Glossary of Financial Terms

A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

A

AA/Aa

A high grade assigned to a debt instrument (bond) by a rating agency. Such a rating indicates a very strong capacity to pay interest and repay principal.

AAA

The highest grade assigned to a debt obligation (bond) by a rating agency. Such a rating indicates an unusually strong capacity to pay interest and repay principal.

Above par

Designating a security that sells at greater than face value or par value. Also premium.

Accrued interest

Interest that has accumulated on a bond between the last payment and the current date. Important when selling a bond; the buyer pays the price of the bond plus any interest that has accrued.

Accumulation

The purchase of shares based on a regular schedule.

Accumulation Unit

A variable annuity owner buys this when building up a separate account. Subsequently, the account balance is annuitized. To calculate an accumulation unit's purchase price or value, divide the total assets in the separate account by the outstanding number of accumulation units.

Actual Net Investment Return (ANIR)

The actual return of a separate account for a given year. This investment result is capital gains (both realized and unrealized) and current income. ANIR is compared to the AIR for both variable life insurance and variable annuity contracts to determine benefits adjustments.

Additional voluntary contributions

After-tax contributions an employee makes to a 401(k) plan beyond what the employer will match, and often beyond the maximum pretax investment.

Adjusted gross income

Amount of income which is subject to federal income tax. In addition to any other tax credits, contributions to IRAs and 401(k) plans are subtracted from the total, so that the adjusted gross income will be lower, as will the amount of tax paid.

Aggressive

Relating or referring to an investment philosophy that seeks above-average returns by accepting above-average risk.

American Depository Receipts (ADR)

Foreign stocks, denominated in American dollars, that are traded on a U.S. stock exchange.

American Stock Exchange (AMEX)

The second largest exchange in the U.S., specializing in small-to-medium size companies.

Annualized returns

Returns that reflect a security's yearly rate of return. See cumulative returns.

Annuitant

Person who receives annuity benefit payments.

Annuity

Contract issued by a life insurance company, which promises to make periodic payments to the buyer over a set period of time. Payments are made to individuals, referred to as annuitants.

Annuity Period

Also referred to as the payout or liquidation period. This is the period during which assets supporting the annuity are sold to make payments to annuitants.

Appreciation

An increase in value of an asset.

Asset allocation

The assignment of investment funds to a broad category of assets.

Asset allocator

Managers who capitalize on the cyclical behavior of the economy and of market price trends by altering the level of equity or fixed income exposure in anticipation of these cycles.

Assumed Interest Rate (AIR)

The AIR, or assumed investment rate, is an estimate of expected investment results for separate account assets supporting a variable annuity or variable life insurance product.

B

BB/Ba

A higher speculative grade assigned to a debt obligation (bond) by a rating agency. Such a rating indicates significant speculative elements and moderate ability to pay interest and repay principal.

BBB/Baa

A medium-grade assigned to a debt obligation (bond) by a rating agency. Such a rating indicates an adequate ability to pay interest and repay principal. This is the lowest level to be considered investment grade.

Backdating

Permitting a mutual fund shareholder to use previous purchases of a fund's shares to qualify for reduced commission charges on subsequent purchases.

Balanced fund

A type of mutual fund that spreads its investments among stocks and bonds. Essentially, a balanced fund is a middle-of-the road fund that balances its portfolio to achieve both moderate income and moderate capital growth.

Bank trust department

Department of a bank that handles estate planning, guardianships and trusts for individuals or families with a high net worth. Trust funds are typically conservative investors, but are highly influential because of the large amounts of money they manage.

Banker's acceptance

A short-term credit instrument created by a non-financial firm and guaranteed by a bank as to payment. These instruments are commonly found in money market funds.

Basis point

One one-hundredth of a percent (1/100 of 1%). Commonly expressed as 0.01.

Bear

An investor who believes a security or the security market in general will follow a general downward path.

Bearer bond

A debt instrument having no owner's name on the issuer's books and no name inscribed on the certificate.

Bear market

An extended period of general price declines in the securities market.

Bellwether

A stock whose performance is indicative of the overall market direction.

Below par

Designating a security that sells at less than face value or par value. Also discount.

Beta

A measure indicating the sensitivity of the rates of return on a portfolio or a security compared to the rates of return on the market as a whole.

Blanket recommendation

Purchase recommendation sent to all customers of a brokerage firm regardless each customer's investment objectives.

Blue chip

A very high quality investment involving a lower-than-average risk of loss of principal or reduction in income.

Blue sky laws

Securities regulations issued by states. These laws vary from state to state and are often more extensive than the laws enforced by the Securities and Exchange Commission.

Board of directors

The body of people responsible for supervising the affairs of the corporation.

Boiler room

Cold-calling operation in which hard-sell salespeople peddle questionable stocks. Often illegal, and always frowned on by the National Association of Securities Dealers, solicitations from these companies should be avoided.

Bond

A long-term promissory note that obligates the borrower to make specified payments over a specific period of time. Bonds vary widely in maturity, security and type of issuer, although most are sold in $1,000 denominations.

Bond dividend

A dividend paid in the dividend payer's bonds.

Bond rating

The grading of a debt security with respect to the issuer's ability to meet interest and principal payments in a timely manner. See AAA, AA/Aa, BBB/Baa, BB/Ba.

Book value

The net dollar value at which an asset is carried on a firm's balance sheet.

Bull

An investor who believes the price of a security or the security market will follow a broad upward trend.

Bull market

An extended period of general price increases in the securities market.

C

Callable bond

A bond that is subject to the redemption by its issuer before maturity.

Capital gain

The excess by which proceeds from the sale of a capital asset exceeds the cost.

Capital gains distribution

Payment to investment company (mutual funds) shareholders based on gains from securities in the firm's portfolio that have been sold.

Capitalization

The company's stock price per share multiplied by the total number of shares outstanding.

• Small cap: less than $1.5 billion
• Mid cap: between $1.5 billion and $10 billion
• Large cap: over $10 billion

Cash

Balance sheet asset that includes paper money, bank balances and highly liquid securities such as money markets and U.S. government securities. Mutual funds tend to maintain a cash position of 5% to 10%

Cash dividend

Dividend paid in cash to holders of a firm's stock.

Certficate of deposit (CD)

A receipt for a deposit of funds in a financial institution that permits the holder to receive interest plus the deposit at maturity.

Clone fund

A mutual fund started by another mutual fund having grown so large that its management feels the fund is limited as to the investments it can make.

Closed-end investment company (closed-end mutual fund)

An investment company (mutual fund) that issues a limited number of shares and does not redeem those that are outstanding. Purchase of shares of a closed-end investment company must occur on the exchanges or over-the-counter-market.

Commercial paper

A short-term unsecured promissory note issued by a finance company or a large industrial firm. Commonly found in money market funds.

Common stock

A class of stock that has no preference to dividends or any distribution of assets.

Common stock fund

A mutual fund that limits its investment to shares of common stocks. Also equity funds, stock funds.

Compound interest

Interest paid on interest from previous periods in addition to principal.

Consumer price index (CPI)

A measure of the average change over time in the prices paid by urban consumers for a fixed "market basket" of day-to-day expenses (including food, automobile registration, clothing, etc.).

Contrarian

An investor who decides which securities to buy and sell by going against the crowd.

Convertible security

A security that, at the option of the holder, may be exchanged for another asset, generally a bond for a fixed number of shares of common stock.

Corporate bond fund

An investment company (mutual fund) that invests in long-term corporate bonds and passes the income on these securities to its shareholders.

Correction

Reverse movement in the price of an individual stock, bond, commodity or index after any long-term move. Can be a movement up or down, but usually refers to a fall in the price.

Correlation coefficient

Statistical measure of the relationship between the movements of two variables. Often used to describe similar movements in prices of two stocks.

Coupon

The annual interest paid on a debt instrument.

Covariance

Correlation between two securities multiplied by the standard deviation for each.

Credit rating

A grading of a borrower's ability to meet financial obligations in a timely manner.

Current maturity

The length of time before a security matures.

Current yield

The annual rate of return received from an investment's current market value. Calculated by dividing the coupon rate by the current value of the bond.

Custodian

Financial institution -- usually a bank -- that keeps custody of stock certificates and other assets of a mutual fund, individual or corporate client.

Cyclical stock

Common stock of a firm whose profits are heavily influenced by cyclical changes in general economic activities.

D

Debenture

A corporate bond that is not secured by specific property.

Debt security

A security representing borrowed funds that must be repaid. Also bond, liability.

Deep discount bond

Bond selling at more than 20% off its face value.

Default risk

Risk that a particular debtor will fail to make timely payments of interest and principal. Interest rates on a debt instrument rise as the default risk increases. Risk is usually determined by a ratings agency such as Moody's or Standard and Poor's.

Defensive stock

A stock that tends to resist general stock market declines.

Defined benefit pension plan

Retirement plan in which a fixed amount is paid to the employee after a certain number of years of service. Contributions are usually made by the employer.

Defined contribution pension plan

Retirement plan -- including 401(k), 403(b) and 457 plans -- in which the employee makes a fixed contribution but is paid out according to the performance of the investments.

Derivative

A contract whose value is based on the performance of an underlying security.

Discount bond

A bond that is selling at less than its par value.

Discount broker

Brokerage house that executes trades at significantly lower commission rates than those offered by full-service brokerages.

Diversification

Minimizing risk by investing in a wide range of securities invested in many industries.

Dividend

A share of a company's net profits distributed by the company to a class of its stock holders.

Dividend yield

An equity characteristic commonly used as a value indicator. Calculated by dividing the indicated dividend rate for the next 12 months by the current price.

Dollar-cost averaging

Investment of an equal amount of money at regular intervals resulting in the purchase of more shares during market downturns and fewer shares during market upturns.

Dow Jones Industrial Average (DJIA)

A widely quoted measure of stock market price movements of 30 large, seasoned industrial firms.

Downside risk

Chance that a security will decline, and estimate of how much the decline might be, given factors affecting its performance.

Duration

A risk measure for a bond or bond portfolio which indicates its price sensitivity to a percentage change in interest rates. The longer the duration, the more interest-rate sensitive the bond.

E

Early withdrawal penalty

Charge levied on a person who withdraws from an investment before the agreed withdrawal time.

Earnings

Income of a business, typically, after-tax income but may refer to before-tax income or revenues.

Earnings per share

The amount a stock will pay in income or dividends.

Economic indicators

Statistics such as unemployment, inflation and factory utilization that analysts use to predict the direction of the overall economy.

Efficient frontier

A graph representing a set of portfolios that maximizes expected return at each level of portfolio risk.

Efficient market

A market in which security price reflect all available information and adjust instantly to any new information.

Efficient portfolio

A combination of investments offering the highest possible yield at a given level of risk or the minimum possible risk at a given yield level.

Emerging growth stock

The common stock of a relatively young firm operating in an industry with very good growth prospects. This kind of stock offers unusually high returns, it is also very risky because the expected growth may not occur.

Emerging market

Market in a country which does not have a fully developed economy. Mexico is the nearest example. Investments in these markets are usually characterized by a high level of risk and possibility of a high return.

Emerging Market stocks

Stock of companies located in developing nations. Emerging markets share certain characteristics. Politically and economically, these countries are not considered to have reached the degree of stability associated with developed nations, and are considered to have a lesser degree of economic sophistication. The benchmark for this asset class is the Morgan Stanley EAFE Emerging Markets.

Employee Retirement Income Security Act (ERISA)

A 1974 act that protects the retirement income of pension funds participating by setting standards for eligibility, performance, investment selection, funding and vesting.

Employee Stock Ownership Plan (ESOP)

A qualified retirement plan in which employees receive shares of the company stock

Energy stock

The stock of a company engaged in an energy-related business such as coal-mining, oil-refining, or electric power generation.

Equity

See stock

Equivalent taxable yield

The taxable return that must be achieved in order to equal, on an after-tax basis, a given tax-exempt return.

Estimated tax

An estimate of tax that will be owed by a corporation or individual in the coming year.

Eurobond

A bond issued and traded in countries other than the one in which the bond is denominated.

Eurodollar

Dollar-denominated deposits in foreign banks or foreign branches of U.S. banks.

European Community (EC)

A group of Western European countries joined together to promoted trade and economic and political operation. Formerly European Economic Community (EEC).

Ex-dividend date

The first day of trading when the seller, rather than the buyer, of a security will be entitled to the most recently announced dividend payment.

Expected rate of return

The rate of return expected on an asset or a portfolio.

Expense ratio

The proportion of assets required to pay annual operating expenses and management fees of a mutual fund.

F

Family of funds

A group of mutual funds operated by the same investment management (mutual fund) company.

Fannie Mae

1. Federal National Mortgage Association (FNMA). A privately owned profit seeking corporation that adds liquidity to the mortgage market by purchasing loans from lenders. 2. A security issued by FNMA that is back by insured and conventional mortgages.

Federal Deposit Insurance Corporation (FDIC)

The federal agency that insures deposits at a commercial bank to a limit of $100,000 per depositor.

Federal funds

Reserve balances above those required that are maintained by commercial banks in the Federal Reserve System.

Federal funds rate

The rate of interest, determined by the Federal Reserve, on overnight loans of excess reserves among commercial banks. A declining federal fund rate may indicate the Federal Reserve has decided to stimulate the economy by making it cheaper for one bank to borrow from another.

Freddie Mac

1. Federal Home Loan Mortgage Corporation (FHLMC). A government organization established in 1970 to create a secondary market in conventional mortgages. The FHLMC purchases mortgages from federally insured financial institutions and resells them in the form of mortgage-backed, pass-through certificates. 2. A security issued by the FHLMC secured by pools of conventional home mortgages.

Federal Reserve Board

The seven governing members of the Federal Reserve System who determine the country's monetary policy.

Federal Reserve System

The independent central bank that influences the U.S.'s supply of money and credit through its control of bank reserves.

Fiduciary

A person who has discretionary authority or control over a qualified plan trust, its assets, or its administration, or who for compensation provides investment advice regarding plan assets.

Financial planner

Investment professional who performs an analysis of an individual's circumstances and prepares a program to meet the investor's objectives.

Fixed annuity

Annuity that guarantees fixed payments to the annuitant, either for life or for a set period of time.

Fixed-income security

A security, such as a bond or preferred stock, that pays a constant income each period.

401(k) plan

Plan in which employees elect to contribute pretax dollars to a qualified tax-deferred investment plan.

403(b) plan

A type of individual retirement account offered to employees of non-profit organizations.

Fourth market

Direct trading of large blocks of securities between institutional investors. This allows the big money managers to avoid brokerage fees.

Full coupon bond

Bond whose coupon is at or above current interest rates.

Full service broker

A broker who, in addition to executing trades, offers investment advice, tax shelters, asset management, financial planning and other services.

Fund of funds

A mutual fund that invests in other mutual funds. They offer more diversification than a single fund, but also have a higher expense ratio because of the fees for the underlying funds. Following the scandal over the IOS Fund of Funds in the1970s, funds of funds fell out of favor and were severely limited by the Securities and Exchange Commission. They are now becoming more popular, and the SEC has been flexible in allowing them to be created.

Fund switching

Selling shares in one mutual fund and re-investing the proceeds in another mutual fund.

Futures contract

Contract to buy or sell a security or commodity at a predetermined price at some future date.

G

General obligation bond (GO)

A municipal debt obligation in which interest and principal payments are guaranteed by the full financial resources and taxing power of the issuer.

Ginnie Mae

1. Government National Mortgage Organization (GNMA). A government owned corporation that acquires, packages, and resells mortgages in the form of mortgage-backed securities. 2. A security backed by the Federal Housing Administration (FHA), Veterans Administration (VA) and Farmers Home Administration (FHA).

Global fund

A mutual fund that includes at least 25% foreign securities in its portfolio.

Go long

Purchase a security for investment, hoping that its price will rise.

Go short

Borrow and sell a security one does not own, hoping its price will fall.

Governments

Securities such as Treasury bills and bonds issued by the U.S. government. The most creditworthy of all debt instruments.

Gross earnings

Total amount of pretax earnings before deductions are made.

Gross national product (GNP)

The dollar output of final goods and services in the economy during a period of time.

Growth stock

The stock of a firm that is expected to have above-average increases in revenues and earnings. These firms normally retain most of their earnings for reinvestment and therefore pay small dividends. Growth stocks tend to have dividend yields below that of the market average, valuation levels above the market average, and volatility above the market average. A growth fund will tend to have a greater amount of portfolio turnover (purchases and sales).

Guaranteed Insurance Contracts (GIC)

Contracts issued by an insurance company or bank promising a stated nominal interest rate over a specified period of time.

H

Haircut

Formula to evaluate a security's worth in order to determine a broker-dealers net worth.

Hedge fund

A very specialized, volative investment company (mutual fund) that permits the manager to use a variety of investment techniques normally prohibited in other types of funds. These techniques are borrowing money, selling short and utilizing options. These funds offer extraordinary gains with above-average risk.

Hidden load

Sales charge that is not immediately apparent to the investor.

Hidden values

Assets, such as real estate, that are owned by a company but not reflected in the balance sheet.

Highs

Stocks that have hit their highest price for a 52-week period.

High-technology stock

The stock of a company involved in sophisticated technology such as electronics, computer software, robotics or life sciences.

Historical yield

Yield produced by a mutual fund such as a money market fund over a period of time.

Hold

Own a security for an extended period of time. The buy-and-hold strategy maintains that stocks' value will increase over time.

I

Illiquid

Not easily sold.

Incentive stock option

Program in which qualifying options are free of tax at the date of grant and the date of exercise.

Income fund

An investment company (mutual fund) whose main objective is to achieve current income for its owners typically purchasing bonds, preferred stocks and common stocks paying high dividends.

Income stock

A stock with a relatively high dividend yield.

Index

Statistical composite that measures changes in the economy or in financial markets, can be expressed in percent changes from a base year or from the previous month. Most common are the S&P500 and the Dow Jones Industrial Average.

Index fund

A mutual fund that keeps a portfolio of securities designed to match the performance of a certain market as a whole.

Industrial

Term for any company that produces goods or services and is not a utility.

Inflation

A general increase in the price level of goods and services.

Initial Public Offering (IPO)

The first sale of a corporation's stock to the investing public.

Insider trading

Buying or selling stocks by a company's management or large shareholders based on information that has not yet been made public.

Institutional investor

Organization that trades large volumes of securities.

Insured account

Bank, savings and loan or other account that is insured by a federal or private insurance corporation.

Interest

Payment for the use of borrowed money.

Interest-sensitive stock

A stock that tends to move in the opposite direction from that of interest rates.

Intermediate term bonds

Debt securities with maturities of one to ten years. The benchmark for this asset class is the Lehman Brothers Intermediate Bond Index.

International bonds

Debt securities of any country. The benchmark for this asset class is the JP Morgan Global Bond Index.

International developed country stocks

Stock of companies located in developed nations. Developed nations are defined by the World Bank having a minimum gross national product of about $10,000 per person. Their markets share certain characteristics, such as having been in operation a long time, having reached a certain size and stability, and having attained a degree of sophistication. The benchmarks for this asset class are Morgan Stanley Asia Ex-Japan, Morgan Stanley Europe 14, and Morgan Stanley Japan.

International fund

A mutual fund that invests only outside the country in which it is located, i.e. an international mutual fund based in the U.S. would only invest in stocks outside of the U.S.

Inverse floater

Derivative whose coupon rate moves in an inverse manner to the market interest rate.

Investment company

A firm in which investors pool their funds for the sake of diversification and professional management. Also mutual fund. See closed-end fund, open-end fund.

Investment Company act of 1940

Legislation establishing general regulations and investment standards for mutual funds.

Investment grade

Designating a bond suitable for purchase by institutions under the prudent man rule. Typically BBB from S&P or Baa from Moody's.

Investment objective

Financial goal of an investor used to determine appropriate investments.

Individual Retirement Account (IRA)

A custodial account or trust in which individuals may set aside earned income in a tax-deferred retirement plan.

IRA Rollover

Reinvestment of a lump-sum distribution from an IRA or 401(k) plan when physical receipt of funds has been taken by the investor.

Investment strategy

Allocating assets among stocks, bonds, cash and cash equivalents and other securities.

J

Junior security

A security with a lower claim to assets and income than a senior security. Important in determining who gets what in a bankruptcy.

Junk bonds

Debt issued by a company whose credit rating is below investment grade (BBB for S&P and Baa for Moody's). Because there is a considerable amount of risk, the company must offer a high coupon to make the bond attractive to investor. The risk of default is much greater than that with investment grade bonds.

Justified price

Fair market price for a security, commodity, piece of real estate or other asset, based on all available knowledge about the asset.

K

Keogh plan

A federally approved retirement program that permits self-employed people to set aside for savings up to $30,000 or up to 25% of their income, whichever is lower.

Key industry

Industry, such as automobile production, that is central to a nation's economic health.

Keynesian economics

The economic philosophy espoused by John Maynard Keynes that advocated an active government role in maintaining the economy.

Kiting

Collusion between buyer and seller to drive up a stock's price through trading. Any manipulative trading practice designed to inflate stock prices.

Know Your Customer

Ethical guideline recognized by most regulatory authorities that states a broker-dealer must ascertain certain basic information about a client prior to opening an account.

L

Ladder portfolio

A bond portfolio with bonds that mature in equal amounts each year or over a specific period of time.

Lagging economic indicator

An economic or financial variable, the movements of which tend to follow the movement of overall economic activity.

Large-capitalization stock

The stock of a big company that has considerable retained earnings and a large amount of common stock outstanding. Typically, a market capitalization of over $3 billion.

Large-cap growth stocks

Stock of companies with market capitalization between $10 and 100 billion, with a growth bias. The benchmark for this asset class is S&P BARRA Growth.

Large-Cap value stocks

Stock of companies with market capitalization between $10 and 100 billion, with a value bias. The benchmark for this asset class is S&P BARRA Value.

Leading economic indicator

An economic or financial variable that tends to move ahead of and in the same direction as general economic activity.

Leveraged buyout

Takeover of a company that is financed with debt.

Leveraged stock

Stock that is purchased with credit, as in a margin account.

Life annuity

Annuity that makes a fixed payment for the life of the annuitant.

Life cycle fund

Also called a lifestyle fund. A mutual fund that seeks to tailor investments to the changing needs of the investor.

Life expectancy

Age to which a person is expected to live, as determined by an actuary.

Limited partnership

Corporation made up of a general partner and several limited partners, investors who have limited liability and do not take an active role in management.

Liquid asset

A security that can easily be sold for cash.

Liquidity

Measurement of how easily an asset can be sold without affecting its price.

Listed security

Stock or bond that is accepted for public trading on one of the major exchanges or marketplaces.

Listing requirements

Criteria that a security must meet in order to be listed on an exchange.

Load

The sales fee that the buyer pays in order to acquire a security, typically a mutual fund.

Load fund

A mutual fund with shares sold at a price including a sales charge of the net amount invested.

Long position

Ownership of a security, with attendant rights to income, dividends, etc.

Long-term bonds

Debt securities with maturities of 10 to 30 years. The benchmark for this asset class is the Lehman Government Long Bond Index.

Long-term goals

Financial goals set by an investor for a period of five years or more.

Long-term investor

Investor who sets investment goals of five years or more.

Loss leader

In discount brokerage, a security sold at less than its real value in order to attract business.

Low

Bottom price at which a security was sold for the preceding 52-week period.

Lump sum

Large payment of money received at one time, for example upon retirement.

Lump-sum distribution

With retirement plans, the disbursement of an individual's benefits in a single payment.

M

M1

A measure of domestic money supply accounting for currency, checking account balances and traveler's checks.

M2

A measure of domestic money supply accounting for M1 plus savings and time deposits, repurchase agreementsand money market accounts.

M3

A measure of money supply that includes M2 plus large time deposits and money market fund balances held by institutions.

Majority shareholder

One of a group of shareholders who together control more than half of the shares of a corporation

Make a market

Establish firm prices for a security by buying and selling large lots at market price.

Managed account

Investment account consisting of money that one or more clients entrust to a manager, who decides when and where to invest it. Clients are then charged a management fee, usually a fixed percentage of the fund's asset value.

Management fee

The money paid to the managers of an investment company (mutual fund).

Margin account

Brokerage account that allows the investor to buy securities with money borrowed from the broker.

Margin call

Demand that an investor deposit enough money in a margin account to bring it up to the margin limits.

Market capitalization

The total value of all of a firm's outstanding shares, calculated by multiplying the market price per share times the total number of shares outstanding.

Market timing

The purchase and sale of securities based on short-term price patterns as well as on asset values.

Maturity

The date on which payment of a financial obligation is due.

May Day Revolution

The end of fixed brokerage fees on May 1, 1975.

Misery index

Index that considers both inflation and unemployment rates.

Money market fund

A mutual fund that purchases short-term, high quality securities such as Treasury Bills, negotiable CDs and commercial paper.

Money market securities

Low-risk, very liquid securities with maturities of one year or less. Other short-term debt that is scheduled to mature within one year may also be classified as money market securities. The benchmark for this asset class is the Salomon 91-Day T-Bill Index.

Money supply

The amount of money in the economy. See M1, M2, M3.

Moodys

A company rating service issuing ratings denoting the relative investment quality of corporate and municipal bonds.

Mortgage

A pledge of a specific property as security for a loan.

Mortgage-backed securities

Ownership claim in a pool of mortgages or an obligation that is secured by such a pool. Also called a pass-through.

Municipal bond

The debt issued by a city, county, state or other political entity. Interest paid by most municipal bonds is exempt from federal income tax and often from state and local taxes as well.

Municipal bond fund

A mutual fund that invests in tax-exempt securities and passes through tax-free current income to its shareholders.

Mutual fund

An investment company that continually offers new shares and stands ready to redeem existing shares from the owners. Also investment company.

N

National Association of Securities Dealers

Self-regulatory organization of broker-dealers operating under the auspices of the Securities and Exchange Commission.

NASDAQ

The NASD's Automated Quotation marketplace, which trades shares electronically. Companies traded on the NASDAQ include many small-to-medium size firms and many technology companies.

Net Asset Value (NAV)

The market value of an investment company's (mutual fund) asset less any liabilities divided by the number of shares outstanding. This is the value of the each share if the fund sold all of its assets at their current market value and paid off any outstanding debts.

Net income

Income after all expenses and taxes have been deducted.

New listing

Company that has just begun to trade on an exchange or marketplace.

New York Stock Exchange

The oldest and most established stock exchange in the U.S., located at 11 Wall Street in New York City. Companies traded on the NYSE are typically the largest in the U.S.

No-load fund

An open-end investment company (mutual fund), shares of which are sold without a sales charge.

O

Offshore

Any organization with headquarters outside the U.S.

Open-ended investment company

See mutual fund.

Option

A contract that permits the owner, depending on the contract, to purchase or sell a security at a fixed price until a specific date.

Option-growth fund

A mutual fund that invests at least 5% of its portfolio of securities in options.

Options-income fund

A mutual fund that attempts to increase current income by writing covered options on securities held in the fund's portfolio.

Over-the-counter stock

Stock that is traded outside of an organized exchange, usually through telephone or electronic connections.

Overvalued

Stock whose current price is higher than its actual value or price/earnings ratio.

P

Par value

The stated value of a security printed on its certificate.

Pass-through security

A security that passes through payments from debtors to investors.

Penny stock

Stock that sells for less than $1 a share. Usually an investment in a highly speculative corporation with an erratic revenue history.

Portfolio beta

The relative volatility of returns earned from holding a specific portfolio of securities.

Portfolio manager

A person who is paid a fee to supervise the investment decisions of others.

Preferred stock

A security that shows ownership in a corporation and gives the holder a claim prior to the claim of common stockholders on earnings and also generally on assets in the event of liquidation.

Price/earnings ratio

Price of a stock divided by its earnings per share.

Primary market

Market for the initial sale of a corporation's securities to the underwriting community. Profits from the primary market go to the company issuing the securities. Later sales to investors are made in the secondary market.

Principal

The amount of outstanding debt or balance of a loan (bond).

Profit sharing plan

An agreement that allows employees to share in the corporation's profit. The company makes annual contributions to a profit-sharing fund, which is invested in stocks, bonds are cash, and generally accumulate tax-free until the employee retires or leaves the company. Do not confuse this plan with investments of 401(k) money in your company's stock. If you want share in the company's profits, do it through a profit-sharing agreement.

Prospectus

A formal written document relating to a new securities offering that delineates the proposed business plan or the data relevant to an existing business plan - information necessary to make an educated decision to purchase a security or not.

Prudent man rule

A federal and state regulation requiring trustees and portfolio managers to make financial decisions in the manner of a prudent man, e.g., with intelligence and discretion.

Q

Qualified plan

Tax-deferred plan set up by an employer for employees. Can be funded by contributions from employer, employee or both. Savings are paid out at retirement, which is the only time taxes are paid.

Quantitative analysis

Analysis of a security or corporation based on measurable factors rather than on subjective factors such as the company's "story" or the skill of its managers.

Quarter

A period of three months. Public companies report earnings on a quarterly basis.

Quoted price

Price at which the last sale and purchase of particular security or commodity took place.

R

Rate of return

The return on an investment.

Recordkeeper

The institution that puts a 401(k) plan together. The recordkeeper is responsible for maintaining participant accounts and providing communications. Insurance companies dominated the recordkeeping business until recently, but mutual fund companies have now taken the majority of the market.

Right of accumulation

The term used when an investor qualifies for reduced sales charges for a purchase based on the total number of shares accumulated at the time of the purchase.

S

Secondary market

Exchanges and over-the-counter markets where securities are bought and sold between investors after the primary issue. Profits in the secondary market go to the selling dealers and investors, not to the issuing companies.

Sector

A group of securities that share certain common characteristics.

Sector fund

An investment company that concentrates its holdings among securities or other assets sharing a common interest.

Sell short

Sell borrowed securities, usually in the hope that the price will decline and a profit can be made on the difference.

Separate account

Investment accounts kept separate from an insurance company's general investment account. Used for both variable life insurance and annuity contracts. Insurers are allowed to invest separate account assets under different guidelines than those applicable to the insurer's general account assets.

Short position

Stock shares that a trader has sold short and not covered by a given date.

Short term bonds

Debt securities with maturities of one to three years. The benchmark for this asset class is the Lehman Government 1-3 Year Index.

Small cap stocks

The stock of a relatively small firm with little equity and few shares of common stock outstanding. Small-capitalization stocks tend to be subject to large fluctuations; therefore, the potential for short-term gains and losses is great.

Small-cap value stocks

Stock of companies with market capitalization between $250 million and $1.5 billion, with a value bias. The benchmark for this asset class is the Wilshire Small Cap Value.

Small-cap growth stocks

Stock of companies with market capitalization between $250 million and $1.5 billion, with a growth bias. The benchmark for this asset class is the Wilshire Small Cap Growth.

Socially responsible fund

A mutual fund that limits investment alternatives to securities of firms meeting certain social standards. Typically, these mutual funds avoid purchase stocks in cigarette manufacturers, alcohol manufacturers, etc. Also ethical fund.

Standard & Poor's 500 (S&P500)

An inclusive index of 500 stocks including 400 industrial stocks, 40 utilities, 20 transportation and 40 financial stocks.

Standard deviation

A statistical measure of the variability of securities returns. The hgiher the standard deviation, the risker the security.

Stock

An ownership share(s) in a corporation
also equity, common stock.

Supermarket

A program offered by brokerage firms that makes funds from many different families available on a no-load, fee-only basis. Charles Schwab & Co.'s OneSource supermarket initiated the trend in 1992, and most major brokerages have since offered their own programs.

T

Tax deferral

The delay of a tax liability until a future date as applicable in IRAs and 401(k) plans.

Tax Reform Act of 1986

Tax legislation that effected major changes in tax laws. Among other things, the act restricted the deductibility of contributions to IRA accounts, eliminated preferential tax treatment for capital games and put a cap on the maximum an employee can contribute to a 401(k) plan.

Third market

The universe of non-exchange member broker dealers who trade exchange-listed securities over the counter.

Time horizon

The time interval over which an investment program is to be completed. An investor's time horizon is important in the selection of appropriate securities.

Transfer agent

Agent appointed by a corporation to maintain records of all stock and bond holders, cancel and issue certificates and resolve problems arising from lost or stolen certificates. Mutual fund transfer agents perform these functions for fund share owners.

Treasuries

All bonds backed by the U.S. government that are issued through the Department of the Treasury.

Treasury Bill

A short-term debt security of the U.S. government that is sold in minimum amounts of $10,000 increments and multiples of $5,000 above this.

12-b

Charges levied from a fund's assets to cover marketing and distribution costs of the fund.

U

Undervalued

Stocks that are selling for less than their value according to analysts. Fundamental analysts try to find undervalued stocks. Takeover specialists often try to buy them.

Underwriter

Investment banker who purchases a new issue of securities (such as company stock or bonds) and distributes it to investors. Most underwriting is done through a group or syndicate of companies.

Unfunded pension plan

Pension plan funded by the employer out of current income. Unlike a 401(k) plan, in which the employee contributes money on a regular basis.

Unit investment trust

Investment company that buys a fixed portfolio of stocks, bonds or other securities. Unit holders receive interest in both the principal and income of the portfolio in proportion to the amount they have invested.

Utility bond

A long-term debt security issued by a utility.

V

Value investing

Managers who invest in companies believed to be undervalued on an absolute basis or relative to the market and/or historic basis. Value stocks or portfolios tend to have lower than average per share growth, low debt, and be of higher quality. Value portfolios have a lower than average portfolio turnover (purchases and sales).

W

Wrap account

An investment consulting relationship in which the client's money is allocated among funds from different money managers.

X

X or XD

Newspaper listings symbol indicating that a stock is traded without dividend.

Y

Year-To-Date (YTD)

Period from the beginning of the calender year to the reporting date. Corporate profits are reported on a quarterly and year-to-date basis.

Yield

The percentage return on an investment.

Yield curve

Interest rates available for each maturity from today out to 30 years. This is an easy way to look at the relationship between yield and maturity. Normally, the longer the time to the maturity of a security, the higher its yield - this gives the yield an "upward slope."

Yield to maturity

The total return an investor will get by holding a long-term, interest-bearing instrument (usually a bond) until it matures.

Yo-Yo Stock

A volatile stock that rises and falls quickly.

Z

Zero-coupon bond

A bond that provides no periodic interest payments to its owner but does pay principal upon maturity.

 

The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.