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
- Active Management - An investment approach
that seeks to exceed the average returns of the financial markets. Active Managers
rely on research, market forecasts and their own judgment and experience in selecting
securities to buy and sell.
- Appreciation - A rise in value, especially over time. Example:
If a stock rises in value from $50 a share to $55 a share, it appreciated $5.
- Asset Allocation - The process of deciding how your investment
dollars will be divided among various asset classes, such as stocks, bonds and short-term
- Asset Classes - Major categories of financial assets. The three
primary asset classes are stocks, bonds and short-term cash reserves.
- Average Duration - An estimate of how much a bond portfolio's share
will fluctuate in response to a change in interest rates. To estimate the price
sensitivity of a portfolio, multiply its duration by the change in rates. If interest
rates rise by one percentage point, the share price of a portfolio with an average
duration of five years would decline by about 5 percent. If rates decrease by a
percentage point, the portfolio's share price would rise by 5 percent.
- Average Maturity - The average length of time until bonds held
by the portfolio reach maturity and are repaid. In general, the longer the average
maturity, the more a portfolio's share price will fluctuate in response to changes
in market interest rates.
- Average Quality - An indicator of credit risk, this designation
is the average of the credit ratings assigned to a portfolio's holding by credit-rating
agencies. Agencies assign credit ratings after appraising an issuer's ability to
meet its obligations. Quality is graded on a scale, with AAA indicating the most
creditworthy issuers of long-term securities, A-1 or P-1 indicating the most creditworthy
issuers of taxable money market securities, and MIG -1 indicating the most credit-worthy
issues of municipal money market securities. (Individual money market securities
with ratings of A, AA, or AAA receive a MIG -1 designation.)
- Bear Market - A market in which prices are
generally going down over a period of time. A stock market decline of 20 percent
or more is considered a bear market.
- Beneficiary - The person designated to receive the proceeds of
a pension, retirement account, annuity contract or insurance policy in the event
of the holder's death.
- Bond - Represents a "loan" from the bond holder to a
company, agent or other bond issuer. In return, the issuer is required to pay the
bond holder a specific sum of money (interest) at specified times, as well as repay
the loan (principal) amount at maturity. Bonds generally have less risk and offer
lower potential returns than stocks.
- Broker-Dealer - A securities firm that sells mutual funds or other
securities to the public.
- Bull Market - A market in which stock prices are generally going
up over a period of time.
- Call Risk - The possibility that during
periods of falling interest rates, a bond issuer will "call"—or
repay—its high-yielding bond before the bond's maturity date. Forced to invest
the unanticipated proceeds at lower interest rates, a portfolio that holds called
bonds would experience a decline in income—and the potential for taxable capital
- Capital Gains - The profit derived from the sales of securities
sold at a higher value than the original purchase cost.
- Cash Reserves - The percentage of a portfolio's net assets invested
in "cash equivalents"—highly liquid, short-term, interest-bearing
- Common Stock - A security representing ownership rights in a corporation.
A stockholder is entitled to share in the company's profits, some of which may be
paid out as dividends.
- Compounding - Growth your investments experience when you reinvest
any interest, dividends and capital gains.
- Country Diversification - The percentage of a global or international
portfolio's assets invested in securities of various countries.
- Country Risk - The possibility that political events (a war, a
coup, national elections, etc.), financial problems (rising inflation, government
default, etc.), or natural disasters (an earthquake, a poor harvest, etc.) will
weaken a country's economy and cause investments in that country to lose money.
- Credit Rating - The published ranking, based on a careful financial
analysis, of a creditor's ability to pay interest and principal owed on a debt.
- Credit Risk - The possibility that a bond issuer will fail to repay
interest and principal in a timely manner.
- Currency Risk - The possibility that a "stronger" U.S.
dollar will reduce returns for Americans investing overseas. Generally, when the
dollar rises in value against a foreign currency, your investment in that country
loses value because its currency is worth fewer U.S. dollars. On the other hand,
a weaker dollar generally leads to higher returns for Americans holding foreign
- CUSIP Number - A code, assigned by the Committee on Uniform Service
Identification Procedures, which uniquely identifies every stock, bond, or other
- Custodian - A bank, trust company or other company responsible
for safeguarding financial assets.
- Derivative - A financial contract whose
value is based on —or "derived" from—a traditional security
(such as a stock or bond), an asset (such as a commodity) or a market index (such
as the S&P 500 Index).
- Distribution - A payment from the Plan to you or your beneficiary.
- Diversification - Spreading your investments among many issuers
(that is, companies or governments that sell securities) or among different types
of investments (stocks, bonds, money market instruments, etc).
- Dividend - A share of profits received by a stockholder or by a
policyholder in a mutual insurance society.
- Dollar Cost Averaging - Investing equal amounts of money at regular
intervals on an outgoing basis. This technique ensures that an investor buys fewer
shares when prices are high and more shares when prices are low. Investors should
consider their financial ability to continue purchases during periods of market
- Earnings Growth Rate - The annual average
rate of growth in earnings over the past five years for a stock.
- Executor - A person named in a will to carry out its terms. The
administration of an estate involves collecting assets, preparing an inventory of
estate assets, satisfying claims made by creditors, preparing and filing tax returns,
paying estate taxes, managing estate assets, court accounting and distributing assets.
- Expense Ratio - The percentage of a portfolio's average net assets
used to pay its annual administrative and advisory expenses. These expenses directly
reduce returns to investors.
- Fixed-Income Securities - Investments, such
as bonds, that have a fixed payment schedule. While the level of income offered
by these securities is predetermined, their prices may fluctuate.
- Foreign Holdings - The percentage of a portfolio's investments
represented by stocks or American Depository Receipts of companies based outside
the United States .
- Fund Beta - A measure of the magnitude of a portfolio's past share-price
fluctuations in relation to the fluctuations in the overall market (or appropriate
market index). The market, or index, has a beta of 1.00, so a portfolio with a beta
of 1.20 would have seen its share price rise or fall by 12 percent when the overall
market rose or fell by 10 percent.
- Index - An unmanaged group of securities
whose overall performance is used as a standard to measure investment performance.
- Inflation - A general rise in the prices of goods and services.
- Inflation Risk - The likelihood that the value of your investments
won't keep up with the rate of inflation over the long term.
- Investment Grade - Bonds whose credit quality is considered to
be among the highest by independent bond-rating agencies. Standard and Poors assigns
investment grade ratings of "AAA", "AA", or "BBB",
- Interest Rate Risk - The possibility that bond prices overall will
decline over short or even extended periods due to rising interest rates. Interest
rate risk should be modest for shorter-term bonds, moderate for intermediate-term
bonds, and high for longer-term bonds.
- Liquidity - The degree of a security's marketability
(that is, how quickly the security can be sold at a fair price and converted to
- Load - A sales charge imposed by some mutual funds.
- Market Risk - The likelihood that the value
of your investments will go up—or down—over time.
- Market Timing - Moving money out of or into one type of investment
when you think the market may go up or down.
- Maturity - The date when a bond issuer agrees to return the bond's
principal to the bond's buyer.
- Money Market Fund - A mutual fund that seeks to provide income,
liquidity and a stable share price by investing in very short-term, liquid investments.
- Money Market Securities - A debt security that can be issued by
a variety of institutions, from corporations to the federal government, offering
a short maturity and a high level of investment security. Money market securities
are generally considered low-risk, low-return investments.
- Municipal Bond - A bond issued by a state or local government.
Dividend income from municipal bonds is generally free from federal income taxes.
- Mutual Fund - An investment company that pools the money of many
people and invests it in a variety of securities in an effort to achieve a specific
objective over time.
- Net Asset Value - The market value of a
mutual fund's total assets, minus liabilities, divided by the number of shares outstanding.
The value of a single share is called its share value or share price.
- No Load - Some mutual funds require you to pay a sales charge when
you buy shares (or sometimes when you redeem shares). A mutual fund that does not
charge for these transactions is called a no-load fund.
- Number Of Issues - An indicator of diversification. The more separate
issues a portfolio holds, the less susceptible it is to a price decline stemming
from the problems of a particular issue.
- Payable Date - The date on which distributions
of dividends or capital gains are paid to shareholders who do not reinvest.
- Portfolio - All the securities held by a fund or the total investment
holdings of an individual.
- Portfolio Asset Allocation - The distribution, by type of asset,
of a portfolio's holdings.
- Portfolio Diversification - Holding a variety of securities so
that a portfolio's return is not hurt by the poor performance of a single security.
- Price/Earnings Ratio - The ratio of a stock's current price to
its per-share earnings over the past year. For a portfolio, the weighted average
P/E of the stocks it holds. P/E is an indicator of market expectations about corporate
prospects; the higher the P/E, the greater the expectations for a company's future
- Principal - The amount of your money you put into an investment.
- Prospectus - A legal document that gives prospective investors
pertinent information about 1) mutual funds, including discussions of the fund's
investment objectives and policies, risks, costs and past performance, 2) variable
life insurance policies, including discussions of the sub-accounts available including
their risks, costs, objectives and past performance, and 3) variable annuities,
including discussions of the sub-accounts available including their risks, costs,
objectives and past performance.
- Record Date - The deadline for owning shares
for the purpose of receiving the next distribution of dividends or capital gains.
- Registered Investment Adviser - An organization that makes day-to-day
decisions regarding a portfolio's investments.
- Sector Diversification - Indicates the percentage
of a portfolio's common stocks invested in each of the major industry classifications
that compose the stock market.
- Securities - Stocks, bonds, money market instruments and other
- Share - One unit representing partial ownership in a company stock,
bond or mutual fund.
- Short-Term Reserves - Investments in interest-bearing bank deposits,
money market instruments, U.S. Treasury bills and short-term bonds.
- Standard & Poors (S&P) 500 - A widely accepted indicator
of the market performance of publicly traded U.S. stocks. The S&P 500 index
represents about 75 percent of the value of the entire U.S. stock market. It is
not possible to invest directly in an index.
- Stock - An investment that represents a share of ownership in a
corporation. Most stock investments are generally higher in risk than bonds and
money market securities, but also generally offer higher potential total returns.
- 12b-1 Fee - An annual fee some mutual funds charge to pay for marketing
and distribution activities.
- Share - One unit representing partial ownership in a company stock,
bond, or mutual fund.
- Tax Deferral - Delaying the payment of income
taxes on investment income.
- Total Return - A percentage change, over a specified time period,
in a portfolio's value, with the ending net asset value adjusted to account for
the reinvestment of all distributions of dividends and capital gains.
- Trust - A legal arrangement whereby one person or institution,
as trustee, manages property given by another person to keep or use for the benefit
of a third party as specified in the agreement. The agreement may specify instructions
to be carried out during one's life, after one's death or both. With careful planning,
trust agreements can be constructed to reduce current or future taxes, and/or transfer
wealth to individuals designated in the agreement.
- Trustee - One who manages a trust according to the instructions
set by the originator or grantor of the trust.
- Turnover Rate - Indicates trading activity during the past year.
Portfolios with high turnover rates incur higher transaction costs and are more
likely to realize and distribute capital gains (which are taxable to investors).
- Volatility - The fluctuations in the value
of a mutual fund or other security. The greater a fund's volatility, the wider the
fluctuations between its high and low share prices.
- Yield To Maturity - The rate of return an
investor would receive if the securities held by a portfolio were held to their
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