|
|
 |
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
|
|
- 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 (AGI)
- The amount of income that is subject to federal income tax. Contributions to 401(k) plans or other defined-contribution plans (403(b), annuity, 457) reduce your adjusted gross income, thereby reducing your tax burden. This is not the same as modified adjusted gross income.
- ADP (average deferral percentage) test
- A test that employers are required to conduct to determine whether their ERISA-compliant 401(k) or 403(b) plans are meeting IRS discrimination rules. ERISA, the Employee Retirement Income Security Act, is the law administered by the U.S. Labor Department that governs how employers run their retirement savings plans. The ADP "discrimination" test is intended to ensure that highly paid corporate executives or managers do not benefit more than lower-paid employees from the tax breaks of defined contribution plans. If a plan does not pass the test, highly compensated employees may see their contribution limit lowered and will likely receive a refund of excess contributions already made. See highly compensated employee, nonhighly compensated employee and discrimination test and a full article.
- Aggressive
- Relating or referring to an investment philosophy that seeks above-average returns by accepting above-average risk.
- Allocation
- Distribution or division of resources or investment monies. When an investor allocates her assets, she makes decisions about how her assets are divided between different investment choices (stocks, bonds, etc.). See asset allocation.
- 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.
- Arbitrage
- The process of buying a commodity or stock share in one market and selling it in another market. A trader will engage in arbitrage when shares of the same security are trading at different prices in each market. For instance, if shares of General Electric trade at $100 on the New York Stock Exchange and $101 on the Boston Stock Exchange, a trader could profit by buying shares on the New York exchange while simultaneously selling the same shares on the Boston exchange. The trader would make an immediate $1 profit on each share, minus any transaction costs. Arbitrage transactions tend to push prices at different exchanges closer to each other, removing any abnormal price variations.
- Asset allocation
- How you divide, or allocate, your assets among different investment categories (known as asset classes). Having an appropriate asset allocation for your situation is important in managing your investment risk. For more about asset allocation, see Wall Street 101.
- 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.
- Asset class
- A way of categorizing investments. Stocks, bonds, real estate and cash are all asset classes. They can also be divided further into subtypes, such as large-cap stocks, small-cap stocks, corporate bonds, high-yield bonds, etc. Categorizing investments by asset class helps investors determine whether their holdings are diversified.
- 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.
Return to top
- 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
- Basis is the purchase price of any property including improvements or depreciation on that property. Basis is used as a baseline for determining capital gains tax on any investment or property. It is also used to figure tax deductions.
Capital gains taxes are figured as a percentage of the amount over basis. For example, imagine that you bought $1,000 worth of mutual fund shares a year ago. You decide to sell those shares and they are now worth $1,200. Your basis is $1,000, the original price of the shares. You will pay capital gains taxes on the $200 that is over the basis. Figuring basis can become complex when you have to include reinvested dividends for a security or multiple appreciations on a piece of property.
A different calculation applies to inherited property. The basis for that property is not the original purchase price but the price at the time it was inherited. For example, imagine your grandfather bought several shares of Coca-Cola stock for $100 in the 1950s and gave those shares to you when he died last year. At that time, the shares were worth $5,000. Now, those shares have appreciated to $5,400 and you decide to sell them. Your basis for figuring capital gains taxes is $5,000 (not $100). That is, you will pay capital gains on the $400 the stock has appreciated since you owned it (not the $5,300 it appreciated since your grandfather first bought it).
Same as cost basis.
- Basis point
- One one-hundredth of a percent (1/100 of 1%). Commonly expressed as 0.01.
- Bear
- An investor who believes either an individual security or the overall securities market will follow a general downward path. See bear market, and compare with bull.
- 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 a securities market. For the U.S. markets, generally described as a decrease of 20 percent from a previous high in each of the three important stock averages: the Dow Jones Industrial Average, the S&P 500 Index, and the Value Line Index. It may also include the NASDAQ. A bear market can also be described simply as a decrease in prices over a period of time (usually at least three months). The term is thought to derive from a proverb about "selling the bearskin before one has caught the bear"; in other words, becoming too risky or speculative. See bear, and compare with bull market. For an interactive lesson, see the Bear's Cave.
- 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.
- Beneficiary
- Person designated to receive retirement-account monies when the account holder dies. Read a full article regarding beneficiaries.
- 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.
- Bid-ask spread
- This is the price difference between the "bid," or highest price that buyers of a stock or commodity are willing to pay, and the "ask," or lowest price that sellers are willing to accept for the same stock or commodity. For instance, if you are willing to pay $2 for a bushel of corn and the farmer who grew it won't accept anything less than $2.25 a bushel, the bid-ask spread is 25 cents a bushel. This price relationship is common in almost all negotiated transactions.
- 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, or debtor, to make regular payments to the lender over a period of time. The borrower can be a government, company, or other institution that needs cash to finance its operations. The lender is the investor who buys the bond. Bonds vary widely in maturity, security and type of issuer, although most are sold in $1,000 denominations. Bonds fall under the category of "fixed-income" securities.
- Bond dividend
- A dividend paid in the dividend payer's bonds.
- Bond rating
- The grading of a debt obligation or bond by a rating agency like Standard & Poor's or Moody's. The grade, described as AAA, AA/Aa, BBB/Baa, BB/Ba, etc, reflects the bond issuer's ability to meet interest and principal payments in a timely manner. A higher grade means a greater likelihood that the bond will be paid off in time and in full. Bonds rated AAA through BBB are considered "investment grade" — these highly rated bonds generally offer relatively low returns but greater security. See bond.
- Book value
- The net dollar value at which an asset is carried on a firm's balance sheet.
- Brokerage window account
- An investment option offered by some 401(k) plans that allows the plan participant to invest 401(k) monies in mutual funds, individual stocks and/or bonds that are outside the plan. Plans typically include a set number of mutual funds for their participants, and the window account allows the participant more flexibility with their investment portfolio. Often, these accounts charge an annual maintenance fee as well as trading commissions. Also known as a self-directed 401(k).
- Bull
- An investor who believes either an individual security or the overall securities market will follow a general upward path. See bull market, and compare with bear.
- Bull market
- An extended period of general price increases in a securities market. For the U.S. market, a bull market is generally described as an increase of 20 percent from a previous low in each of the three important stock averages: the Dow Jones Industrial Average, the S&P 500 Index, and the Value Line Index. It may also include the NASDAQ. A bull market can also be described simply as an increase in prices over a period of time (usually at least three months).
See bull, and compare with bear market.
Return to top
- 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.
- Catch-up provision
- A provision in 403(b) and 457 plans that allows some participants who are nearing retirement to make contributions over the usual annual limit if they have not maximized their contributions in earlier years. Not all participants qualify to make catch-up contributions. There are now proposals in Congress to allow catch-contributions for 401(k) plan participants.
- 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.
- Cliff vesting
- A description for a vesting schedule. In cliff vesting, the employee owns no part of the company's matching contribution until a certain time limit. For instance, if your company has a "three year cliff," any matching contribution will become your property after you have been with the company for three years. During the three year interlude, your company invests your money according to the same decisions you make with your own contributions. As of the year 2000, a cliff vesting schedule cannot exceed five years.
- 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.
- Conduit IRA
- An IRA used as a holding tank to keep money from an employer-sponsored retirement plan, such as a 401(k) or 403(b), separate from an IRA that you contribute to annually. If you keep the money from the employer-sponsored plan separate, and don't make any new contributions to it, you retain the possibility of later transferring it to a new employer's retirement plan. For example, say you changed jobs and your new employer did not offer a 401(k). You put your money in a conduit IRA. Three years later you change jobs again and your new employer has a great 401(k). If you haven't made contributions to your conduit IRA, you can roll the entire balance into your new employer's 401(k), if it accepts rollovers.
Conduit IRAs can also be used to transfer money from a former employer's 401(k) plan into a new employer's 403(b) plan, since direct rollovers between these plans are not permitted. Conduit IRAs are sometimes referred to as "rollover IRAs."
- Consumer cyclicals
- Stock in companies whose success is tied to economic cycles or interest rates. These stocks generally perform well during economic expansions and perform poorly during recessions. Examples include automobile, construction and chemical stocks. Also called cyclicals. Compare with consumer noncyclicals.
- Consumer noncyclicals
- Stock in companies whose success is not tied to economic cycles or interest rates. Examples include agriculture, tobacco, beverage and utility industry stocks, which are tied to products that are desired in any economic cycle. Also called countercyclicals or noncyclicals. Compare with consumer cyclicals.
- 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
- Stock in a company whose success is tied to economic cycles or interest rates. These stocks will do well during economic expansions and perform poorly during recessions. Examples include automobile, construction and chemical stocks. Also called consumer cyclicals. Compare with consumer noncyclicals.
Return to top
- 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.
- Discrimination test
- In ERISA-compliant 401(k) and 403(b) plans, a test that employers are required to conduct to determine if highly and lower-paid employees are contributing to their plans at similar rates. ERISA, the Employee Retirement Income Security Act, is the law administered by the U.S. Labor Department that governs how employers run their retirement savings plans. The discrimination test was created by Congress to ensure that deferred compensation plans would be used by all employees and that highly paid corporate executives or managers would not benefit disproportionately from the tax advantage. There are several methods for testing; if a plan does not pass the test, highly compensated employees may see their contribution limit lowered and will likely receive a refund of excess contributions already made. See highly compensated employee, ADP test and a full article.
- Distribution
- The money paid out to the holder of a qualified retirement account; also called a withdrawal. The IRS has created a series of rules which dictate how and when distributions may be made.
- Diversification
- Minimizing risk by investing in a wide range of securities invested in many
industries.
- Divestiture
- The sale, liquidation, or spin-off of a company division or subsidiary. A firm may divest itself of a division to focus on the more promising segments of its operations.
- 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.
Return to top
- 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).
- Exchange-traded fund
- A stock-like security that follows a specific stock index, like the Dow Jones Industrial Average or the S&P 500. This type of security allows investors to buy and sell the entire index in a single transaction. These funds are similar to an "index" mutual fund, but can be traded in real time, unlike most mutual funds (for which trades are calculated using the fund's price at the market's open or close on any given day). Exchange-traded funds are regulated by the Securities and Exchange Commission.
- 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.
Return to top
- 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.
- 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.
- Float
- The number of shares of a security that are outstanding and available for public trading.
- 401(a) plan
- An employer-sponsored retirement plan that is generally funded entirely by employer contributions and/or after-tax contributions by the employee. This type of plan can be a defined benefit plan, such as a pension, or a defined contribution plan, including money purchase and profit-sharing plans. The name "401(a)" comes from the section of the tax code that allows tax-deferred savings, and this type of plan lets you benefit from tax deferral until you withdraw the money at retirement. A 401(k) plan is a type of 401(a) plan that lets you make pretax contributions.
- 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 nonprofit
organizations.
- 404(c) regulations
- Department of Labor regulations that serve as guidelines for retirement plan fiduciaries. 404(c) regulations are designed to reduce employer liability by transferring the responsibility for investment decisions to the employee. For instance, the regulations suggest that 401(k) plan sponsors should provide at least three distinct investment options with substantially different risk/return objectives. The regulations also ask employers to provide employees with a degree of information about plan features, such as prospectuses of mutual funds offered in the plan.
- Fourth market
- Direct trading of large blocks of securities between institutional investors.
This allows the big money managers to avoid brokerage fees.
- 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.
- 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.
Return to top
- 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.
- Graded vesting
- A description for a vesting schedule. With graded vesting, you own an increasing portion of your matching contribution each year you are with your company. In a four year graded plan, you own 25 percent of your employer's matching contributions each year (25 percent x 4 years = 100 percent). As of the year 2000, a graded vesting schedule cannot exceed seven years.
- 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.
Return to top
- 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.
- Highly compensated employee (HCE)
- An IRS definition for employees covered by ERISA-compliant 401(k) and 403(b) plans. ERISA, the Employee Retirement Income Security Act, is the law administered by the U.S. Labor Department that governs how employers run their retirement savings plans. HCE contribution limits for a given year are based on the previous year's salary. For instance, you will be considered a highly compensated employee for 2001 if your salary in 2000 was more than $85,000 or if you owned 5 percent or more of your company. Employers offering ERISA-compliant plans are required to conduct discrimination tests annually. If a plan does not pass the test, highly compensated employees may see their contribution limit lowered and will likely receive a refund of excess contributions already made. See nonhighly compensated employee, discrimination test and a full article.
- Highs
- Stocks that have hit their highest price for a 52-week period.
- High-technology stock
- Stocks of companies that produce and/or distribute products and/or services in industries such as computer hardware and software, electronics, semiconductor, communications, networking, broadcasting, defense and aerospace, biotechnology, robotics, and life sciences. Technology companies represent the largest sector exposure within the U.S. stock markets.
- 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.
Return to top
- 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.
- Individual retirement account (IRA)
- A custodial account or trust in which individuals may set aside earned income in a tax-deferred retirement plan.
- 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.
- Intraday price
- A stock's price at any given time during a day that the stock market is open for trading, as opposed to its price at the open or close of trading. For example, on Nov. 9, 2000, General Motors' common stock hit an intraday high of 58½ before closing at 57
 .
- 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.
- Investment strategy
- Allocating assets among stocks, bonds, cash and cash equivalents and other
securities.
- 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.
Return to top
- 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.
Return to top
- 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.
Return to top
- 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-cap fund
- A mutual fund that contains large-capitalization (large-cap) stocks. Large-cap stocks are those of big companies with considerable retained earnings and a large amount of common stock outstanding — typically, over $10 billion.
- Large-cap stock
- The stock of a company that has considerable retained earnings and a large amount of common stock outstanding — typically, more than $10 billion.
- Large-cap growth stock
- Stock of companies with market capitalization over $10 billion, with a growth bias. The benchmark for this asset class is S&P BARRA Growth.
- Large-cap value stock
- Stock of companies with market capitalization over $10 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
- A type of lifestyle fund that seeks to tailor its risk level to the needs of investors in a specific age group. For example, a life cycle fund for young workers would generally be comprised of aggressive investments but would move into more conservative investments as those workers approached retirement age. These funds are designed so they can function as the only investment in a portfolio and are meant to reduce hassle for the individual investor by handling asset allocation and rebalancing needs. See also profile fund or lifestyle fund.
- Life expectancy
- Age to which a person is expected to live, as determined by an actuary.
- Lifestyle fund
- A mutual fund that seeks to tailor its investments to an investor's risk tolerance and/or investment horizon. Lifestyle funds can be based on an investor's chosen risk profile — conservative, aggressive, moderate, etc. — or they can assume a certain level of risk based on the investor's target retirement date. These funds are designed so they can function as the only investment in a portfolio and are meant to reduce hassle for the individual investor by handling asset allocation and rebalancing needs. Also called a profile fund. See also life cycle fund.
- 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.
- Lockup period
- A time period during which certain investors are prevented from selling an investment or security. Generally used to describe a situation in which an employee can't sell company stock for a certain time period following the initial public offering (IPO). This period is designed to prevent insiders from unduly influencing the performance of their company's stock during the initial period that it is publicly traded; it is often set at 180 days from the IPO date.
- 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.
Return to top
- 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.
- Market valuation
- Same as market capitalization, when referring to an individual company.
- Matching contribution
- An incentive that employers may offer their employees to encourage them to contribute into a 401(k) plan. If a company offers a matching contribution, it will generally match part or all of the employee's contribution, up to a certain percentage of salary. For instance, say a company offers a match of 50 cents on the dollar, up to 3 percent of an employee's pay. If an employee earned $30,000, and put $900 (3 percent of his salary) into his 401(k) plan during the year, the employer would contribute $450 (or 50 percent of the employee's contribution) into the plan. The total contribution for the year would therefore rise to $1,350 from the original $900. In this example, if the employee contributed more than $900, the match would remain at $450 because it is capped at 3 percent of salary.
Although they are deposited regularly in employees' accounts, matching contributions may not belong to employees right away. In many cases, they vest over time.
- 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.
- Modified adjusted gross income (MAGI)
- Used to determine eligibility for various IRA contributions and to perform certain tax calculations. Your MAGI may be higher than your adjusted gross income because it doesn't include IRA contributions, student loan interest and certain other deductions. See the IRS Web site for more details.
- 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 vehicle that pools money collected from individual investors and places it into stocks, bonds or other securities. The holdings in the fund are its "portfolio," and the financial professional who decides when to buy or sell those holdings is called a "portfolio manager." Different mutual funds are invested into different types of securities, depending on the fund's stated goal. Mutual funds vary widely in terms of performance and risk and return levels. The mutual fund market is incredibly diverse, with thousands of funds sponsored by hundreds of companies in the United States alone.
Mutual funds are a convenient and relatively inexpensive way to access capital markets and reduce investment risk. Because the fund is able to pool money from hundreds or thousands of investors, transaction fees for individuals are greatly reduced. As a mutual fund owner, you own a certain number of shares in your fund. The share price fluctuates depending on the value of the securities that comprise its holdings. For an in-depth look at mutual funds, see our Wall Street 101 explanation.
Return to top
- 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.
- Nonhighly compensated employee (NHCE)
- An IRS definition for employees who participate in ERISA-compliant 401(k) or 403(b) plans and, in 2000, earned less than $85,000 and owned less than 5 percent of their company. ERISA, or the Employee Retirement Income Security Act, is the law administered by the U.S. Labor Department that governs how employers run their retirement savings plans. All ERISA-regulated plans must conduct annual discrimination tests to determine whether highly compensated employees are contributing too much to their plans in comparison with nonhighly compensated employees. If a plan does not pass the test, highly compensated employees may see their contribution limit lowered and will likely receive a refund of excess contributions already made. See highly compensated employee, discrimination test and a full article.
Return to top
- 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.
Return to top
- 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.
- Plan document
- The document that describes an employer's 401(k), 403(b) or 457 plan, including details about benefits, eligibility, rules, investment options, etc. Employers are legally required to provide a summary of this document (or a "summary plan description") to all plan participants and beneficiaries.
- Plan sponsor
- An employer that sets up a pension or retirement plan for its employees, such as a 401(k) or 403(b) plan. Plan sponsors have certain legal obligations to their participants and beneficiaries under the terms of each plan. See plan document.
- 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 or make decisions on their behalf. Portfolio managers are usually responsible for the large institutional holdings of mutual funds, insurance companies, pension funds, or bank trust departments. Also money manager.
- 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).
- Probate
- The process by which an executor of a will or a court-appointed administrator distributes the property of a person who has died.
Also, the review or testing of a will before a court of law to ensure that the will is authentic. Certain assets are subject to this review, while others are not. Read a full article concerning probate and estate planning.
- Profile fund
- A mutual fund that seeks to tailor its investments to an investor's risk tolerance and/or investment horizon. Profile funds can be based on an investor's chosen risk profile — conservative, aggressive, moderate, etc. — or they can assume a certain level of risk based on the investor's target retirement date. These funds are designed so they can function as the only investment in a portfolio and are meant to reduce hassle for the individual investor by handling asset allocation and rebalancing needs. Also called a lifestyle fund. See also life cycle fund.
- 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.
Return to top
- Qualified domestic relations order (QDRO)
- A provision of the tax code that provides protection to former spouses and children of employees covered by qualified retirement plans. Under this provision, former spouses and children have the right to claim all or a portion of an employee's retirement benefits in a divorce settlement.
- 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.
Return to top
- 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.
- Required beginning date
- For a traditional IRA, 401(k) plan or 403(b) plan, the date by which you must begin taking required minimum distributions. The date is April 1 of the year after you turn age 70½. See "required minimum distribution (RMD)" below.
- Required minimum distribution (RMD)
- The amount you are required to withdraw from certain tax-deferred retirement savings accounts after you turn 70½. You must take your first minimum distribution by April 1 of the calendar year following the year in which you turn 70½. You must take your second distribution by Dec. 31 of that same year and subsequent distributions each year by Dec. 31. If you don't make these withdrawals, you'll have to pay a 50 percent penalty tax. (An exception is made in the case of a 401(k) plan if you are still working for the company sponsoring the plan, and if you own less than 5 percent of the company.) Your distribution amount is determined by your life expectancy (using an IRS-approved mortality table), the amount of money you have in your account and, in certain cases, the life expectancy of your beneficiary. There are several IRS-approved methods for calculating your RMD.
- 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.
- Risk
- In the investment world, risk is the fluctuation (up or down) in the return on an investment. Those investments for which returns fluctuate heavily are said to have more risk (or are more "volatile"). Low-risk investments are those that have a history of consistent, stable returns. Risk is not an "either-or" proposition, with investments neatly divided into "safe" and "risky" categories. In fact, there are many levels of risk, and while some investments may be "safe" in the sense that they won't actually decline in value, no investment is 100 percent safe. Investment risk rarely means total, irretrievable loss. For further information, see Wall Street 101.
- Risk tolerance
- The ability to tolerate investment risk. Risk is defined as the fluctuation (up or down) in the return on an investment. Risk tolerance is dependent on your investment goals and time horizon. If you have a long time before you will need your investments, you will generally have a higher risk tolerance. This would apply if you have many years before you retire. If you will need the money sooner for a more immediate goal like buying a house or saving for a high school student's college education, or if you are retiring soon, you will generally have a lower risk tolerance. For further information, see Wall Street 101.
- Rollover
- Transferring money between retirement accounts, usually to avoid tax penalties. An "ordinary" rollover involves a direct withdrawal of monies to the account holder and a redeposit within a specified time period. In a "direct" rollover, money is transferred from one account directly to the other (without funds passing through your hands). See a full article about rollovers.
- Roth conversion
- The process of moving money from a traditional IRA to a Roth IRA. When you convert the IRA, you will have to pay tax (but not the 10 percent early withdrawal penalty) on the deductible contributions you convert. The entire converted taxable amount must be included in your taxable income for the year in which you do the conversion. Individuals who are married and file separate tax returns may not do a Roth conversion. Likewise, individuals with adjusted gross income (AGI) over $100,000, or married couples with combined AGI of over $100,000, may not convert to a Roth.
- Roth IRA
- An individual retirement account in which you contribute after-tax dollars. You cannot take a tax deduction on Roth IRA contributions, but withdrawals on both your principal and earnings can be made tax-free after age 59½, if you meet the requirements. The contribution limit to a Roth IRA is $2,000. This limit applies to all your traditional and Roth IRAs combined, if you have more than one. Roth IRAs are named after Sen. William Roth, R-Del., who created them in 1997 to provide greater incentive for Americans to save for retirement. See our IRABCs for more specifics about Roth IRAs.
Return to top
- Safe harbor plan
- A type of 401(k) plan that exempts the employer from the special nondiscrimination tests that apply to regular 401(k) plans. Under a safe harbor plan, the employer has to pay a certain amount of money into the accounts of nonhighly compensated employees. There are various formulas for calculating the amount of these contributions, which have to be fully vested from the word go. This plan option first became available on Jan. 1, 1999.
- 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.
- Self-directed 401(k) plan
- An investment option offered by some 401(k) plans that allows the plan participant to invest 401(k) monies in mutual funds, individual stocks and/or bonds that are outside the plan. Plans typically include a set number of mutual funds for their participants, and the window account allows individual investors more flexibility with their investment portfolio. Often, these accounts charge an annual maintenance fee as well as trading commissions. Also known as a brokerage window account.
- 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.
- Simplified employee pension (SEP)
- A type of retirement plan generally used by small businesses. SEPs allow employers to make tax-deferred contributions to individual retirement arrangements (IRAs) for their employees. Any contributions employers make to their own SEP-IRAs must be matched on a percentage basis for their qualifying employees. For instance, if a business owner contributes 5 percent of his salary to his SEP-IRA, he must contribute the equivalent of 5 percent of each his qualifying employees' salaries to their respective SEP-IRAs. Employees may not contribute to these plans but may still fund IRAs outside of the SEP.
For the 2001 tax year, in general, employer contributions are limited to the lesser of 15 percent of an employee's compensation or $35,000; there are additional rules regarding higher-paid employees. Withdrawal rules for SEPs are similar to those for other IRAs.
- Small-cap stock
- 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 stock
- 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 stock
- 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&P 500)
- 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 higher the standard deviation, the riskier the security.
- Stock
- An ownership share(s) in a corporation
also equity, common stock; see also preferred stock
- Summary plan description
- The document that summarizes a company or government agency's 401(k), 403(b) or 457 plan. By law, this document must be provided to all plan participants and beneficiaries. This summary outlines all the features of the plan, including eligibility, benefits, rules, investment options, etc.; and is generally an abridged version of the plan document.
- 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.
Return to top
- 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.
- Tax-loss selling
- A strategy used to reduce tax payments at the end of a year by selling securities at a loss to offset large capital gains (or investment profits) accrued during the year. The term "tax-loss selling" often refers to a specific issue regarding mutual funds. Many mutual fund managers sell off securities when prices are high, creating a capital gain for the mutual fund owner. These gains are generally reported at the end of the year, creating an unexpected increase in income for the individual investor that may push him or her into a higher tax bracket. If he or she sells other securities at a loss, however, he or she can counteract the capital gains by reducing income, thereby reducing tax payments.
- 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.
- Tracking stock
- A type of stock that tracks the performance of a particular part, unit, or subsidiary of a larger company. Tracking stocks are usually issued by the larger company to attract investors to an emerging division. Owners of tracking stock usually do not have voting rights or a claim to assets in the larger company. A number of large companies have recently issued tracking stocks of their Internet or technology divisions to attract public investment.
- 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 instrument, or bond, issued by the U.S. government. T-bills are sold at a minimum of $1,000 and can be bought in $1,000 increments above the minimum.
- Trustee
- The financial institution responsible for holding the assets of a retirement plan. The trustee is responsible for guaranteeing any monies held in a plan, even if the sponsoring employer goes bankrupt.
- Trustee-to-trustee transfer
- The direct transfer of money from one tax-deferred account to another (such as from an IRA to another IRA, a 401(k) to another 401(k), or a 401(k) to an IRA) without a check being made out to the account holder. Also known as a direct rollover. Having the money transferred directly from one financial institution to the other means the account holder doesn't have to worry about missing the 60-day rollover deadline. (If the account holder has the check made out to her and doesn't deposit it in a new tax-deferred account within 60 days, the money will be treated as an early withdrawal. It will then have to be declared as income for that year and will be subject to income tax, and possibly a 10 percent early withdrawal penalty.)
- 12-b
- Charges levied from a fund's assets to cover marketing and distribution costs of the fund.
Return to top
- 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.
Return to top
- 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).
- Vest
- When a 401(k) contribution "vests," it is your property. Vest is typically used to describe the amount of time it takes for an employer's matching contribution to become yours. Some employer contributions become the employee's property immediately. Others use the vesting period as an employee retention tool and their contribution may vest over a fixed period of time (three years, for instance). Plans may include cliff or graded vesting schedules. The vesting schedule must be spelled out in the summary plan description. See more about vesting in our article, Ten Steps to 401(k) Fitness.
- Vesting schedule
- The schedule for an employer's matching contributions to become vested in a 401(k) plan, or to become the full property of the employee. These schedules vary from company to company, but must be spelled out in the plan's summary description. Vesting schedules are of two types: cliff and graded. Also termed a vesting period.
- Volatility
- The relative rate at which the price of a security moves up and down. Highly volatile stocks have prices that rise and fall rapidly over short periods of time. Compare with beta.
Return to top
- Wrap account
- An investment consulting relationship in which the client's money is
allocated among funds from different money managers.
Return to top
- X or XD
- Newspaper listings symbol indicating that a stock is traded without dividend.
Return to top
- 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.
Return to top
- Zero-coupon bond
- A bond that provides no periodic interest payments to its owner but does pay principal upon maturity.
Return to top
|
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.
|
401Kafe.com is the premier online community resource for 401(k) participants
Copyright © 1996 - 2000 mPower. All Rights Reserved.
|
|
