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actively managed fund.
A mutual fund in which individual stocks, bonds and/or cash investments are bought and sold based on research or other criteria used by fund managers. Actively managed funds generally try to outperform the market.
alternative minimum tax (AMT)
A tax system devised to ensure that at least a minimum amount of tax is paid by high-income individuals and corporations.
annual percentage yield (APY)
. The yearly rate of return on an interest-paying account.
A financial statement issued each year by a corporation or mutual fund. It lists assets, liabilities and earnings, as well as some historical information. Each of the company’s shareholders receives a copy of the annual report.
A property that has monetary value, including personal possessions (e.g., houses, cars, jewelry) and financial assets (e.g., savings and investments).
The process of deciding how to divide investments among the three types of asset classes: stocks, bonds and cash equivalents. This decision is based on tolerance for risk and preferred time horizon. Also known as asset mix
One of the three major types of investments: stocks, bonds and cash equivalents.
See definition of asset allocation.
A sales charge on a mutual fund that is applied when shares of the fund are sold (see also front-end load).
A mutual fund that attempts to produce the highest return, consistent with a low-risk investment strategy; it employs a mix of stocks, bonds and cash equivalents. Also known as a blended fund
A declining market in which prices fall for a sustained period of time.
The person or organization designated to receive the funds or other property from a trust, insurance policy or retirement account.
See definition of balanced fund
Generally speaking, the stock of a large, well-established company. Blue-chip stocks typically offer lower-than-average risk because of their solid track records.
A type of investment that is similar to an IOU from a corporation or a municipal or federal government. Money is loaned, with interest, for repayment in full on a specific date.
The lifetime of a bond, concluding when the final payment of that obligation is due.
bond mutual fund.
A mutual fund that includes only bonds—typically corporate, municipal or U.S. government bonds.
A person who acts as an intermediary between a buyer and seller of securities, usually charging a commission.
A rising market in which prices go up for a sustained period of time.
The profit one receives when one sells an investment for more than one paid for it. Capital gains are taxable income and must be reported to the IRS on your tax return.
capital gains distribution.
A payment an investor receives when a mutual fund makes a profit by selling some of the securities in his or her portfolio. Capital gains distributions are usually made annually, often at the end of the calendar year.
The total stock market value of all shares of a company’s stock (the stock price multiplied by the number of shares outstanding).
An investment that can easily be converted into cash, such as a money market fund or Treasury bill.
certificate of deposit (CD).
An investment made with a financial institution in which a specified amount is deposited for a specific period of time, at a preset, fixed interest rate.
Certified Financial Planner™ (CFP®).
A professional planner who has met the Certified Financial Planner Board of Standards’ requirements in education, experience and ethical conduct; passed a 10-hour comprehensive examination in investment, tax, estate, retirement and insurance planning; and agreed to follow a code of ethics.
Certified Public Accountant (CPA).
A licensed accountant who may also have earned a Personal Financial Specialist (PFS) designation from the American Institute of Certified Public Accountants.
Securities that represent an ownership interest in a company (as opposed to preferred stock, in which stockholders usually receive preferential treatment).
The growth that results from investment income being reinvested. Compound growth has a snowball effect because both the original investment and the income from that investment are invested. Also known as compound growth
concentrated equity position.
A large amount of one company’s stock held in a given portfolio. A concentrated equity position is often due to company stock options, but it can also be the result of inherited stock or holding too much company stock in a 401(k) plan.
What was initially paid for an investment, as opposed to its current market value.
A bank or brokerage account set up under the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA). Although the custodian has sole responsibility to manage the assets until the custodianship ends (usually when the minor reaches the age of 18 or 21, depending on the state), all money and assets deposited into a custodial account are the irrevocable property of the minor and must be used for the benefit of the minor.
A bank card used to make electronic withdrawals from funds on deposit.laddering. A strategy in which bonds (or Treasury notes) are purchased with increasing maturities that are staggered so that the interest provides a steady stream of income.
Insurance that replaces a percentage of income in the event that an illness or injury prevents an insured individual from working.
Lowering risk potential by spreading money across and within different asset classes such as stocks, bonds and cash equivalents.
The part of a company’s net profits that is distributed to shareholders. A shareholder can specify that his or her dividends be reinvested to buy more shares, or that they be paid in cash.
Investing the same dollar amount in the same securities, at regularly scheduled intervals over the long term, with the aim of stabilizing returns.
domestic stock mutual fund.
A mutual fund that invests primarily in stocks issued by U.S. companies. These funds are classified according to size (large-cap, mid-cap and small-cap) and style (growth and value).
Dow Jones Industrial Average (DJIA or “the Dow”).
A measure of the performance of a collection of 30 blue-chip stocks—primarily industrial stocks considered leaders in the market.
Salaries, wages, tips, professional fees and other amounts received as pay for work performed.
A company’s net income or profit, usually quoted in millions of dollars.
earnings per share (EPS).
A company’s total earnings for a period (its net income minus preferred dividends) divided by the number of common shares outstanding.
education savings account (ESA).
A tax-deferred account established to help pay the higher education expenses of a child, grandchild or other designated beneficiary who is a minor. Also known as a Coverdell.
Another name for stock, representing ownership of a corporation.
A document that establishes who will receive a person’s property and possessions after his or her death. Its most common tools are wills and trusts.
A transfer tax imposed on the value of property left at death. Also known as an inheritance tax or “death tax.”
The person or institution named in a will that is responsible for the management of the assets and the ultimate transfer of the property; also referred to as a personal representative.
The amount of assets that can be transferred free of tax, either during one's lifetime or at death.
For mutual funds, the percentage of a fund’s average net assets that are used to pay fund expenses. This percentage accounts for management fees, administrative fees and any 12b-1 fees.
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Federal Deposit Insurance Corporation (FDIC).
A U.S. government agency that insures cash deposits, including certificates of deposit, that have been placed in member institutions, for up to $100,000.
A way in which a client is charged for professional financial help. With fee-based management, a client is charged a percentage of the assets in the manager’s control, usually around 1%–2%.
fixed income investment.
An investment that produces a steady stream of income in the form of interest payments. The borrower, or issuer, can be a government—municipal, state or federal; a corporation; or a bank or savings and loan association.
A mutual fund that invests in developed markets outside the United States. See international stock funds.
A tax form prepared by an employer and given to an employee to be filed with his or her Form 1040. A W-2 lists wages earned during that year, federal and state taxes withheld, and Social Security tax information.
A tax form prepared by an employee for an employer indicating the employee’s exemptions and Social Security number, and allowing the employer to determine the amount of taxes to be withheld for the employee.
The IRS form for the annual reporting of dividend and interest payments made to investors. Companies, mutual funds, banks and other financial institutions report an investor’s dividend and interest directly to the IRS with this form.
A defined contribution plan in which an employer takes money directly from an employee’s salary and places it in a tax-deferred retirement account, which means that the employee doesn’t pay taxes on this money until he or she withdraws it. The decision about how and where the money is invested is usually the employee’s. Employers often match a percentage of employee contributions, sometimes as much as 50 cents on the dollar.
A 401(k) plan in the world of charitable and nonprofit organizations, including educational institutions. Contributions are deducted directly from employees’ salaries before taxes, and employers can contribute as well.
A sales charge on a mutual fund that is applied when shares of the fund are purchased (as opposed to a back-end load, applied when shares are sold).
A tax imposed on transfers of property as gifts during the donor’s lifetime.
Federal law permits tax-free gifts of up to $12,000 (as of 2007) per individual each year. Married couples may jointly give tax-free gifts of up to double that amount.
A bond issued by the U.S. Treasury or other federal agencies.
All income from all sources (other than tax-exempt income) that must be included on one’s tax return. Also known as gross earnings.
growth and income fund.
A mutual fund that seeks both capital appreciation (growth) and current income. Investments are selected based on both their appreciation potential and their ability to pay dividends.
A stock fund that seeks long-term capital appreciation. Growth funds generally buy common stocks of companies that advisors believe have long-term growth potential.
The stock of a company that has previously seen rapid growth in revenue or earnings and is expected to see similar growth beyond the short term. Generally speaking, growth stocks pay relatively low dividends and sell at a relatively high price, considering their earnings and book value.
The person who is legally responsible for the care and well-being of a minor (or in some states, of an incapacitated adult). If appointed by a court, the guardian remains under court supervision.
A composite of companies that measures changes in market behavior. Well-known market indices include the S&P 500® Index, the Dow Jones Industrial Average, the NASDAQ Composite Index, and the Wilshire 5000 Index.
A mutual fund that seeks to track the performance of a market index, such as the S&P 500 Index, by investing in the stocks or other securities that compose that index.
Individual Retirement Account (IRA).
A self-funded retirement plan (a plan that an individual, not an employer, establishes and funds) that provides tax benefits. There are several different types of IRAs, including Traditional IRA, Rollover IRA, Education IRA, and Roth IRA.
An increase in the cost of living, measured as a percentage and classified according to its severity. Mild inflation occurs when the price level—an average of all prices—rises from 2% to 4%. Moderate inflation refers to an inflation rate of 5% to 9%. Severe inflation (or “double-digit inflation”) refers to an inflation that threatens a country’s economy, in which money loses its value and people turn to bartering rather than relying on currency.
State death taxes imposed on property received by inheritance. See estate tax.
international stock fund.
A mutual fund that invests outside of the United States. International stock funds can include global funds, which invest in securities issued throughout the world (including the U.S.) or in foreign funds, which invest in developed markets exclusively outside the U.S.
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An employer-sponsored retirement plan for a partnership (or for a sole proprietorship for self-employed people). A Keogh requires significantly more paperwork than an IRA, and it's more complex to understand and manage.
An obligation to make a payment or settle a debt (e.g., a mortgage or car loan payment).
The stock of a company whose median market capitalization is in the top 5% of the largest domestic companies. A large-cap mutual fund is a mutual fund that invests only in large-cap stocks.
An investment that can be easily converted to cash.
A commission or sales fee on a mutual fund. A mutual fund without a load is a no-load fund.
long-term care insurance.
Insurance that covers some or all of the expenses incurred as a result of required long-term care.
The total value of a company’s stock, calculated by multiplying the number of outstanding shares by the price per share.
For a fixed income investment, the specified date at which the issuer promises to repay the money it has borrowed.
The stock of a company whose market capitalization falls between large-cap (top 5%) and small-cap (bottom 80%).
money market fund.
A mutual fund that invests solely in securities that can easily be turned into cash, such as Treasury bills, certificates of deposit (CDs) and short-term loans. Money market funds are designed to maintain a stable $1 share value, but there is no assurance that they will be able to do that.
A debt security issued by state and local governments and their agencies. Munis typically pay interest at a fixed rate twice a year, and the issuer promises to return the investor’s principal at maturity. In general, interest paid on municipal bonds is exempt from federal taxes. Some investors may be subject to the alternative minimum tax (AMT). Also known as munis.
A type of investment that pools the money of many investors to buy various securities, including stocks, bonds and/or cash equivalents.
Acronym for National Association of Securities Dealers Automated Quotation System.
net asset value per share (NAV).
The market value of a single share of a mutual fund. It is calculated at the end of each business day by adding up the value of all the securities in the fund’s portfolio, subtracting expenses and dividing the sum by the number of shares outstanding. Mutual funds are traded based on their NAVs. Funds with an offer price identical to the NAV are either no-load or load funds carrying a contingent deferred sales charge.
Gross income minus adjustments to income. Adjustments include deductions for moving expenses, alimony payments and penalties on early withdrawal from an IRA. Adjustments can be taken even if itemized deductions are not claimed. Also known as net earnings and adjusted gross income.
The remaining profit on an investment once all expenses have been deducted.
The taxable value of an estate, calculated by subtracting what is owed (liabilities) from what is owned (assets).
A no-load mutual fund is one that does not carry a sales charge or commission. The initials “NL” in the offer price column of a mutual fund table mean that the fund is no-load, meaning the fund can be bought and sold at the price listed in the NAV column. However, a transaction fee or short-term redemption fee may apply to some no-load mutual fund transactions.
operating expense ratio (OER).
A mutual fund’s annual expenses (operating expenses, management fees and 12b-1 fees, if any) expressed as a percentage of the fund’s average net assets. These expenses are deducted before calculating the fund’s NAV.
Costs incurred by a mutual fund in its day-to-day operations. Every fund is subject to some amount of operating expenses, which usually include management fees, annual fees, administrative costs and maintenance fees.
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P Q R S T
P/E ratio (price/earnings ratio).
A measurement that represents the relationship between the price of a company’s stock and its earnings for the past year. To get a company’s P/E ratio, divide its current price by its earnings per share (EPS) for the past year.
The combined holding of stocks, bonds and cash investments held by an individual investor, a mutual fund or a financial institution.
A class of stock that has a claim on the company’s earnings before payment is made on the common stock if the company declares a dividend.
Funds put up by an investor to purchase a security. For bond investing, the principal is the face amount of a bond. For example, the principal amount of a $10,000 bond is $10,000.
A legal document that describes a mutual fund and offers its shares for sale. It contains information required by the SEC and state securities regulators, including the fund’s investment objectives and policies, investment restrictions, fees and expenses, and how shares can be bought and sold. Every mutual fund is required to publish a prospectus and provide it to investors free of charge.
An employee or partner in a brokerage firm who is registered to handle customer accounts. A registered representative must pass an examination administered by the National Association of Securities Dealers (NASD). Also known as a broker.
Using dividends from an investment to buy more shares of that investment.
An acronym for Real Estate Investment Trust. A company that purchases and manages real estate or real estate loans, using money invested by its shareholders.
A transfer of assets from a qualified plan to an Individual Retirement Account without tax. If an investor changes jobs, retires or receives a divorce settlement that includes a distribution from a company retirement plan, it can be “rolled over” into an IRA to preserve capital and maintain its tax-deferred status.
A tax-deferred retirement plan. Although contributions are not deductible, if certain qualifications are met, withdrawals—including interest—are "not taxed."
Stocks that signify ownership interest in a company, or bonds that indicate a credit relationship with a borrower. Some other types of securities are options, warrants and mutual funds.
The Securities and Exchange Commission.
An acronym meaning Simplified Employee Pension—Individual Retirement Account. A SEP-IRA is used by those who are self-employed or who own a small business with employees.
A unit of ownership in company stock or in a mutual fund investment.
The stock of a company with a relatively small total market value, meaning a median market capitalization in the lower 80% of the largest domestic companies.
Standard & Poor’s 500 (S&P 500®) Index.
A well-known capitalization-weighted index consisting of 500 of the country’s most widely traded companies that are listed on the New York Stock Exchange (NYSE) or the American Stock Exchange (AMEX).
An investment that represents a share of equity ownership in a company. Also known as equity.
A balanced mutual fund designed to become more conservative as the investor approaches retirement (by moving from equity to fixed income mutual funds). These "life-cycle funds" are typically offered by larger fund companies and are funds of funds. Many life-cycle funds have a “target date” for a person’s retirement (like 2025), while other life-cycle funds focus more on aggressive, moderate or conservative risk tolerances. Also known as a life-cycle fund.
term life insurance.
A type of life insurance that is in effect for a specified period, usually a five-, 10-, 15- or 30-year term.
Treasuries, Treasury bill (T-bill), Treasury note or Treasury bond.
Securities issued by the U.S. government. T-bills are short-term obligations that mature in one year or less; Treasury notes mature in between one and 10 years; Treasury bonds are long-term obligations.
Annual fees assessed by some mutual funds to cover the costs of marketing and distribution, charged as a percentage of the fund’s total assets. For a fund to be considered no-load, its 12b-1 fee must be 0.25% or lower.
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ultra-short bond funds.
Mutual funds that generally invest in fixed income securities with extremely short maturities or time periods in which they become due for payment.
Income other than earned income. This is investment-type income and includes interest, dividends and capital gains. Distributions of interest, dividends, capital gains and other unearned income from a trust are also unearned income to a beneficiary of the trust.
A mutual fund that invests in companies whose assets are considered undervalued, or in companies that have turnaround opportunities, such as those with lower P/E ratios.
The magnitude and frequency of change in securities’ values. The more volatile an investment, the higher its risk and return potential.
A legally binding document directing the disposition of one’s property. A will is not operative until death and can be revoked up to the time of death, or until there is a loss of mental capacity to make decisions regarding a will.
Wilshire 5000 Index.
A stock performance measurement created by Wilshire Associates, Inc. It measures the performance of all U.S.-headquartered equity securities with readily available price data.
Bonds that do not pay interest until maturity. They are sold at a discount from their face value, and their value increases as they near maturity. An investor’s return comes from the appreciation. There are three types of zero-coupon bonds: corporate, municipal and Treasury. Also known as zeros.
The information on this website is for educational purposes only. It is not intended to be a substitute for specific individualized tax, legal or investment planning advice. Where specific advice is necessary or appropriate, consult with a qualified tax advisor, CPA, financial planner or investment manager.