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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.
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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A back-end load is a sales charge or fee charged when funds are withdrawn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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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'.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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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