Glossary of Financial Terms

Active management:
An investment strategy that seeks to outperform the returns of the financial markets or a particular benchmark
Annualize:
To make a period of less than a year apply to a full year. For example, a six-month return of 5 percent would be annualized at 10 percent.
Automatic reinvestment:
An arrangement whereby mutual fund distributions (dividends and capital gains) are used to buy additional shares
Benchmark index:
An index used by a mutual fund manager to compare against his or her fund’s performance
Bond duration:
Provides an estimate of a bond fund’s volatility. For example, a bond fund with a three-year duration will decrease in value by approximately 3 percent if interest rates rise 1 percent, while a bond fund with a five-year duration will decrease in value by approximately 5 percent if interest rates rise by the same 1 percent.
Capital gain:
The difference between the purchase price and the sale price
Capital gain distribution:
Payments to mutual fund shareholders of gains on the net sale of securities in the fund
Equities:
Stocks
Exchange-traded fund (ETF):
An index fund that trades on the stock market. ETFs are purchased and sold through a broker.
Expense ratio:
The percentage of a fund’s net assets used to pay a portion of its annual expenses
Extended Market Index Fund:
A fund of about 3,000 broadly based stocks that, when combined with an S&P 500 Index Fund in an approximate 1:5 ratio, is nearly identical to a total market index fund
Index fund:
A type of mutual fund constructed to include all or most of the components of a given market sector
Long-term capital gain:
Profit on the sale of a security held at least one year, that generally results in a lower tax
Market timing:
Attempting to forecast market direction and then investing based on the forecasts
Price/earnings ratio (P/E):
A stock’s current price divided by its earnings
Reversion to the Mean:
The theory that prices and returns eventually will tend to move to the average price over time
Risk tolerance:
The investor’s ability to endure declines in the value of investments without selling and without worry—often called your “sleep well at night factor.”
Rollover:
A tax-free transfer of assets from one retirement plan to another
Roth IRA:
A tax-favored retirement plan. Contributions are not deductible, but earnings are tax-free during accumulation and also when withdrawn.
Target Retirement fund:
A mutual fund comprised of a portfolio of mutual funds that becomes more conservative with age
Taxable account:
An account in which the securities are subject to annual federal taxes
Tax advantaged:
Any type of investment, account, or plan that is exempt from taxation, is tax deferred, or offers other types of tax benefits (IRAs, 401Ks, and municipal bonds are examples.)
Tax-deferred account:
An account in which federal income taxes are deferred until withdrawn
Tax efficient:
Owing the least amount in taxes
Tax inefficient:
Owing more tax than necessary
Tax-loss harvesting:
The practice of selling a taxable security with a loss to offset other taxable income and gains
Total Market Index Fund:
A mutual fund or exchange-traded fund (ETF) composed of nearly all the investable companies in all market sectors
Traditional IRA:
A tax-favored retirement plan. Contributions are deductible and the tax on both the contributions and earnings are deferred during accumulation. Withdrawals are taxed at one’s ordinary income tax rates. Penalties apply if withdrawals are made prior to age 59-1/2 except in limited situations.
Turnover rate:
An indication of the manager’s trading activity during the past year
Unrealized capital gain/loss:
A gain or loss that would be realized if the fund’s securities were sold
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