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Glossary

12b-1 plan:
Permits a mutual fund adviser to use fund assets to pay for distribution costs. The 12b-1 fee is an annual charge based on the value of the investment.

401(k) plan:
A defined-contribution retirement plan that allows an employee to contribute pretax dollars to a company pool that is invested in stocks, bonds, or money market instruments. Named after the section of the Internal Revenue Code that created it.

403(b) plan:
A defined-contribution retirement plan available to employees of public schools, certain tax-exempt entities (including churches), and educational institutions. Allows an employee to contribute pretax dollars to a company pool that is invested in stocks, bonds, or money market instruments. Named after the section of the Internal Revenue Code that created it.

A

Accounts receivable:
The credit extended to customers to purchase goods. The accounts receivable balance is the total money owed to the company by customers at the end of the reporting period. A low accounts receivable balance may indicate that the firm is efficient in its collections or that credit standards are too restrictive and depressing sales. A large balance may indicate that the company is having difficulty collecting the money it is owed and its credit standards are too lax. Once a company recognizes that an accounts receivable will not be collected, it must reduce the value of the account and write the uncollectable accounts off. The recognition of this charge will ultimately impact the company.

accrued interest:
Accumulated interest since the most recent payment and the date that the fixed income security is sold. Calculated by multiplying the coupon rate by the number of days since the last payment.

American depositary receipt (ADR):
Security representing the ownership interest in a foreign company's common stock. ADRs allow foreign shares to be traded in the United States much like any other security.

annuity:
A series of fixed-amount payments paid at regular intervals over the period of the annuity.

asset:
A resource that has economic value to its owner. Examples of an asset are cash, accounts receivable, inventory, real estate, and securities.

asset allocation:
Dividing your investment portfolio among the major asset categories. The most important decision you will make.

ask price:
The price a seller is willing to accept for the security; also called the offer price.

automatic reinvestment plan:
A plan offered by a mutual fund in which the fund automatically reinvests all distributions to a shareholder account.

B

balance sheet:
The firm's financial statement that provides a picture of its assets, debts, and net worth at a specific point in time.


balanced fund:
Mutual fund that combines investments in common stock, bonds, and preferred stock. Its goal is to provide income plus some capital appreciation.

beta:
A measure of a stock's risk relative to the market, usually the Standard & Poor's 500 index. The market's beta is always 1.0; a beta higher than 1.0 indicates that, on average, when the market rises, the stock will rise to a greater extent and when the market falls, the stock will fall to a greater extent. A beta lower than 1.0 indicates that, on average, the stock will move to a lesser extent than the market. The higher the beta, the greater the risk.

bid price:
The price a buyer is willing to pay for a security.

blue chip stock:
Stock of large, well-known companies.

bond:
A security that obligates the issuer to repay the principal amount upon maturity and to make specified interest payments over specified time intervals to the bond holder. The issuer can be a corporation or a governmental entity. A bond is a debt obligation; the bondholder is a lender to the issuer and there is no ownership position.

bond amortization:
Each year a portion of the original issue discount must be accrued and included in gross income.

book value per share:
The accounting value of a share of common stock. It is determined by dividing the net worth of the company (common stock plus retained earnings) by the number of shares outstanding.

business and industry risk:
Uncertainty of an investment's return due to a fall-off in business that is firm-related or industry-wide.

buy-and-hold:
A strategy in which the stock portion of your portfolio is fully invested in the stock market at all times.

C

call option:
The right to purchase stock at a specified (exercise) price within a specified time period.

callable bond:
A bond that can be redeemed by the issuer prior to its maturity. Usually a premium is paid to the bond owner when the bond is called.

capital gain:
An increase in the value of a capital asset such as common stock. If the asset is sold, the gain is a "realized" capital gain. A capital gain may be short-term (one year or less) or long-term (more than one year.)

cash:
The most liquid of the assets is watched carefully by equity and credit analysts. Keep in mind that when we are referring to cash, we are also including marketable securities and other cash-equivalent interest-bearing accounts. Too little cash may make it difficult for a firm to meet its cash obligations, such as the interest payment on a bond. However, too much cash reduces the potential earnings of the firm. Attractive companies should be able to earn more in their normal business lines than the prevailing short-term interest rate.

cash flow per share:
Earnings after taxes plus depreciation, on a per share basis. A measure of a firm's financial strength.

cash investment:
Very short-term (usually 90 days' maturity or less) obligation such as money market fund or very short-term CD that provides a return in the form of interest payments.

cash value:
In a life insurance policy, cash value is the build-up in the owner’s cash savings. At any point in time, it represents the amount of money (before adjustments) that would be returned to the policy owner upon cancellation of a policy.

certificate of deposit (CD):
Savings certificate that entitle the holder to the receipt of interest. CDs are issued by commercial banks and savings and loans (or other thrift institutions).

closed-end fund:
A pooled investment fund that has a fixed capitalization after the initial issue. Fund shares are bought from or sold to other investors in the over-the-counter market or traded on an exchange (see open-end fund).

commission:
Broker's fee for buying or selling securities.

commodity futures:
A contract to buy or sell a commodity in the future at a given price.

common stock:
A security issued by a corporation that represents ownership.

compound sum of an annuity:
Constant payments are made at equally spaced time periods and grow to a future value.

compounding:
The ability of an asset to generate earnings that are then reinvested and generate their own earnings (earnings on earnings).

conversion premium:
The amount, expressed as a dollar value or as a percentage, by which the price of the convertible security exceeds the current market value of the common stock into which it may be converted.

convertible security:
A corporate bond or a share of preferred stock that can be converted into shares of common stock of the issuing corporation.

current ratio:
Current assets, including cash, accounts receivable and inventory, divided by current liabilities, including all short-term debt. A rough measure of financial risk: the smaller current assets relative to current liabilities, the greater the risk of credit failure.

current yield:
Annual income (interest or dividends) divided by the current price of the security. For stocks, this is the same as the dividend yield.

cyclical industry:
An industry, such as automobiles, whose performance is closely tied to the condition of the general economy.

D

debt-to-equity ratio:
Long-term debt divided by stockholders' equity. The ratio identifies the relationship of debt to ownership interest in the firm's financial structure. A measure of financial risk.

default risk:
The risk that a company will be unable to pay the contractual interest or principal on its debt obligations.

defined-benefit plan:
Plan that promises to pay a specified amount to each person who retires after a set number of years of service. Such plans pay no taxes on their investments. Employees contribute to them in some cases; in others, all contributions are made by the employer.

defined-contribution plan:
A type of retirement plan where the ultimate benefits that are paid out depend on the level of contributions made to the plan and the investment performance of those contributions.

deep discount bond:
A bond that has a coupon rate far below rates currently available on investments and whose value is at a significant discount from par value.

discount bond:
A bond that is valued at less than its face amount.

discount broker:
A stockbroker who charges a reduced commission and provides no investment advice.

discount rate:
The interest rate used in discounting future cash flows; also called the "capitalization rate."

diversification:
The process of accumulating securities in different investments, types of industries, risk categories, and companies in order to reduce the potential harm of loss from any one investment.

dividend:
A cash payment financed by profits that is designated by a company's board of directors to be distributed among stockholders.

dividend payout ratio:
Annual dividends per share divided by annual earnings per share.

dividend yield:
Annual dividends per share divided by price per share. An indication of the income generated by a share of stock. The dividend yield plus capital gains percentage equals total return.

dollar cost averaging:
A system of putting equal amounts of money in an investment at regular time intervals to lessen the risk of investing a large amount of money at a particularly inopportune time.

Dow Jones industrial average (DJIA):
Price-weighted average of 30 actively traded blue-chip stocks, traditionally of industrial companies.

duration:
A maturity measure which accounts for the dates on which interest is paid and the amount of interest along with the redemption date. It is the time-weighted present value of all cash flows divided by the bond price.

E

earnings multiplier:
An estimated price-earnings ratio adjusted for the current level of interest rates. Used to determine the value of a stock, based on Graham's formula relating value to recent earnings and expected earnings growth rates.

earnings per share:
The net income of the firm divided by the number of common stock shares outstanding. Evaluates earnings stability and the trend in earnings when comparing each year.

earnings yield:
Earnings per share for the most recent 12 months divided by market price per share. Relates the generation of earnings to share price. It is the inverse of the price-earnings ratio.

equity:
Another word for stock (or similar securities representing an ownership interest).

equity risk premium:
An extra return that the stock market must provide over the rate on Treasury bills to compensate for market risk.

excess returns:
Returns in excess of the risk-free rate or in excess of a market measure such as the S&P 500 index.

expected return:
The average of a probability distribution of possible returns.

exchange privilege:
A feature offered by a mutual fund in which a shareholder is able to move money between various funds at a very minimal processing charge and without a commission.

F

face value:
The stated principal amount of a debt instrument.

family of funds:
A group of mutual funds under the same management company.

financial planner:
An investment professional generalist who helps individuals delineate financial plans with specific objectives and helps coordinate various financial concerns.

fixed-income security:
An investment vehicle that provides a return in the form of fixed periodic payments and return of principal; examples are bonds and certificates of deposit.

float
The number of a company's outstanding shares that are in the hands of public investors, as opposed to company officers, directors, or controlling-interest investors.

foreign currency effects:
To the extent a foreign currency appreciates relative to the dollar, returns on foreign investments will increase in terms of dollars. The opposite would be true for declining foreign currencies.

front-end load:
Initial sales commission at the time of the purchase of mutual funds.

free cash flow per share:
Net income plus all non-cash expenses, less dividends and capital expenditures, on a per share basis. A measure of a firm's financial flexibility.

fundamental analysis:
This valuation of stocks based on fundamental factors, such as company earnings, growth prospects, and so forth, to determine a company's underlying worth and potential for growth.

G

general obligation bond (GO):
A municipal bond backed by the full faith, credit, and "taxing power" of the issuing unit rather than the revenue from a given project.

GNMA (Ginnie Mae) pass-through certificate:
Fixed-income securities that represent an undivided interest in a pool of federally insured mortgages put together by GNMA, the Government National Mortgage Association.

going public:
Selling privately held shares to new investors on the over-the-counter market for the first time.

government bond:
A debt obligation issued by the U.S. government.

gross domestic product (GDP):
A measure of output from United States factories and related consumption in the United States. It does not include products made by U.S. companies in foreign markets.

growth stock:
The shares of a company whose earnings are expected to grow at an above-average rate.

guaranteed investment (interest) contract (GIC):
Debt instrument sold in large denominations often bought for retirement plans. The word guaranteed refers to the interest rate paid on the GIC; the principal is at risk.

H

holding period return/yield:
Income plus price appreciation during a specified time period divided by the cost of the investment.

I

income statement:
The financial statement of a firm that summarizes revenues and expenses over a specified time period; a statement of profit and loss.

income stock:
Those stocks having a history of regular dividend payments that contribute the largest proportion of the stock's overall return.

index:
A statistical measure of the changes in a portfolio representing a market. The Standard & Poor's 500 is the most well-known index, which measures the overall change in the value of the 500 stocks of the largest firms in the U.S.

index fund:
A portfolio of stocks, held by a mutual fund, designated to track a market index.

initial public offering (IPO):
The process of bringing private companies to the public market for the first time.

Individual Retirement Account (IRA):
Personal retirement account that an employed person can set up with a deposit that is tax deductible up to $2,000 per year. Such deposits qualify as a deduction against income earned in that year and interest accumulates tax-deferred until the funds are withdrawn at age 59 1/2 or later. Early withdrawals are subject to a 10% penalty.

insider trading:
Trading by management or others who have special access to unpublished information. If the information is used to illegally make a profit, there may be large fines and possible jail sentences.

investment adviser:
A person who manages assets, making portfolio composition and individual security selection decisions, for a fee, usually a percentage of assets invested.

J

junk bond:
Bond purchased for speculative purposes. They are usually rated BB and lower, and they have a higher default risk.

K

A tax-deferred pension account designated for employees of unincorporated businesses or for persons who are self-employed (either full-time or part-time). The Keogh plan allows all investment earnings to grow tax deferred until capital is withdrawn, as early as age 59 1/2 and starting no later than age 70 1/2. Almost any investment except precious metals or collectibles can be used for a Keogh account.

L

lagging indicator:
Economic indicator that changes directions after business conditions have turned around.

leading indicator:
Economic indicator that changes direction in advance of general business conditions.

limit order:
An order placed with a broker to buy or sell at a price as good or better than the specified limit price.

limited partnerships:
An arrangement between a general partner and a limited partner. The general partner manages the project, and collects fees and a percentage of profits and income. Limited partners invest in the project but have limited liability; they are not involved in the day-to-day management of the project, and they receive a percentage of the profits and income. In general, they also receive tax benefits.

load:
A sales commission to buyers that a mutual fund may charge.

low-load fund:
A mutual fund that charges a small commission for investment.

liquidity:
The degree of ease and certainty of value with which a security can be converted into cash.

lump-sum distribution:
A single payment to a beneficiary covering the entire amount of an agreement. Participants in Individual Retirement Accounts (IRAs), pension plans, profit-sharing, and executive stock option plans generally can opt for a lump-sum distribution if the taxes are not too burdensome when they become eligible.

M

margin:
The use of borrowed money to purchase securities (buying "on margin").

market capitalization:
Number of common stock shares outstanding times share price. Provides a measure of firm size.

market order:
An order placed with a broker to buy or sell a security at whatever the price may be when the order is executed.

market risk:
The volatility of a stock price relative to the overall market as indicated by beta.

market timing:
Attempting to leave the market entirely during downturns and reinvesting when it heads back up. Requires a crystal ball to be effective.

maturity:
The length of time until the principal amount of a bond must be repaid.

Medicare:
A U.S. Social Security Administration program that reimburses hospitals and physicians for certain medical care to qualifying persons over the age of 65.

money market mutual fund:
A mutual fund that invests in very short-term financial securities, usually of less than 30 days maturity.

mutual fund:
A pool of investors' money invested and managed by an investment adviser. Money can be invested in the fund or withdrawn at any time, with few restrictions, at net asset value (the per share market value of all securities held) minus any loads and/or fees.

municipal bond:
Tax-free debt instrument issued by a state or local government.

N

National Association of Securities Dealers Automated Quotations System (Nasdaq):
A computerized system that provides up-to-the-minute price quotations on about 5,000 of the more actively traded over-the-counter stocks.

net asset value:
The market value of a mutual fund's total assets, after deduction of liabilities, divided by the number of outstanding shares; the per share price of no-load mutual funds.

New York Stock Exchange index:
A market value-weighted measure of stock market changes for all stocks listed on the NYSE.

no-load fund:
A mutual fund that sells its shares at net asset value, without the addition of a sales fee (load).

O

odd lot:
A transaction involving fewer shares than in a "round" lot, which for most stocks is 100 shares.

open-end fund:
A mutual fund that continuously sells shares to investors and redeems shares when investors wish to sell. Open-end funds have no limit to the number of shares they can issue.

over-the-counter market:
A communications network through which trades of bonds, non-listed stocks, and other securities take place. Trading activity is overseen by the National Association of Securities Dealers (NASD).

P

par value (bond):
The face value of a bond, generally $1,000 for corporate issues, with higher denominations for many government issues.

payout ratio:
Dividends per share divided by earnings per share. Provides an indication of how well earnings support the dividend payments. The lower the ratio, the more secure the dividend.

pension:
Fund set up by a corporation, labor union, governmental entity, or other organization to pay the pension benefits of retired workers. Pension funds invest billions of dollars annually in the stock and bond markets, and are therefore a major factor in the supply-demand balance of the markets.

portfolio manager:
One responsible for managing large pools of funds. Portfolio managers may be employed by insurance companies, mutual funds, bank trust departments, pension funds, and other institutional investors.

preferred stock:
A security representing prior claim to common stock on the firm's earnings and assets. Preferred stockholders normally forgo voting rights and receive a fixed dividend that takes precedence over payment of dividends to common stockholders.

present value:
The value today of a future payment, or stream of payments, discounted at some appropriate interest rate.

price-earnings ratio (P/E):
Market price per share divided by the firm's earnings per share. A measure of how the market currently values the firm's earnings growth and risk prospects.

price-earnings ratio to earnings per share growth (P/E to EPS growth):
Stock's price-earnings ratio divided by earnings per share growth rate. Provides an indication of the price the market has put on earnings expectations relative to what the firm has actually produced.

price-earnings relative:
Stock's price-earnings ratio divided by the price-earnings ratio for the market as measured by a broad market measure such as the S&P 500 index or the Value Line index. A method for judging whether a price-earnings ratio is reasonable based on current market conditions and historical relationships.

price-to-book ratio:
Market price per share divided by book value (tangible assets less all liabilities) per share. A measure of stock valuation relative to net assets. A high ratio might imply an overvalued situation; a low ratio might indicate an overlooked stock.

price-to-cash-flow ratio:
Price per share divided by cash flow per share. A measure of the market's expectations regarding a firm's future financial health. Provides an indication of relative value, similar to the price-earnings ratio.

price-to-sales ratio:
Price per share divided by the latest 12-month sales per share. It's used similarly to price-earnings ratios to identify "out-of-favor" stocks.

principal:
The amount owed; the face value of a debt; the amount invested.

profit margin:
Net earnings after taxes divided by sales. Measures the ability of a firm to generate earnings from sales.

profit-sharing plan:
an agreement between a corporation and its employees that allows the employees to share in company profits. Annual contributions are made by the company, when it has profits, to a profit-sharing account for each employee, either in cash or in a deferred plan, which may be invested in stocks, bonds, or cash equivalents. The funds in a profit-sharing account generally accumulate tax deferred until the employee retires or leaves the company. Many plans allow employees to borrow against profit-sharing accounts for major expenditures such as purchasing a home or financing children's education. Because corporate profit-sharing plans have custody over billions of dollars, they are major institutional investors in the stock and bond markets.

prospectus:
The written statement that discloses the terms of a securities offering or a mutual fund. Strict rules govern the information that must be disclosed to investors in the prospectus.

put option:
The right to sell stock at a specified (exercise) price within a specified period of time.

Q

There are no glossary terms beginning with this letter.

R

real rate of return:
The annual percentage return realized on an investment, adjusted for changes in the price level due to inflation or deflation.

redemption fees:
Charges assessed upon redemption of mutual fund shares.

REITs:
Real estate investment trusts that characteristically have higher dividend yields than common stocks. Their dividend yields are generally comparable with 10-year Treasuries. As a group, they often perform modestly above common stocks.

relative strength:
Price performance of a stock divided by the price performance of an appropriate index over the same time period. A measure of price trend that indicates how a stock is performing relative to other stocks.

required rate of return:
The rate of return demanded to induce investors to invest in a security.

retention ratio:
The percent of earnings retained in the firm for investment purposes.

return:
Consists of income plus capital gains relative to investment.

return on equity (ROE):
Net income after all expenses and taxes divided by stockholders' equity (book value). An indication of how well the firm used reinvested earnings to generate additional earnings.

return on investment (ROI):
A means of evaluating the efficiency of management and the development of product lines for the comparison of companies. Calculated by dividing total capital into earnings.

revenue bond:
A municipal bond supported by the revenue from a specific project, such as a toll road, bridge, or municipal coliseum.

Rho:
The dollar change in the price of an option in response to a 1% change in interest rates.

risk:
Possibility that an investment's actual return will be different than expected; includes the possibility of losing some or all of the original investment. Measured by variability of historical returns or dispersion of historical returns around their average return.

risk/return trade-off:
The balance an investor must decide on between the desire for low risk and high returns, since low levels of uncertainty (low risk) are associated with low potential returns and high levels of uncertainty (high risk) are associated with high potential returns.

round lot:
The basic trading block for stocks–usually 100 shares.

S

secondary market:
A market in which an investor purchases an asset from another investor rather than the issuing corporation. An example is the New York Stock Exchange.

security analyst:
One who studies various industries and companies and provides research reports and valuation reports.

short sale:
A market transaction in which an investor sells borrowed securities in anticipation of a price decline.

Standard & Poor's 500 index:
An index of 500 major U.S. corporations. There are 400 industrial firms, 20 transportation firms, 40 utilities, and 40 financial firms. This index is value-weighted.

stock dividend:
A dividend paid in additional shares of stock rather than in cash.

stock split:
The division of a company's existing stock into more shares. In a 2-for-1 split, each stockholder would receive an additional share for each share formerly held.

stockbroker:
An agent who for a commission handles the public's orders to buy and sell securities.

stop-limit order:
An order placed with a broker to buy or sell at a specified price or better after a given stop price has been reached or passed.

stop-loss order:
An order placed with a broker to buy or sell when a certain price is reached; designed to limit an investor's loss on a security position.

T

technical analysis:
An analysis of price and volume data as well as other related market indicators to determine past trends that are believed to be predictable into the future. Charts and graphs are often utilized.

term life insurance:
A type of life insurance where the insured only pays for the cost of protection of death.  No cash value is built up, so term insurance is cheaper; however, as the insured gets older, the cost of premiums increases.

time horizon:
The length of time an investment is held.

total debt to total assets:
Short-term and long-term debt divided by total assets of the firm. A measure of a company's financial risk that indicates how much of the assets of the firm have been financed by debt.

trading range:
The spread of prices that a stock normally sells within.

transaction costs:
Costs incurred buying or selling securities. These include brokers' commissions and dealers' spreads (the difference between the price the dealer paid for a security and for which he can sell it).

Treasury bill:
Short-term debt security issued by the federal government for periods of one year or less.

Treasury bond:
Longer-term debt security issued by the federal government for a period of seven years or longer.

Treasury note:
Longer-term debt security issued by the federal government for a period of one to seven years.

U

universal life insurance:
A form of whole life insurance in which premium payments and coverage is more flexible, allowing increases and decreases without additional sales charges.

unseasoned issue:
An issue that has not been formerly traded in the public markets.

V

valuation:
The process of determining the current worth of an asset.

Value Line index:
The index represents 1,700 companies from the New York and American Stock Exchanges and the over-the-counter market. It is an equal-weighted index, which means each of the 1,700 stocks, regardless of market price or total market value, are weighted equally.

variability:
The possible different outcomes of an event. As an example, an investment with many different levels of return would have great variability.

variable annuities:
A life insurance company investment product that combines a savings plan with a small life insurance component to provide certain tax benefits. The savings portion can be invested in a choice of pooled vehicles, including stock funds.

variable life insurance:
A form of whole life insurance that allows the cash value portion to be invested in stock, bond or money market portfolios.

W

warrant:
A long-term option that guarantees the right to purchase a stated number of shares of common stock in a company at a specified (exercise) price.

whole life insurance:
Insurance that provides protection if the insured dies while also building up cash value. Premiums are high but level, and include the cost of term insurance plus a savings component.

Wilshire 5000 equity index:
A stock market measure comprising 5,000 equity securities. It includes all New York Stock Exchange and American Stock Exchange issues and the most active over-the-counter issues.

X

There are no glossary terms beginning with this letter.

Y

yield:
The amount of interest paid on a bond divided by the price. A measure of the income generated by a bond. A yield is not a total return measure because it does not include capital gains or losses.

yield curve:
A curve that shows interest rates at a specific point for all securities having equal risk but different maturity dates. Usually, government securities are used to construct such curves.

yield to maturity:
The rate of return anticipated on a bond if it is held until the maturity date.

Z

zero-coupon bond:
A bond that generates no periodic interest payments and is issued at a discount from face value. All return is realized at maturity.


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