Financial
Glossary
| 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 |
Please
click on one of the letters above to go to the section of your
choice. At the end of every section is a button that brings you
right back to the top.
A
Annuity
An
annuity is a contract between an insurance company and a buyer.
The buyer pays a premium, in one or several payments, and the
insurance company agrees to pay the buyer a regular return for
a specified period of time, usually the remainder of the buyer’s
lifetime. The insurance company invests the money to earn interest,
receive dividend income, or collect capital gains distributions.
The insurance company then pays the buyer an income based on the
terms of the contract. Annuities can be variable or fixed, deferred
or immediate. A fixed annuity ensures that the insurance company
will pay a set principal plus a set interest rate. Returns on
a variable annuity, however, fluctuate based on the performance
of the investments. With a deferred annuity, the premium gathers
interest for a certain set period of time, tax-free, before payments
to the buyer begin. Immediate annuities, on the other hand, establish
a return for the buyer based on the buyer’s age, part of which
is considered principal and part of which is considered taxable
interest. Thus, age, wealth, and risk tolerance will heavily influence
the type of annuity an individual buyer selects.
Asset
Assets
include any of an individual’s possessions that have economic
value. The sum of one’s assets is considered to be the individual’s
net worth. Assets include stocks, bonds, cash, real estate, jewelry,
investments, and other properties.
Asset
Allocation
Asset
allocation refers to the specific distribution of funds among
a number of different asset classes within an investment portfolio;
it is diversification put into practice. Funds may be distributed
among a number of different asset classes, such as stocks, bonds,
and cash funds, each of which has unique types of expected risk
and return. Within each asset class are several variations of
the asset, meaning that there are levels of risk within each asset
class. Asset allocation involves determining what percentage of
funds will be invested in each asset. Determining how to allocate
funds depends on the individual investor. The investor's goals,
time frame, and risk tolerance will all affect how an investor
wishes to allocate funds based on the investor's desired return
and acceptable risk.
Back To Top
Back-end
load
A
back-end load is a sales charge or fee charged when funds are
withdrawn from an investment, particularly mutual funds and annuities.
In many cases, the fee is reduced over the years of investment,
or holding period, and eventually is reduced to zero.
Bear
Someone
who believes or speculates that a particular security or the
securities in a market will decline in value is referred to
as a bear.
Bear
Market
A
bear market is a market in which a group of securities falls
in price or loses value over a period of time. A prolonged bear
market may result in a decrease in market prices by 20% or more.
A bear market in stocks may be due to investor’s expectations
of economic trends; in bonds a bear market results from rising
interest rates.
Blue
Chip
Blue
Chip refers to companies that have become well established and
reliable over time, demonstrating sound management and quality
products and services. Such companies have shown an ability
to function throughout both good and bad economic times, usually
paying dividends to investors even during lean years.
Bond
A
bond is essentially a loan made by an investor to a division
of the government, a government agency, or a corporation. The
bond is a promissory note to repay the loan in full at the end
of a fixed time period. The date on which the principal must
be repaid is the called the maturity date, or maturity. In addition,
the issuer of the bond, that is, the agency or corporation receiving
the loan and issuing the promissory note, agrees to make regular
payments of interest at a rate initially stated on the bond.
Interest from bonds is taxable based on the type of bond. Corporate
bonds are fully taxable, municipal bonds issued by state or
local government agencies are free from federal income tax and
usually free from taxes of the issuing jurisdiction, and Treasury
bonds are subject to federal taxes but not state and local taxes.
Bonds are rated according to many factors, including cost, degree
of risk, and rate of income.
Bull
Someone
who believes that a particular security or the securities in
a market will increase in value is known as a bull.
Bull
Market
A
bull market is a long period of rising prices of securities,
usually by 20% or more. Bull markets generally involve heavy
trading and are marked by a general upward trend in the market,
independent of daily fluctuations.
Back To Top
Capital
Gains
A capital
gain is the appreciation in value of an asset, that is, when the
selling price is greater than the original price at which the security
was bought. The tax rate on capital gain depends on how long the
security was held.
Certificate
of Deposit
A
Certificate of Deposit (CD) is a note issued by a bank for a savings
deposit that the individual agrees to leave invested in the bank
for a certain term. At the end of this term, on the maturity date,
the principal may either be repaid to the individual or rolled
over into another CD. The bank pays interest to the individual,
and interest rates between banks are competitive. Monies deposited
into a Certificate of Deposit are insured by the bank, thus they
are a low-risk investment and a good way of maintaining a principal.
Maturities may be as short as a few weeks or as long as several
years. Most banks set heavy penalties for premature withdrawal
of monies from a Certificate of Deposit.
Commission
Commission
is a fee charged by an agent making transactions of buying or
selling securities for another individual. This fee is generally
a percentage based on either the number of stocks bought or sold
or the value of the stocks bought or sold.
Credit
Risk
Credit
risk refers primarily to the risk involved with debt investments,
such as bonds. Credit risk is essentially the risk that the principal
will not be repaid by the issuer. If the issuer fails to repay
the principal, the issuer is said to default.
Back To Top
Default
To default
is to fail to repay the principal or make timely payments on a bond
or other debt investment security issued. Also, a default is a breach
of or failure to fulfill the terms of a note or contract.
Diversification
Diversification
is the process of optimizing an investment portfolio by allocating
funds to a number of different assets. Diversification minimizes
risks while maximizing returns by spreading out risk across a number
of investments. Different types of assets, such as stocks, bonds,
and cash funds, carry different types of risk. It is important to
diversify among assets with dissimilar risk levels for an optimal
portfolio. Investing in a number of assets allows for unexpected
negative performances to balance out with or be superceded by positive
performances.
Dividend
A dividend
is a payment made by a company to its shareholders that is a portion
of the profits of the company. The amount to be paid is determined
by the board of directors, and dividends may be paid even during
a time when the company is not performing profitably. Mutual funds
also pay dividends. These monies are paid from the income earned
on the investments of the mutual fund. Dividends are paid on a schedule,
such as quarterly, semi-annually, or annually. Dividends may be
paid directly to the investor or reinvested into more shares of
the company’s stock. Even if dividends are reinvested, the individual
is responsible for paying taxes on the dividends. Unfortunately,
dividends are not guaranteed and may vary each time they are paid.
Dow
Jones Industrial Average
The
Dow Jones Industrial Average is an index to which the performance
of individual stocks can be compared; it is a means of measuring
the change in stock prices. This index is a composite of 30 Blue
Chip companies ranging from AT&T and Hewlett Packard to Kodak
and Johnson & Johnson. These 30 companies represent not just
the United States; rather, they are companies involved with commerce
on a global scale. The DJIA is computed by adding the prices of
these 30 stocks and dividing by an adjusted number which takes into
account stock splits and other divisions that would interfere with
the average. Stocks represented on the Dow Jones Industrial Average
make up between 15% and 20% of the market.
Back To Top
Equity
Equity
is the total ownership or partial ownership an individual possesses
minus any debts that are owed. Equity is the amount of interest
shareholders hold in a company as a part of their rights of partial
ownership. Equity is considered synonymous with ownership, a share
of ownership, or the rights of ownership.
Back To Top
401k
plan
A 401k
plan is a retirement plan sponsored by employers. Employees may
choose to have a portion of their salary deferred to any of the
401k investment choices selected by the employer. The employer may
also contribute to the employee’s 401k by matching a portion of
the investment (for example, $.50 for every $1.00 the employee invests).
The investments to which money is deferred may include stocks, bonds,
money market funds, and company stocks. Monies deferred into the
401k are allowed to grow tax-free, and these monies are subtracted
from the employee’s taxable income. The maximum amount allowed to
be contributed to a 401k changes annually. If money is withdrawn
from the 401k before the employee turns 59 ½, the individual may
have to pay penalties. If the individual changes jobs, the monies
in the 401k may be rolled over to a 401k of the new employer or
to an Individual Retirement Account (IRA).
Front-end
load
A
front-end load is a commission or fee that is charged when an
investment is initially purchased. Investments that require a
front-end load include mutual funds, annuities, and life insurance
policies. Typically, the fee amount is a percentage of the net
asset value of the investment.
Back To Top
Going
Public
A company
that has previously been privately owned is said to be ‘going public’
the first time the company’s stock is offered up for public sale.
Back To Top
Hedge
Hedging
is a strategy of reducing risk by offsetting investments with
investments of opposite risk. Risks must be negatively correlated
in order to hedge each other; for example, an investment with
high inflation risk and low immediate returns with investments
with low inflation risk and high immediate returns. Long hedges
protect against a short-term position and short hedges protect
against a long-term position. Hedging is not the same as diversification,
as it aims to protect against risk by counterbalancing a specific
area of risk.
Back To Top
Individual
Retirement Account (IRA)
An
Individual Retirement Account allows individuals who are earning
income to contribute to a tax-deferred investment fund. An individual
can contribute up to $2,000 per year or $4,000 if married to an
unemployed spouse. Contributions to an IRA are tax-deductible
based on the individual’s marriage status and income level. Monies
contributed to an IRA may be invested in stocks, bonds, mutual
funds, annuities, bank savings accounts, Certificates of Deposit,
government bonds, and investment trusts but not more personal
and immediate investments such as a home or collectibles. The
individual may contribute to the Individual Retirement Account
until age 70 ½, but if money is withdrawn before age 50 ½, penalties
will be incurred.
Inflation
Risk
Inflation
risk is the risk that rising prices of goods and services over time,
or, generally the cost of living, will decrease the value of the
return on investments. Inflation risk is also known as ‘purchasing-power
risk’ since it refers to increased prices of goods and services
and a decreased value of cash.
Back To Top
Junk
Bond
Junk
bonds are bonds that are considered high yield but also have a high
credit risk. They are generally low rated bonds and are usually
bought on speculation, with the investor hoping for the yield, rather
than the default. An investor with high risk tolerance may choose
to invest in junk bonds.
Back To Top
Keogh
Plan
The
Keogh Plan is a type of tax-deductible retirement plan, similar
to Individual Retirement Accounts, for self-employed individuals.
It is also known as a self-employed pension plan. The individual
may contribute up to $30,000 or 15% of total earned income per year,
whichever is less.
Back To Top
Liquidity
Liquidity
refers to the ease with which investments can be converted to cash
at their present market value. Additionally, liquidity is a condition
of an investment that shows how greatly the investment price is
affected by trading. An investment that is highly liquid is composed
of enough units (such as shares) that many transactions can take
place without greatly affecting the market price. High liquidity
is associated with a high number of buyers and sellers trading investments
at a high volume.
Back To Top
Market
Risk
Market
risk is the risk that investments will lose money based on the
daily fluctuations of the market. Bond market risk results from
fluctuations in interest. Stock prices, on the other hand, are
influenced by factors ranging from company performance to economic
factors to political news and events of national importance. Time
is a stabilizing element in the stock market, as returns tend
to outweigh risks over long periods of time. Market risk cannot
be systematically diversified away.
Market
Value
Market
value is the value of an investment if it were to be resold, or
the current price of a security being sold on the market.
Modern
Portfolio Theory
Aims
to minimize the risks of investing while maximizing returns through
the diversification of a portfolio. Diversification is the process
of allocating funds among a number of different asset classes.
Modern portfolio theory looks at three main factors in determining
appropriate investments for an investor's portfolio: the investor's
goals and objectives for investing, the time frame of investment,
and the investor's risk tolerance, or how comfortable the investor
is with taking certain risks. Optimizing a portfolio according
to modern portfolio theory involves matching the statistics of
expected risk and return for a number of different assets with
the individual’s terms of investment.
Mutual
Fund
Mutual
funds are investment companies whose job it is to handle their
investors’ money by reinvesting it into stocks, bonds, or a combination
of both. Mutual funds are divided into shares and can be bought
much like stocks, allowing mutual funds to have a high liquidity.
Mutual funds are convenient, particularly for small investors,
because they diversify an individual’s monies among a number of
investments. Investors share in the profits of a mutual fund,
and mutual fund shares can be sold back to the company on any
business day at the net asset value price. Mutual funds may or
may not have a load, or fee; however, funds with a load will provide
advice from a specialist, which may help the investor in choosing
a mutual fund.
Back To Top
NASDAQ
(National Association of Securities Dealers Automated Quotation)
The
National Association of Securities Dealers Automated Quotation
is a global automated computer system that provides up-to-the-minute
information on approximately 5,500 over-the-counter stocks. Whereas
on the New York Stock Exchange (NYSE) securities are bought and
sold on the trading floor, securities on the NASDAQ are traded
via computer.
NASD
(National Association of Securities Dealers)
The
National Association of Securities Dealers is an organization
of broker/dealers who trade over-the-counter securities. The NASD
is self-regulated. The largest self-regulated securities organization.
This organization operates and regulates both the NASDAQ and over-the-counter
markets, ensuring that securities are traded fairly and ethically.
NAV
(Net Asset Value)
Net
Asset Value is the price of a share in a mutual fund or investment
company. This price is calculated once or twice daily. Net asset
value is the amount by which the assets’ value exceeds the company’s
liabilities. It is calculated by adding up the market value of
all securities owned by the company, subtracting the company’s
liabilities, and dividing this value by the number of shares of
the company outstanding. Thus, the NAV indicates the current buying
or selling price of a share in an investment company.
NYSE
(New York Stock Exchange)
Established
in 1792, the New York Stock Exchange in the largest securities
exchange in the United States. Securities are traded by brokers
and dealers for customers on the trading floor at 11 Wall Street
in New York City. The exchange is headed by a board of directors
that includes a chairman and 20 representatives who represent
both the public and the members of the exchange. This board approves
applicants as new NYSE dealers, sets policies for exchange, oversees
the exchange, regulates member activities, and lists securities.
Back To Top
Option
An
option is a security that can be bought as a contract to fix the
price on another, underlying security. The buyer can pay the issuer
of the option a premium that fixes the price on an investment,
including stocks, bonds, real estate, and others, for a specified
period of time. The holder of the option can then choose to buy
or sell the underlying security at the fixed price during this
time period; however, the holder is under no obligation to buy.
For example, if the holder purchases an option to buy a stock
at $30, the individual may not wish to buy the stock during the
time period of the option if the shares are being sold for $27.
However, if the shares are being sold for $33, the holder will
save $3 per share with the option. Thus, options may or may not
prove advantageous to the holder.
Back To Top
Price-Earnings
Ratio
The
price-earnings ratio is a measure of how much buyers are willing
to pay for shares in a company, based on that company’s earnings.
Price earnings ratio is calculated by dividing the current price
of a share in a company by the most recent year’s earnings per share
of the company. This ratio is a useful way of comparing the value
of stocks and helps to indicate expectations for the company’s growth
in earnings. It is important, however, to compare the P/E ratios
of companies in similar industries. Price-earnings ratio is sometimes
also called the "multiple".
Back To Top
Quotation
A quotation,
or quote, refers to the current price of a security, be it either
the highest bid price for that security or the lowest ask price.
Back To Top
Real
Rate of Return
The
Real Rate of Return refers to the annual return on an investment
after being adjusted for inflation and taxes.
Reinvest
Reinvestment
is the use of capital gains, including interest, dividends, or
profit, to buy more of the same investment. For example, the dividends
received from stock holdings may be reinvested by buying more
shares of the same stock.
Back To Top
SEC
(Securities and Exchange Commission)
The
Securities and Exchange Commission is a federal government agency
comprised of 5 commissioners appointed by the president and approved
by the Senate. The SEC was established to protect the individual
investor from fraud and malpractice in the marketplace. The commission
oversees and regulates the activities of registered investment
advisors, stock and bond markets, broker/dealers, and mutual funds.
Security
A
security is any investment purchased with the expectation of making
a profit. Securities include total or partial ownership of an
asset, rights to ownership of an asset, and certificates of debt
from an institution. Examples of securities include stocks, bonds,
certificates of deposit, and options.
S&P
(Standard and Poor’s) 500 Index
The
Standard and Poor’s 500 Index is a market index of 500 of the
top-performing United States corporations. This index is a broader
measure of the domestic market than the Dow Jones Industrial Average,
indicating broad market changes. The S&P 500 index includes
400 industrial firms, 20 transportation firms, 40 utilities, and
40 financial firms.
Split
A
split is when a company’s board of directors and the shareholders
agree to increase the number of shares outstanding. The shareholders’
equity does not change; instead, the number of shares increases
while the value of each share decreases proportionally. For example,
in a 2-for-1 split, a shareholder with 100 shares prior to the
split would now own 200 shares. The price of the shares, however,
would be cut in half; shares that cost $40 before the split would
be worth $20 after the split.
Back To Top
Ticker
The
ticker displays information on a moveable tape or, in modern times,
as a scrolling electronic display on a screen. The symbols and
numbers shown on the ticker indicate the security being traded,
the latest sale price of the security, and the volume of the last
transaction.
Back To Top
Underwriter
An
underwriter is an individual distributing securities as an intermediary
between the issuer of the security and the buyer. For example,
an underwriter may be the agent selling insurance policies or
the person distributing shares of a mutual fund to broker/dealers
or investors. Generally, the underwriter agrees to purchase the
remaining units of the security from the issuer, such as remaining
shares of stocks or bonds, if the public does not buy all specified
units. An underwriter may also be a company that backs the issue
of a contract, agreeing to accept responsibility for fulfilling
the contract in return for a premium.
Back To Top
Volatility
Volatility
is an indicator of expected risk. It demonstrates the degree to
which the market price of an asset, rate, or index fluctuates
from average. Volatility is calculated by finding the standard
deviation from the mean, or average, return.
Back To Top
Warrant
A
warrant is similar to an option, giving the holder the right to
purchase securities at a set price for a specific period of time.
Warrant certificates last longer than options, typically holding
value for a few years or indefinitely. Warrants are often traded
as securities at a price that reflects the underlying security.
Back To Top
Yield
Yield
is the return, or profit, on an investment. Yield refers to the
interest gained on a bond or the rate of return on an investment,
such as dividends paid on a mutual fund. Yield does not include
capital gains.
Back To Top
|
 |
