. Equity also generally
refers to the difference between an asset's market value and the
debt against it. For example, if you own a car valued at $15,000,
but owe $10,000 on a car loan, your equity in the car is
$5,000.
Equity Income Fund
A conservative mutual fund with the objective of attaining
income and growth from blue chip stocks and utilities that pay high
dividends. Equity income funds favor long-term growth with a
limited risk to principal. Mutual funds are sold by prospectus; a
prospectus contains complete information on risks, fees and
expenses, and should be read carefully before investing.
Exchange Privilege
The ability of mutual fund shareholders to transfer assets
between funds within a fund family, often at no additional charge.
For example, suppose you have money invested in a growth fund,
which has an objective of providing high potential future income,
but you would like a fund that provides more immediate income.
Exchange privilege may allow you to shift your investment to an
income fund, which generally seeks to maximize current income.
Exchange Privilege
The ability of mutual fund shareholders to transfer assets
between funds within a fund family, often at no additional charge.
For example, suppose you have money invested in a growth fund,
which has an objective of providing high potential future income,
but you would like a fund that provides more immediate income.
Exchange privilege may allow you to shift your investment to an
income fund, which generally seeks to maximize current income.
Expense Ratio
The percent of a mutual fund shareholder's total investment paid
as operating expenses and management fees. For example, if a fund
has an expense ratio of 1%, an investor will be charged $1 for
every $100 invested. Mutual funds with lower expense ratios are
able to distribute a higher percentage of their total returns to
their shareholders.
Face Value
The value of a bond at maturity as noted by the issuer on the
face of the bond, also known as the par value. Interest payments
are based on the face value, which is not an indicator of market
value.
Family of Funds
A group of mutual funds operated by the same company. Each fund
generally has a different objective. For example, one may be a
growth fund, another may be a growth and income fund, while still
another may be a money market fund. Shareholders are often allowed
to transfer their assets between funds at no additional cost.
Federal Deposit Insurance Corporation (FDIC)
A government agency that guarantees deposits in the event a
member bank fails. Coverage is generally restricted to $100,000 per
account.
Federal National Mortgage Association ("Fannie Mae")
A shareholder-owned corporation that buys mortgages, often from
the U.S. Federal Housing Administration (FHA), then packages them
as mortgage-backed securities, and resells them to investors.
Federal Reserve System (The Fed)
The seven-member Board of Governors that oversees Federal
Reserve Banks, establishes monetary policy (interest rates, credit,
etc.), and monitors the economic health of the country. Its members
are appointed by the President, subject to Senate confirmation, and
serve 14-year terms.
Fiduciary
An individual who provides investment advice for a fee, or
exercises discretionary authority or control in managing assets.
Also, an individual, company, or association responsible for
holding assets in trust and investing them wisely for the benefit
of a trust's beneficiary. Examples of fiduciaries include trustees,
bankruptcy receivers, and executors of wills and estates.
Fixed Annuity
An investment contract sold by a life insurance company that
guarantees regular payments to the purchaser for a specified period
of time, or for life through annuitization. The purchaser generally
pays a premium either in a lump sum or in installments. during the
accumulation phase, a fixed anuity will earn a fixed rate of
interest, as stated in the contract. This interest will accumulate
on a tax deferred basis, wi th taxes due upon distribution.
Distributions prior to age 59 1/2 may be subject to an additional
10% federal tax penalty.
Fixed-Income Fund
Mutual fund with the objective of providing current income by
investing in fixed income securities, such as government bonds,
corporate bonds, municipal bonds, or preferred stock. Mutual funds
are sold by prospectus; a prospectus contains complete information
on risks, fees and expenses, and should be read carefully before
investing.
Fixed-Income Investment
A security that pays a fixed rate of return on a regular
schedule, such as a bond or a certificate of deposit (CD).
Fixed-income investments are generally considered less volatile
than other investment vehicles, such as common stock and, as a
result, they tend to provide lower rates of return and less
protection against rising inflation.
Front-End Load
A sales fee (load) investors pay up-front at the time they
purchase an investment. For example, suppose a company charges a 5%
front-end load, and you would like to invest $5,000. The sales fee
due at the time of purchase would be $250.
Futures
Agreements to buy or sell a specific amount of a commodity or
financial instrument at a set price on a specific future date.
Global Fund
Also called an international fund. A mutual fund investing in
securities worldwide. In addition to managing trends in particular
securities markets, global funds must also manage foreign currency
movements. Mutual funds are sold by prospectus; a prospectus
contains complete information on risks, fees and expenses, and
should be read carefully before investing. The risks associated
with investing on a worldwide basis include differences in
regulation of financial data and reporting, currency exchange
differences, as well as economic and political systems that may be
different from those in the United States.
Going Public
When a company makes an initial public offering (IPO), and sells
shares of its stock to the public for the first time.
Government Bond
A debt security issued by the U.S. government. Two common types
are savings bonds and marketable securities; both tend to have a
low default risk. Government savings bonds are not traded on any
exchange; therefore, they are immune to market fluctuation. In
contrast, "marketable" U.S. government securities, such as U.S.
Treasury bills, Treasury notes, Treasury bonds, and Treasury
Inflation-Protection Securities (TIPS), are commonly traded.
Growth Fund
Also called a capital growth fund. A mutual fund with the
objective of providing long-term capital gains and high potential
future income, rather than current income. Growth funds are more
aggressive than common stock funds, generally investing in more
speculative issues. Mutual funds are sold by prospectus; a
prospectus contains complete information on risks, fees and
expenses, and should be read carefully before investing.
Growth and Income Fund
A mutual fund with the objective of providing long-term
principal and income growth, as well as current dividend income.
For example, a growth and income fund may invest in high-yield
bonds, as well as in blue chip companies expected to return regular
dividends while their shares grow more valuable over time. Mutual
funds are sold by prospectus; a prospectus contains complete
information on risks, fees and expenses, and should be read
carefully before investing.
Hedging
An investment strategy designed to reduce the risk of loss.
Hedging strategies may include buying put options, selling call
options, selling short, or purchasing assets to outpace
inflation.
Income Fund
A mutual fund with the objective of paying a higher-than-average
rate of return by concentrating in securities not generally favored
by other investors. Income funds generally invest a high percent of
their assets in bonds. Mutual funds are sold by prospectus; a
prospectus contains complete information on risks, fees and
expenses, and should be read carefully before investing.
Index
An indicator of the market prices of securities issued by
companies included in the index. An index is used to measure the
movements of securities of similar companies. Some well-known
indexes are the New York Stock Exchange Index (NYSE), the American
Stock Exchange Index (AMEX), the Standard & Poor's 500 Index
(S&P 500), the Russell 2000 Index, and the Value Line
Index.
Index Fund
A mutual fund that attempts to match the performance of a market
index by patterning the portfolio on the index. Index funds assume
that it is impossible to consistently outperform the market. Mutual
funds are sold by prospectus; a prospectus contains complete
information on risks, fees and expenses, and should be read
carefully before investing.
Individual Retirement Account (IRA)
A tax-deferred retirement savings account that allows
individuals to deposit a limited amount per year ($3,000 for
individuals in 2002). A traditional IRA may allow individuals,
depending on their income and participation in employer-sponsored
retirement plans, to deduct part or all of their contributions on
their tax returns. Withdrawals made after age 59 1/2 are taxed at
the current tax rate. In contrast, Roth IRAs allow individuals to
withdraw earnings tax free anytime after the age of 59 1/2 after
certain requirements are met, but the initial contributions are
made with after tax dollars.
Inflation
A general rise in the prices of goods and services that occurs
when demand increases relative to supply. Usually measured by the
Consumer Price Index (CPI), and the Producer Price Index. The
purchasing power of the dollar decreases. For example, if inflation
occurs at 3% annually, in one year $100 would be worth only
$97.
Inflation-Indexed Security
An investment, such as a bond or Treasury note, that promises a
return greater than inflation if held until maturity.
Inflation-indexed funds are mutual funds that invest in
inflation-indexed securities.
Initial Public Offering (IPO)
A company's first stock issue offered to the public. Often,
companies go public when their need for cash, perhaps to finance
growth, exceeds the amount private investors, such as venture
capitalists, are willing or able to provide. Investment banks buy
shares, and then offer them to the public at an offering price. As
the stock is traded, the market price may be more or less than the
offering price.
Insider Trading
The buying or selling of company shares by management, the
board, or anyone with a 10% interest in the company. Insider
trading based on information available to the public is legal.
Illegal insider trading takes advantage of corporate information
not available to the public.
Interest
The cost of borrowed money. It may be the payment you receive
from an investment such as a bond, or the amount you pay for a
loan, which is generally a percentage of the total amount borrowed.
For example, if you take out a $5,000 loan for a year at 9%
interest, the cost of taking the loan would be 9% of the total
amount borrowed - $450. Also, the term interest can refer to a
right or share in an asset or property.
Interest Rate
The cost of borrowed money, expressed as a percentage for a
given period, usually one year. Interest rates are considered by
many to be key economic indicators. The Federal Reserve (The Fed),
a government agency that oversees the national economy and sets
monetary policies, regulates interest rates. The Fed may lower
interest rates, making borrowing money less expensive, in an effort
to stimulate growth in the economy, or may raise them, making
borrowing money more expensive, in an effort to slow economic
growth.
International Fund
Also called a global fund. A mutual fund investing in securities
worldwide. International funds, which may be invested in the
emerging markets of developing countries, more established
economies, or a combination, must manage foreign currency trends,
as well as trends in the securities markets. Mutual funds are sold
by prospectus; a prospectus contains complete information on risks,
fees and expenses, and should be read carefully before investing.
The risks associated with investing on a worldwide basis include
differences in regulation of financial data and reporting, currency
exchange differences, as well as economic and political systems
that may be different from those in the United States.
Investment Grade
A bond rating evaluating the likelihood that the bond issuer
will meet their payment responsibilities in full and on time. Bonds
rated BBB and higher by an independent agency are considered
investment grade.
Investment Objective
A financial goal. Different investment vehicles have different
objectives. For example, a fixed income fund may have outlined in
its prospectus an objective of providing current income by
investing in fixed income securities; whereas, a capital growth
fund looks to provide long-term capital gains and high potential
future income. Individual investors also have personal investment
objectives, based on their own time horizon and tolerance for
risk.
Junk Bond
A debt security with a credit rating below investment grade.
Junk bonds, which are often issued by companies with questionable
credit, generally pay higher yields than investment grade bonds,
but carry a greater risk of default.
Laddering
A method of maintaining a series of fixed-interest investments,
such as bonds or certificates of deposit (CDs), with staggered
maturities. Laddering may offer a fixed-income investor liquidity
options, as well as a hedge against inflation and fluctuating
interest rates.
Life Insurance
Life insurance is a contract wherein a premium is paid to an
insurance company in return for the insurance company's promise to
pay the beneficiary a defined amount upon the death of the insured.
There are various types of life insurance available, including term
life, whole life, and universal life.
Limited Partnership
A financial affiliation consisting of a general partner and
limited partners that invests in projects such as real estate, oil
and gas, equipment, movies, etc. The general partner, in return for
fees and a percentage of ownership, manages operations and is
ultimately liable for any debt. Limited partners, who may receive
income, capital gains, and tax benefits in return for their
investment, have little involvement in management. They also have
limited liability, which limits their maximum loss to the amount
they invested.
Liquidity
The ability to quickly and easily convert assets into cash
without incurring a significant loss.
Load Fund
A mutual fund that assesses a sales charge for a broker's
services. A fund may be front-end loaded (fee owed when shares are
bought) or back-end loaded (fee owed when shares are sold). Fund
representatives will often offer advice on buying and selling.
Complete details on the expenses associated with the fund can be
found in the fund's prospectus.
Management Fee
A charge against an investor's assets for the fund manager's
services in overseeing the portfolio. The charge is calculated as a
fixed percentage of the fund's asset value, usually 1% or less, and
should be disclosed in the fund's prospectus.
Market Price
The most recent price of a security traded on an exchange.
Market Risk
Also called systematic risk. The portion of a security's risk
common to all securities in the same asset class, and that cannot
be eliminated through diversification. For example, a market risk
associated with investment in stocks is the general tendency of
share prices to decrease during an economic downturn.
Market Timing
Making buy-sell decisions by attempting to predict market
trends, such as the direction of stock prices, the direction of
interest rates, or the condition of the economy. Unlike investors
who buy and hold securities with the hope of substantial gains over
an extended period of time, market timing investors actively buy
and sell securities, hoping to turn quick profits on short-term
price fluctuations.
Market Value
The price at which securities are being traded. Estimated market
value refers to the highest potential price a buyer might pay, and
a seller would accept.
Maturity
The date on which a debt becomes due for payment. For example,
if a bond has a face value of $1,000 and a 30-year term of
maturity, the bondholder should receive $1,000 in 30 years.
Money Market Fund
A mutual fund, usually no-load, investing in highly liquid
short-term securities, such as certificates of deposit (CDs), U.S.
Treasury bills, commercial paper, bankers' acceptances, and
repurchase agreements. Most money market funds are not federally
insured, although some carry private insurance. Many are part of
fund families that allow investors to transfer money between
accounts at no charge. An investment in a money market fund is not
insured or guaranteed by the FDIC or any other government agency.
Although the fund seeks to preserve the value of your investment at
$1.00 per share, it is possible to lose money by investing in the
fund.
Municipal Bond
A tax-exempt bond that may be issued by a state government or
agency, or by a town, county, or other political subdivision or
district. Interest payments are generally not subject to federal
taxes, and may be exempt from state and local taxes if the
bondholder is a resident of the state where the bond was issued,
although income may be subject to the alternative minimum tax.
Mutual Fund
A fund managed by an investment company that raises money from
shareholders and invests it in stocks, bonds, real estate, money
market securities, commodities, or options. Mutual funds offer
investors the benefits of professional management and
diversification, for which they charge a management fee. Some
mutual funds charge a sales fee (load). Mutual funds are sold by
prospectus, which contains complete information on the fund's
investment objectives, the risks involved, and any fees and
expenses associated with the fund. The prospectus should always be
read carefully before investing.
National Association of Securities
Dealers Automated Quotations (NASDAQ)
A system quoting current prices for securities traded over the
counter (OTC), as well as many listed on the New York Stock
Exchange (NYSE).
Net Asset Value (NAV)
Also called the bid price. The market price an investor pays for
a mutual fund share. The NAV is computed at the end of each
business day by adding the closing market value of the fund's
securities to the value of its other assets, subtracting
liabilities, and then dividing the sum by the total number of
shares outstanding.
New York Stock Exchange (NYSE)
Also called The Big Board and The Exchange. The oldest and
largest stock exchange in the U.S., listing the country's largest
corporations. Memberships are sold to brokers, who buy and sell
stocks on the floor of the exchange.
No-Load Fund
A mutual fund that does not charge a sales fee (load). Investors
in no-load funds purchase shares directly from the fund company,
rather than through a broker. Because no-load funds do not charge
commissions, a salesperson may not be available to offer advice on
buying and selling. Some companies selling no-load funds may charge
an annual fee for marketing, commonly called a 12b-1 fee. Mutual
funds are sold by prospectus, which contains complete information
on the fund's investment objectives, the risks involved, and any
fees and expenses associated with the fund. The prospectus should
always be read carefully before investing.
Offering Price
The per-share price at which a stock or mutual fund is offered
to the public. Companies going public for the first time will issue
shares of stock at an offering price, as will companies who are
issuing new shares. The market price may be more or less than the
offering price. With no-load funds (mutual funds that do not charge
sales commissions), the offering price is the same as the market
price. With load funds, mutual funds that charge sales commissions,
a sales charge is added to the market price to reach the offering
price.
Option
An option gives the buyer the right, but not the obligation, to
buy or sell stock at a set price on or before a given date.
Investors, not companies, issue options. Investors who purchase
"call" options bet the stock will be worth more than the price set
by the option (the strike price), plus the price they paid for the
option itself. Buyers of "put" options bet the stock's price will
go down below the price set by the option. Options involve risk and
may not be suitable for all investors. Prior to buying or selling
an option, an investor must received a copy of "Characteristics and
risk of Standardized Options".
Over The Counter (OTC)
A security, typically of a smaller company, not listed or traded
on an exchange. Also, a market where transactions are conducted
among securities dealers over a network of telephone and computer
lines, rather than on the floor of an exchange.
Par Value
The face value of a stock or bond when issued. The par value may
bear little relationship to a security's current market value.
Portfolio
The combined security holdings of an individual investor or
mutual fund. A portfolio can consist of any combination of stocks,
bonds, derivatives, and such. A typical objective of holding
investments in a portfolio is to provide diversification.
Preferred Stock
A type of stock that pays a fixed dividend regardless of
corporate earnings, and which has priority over common stock in the
payment of dividends. Should earnings rise significantly, the
preferred holder is stuck with the same fixed dividend while common
holders collect more. Preferred stock carries no voting rights (as
does common stock), but takes precedence in claims against a
company's profits and assets.
Price to Earnings (P/E) Ratio
Also called the "multiple." The P/E ratio is calculated as a
stock's price divided by its earnings per share. It gives investors
an idea of how much they are paying for a company's current
earnings. For example, a stock selling for $30 a share with
earnings per share of $2 has a P/E ratio of 15. In other words, the
investor paid $15 for each $1 of earnings. Faster growing, or
higher risk companies, generally have higher P/E ratios than slower
growing, or less risky, firms.
Prospectus
The official document that must be provided (according to SEC
regulations) by the issuer to potential purchasers of a new
securities mutual funds issue. It highlights the much longer
Registration Statement filed with the SEC that gives information on
the financial well being of the issuer and the specifics of the
issue itself. The prospectus continas complete information on
risks, fees, and expenses, and should be read carefully before any
investment is made.
Put Option
A contract that grants the buyer of an option the right to sell
a set number of shares of stock, at a predetermined price (the
strike price), to the seller of the option, during a certain length
of time. Because the buyer of the put option has paid a premium,
the seller of the option must purchase the shares if called to do
so. Options involve risk and are not suitable for all
investors.
Quotation
The highest bid and lowest offer (asked) price available for a
security at any given time. For example, an investor requesting a
price on XYZ Company might be quoted "40 to 40 1/2." This means
that the best bid price (the highest price any buyer will pay) is
currently $40 a share, and the best offer price (the lowest price
any seller will accept) is $40.50.
Real Estate Investment Trust (REIT)
A trust that invests primarily in real estate and mortgages and
passes income, losses, and other tax items to its investors. The
Fund is subject to many of the risks associated with direct real
estate ownership, such as declines in real estate values,
overbuilding and extended vacancies, limitation of fluctuations in
rent payments and other risks associated with general and local
economic conditions. Shares, when redeemed, may be worth more or
less than the original amount invested.
Redemption
The repayment of a debt security or preferred stock, either for
par value at maturity or for a premium before maturity.
Sector Fund
A specialized mutual fund investing in one industry or market
sector, such as chemicals, electronics, energy, or health care.
Sector funds tend to be more volatile than more diversified funds.
Mutuals funds are sold by prospectus; a prospectus contains
complete information on risks, fees and expenses, and should be
read carefully before investing. Funds that concentrate its
investments in one region or industry may carry greater risk than
more broadly diversified funds.
Securities and Exchange Commission (SEC)
The primary federal regulatory agency for the securities
industry, whose responsibility is to promote full disclosure and to
protect investors against fraudulent and manipulative practices in
the securities markets. The SEC enforces, among other acts, the
Securities Act of 1933, the Securities Exchange Act of 1934, the
Trust Indenture Act of 1939, the Investment Company Act of 1940,
and the Investment Advisers Act.
Selling Short
A trading technique, wherein an investor, who anticipates a
decline in a stock price, borrows shares of that stock from a
broker, then sells them, and waits for the share price to drop. If
the share prices drop, the investor generally buys back shares at
the lower price, and his/her profit equals the difference between
the two prices (often minus interest and commission). If share
prices rise, the investor may experience a loss. For example,
suppose an investor sells 100 shares of borrowed stock valued at
$20 per share, and receives $2,000. When the stock drops in price
to $15 per share, the investor buys 100 shares for $1,500, and then
returns them to the broker having profited $5 per share, or $500.
On the other hand, if stock prices had gone up instead of down, and
the investor had to sell 100 shares at $25, the loss experienced
would be $5 per share or $500.
Share
Certificate representing one unit of ownership in a corporation,
mutual fund, or limited partnership.
Specialty Fund
A mutual fund with a particular focus, such as a single industry
or sector, a group of related industries, industries within a
particular region, or nonfinancial assets, such as real estate.
Mutuals funds are sold by prospectus; a prospectus contains
complete information on risks, fees and expenses, and should be
read carefully before investing. (G) Funds that concentrate its
investments in one region or industry may carry greater risk than
more broadly diversified funds.
Spread
The difference between two measurements. In stocks, the spread
equals the difference between a bid (the highest price offered by a
buyer), and the ask price (lowest price offered by a seller). For
fixed-income investments, the spread represents the difference in
yield either for securities with the same credit ratings but
different maturity dates, or for securities with different credit
ratings but the same maturity dates.
Standard & Poor's 500 Index (S&P 500)
An index of 500 of the most widely held common stocks on the New
York Stock Exchange (NYSE). It is used as a measure to indicate the
overall health of the U.S. stock market. This index is composed of
industrial, transportation, utility, and financial companies with a
heavy emphasis on industrial companies.
Stock
A security representing partial ownership, also called equity,
in a corporation. Each stock share represents a proportionate claim
against the company's profits and assets. Common stock entitles
shareholders to participate in stockholder meetings and to vote for
the board of directors. Preferred stock does not confer voting
rights, but takes precedence in claims against profits and
assets.
Stock Certificate
A document indicating legal ownership of shares of stock in a
corporation. Stock certificates are made out to the shareholder or
the brokerage firm, and identify the issuer, the number of shares,
the par value, and the stock class. A stock certificate must be
endorsed by the shareholder to sell the shares.
Stock Exchanges
Formal organizations, approved and regulated by the (SEC), are
made up of members who use the facilities to exchange certain
common stocks. The two major national stock exchanges are the New
York Stock Exchange (NYSE) and the American Stock Exchange (ASE or
AMEX).
Stock Fund
A mutual fund that invests primarily in stocks. Mutuals funds
are sold by prospectus; a prospectus contains complete information
on risks, fees and expenses, and should be read carefully before
investing.
Stock Market
A general term referring to the organized trading of securities
in the various market exchanges and the over the counter (OTC)
market.
Stock Split
A distribution of additional shares to each stockholder in
proportion to the shares the individual already owns. A stock split
has no immediate effect on a stockholder's equity. For example, if
a stock splits 2-for-1, a shareholder who owns one share with a
$100 par value before the split, would own two shares, each with a
$50 par value, after the split.
Strike Price
The price at which an option holder may purchase shares of
stock. An option generally sets the strike price, which may be
higher or lower than the market price of shares.
Supply and Demand
Supply refers to the availability of a commodity, while demand
refers to the desire consumers have for that commodity, and the
amount they are willing to purchase. The relationship between
supply and demand generally influences price.
Tax Deferred
The postponement of taxes on accumulated investment earnings
until the investor takes possession of them. For example, an
Individual Retirement Account (IRA) holder may postpone paying
taxes on any earnings if he or she waits until age 59 1/2 to make
withdrawals. Taxes would be due at that time.
Tax Exempt
Not subject to taxation by federal, state, and/or local
authorities.
Tax-Exempt Bond
A bond, issued by a municipal, county, or state government,
whose interest payments are not subject to federal income tax, and
sometimes also state or local income tax.
Tax-Sheltered Investment
An investment vehicle that legally avoids or limits tax
liabilities. For example, an Individual Retirement Account (IRA)
allows for tax-deferred capital growth on retirement savings. Other
examples include municipal bonds (munis) and annuities.
Time Horizon
Length of time for which an investor plans to hold
investments.
Total Return
Gross annual return on an investment, including capital
appreciation or distributions, interest, dividends, and personal
taxes.
Treasury Bill
Also called a T-bill. A negotiable debt obligation issued by the
U.S. government and backed by its full faith and credit, having a
maturity of one year or less. Exempt from state and local taxes.
Treasury bills have face values ranging from $10,000 to $1 million,
and sell at a discount based on current interest rates.
Uniform Gift to Minors Act (UGMA)
Also called Uniform Transfer to Minors Act (UTMA) in some
states. Laws adopted by most states allowing an adult to contribute
to a custodial account in a minor's name without having to
establish a trust or name a legal guardian.
Uniform Transfer to Minors Act (UTMA)
Also called Uniform Gift to Minors Act (UGMA) in some states.
Laws adopted by most states allowing an adult to contribute to a
custodial account in a minor's name without having to establish a
trust or name a legal guardian.
United States Savings Bonds
Non-marketable debt securities issued by the U.S. Treasury
Department that are backed by the full faith and credit of the
federal government. They are considered low risk, and the interest
income is generally not subject to state or local taxes. There are
currently three types of U.S. savings bonds: Series "EE"; Series
"I"; and Series "HH." Series EE bonds currently have a maturity of
17 years, and are sold at 50% of their face value, which range from
$50 to $10,000. Series I bonds are indexed for inflation, and are
sold at face value in denominations of $50, $75, $100, $200, $500,
$1,000, $5,000, and $10,000. Series HH bonds have maturities of 20
years, provide interest income every six months, and are issued in
denominations of $500, $1,000, $5,000, and $10,000. Series HH bonds
cannot be purchased with cash, but may be acquired in exchange for
matured bonds of the same series or for Series EE bonds.
Variable Annuity
A long-term contract sold by life insurance companies in which
premiums are invested, and future payments to the purchaser are
based on the performance of the investment portfolio. If an
individual dies before receiving income from his or her variable
annuity, the individual's beneficiaries are entitled to the amount
invested in the annuity, regardless of the portfolio's performance.
Usually Variable Annuities are sold by prospectus, which contains
complete information on risks, fees and expenses, and should be
read carefully.
Volatility
The relative rate at which the price of a security moves up and
down; found by calculating the annualized standard deviation of
daily change in price. The more volatile a security or mutual fund,
the more it is subject to rapid and extreme price fluctuations
relative to the market.
Yield
The annual gain or loss earned on an investment, generally
expressed as a percent. To determine the yield on a bond, divide
the amount of interest received from the bond by the amount paid
for the bond. For example, suppose an individual paid $5,000 for a
bond. At 5% interest, he/she would earn $250 annually in interest
income. The yield, $5,000 divided by $250, would be 5%. Similarly,
to determine the yield on stocks, divide the dividend received per
share by the amount paid per share.
Yield To Maturity (YTM)
The return an investor will receive if a long-term
interest-bearing investment, such as a bond, is held until the date
it becomes due and payable (maturity date). A calculation to
determine the YTM of a bond, for example, would account for the
interest rate, the payment schedule, the market value, the face
value, and the length of the term.
Zero Coupon Bond
A bond that makes no periodic interest payments, but sells at a
deep discount from its face value. At the maturity date, the
investor will receive the face value of the bond, plus the interest
that has accrued over a fixed term.
12b-1 Marketing Fee