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withdrawn from an investment, particularly mutual funds and annuities.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