Need help understanding some of the more common financial terms? This glossary will help get you started.
 
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
annual compound rate
the annual rate at which money would have to increase or compound to reach the cumulative figure resulting from annual total returns. It is a discount rate and different from average annual return.

annual rate of return
annual percentage return after taxes that actually occurs or is anticipated on an investment. In common stock, the rate of return equals its dividend yield – calculated by dividing the annual dividend by the original purchase price. Rate of return may also refer to the total return, which is capital appreciation plus the dividend. In fixed-income securities such as bonds and preferred stock, the rate of return equals the current yield, which is the coupon or dividend rate divided by the original purchase price.

appreciation
an increase in value.

assets
an item of value that is owned by a business, institution or individual.

bonds
an interest-bearing document used as a means for the government or business to raise money. The issuer (borrower) promises to pay the bondholder (creditor) a specified amount of interest for a specified time period and to repay the debt at maturity. Obligations that are due in more than one year are classified as bonds whereas if the debt is for less than one year, it is called a "note." Bondholders are creditors of the issuer and they do not have ownership privileges.

capital assets
regarding individuals, any kind of investment. In relation to corporations, besides security investments, it includes fixed assets such as land, buildings, equipment and furniture. Generally, a capital asset can be any item that is not bought or sold in the normal course of business.

capital gains
the positive difference between an asset's purchase price and the selling price. Current tax regulations require any gains to be taxed at a rate up to 28%.

Certificates of Deposit
a money market instrument issued by banks that has a set interest rate and maturity date. CDs may be issued for as low as $100. CDs that are in denominations of $100,000 or more are called "jumbo CDs." Maturities can range from a few weeks to several years.

closed-end investment company
term used interchangeably with "closed-end fund." It is an investment company that issues a fixed number of shares and is listed on a major stock exchange. An investor who wishes to buy shares must purchase them from an investor who wishes to sell their shares. They do not deal with the investment company directly. In addition, an investor who wishes to sell their shares of a closed-end fund, must find a buyer.

collateral
assets, such as securities, that are pledged to a lender by a borrower. The assets secure the loan until the borrower repays it. In the event the borrower is unable to pay, the lender has the legal right to sell the assets to pay off the loan.

common stocks
securities which represent an ownership interest in a public corporation. Owners are entitled to vote on the selection of directors and other important matters as well as to receive dividends when they are declared. If a corporation is liquidated, the claims of secured and unsecured creditors, bondholders and owners of preferred stock have priority over the claims of common stockholders.

compounding
increasing or combining; adding something that increases

corporate bonds
debt instrument issued by a corporation. In contrast to most municipal and government bonds, which are not traded on major exchanges and are tax-free, corporate bonds are traded on major exchanges and the interest paid to the investor is taxable.

deductibles
expenses that can be subtracted from an individual's adjusted gross income to obtain their taxable income. The type of expense deductions allowed is determined by the Internal Revenue Service (IRS). Examples include state and local taxes, charitable contributions and mortgage interest paid.

distributions
1: The payment, to investors, of realized capital gains on securities within the portfolio of a mutual fund or closed-end investment company.
2: Sale of a large block of securities over a period to avoid a decline in their prices. Technical analysts consider distribution patterns to predict when the security's price will fall.

diversified investment company
term used for either closed or open-ended mutual funds or unit trusts that invest in many different kinds of securities and companies. Under the Investment Company Act of 1940, an investment company, with respect to 75% of its portfolio, may not have more than 5% of its assets invested in the securities of any one issuer and may not own more than 10% of the voting shares of any one issuer.

dividend
distribution of a company's earnings to its shareholders, usually in the form of a quarterly check. The company's board of directors authorizes and determines the amount of the dividend. Dividends are taxed as income in the year they are received by the shareholder. A mutual fund dividend is paid out of income and the shareholder's tax is dependent on whether the distributions originated from interest income, capital gains, or dividends received by the fund.

dividend reinvestment plan
a program in which a dividend paying company (especially mutual funds) will automatically reinvest an investor's dividend to purchase additional shares of the company's stock. The dividend is still taxable by the IRS. In participating in this type of program, investors use dollar cost averaging to increase their amount of capital in the stock.

Dow Jones Industrial Average
average of the prices of 30 well-known, predominantly blue-chip, industrial stocks. It is the oldest and most widely quoted of the marketing indicators.

earned income
income generated from employment, pensions or annuities -- for example, wages, salary, commissions, bonuses, IRAs, etc.

earnings
the amount of profit a corporation receives after expenses and taxes are paid.

equity funds
mutual funds that invest in common stocks (or ownership interests in public corporations).

exchange value
the amount that could be received in a trade or exchange.

exemptions
IRS-allowed direct reductions from gross income. Personal and dependency exemptions are allowed for: individual taxpayers; elderly and disabled taxpayers; dependent children and other dependents more than half of whose support is provided; total or partial blindness; and a taxpayer's spouse.

fixed income
a security that pays a fixed rate of return, such as a bond or preferred stock. Fixed income investments offer protection against market risk, but do not protect holders against the risk of inflation.

fully-managed fund
a mutual fund which allows the investment managers broad authority to use their best judgment to determine what to invest in, where to invest, how much to invest, how long to invest and how much cash to hold if attractive investments cannot be found. Minimal limitations are placed on the management of the fund.

government bonds
US government debt obligations that the government has promised to repay.

gross income
total personal income before exclusions and deductions.

income
money, or other benefit, received from working, investments, etc.

inflation
the persistent and appreciable rise in the prices of goods and services. Moderate inflation is normally associated with periods of expansion and high employment – increasing dollars chasing a dwindling supply of goods. Hyperinflation, when prices rise 100% or more a year, causes people to lose confidence in the currency. During inflationary times, people often divert their investments into real estate and gold because they usually retain their value.

inflation hedge
investment designed to protect against the loss of purchasing power from inflation.

insurance annuity income
the income or money received as a result of a contract between a life insurance company and an individual. This contract guarantees income for a defined period, usually starting at retirement, to the person on whose life the contract is based. In exchange, the individual agrees to make periodic payment to the insurance company. All capital in the annuity grows tax-deferred.

interest
dollar cost that a borrower pays a lender for the use of the lender's money.

interest rates
rate of interest charged for the use of money, usually expressed at an annual rate. The rate is figured by dividing the amount of interest by the amount of principal borrowed.

intrinsic value
genuine or real value.

investment objective
financial objective that an investor or fund manager uses to determine which kind of investment is appropriate.

leveraging
method of enhancing return or value without increasing investment. For instance, leveraging is using borrowed money to own an investment that is expected to provide higher earnings and profits than the cost of borrowing.

liability
the claims by creditors against a corporation or an individual. A corporation's liabilities include accounts payable, wages payable, dividends declared payable, accrued taxes payable, and long-term liabilities (bank loans and debentures).

liquidity
the ability to buy or sell an asset quickly and in large volume without substantially affecting the asset's price. Liquidity also refers to the ability to convert to cash quickly.

load funds
mutual funds that charge a fee when investors make purchases. This fee (or "load" as it is called) is used primarily to compensate salespeople selling the fund.

maturity
the date of which the principal amount of a loan, bond, or any other debt instrument becomes due and is to be paid in full.

municipal bonds
a debt obligation issued by a state, state agency or authority, or a political subdivision, such as county, city, town or village. They may be issued for general governmental needs or special projects. Issuance must be approved by referendum or by an electoral body. Before the Tax Reform Act of 1986, interest paid on municipal bonds was exempt from federal income tax and state and local income tax within the issuing state. The terms municipal and tax-exempt were synonymous. However, the Act separated municipal bonds into two broad groups–public purpose bonds and private purpose bonds. Public purpose bonds are tax-exempt and may be issued without limitations. Private purpose bonds are taxable unless specifically exempted. The difference between public and private purpose bonds is based on the percentage in which the bonds benefit private parties.

mutual fund
an open-end investment that offers the investor the benefits of portfolio diversification (provides greater safety and reduced volatility), and professional management. The shares are redeemable on demand at their net asset value. The fund invests the pooled assets into various investment vehicles including stocks, bonds, options, commodities and money market securities. How the fund invests is determined by the fund's objectives. The mutual fund's prospectus details this type of information plus information on any fees, the management company and other relevant data.

net asset value (NAV)
an open-ended mutual fund's per share market value. In mutual funds, the net asset value is synonymous with "bid price" and "redemption price". In no-load funds, the NAV is also the asked price. They are all one figure. In load funds, the asked price is quoted after the sales charge is added to the net asset value. Most funds compute the NAV after the close of the exchanges each day. It is calculated by taking the closing market value of all securities within the fund plus all other assets (i.e., cash), subtracting all liabilities, then dividing the result (total net assets) by the total number of outstanding shares. The total number of outstanding shares usually varies daily because of redemptions and purchases.

no-load funds
a mutual fund that allows shares to be purchased without a sales charge imposed on its investors.

open-end investment company
a management investment company that issues new shares on demand when people buy them. The shares are bought at net asset value and may be redeemed back to the management company at any time at the current market price. Commonly called a "mutual fund", the type of vehicle that the shareholder's funds are invested in is dependent on the type of fund and its objectives.

portfolio
the holdings of more than one stock, bond, cash equivalent or other asset by an individual or institution. A portfolio may be designed to achieve the investor's goals–such as obtaining maximum returns or reducing risk through diversification.

premium
fee paid to an insurance company for insurance protection. Also, the single or multiple payments made to build an annuity fund.

principal
1: The face value or par value of a debt instrument that is separate from interest.
2: A person's capital, or the amount invested.
3: An employee of a securities firm who has supervisory responsibilities.

probate
process whereby a decedent's will is presented to a court and an executor is appointed to handle the settlement of the will.

profits
the difference between a security's purchase price and selling price. If the selling price is higher than the purchase price, there is a profit. Conversely, if the selling price is lower than the purchase price, there is a loss.

prospectus
a printed document that summarizes a corporation's registration statement for a new issue of non-exempt securities that was filed with the SEC. It details material information about the corporation and the security being issued. A prospectus must be given to all buyers and potential buyers of the new issue.

A preliminary prospectus is given to investors when brokers obtain indications of interest.

Although the document does not have all the information included in the offering circular, it does include the major facts. A preliminary prospectus is often called a "red herring" because its front-page notice is printed in red ink. The notice states that the preliminary prospectus is "subject to completion or amendment" and "shall not constitute an offer to sell ...".

rates of return
1: In common stock, the rate of return equals its dividend yield–calculated by dividing the annual dividend by the original purchase price. Rate of return may also refer to the total return, which is capital appreciation plus the dividend.
2: In fixed-income securities such as bonds and preferred stock, the rate of return equals the current yield, which is the coupon or dividend rate divided by the original purchase price.

securities
any instrument that represents ownership, or the right to ownership, of a corporation, or that represents the debt of a corporation.

self-insured
when the assets accumulated are equal or greater than the amount of money needed for future security.

share
a single unit of ownership in a corporation or mutual fund.

Standard & Poor's 500 Index (S&P 500)
acomposite index that tracks 500 industrial, transportation, public utility, and financial stocks. The selection of stocks included in the index is determined by Standard & Poor's Corporation, which also publishes the index.

stock market
an organized marketplace where members gather to trade securities. Members may act either as agents for customers, or as principals for their own accounts.

stock market indicator
measurement utilized by technical analysts to make forecasts regarding the direction of the overall market or the movement of a particular stock.

transfer of ownership
1: Process whereby a seller's broker delivers the certificates to the buyer's broker to effect a legal change of ownership.
2: To record the change of ownership on a corporation's books by its transfer agent. The buyer's name is recorded and all dividends, financial reports, proxies, and other literature are mailed directly to the new owner.

trust instrument
a legal document that establishes a fiduciary relationship in which a person, called a trustee, controls the spending of assets for the benefit of another person, called a beneficiary.

12b-1 charges
a fee charged by some mutual funds to help cover the fund's sales and marketing expenses. The 12b-1 fee typically ranges from .25% of net assets in the case of some no-load funds that use it to cover advertising and marketing costs, to as high as 8.5%, the maximum allowed under National Association of Securities Dealers (NASD) rules. The primary use of 12b-1 fees is in funds sold through brokers, insurance agents, and financial planners.

yield
an investment's return from dividends or interest expressed as a percentage of either cost at purchase or the investment's current price. For example, a security with a current market value of $36 a share paying a dividend of $2.50 annually will give an investor a return of 7% ($2.50/$36.00).