Appendix A
Glossary

401(k) A retirement plan into which an employee can contribute a portion of his or her salary (usually before taxes). Contributions can grow tax-deferred until they are withdrawn upon retirement.

adjustable life insurance A hybrid whole life insurance product where you don’t pay as large an initial premium as with a whole life product. The death benefit is dependent on the amount of premiums paid over the life of the policy.

adjustable-rate mortgage A mortgage set up with an interest rate that can change at specific intervals, as determined under the initial contract.

adjusted gross income (AGI) Your gross income less certain allowed business-related deductions. These deductions include alimony payments, contributions to a Keogh retirement plan, and, in some cases, contributions to an IRA.

ADRs (American Depository Receipts) Trust receipts for shares of a foreign company purchased and held by a foreign branch of the bank. The ADRs are legal claims against the equity interest that the bank holds. ADRs are an excellent alternative to direct investing in foreign companies.

aggressive growth fund A type of mutual fund that has a primary investment objective of seeking capital gains. It is understood that the potential for above-average returns in such an investment is countered by above-average risks.

American Stock Exchange (AMEX) At one time, AMEX was the second largest stock exchange in the U.S. AMEX has recently been merged with NASDAQ. Currently, the two exchanges still operate independently.

amortization Reducing the principal of a loan by making regular payments.

amortization schedule A schedule of regular payments with which to repay a loan. The schedule indicates to the borrower the amount of each payment that is principal, that which is interest, and that which is the remaining balance of the loan.

analysisSee fundamental analysis.

annual dividend A share of a company’s net profits that are distributed by the company to a class of its stockholders each year. The dividend is paid in a fixed amount for each share of stock held. Although most companies make quarterly payments in cash, dividends also may be made in other forms of property, such as stock. Dividends must be approved by the company’s directors before each payment is made.

annual fee The amount a cardholder pays to a credit card company for the right to hold a particular credit card.

annual report A source of operating data on a company published annually by most publicly held firms. Also known as a shareholder’s report.

annuity A stream of equal payments, as to a retiree, that occur at predetermined intervals (for example, monthly or annually). The payments may continue for a fixed period or for a contingent period, such as the recipient’s lifetime. Annuities are most often associated with insurance companies and retirement programs.

ask price The lowest price at which a given security is offered for sale.

asset allocation The process of determining the assignment of investment funds to broad categories of assets. For example, you (or your broker) decide what percentage of your stock should be in technology investments.

at the market Refers to a security transaction that occurs at whatever price the broker can get for you at the time of the trade. You either buy or sell a stock at a set price, or you give an order to buy the security at whatever price the security happens to be when the order is placed.

baby boomer A common term used to define individuals born between 1946 and 1964.

balanced mutual fund A mutual fund whose primary objective is to buy a combination of stocks and bonds. These middle-of-the-road funds balance their portfolios to achieve both moderate income and moderate capital growth. These funds tend to be less volatile than stock-only funds. Balanced funds tend, on average, to be invested as 45 percent bonds and 55 percent stocks.

bear market An extended period of general price decline in the stock market as a whole.

beneficiary The person who is named to receive the proceeds from an investment vehicle, trust, or contract. A beneficiary can be an individual, a company, or an organization.

beta (B) A mathematical measure of the risk on a portfolio or a given stock compared with rates of return on the market as a whole. A beta of less than one is less volatile than the general market. A beta above one is more volatile than the market.

bid price The highest price offered to purchase a given security.

blackout period The period of time between when the surviving spouse’s Social Security benefits cease after the children are grown until they receive Social Security benefits (the earliest date would be age 60).

blue chip investment A high-quality investment involving a lower-than-average risk. Blue chip investment is generally used to refer to securities of companies having a long history of sustained earnings and dividend payments.

blue chip stock This is the common phrase for stock of well-established companies that historically pay dividends in good years and bad. Some examples of blue chip stocks are General Motors, Exxon, and IBM.

bond A debt instrument. The issuer promises to pay the investor a specified amount of interest for a period of time and to repay the principal at maturity.

bond fund A mutual fund that invests in bonds and passes current income to its shareholders, with capital gains as a secondary objective. Some bond funds purchase long-term securities providing a relatively high current yield, but varying substantially in price with changes in interest rates. Other funds choose short-term securities having lower yields, but fluctuating little in value.

broker A person who earns a commission or fee for acting as an agent in making contracts or sales.

budget A schedule of income and expenses commonly broken into monthly intervals and typically covering a one-year period.

bull market An extended period of generally rising prices in the market as a whole.

business risk The degree of uncertainty associated with a company’s earnings and its ability to pay interest, dividends, and other returns owed investors.

C corporations C corporations get a double whammy when it comes to paying federal income tax. The corporation has to pay a tax on its earned profit, and the people who get salaries or corporate dividends have to pay again.

capital expenses Expenses spent to improve property.

capital gain Profits from the sale of an investment or asset. Tax on this gain is usually due when the asset is sold.

capital gains exclusion An exclusion to the practice of taxing capital gains that applies to the sale of real estate.

capitalization The sum of a corporation’s long-term debt, stock, and retained earnings—also called invested capital.

cash flow Shows the ability of a company to meet its day-to-day operating expenses and satisfy its short-term obligations as they come due. It’s a measure of how well they can pay their bills, and it’s important for an investor to know this information.

cash-value life insurance In this insurance, part of the premium is used to provide death benefits, and the remainder is available to earn interest. Cash-value life insurance is a protection plan and a savings plan that charges significantly higher premiums than term insurance.

certificate of deposit (CD) A receipt for a deposit of funds in a financial institution that permits the holder to receive the deposit plus interest at maturity.

certified financial planner (CFP) A professional financial planner who has completed a series of correspondence courses and passed a 10-hour examination in subject areas such as insurance, securities, and taxes. The designation is awarded by the College for Financial Planning in Denver, Colorado.

certified public accountant (CPA) An accountant who has met certain state requirements as to age, education, experience, residence, and accounting knowledge. Accountants must pass an extensive series of examinations before becoming CPAs.

chartered financial consultant (ChFC) A professional financial planner who has completed a series of 10 courses and examinations in subject areas such as economics, insurance, investments, and tax shelters. The designation is awarded by the American College of Bryn Mawr, Pennsylvania.

churning and burning To trade securities very actively in a brokerage account in order to increase brokerage commissions rather than customer profits. Brokers may be tempted to churn accounts because their income is directly related to the volume of trading undertaken by the customers. Churning is illegal and unethical.

closed-ended fund A type of mutual fund in which only a limited number of shares can be sold.

collateral Assets pledged as security for a loan. If a borrower defaults on the terms of a loan, the collateral may be sold, with the proceeds used to satisfy any remaining obligations. High-quality collateral reduces risk to the lender and results in a lower rate of interest on the loan.

commercial bank Financial institutions, either chartered by the federal or state government that take deposits, loan money, and provide other services to individuals or corporations.

commission The sum or percentage allowed to a broker (agent) for his services.

common stock Shares of ownership of a company; a class of capital stock that has no preference to dividends or any other distributions.

compound interest Interest paid on interest from previous periods in addition to principal. Essentially, compounding involves adding interest to principal and any previous interest in order to calculate interest in the next period. Compound interest may be figured daily, monthly, quarterly, or annually.

consumer price index (CPI) A measure of the relative cost of living compared with a base year (currently 1967). The CPI can be a misleading indicator of inflationary impact on a given person because it is constructed according to the spending of an urban family of four. It is used as a measure of inflation.

consumer prices Consumer price indicators are changes in prices for a fixed market basket of about 360 goods and services. The changes are used as a measure of inflation.

corporate bond A bond issued by a corporation as opposed to a bond issued by the U.S. Treasury or a municipality.

corporation Formed into an association and endowed by law with the rights and liabilities of an individual.

credit history The record of an individual’s past events that pertain to credit previously given or applied for.

credit unions Alternatives to commercial banks, credit unions are nonprofit organizations that provide many of the same services as banks. Generally, credit unions can offer better rates on loans and savings because they don’t pay federal taxes.

customer service representative (CSR) A front-line bank employee who opens checking and savings accounts, certificates of deposit, and so forth. They know the products their financial institutions provide.

cyclical stock Common stock of a firm whose earnings are heavily influenced by cyclical changes in general economic activity. As investors anticipate changes in profits, cyclical stocks often reach their high and low levels before the respective highs and lows in the economy.

debit card A plastic card used for purchasing goods and services or obtaining cash advanced in which payment is made from existing funds in a bank account.

deductible The amount the insured must pay before an insurance company pays a claim.

deduction An expenditure permitted to be used in order to reduce an individual’s income tax liability.

default Failure to live up to the terms of a contract or to meet financial obligations. Generally, the term is used to indicate the inability of a homeowner to pay interest or principal on a debt when it is due.

defensive stock A stock that tends to resist general stock market declines and whose price will remain stable or even prosper when economic activity is tapering.

defensive stock annual report A source of operating data on a company published annually by most publicly held firms. Also known as a shareholder’s report.

defined benefit plan A qualified retirement plan that specifies the benefits received, rather than contributions into the plan, usually expressed as a percentage of pre-retirement compensation and number of years of service. The responsibility for the benefit is on the company, not the employee.

defined contribution plan A qualified retirement plan that specifies the annual contributions to the plan, usually expressed as a percentage of the employee’s salary. Contributions can be made by the employer, the employee, or both.

depreciation The systematic write-off of the basis of a tangible asset over the asset’s estimated useful life. Depreciation is intended to reflect the wear, tear, and obsolescence of the asset.

disability The lack of competent power, strength, or physical or mental ability.

disability insurance Insurance intended to cover loss of income due to a disability.

discount broker A broker that charges a lower commission than a full-service broker. In exchange, the service is less than with a full-service broker.

discounted bond A bond in which the current market value of the bond is less than the face or par value of the bond that will be received at maturity.

discretionary expenses Expenses that are incurred for nonessentials; money spent as a person chooses.

disposition charges Expenses charged to a lessee for selling the vehicle or property leased at the end of the lease.

diversification The acquisition of a group of assets in which returns on the assets are not directly related over time. Proper investment diversification, requiring a sufficient number of different assets, is intended to minimize risk associated with investing.

dividend A share of a company’s net profits distributed by the company to a class of its stockholders. The dividend is paid in a fixed amount for each share of stock held. Dividends are usually fixed in preferred stock; dividends from common stock vary as the company’s performance shifts.

dividend reinvestment plan (DRIP) Stockholders may automatically reinvest dividend payments in additional shares of the company’s stock. Instead of receiving the normal dividend checks, participating stockholders will receive quarterly notification of shares purchased and shares held in their accounts. Dividend reinvestment is normally an inexpensive way of purchasing additional shares of stock because the fees are low or are completely absorbed by the company. In addition, some companies offer stock at a discount from the existing market price. Normally, these dividends are fully taxable as income even though no cash is received by the stockholder.

dollar cost averaging Investment of an equal amount of money at regular intervals, usually each month. This process results in the purchase of extra shares during market downturns and fewer shares during market upturns. Dollar cost averaging is based on the belief that the market of a particular stock will rise in price over the long term and that it is not worthwhile (or even possible) to identify immediate highs and lows.

Dow Jones Industrial Average (DJIA) One of the measures of the stock market that includes averages for utilities, industrial, and transportation stocks, as well as the composite averages. See also index.

down payment Funds the purchaser puts down when property is sold. Remaining funds for purchase are borrowed.

durable power of attorney A legal transfer of authority enabling one party to conduct the business of another while they are disabled or incompetent.

dwelling coverage The part of your homeowner’s insurance that covers the structure in which you live.

dwelling insuranceSee renter’s insurance.

earned income Salary, wages, and self-employment income derived as compensation for services rendered. Unearned income includes the return you receive from investments.

elimination period The number of days that must pass before the insured can receive benefits. The longer the period, the lower the premium that is charged.

emergency fund A source of money put away to be used in case of illness, job loss, disability, or other circumstances. Experts recommend having between three and six months’ salary in an emergency fund.

emerging growth fund The common stock of a relatively young firm operating in an industry with very good growth prospects. Although this kind of stock offers unusually large returns, it is very risky because the expected growth may not occur, or the firm may be swallowed by the competition.

emerging market stock The term which broadly categorizes countries in the midst of developing their financial markets and economic infrastructures.

employer identification number (EIN) A nine-digit number assigned to corporations, partnerships, estates, trusts, and other entities for tax filing and reporting purposes.

enrolled agent A designation given by the IRS. They are licensed and can represent clients in front of the IRS in the event of an audit. Enrolled agents generally have more training than tax preparers, and they’re required to participate in continuing education. As a group, they charge more than tax preparers.

equity The value of ownership in property or securities. The equity in your home is the difference between the current market value of the home and the amount still owed on the mortgage.

ERISA Employee Retirement Income Security Act of 1974. Federal legislation that sets the guidelines for employer retirement plans.

escrow The holding of assets (for example: securities, cash, a collection) by a third party, which delivers the assets to the grantee or promisee on the fulfillment of some condition. Some parts of mortgage payments are held in escrow to cover expenses owed, such as property taxes and insurance.

executor (executrix) A person named in a will who is appointed to administer the decedent’s estate.

fair market value The price at which a buyer and a seller willingly consummate a trade; the prevailing price of a security or property.

Fannie Mae A security issued by the Federal National Mortgage Association (FNMA) that is backed by insured and conventional mortgages. Monthly returns to holders of Fannie Maes consist of interest and principal payments made by the homeowners on their mortgages.

Federal Home Mortgage Association (FHMA) A privately owned profit-seeking corporation that adds liquidity to the mortgage market by purchasing loans from lenders. It finances the purchases by issuing its own bonds or by selling mortgages it already owns to financial institutions.

finance charges Interest expenses incurred from lending or leasing.

financial advisor A professional who guides individuals to arrange and coordinate their financial affairs.

financial consultant Someone who provides an overview of financial information and options, in order for you to choose products and services from which you will benefit.

financial planner A person who counsels individuals and corporations with respect to evaluating financial status, identifying goals, and determining ways in which the goals can be met.

financial planning The process of defining and setting goals to achieve financial security.

fixed-interest rate loan A loan that has a set rate throughout the period of the loan. Payments are usually set at a specified, equal payment throughout the loan.

fixed-rate mortgage A mortgage in which the annual interest charged does not vary throughout the period of the loan.

foreclosure When a lender claims a property on which the loan has been defaulted.

Freddie Mac A security issued by the Federal Home Loan Mortgage Corporation that is secured by pools of conventional home mortgages. Holders of Freddie Macs receive a share of interest and principal payments by the homeowners.

full-service broker Normally works for a major brokerage firm. She receives commissions on the trades an individual makes, or she gets a fee based on the value of funds within an account.

fundamental analysis The process of comparing the fundamental properties of an investment.

gap insurance Insurance purchased to pay the difference between the value your auto insurance will pay if a leased vehicles is stolen or totaled and the amount required to terminate the lease.

global fund A mutual fund that includes at least 25 percent foreign securities in its portfolio. The value of the fund depends on the health of foreign economies and exchange rate movements. A global fund permits an investor to diversify internationally.

GNP (gross national product) The market value of all goods and services produced by a country over the period of a year.

good-till-cancelled order A limit order that remains outstanding until it is executed or cancelled. Also called an open order.

Government National Mortgage Association (GNMA) A government-owned corporation that acquires, packages, and resells mortgages and mortgage-purchased commitments in the form of mortgage-backed securities.

government obligations A debt that is backed by the full taxing power of the U.S. government. Direct obligations include Treasury bills, Treasury bonds, and U.S. savings bonds. These investments are generally considered to be of the very highest quality.

government securities Bonds, bills, or notes sold by the federal government to raise money.

grantor The person who establishes a trust. Also known as the trustor.

gross income All income except those specifically exempted by the Internal Revenue Code.

group insurance Insurance offered only to members as a group, such as employees, often for only as long as they remain members of the group.

growth fund An investment company whose major objective is long-term capital growth. Growth funds offer substantial potential gains over time but vary significantly in price, depending on general economic conditions.

growth stock The stock of a firm that is expected to have above-average increases in revenues and earnings. These firms normally retain most earnings for reinvestment and therefore pay small dividends. The stocks, often selling at relatively high price-earnings ratios, are subject to wide swings in price. Object of investment is capital appreciation and long-term capital growth.

guaranteed renewable An insurance provision that guarantees that the policy can’t be canceled if you get sick.

guaranteed replacement cost provision An insurance provision that promises to pay the total cost to replace property upon loss or damage.

hardship withdrawals A special provision of the 401(k) plan that permits an employee to withdraw funds from his or her account while still working for the firm. The provisions for withdrawal set up the withdrawal limitations, and the withdrawn funds are taxed and may be subject to a penalty.

high-yield/junk bond A high-risk, high-yield debt security issued by corporations or municipalities that are of lower quality. Junk bonds have a greater risk of default than higher-rated bonds. These securities are most appropriate for risk-oriented investors. They usually pay a higher interest rate than higher-rated bonds.

home equity loan A loan in which property is used as collateral. Usually a second mortgage on a property.

homeowner’s insurance Insurance obtained by a property owner to protect the property and contents. It also provides liability coverage for accidents that occur on the property.

HOPE (Higher Opportunities for Performance in Education) Credit A tax credit permitted for qualified tuition and related expenses for a student’s first two years of college. The student must attend postsecondary courses at least half-time. The credit is 100 percent of the first $1,000 of qualified expenses paid during the year plus 50 percent of the next $2,000, for a maximum of $3,000.

hybrid fund A mutual fund that has characteristics of several types of securities. An example would be a convertible bond, which is a bond that has a conversion feature that permits the investor to convert the security into a specified number of shares of common stock of the company.

income fund An investment company, the main objective of which is to achieve current income for its owners. Thus, it tends to select securities such as bonds, preferred stocks, and common stocks that pay relatively high current returns.

income stocks A stock with a relatively high dividend yield. The stock’s issuer is typically a firm having stable earnings and dividends and operating in a mature industry. The price of an income stock is heavily influenced by changes in interest rates.

index The measurement of the current price behavior of a representative group of stocks in relation to a base value set at an earlier point in time. The best-known indexes are the Dow Jones Industrial Average and Standard & Poor’s 500 Index.

index fund A mutual fund that keeps a portfolio of securities designed to match the performance of the market as a whole. The market is represented by an index, such as the Standard & Poor’s 500. An index fund has low administrative expenses; it appeals to investors who believe it is difficult or impossible for investment managers to beat the market.

individual retirement account (IRA) A retirement savings plan in which you can contribute up to $2,000 per year. Funds can grow tax-deferred until they are withdrawn at retirement. Contributions may or may not be tax-deductible depending on income level and participation in other retirement plans.

inflation A general increase in the price level of goods and services.

inflation rider Additional insurance coverage that is purchased to provide that the underlying policy coverage increases with inflation.

initial public offering (IPO) A company’s first sale of stock to the public. Securities offered in an IPO are often, but not always, those of young, small companies seeking outside equity capital and a public market for their stock. Investors purchasing stock in IPOs generally assume very large risks for the possibility of large gains.

insurance A mechanism that permits individual to reduce risk by sharing in the losses associated with the occurrence of certain events.

insurance bond An insurance policy guaranteeing that funds will be retained as pledged.

intangible personal property Property that attains its value from what it represents, not from what it’s worth. An example is a stock certificate.

interest The cost for the use of borrowed money.

interest-sensitive stock A stock that tends to move in the opposite direction of interest rates. Interest-sensitive stocks include nearly all preferred stocks and the common stocks of industries such as electric utilities, banks, and insurance companies. A common stock may be interest-sensitive because its dividend is relatively fixed (as with an electric utility) or because the firm raises a large portion of its funds through borrowing (as with a savings and loan).

international fund A mutual fund that invests only outside the country in which it is located.

international stock This is stock of companies located outside the United States.

investing When you buy something with the expectation of making a profit.

investment The process of purchasing securities or property for which stability of value and level of expected returns are somewhat predictable.

investment return The return achieved on an investment, including current income and any change in value during an investor’s holding period; also known as total return.

IPO (initial public offering) The stock offering of a company when it goes public. See also initial public offering.

irrevocable trust Usually set up and used by people with many assets, irrevocable trusts can’t be amended or destroyed. Once set up, the trust remains in place and can’t be changed. Used primarily to reduce estate taxes, they are also used to protect property for heirs who can’t handle their money due to age (a minor) or being a spendthrift.

itemized deduction An expenditure permitted to be used to reduce an individual’s income-tax liability.

Keogh A federally approved retirement program that permits self-employed people to set money aside for savings up to $30,000 (or up to 25 percent of their income). All contributions and income earned by the account are tax-deferred until withdrawals are made during retirement.

large-cap stocks Stocks in companies with over $10 billion in capitalization, the largest companies.

leading indicator A statistic indicating that the economy is pointing in a direction opposite of where the economy currently is.

lease A contract under which someone obtains the use of an object, such as a vehicle or property, for a specified time and a specified amount of money.

lending instrument A debt instrument; companies borrow money from investors and agree to pay a stated rate of interest over a specified period of time, at the end of which the original sum will be repaid.

leverage Measures different types of financing for firms and indicates the amount of debt being used to support the resources and operations of the company.

leverage ratios These are the amount of debt being used to support the company, and the ability of the firm to service its debt. Debt-equity ratio measures the amount of financial leverage being utilized by a company.

Lifetime Learning Credit A tax credit for expenses that don’t qualify for the HOPE credit. The Lifetime Learning Credit is available for any school year for courses to acquire or improve job skills. The credit may be for undergraduate, graduate, or professional degree courses.

limit order An order to buy at a specified price (or lower) or sell at (or above) a specified price.

liquidity The ability to quickly convert assets into cash without significant loss.

liquidity ratios These are current ratios and net working capital. You measure the ability of the company to meet its day-to-day operating expenses and satisfy short-term obligations as they come due.

living will Also called medical directives, a document that states your wishes should you become profoundly ill, irreversibly incompetent, and need life support or heroic measures to keep you alive.

long-term capital gains Profits from the sale of investments that you’ve held for more than a year. Long-term capital gains are taxed at either 10 or 20 percent, depending on your income tax bracket. Investors in the 15 percent bracket pay only a 10 percent tax on their capital gains, while all others pay a 20 percent tax on their long-term capital gains.

long-term stock Stock that you keep for more than a year before selling.

marginal tax bracket The percentage of extra income received that must be paid in taxes, or the proportional amount of taxes paid on a given income or the given dollar value of an asset. If the tax is calculated on the basis of total income, it is the average tax rate. If the tax is calculated only on the extra units of income, the rate is the marginal tax rate.

market measuresSee common stock.

market order An order to buy or sell stock at the best price available at the time the order is placed with the broker.

market timing Buying and selling stock, in part or in whole, depending on when an investor feels it’s advantageous to get in and out of the stock market.

market value The prevailing market price of a security or property; an indication of how the market as a whole has assessed the security’s or the property’s worth.

maturity The termination of the period that an obligation has to run (bonds); mortgages have a date of maturity, when they are due to be repaid in full.

medical directive (living will) A legal document directing the implementation or withholding of medical procedures while a person is unconscious and terminally ill.

mid-cap stocks Stocks in companies with $1 billion to $10 billion capitalization.

middle age The period between the ages of 40 and 60. Note that there are many definitions of middle age; this one pertains to financial middle age.

misrepresentation To represent a financial product incorrectly, improperly, or falsely.

money manager A person who is paid a fee to supervise the investment decisions of others. The term is usually used for management of individual portfolios as compared to institutional funds. See also portfolio manager.

money market accounts Accounts held in banks, on which you receive interest.

money market fund A mutual fund that sells shares of ownership and uses the proceeds to purchase short-term, high-quality securities such as treasury bills, negotiable certificates of deposit, and commercial paper. Income earned by shareholders is received in the form of additional shares of stock in the fund (normally priced at $1 each). Although no fees are generally charged to purchase or redeem shares in a money market fund, an annual management charge is levied by the fund’s advisors. This investment pays a return that varies with short-term interest rates. It is relatively liquid and safe, but yields and features vary.

money purchase plan A qualified employer retirement plan in which each employee has an individual account. The employer must make annual contributions to each employee’s account. The amount of contribution is determined by a pre-set formula, based on a fixed percentage or a flat monetary amount.

mortgage A conditional conveyance of property to a creditor as security for the repayment of money.

mortgage life insurance Term insurance that will pay the outstanding balance on the insured person’s home loan should he or she die.

municipal bond The debt issue of a city, county, state, or other political entity. Interest paid by most municipal bonds is exempt from federal income taxes and often from state and local taxes. Municipal bonds with tax-exempt interest appeal mainly to investors with significant amounts of other taxable income.

municipal bond fund A mutual fund that invests in tax-exempt securities and passes through tax-free current income to its shareholders. Some municipal bond funds purchase long-term securities providing a relatively high current yield, but varying substantially in price with changes in interest rates. Other funds choose short-term securities having lower yields but fluctuating little in value.

mutual fund An open-ended investment company that invests its shareholders’ money in a diversified group of securities of other corporations. Mutual funds are usually diversified and professionally managed.

NASDAQ (National Association of Security Dealers Automated Quotation System) A system (exchange) providing up-to-date bid and ask prices on thousands of over-the-counter securities.

net income The income you have after you’ve paid taxes and any and all other liabilities, expenses, or charges against it.

net working capital An absolute measure of a company’s liquidity.

net worth The amount of wealth calculated by taking the total value of assets owned and subtracting all liabilities.

New York Stock Exchange (NYSE) The largest, oldest, key organized trading exchange in the United States for stock and bond transactions, accounting for over 50 percent of the total volume of shares traded on organized exchanges.

no-load fund A mutual fund sold without a sales charge. No-load funds sell directly to customers at net asset value with no intermediate salesperson charging a fee.

nondiversifiable riskSee systematic risk.

nonqualified retirement plans Pension and profit sharing plans that do not meet ERISA requirements to be considered qualified. Usually set up for key employees, deferred compensation and stock options are types of nonqualified plans.

nontaxable income Income specifically exempted from taxation. On federal income tax returns, interest from most municipal bonds, life insurance proceeds, gifts, and inheritances is generally nontaxable income.

odd lot Less than 100 shares of a stock.

open orderSee good-till-cancelled order.

open-ended fund A mutual fund with no limit on the number of shares it can offer for sale.

operating agreement The formal agreement designed and agreed to by members of an investment club.

Operation of Law Transfer of property, at death, from one joint owner to the other joint owner(s) rather than via a will, trust, or beneficiary designation.

partnership A legal relationship between two or more persons contractually associated as joint principals in a business.

pension plan An employer-sponsored retirement plan in which a retiree receives a fixed periodic payment made in consideration of past services, injury or loss sustained, merit or poverty, and so on.

performance The level of profit you make from a particular investment. Performance is measured for a period of time—either a quarter, half-year, or annual rate of return.

personal credit score A score given to individuals by the three major credit firms based on their credit report and credit history. Lenders use this score to decide whether to lend to an individual and at what interest rate.

personal finance Every aspect of one’s life that deals with money.

personal income This is the before-tax income, received in the form of wages and salaries, interest and dividends, rents, and other payments such as Social Security, unemployment, and pensions. This report helps explain trends in consumer buying habits. When personal income rises, it often means that people will increase their buying.

points Prepaid interest paid as a fee to a mortgage lender to cover the cost of applying for the loan. One point is one percent of the loan’s value.

portfolio A group of investments assembled to meet an investment goal.

portfolio manager A person who is paid a fee to supervise the investment decisions of others. The term is normally used in reference to the managers of large institutions, such as bank trust departments, pension funds, insurance companies, and mutual funds.

power of attorney A legal transfer of authority. It enables one party to conduct the business of another while they are away or incompetent.

preferred stock A security that shows ownership in a corporation and gives the holder a claim prior to the claim of common shareholders on earnings and also generally on assets in the event of liquidation. Most preferred stock issues pay a fixed dividend set at the time of issuance, stated in a dollar amount or as a percentage of par value. Because no maturity date is stipulated, these securities are priced on dividend yield and trade much like long-term corporate bonds. As a general rule, preferred stock has limited appeal for individual investors.

premium The amount paid, in one sum or periodically, for a contract of insurance.

premium bond A bond in which the current market value of the bond is more than the face or par value of the bond that will be received at maturity.

price/earnings ratio (P/E ratio) A common stock analysis statistic in which the current price of a stock is divided by the current (or sometimes the projected) earnings per share of the issuing firm.

principal The capital sum, as distinguished from interest or profit.

probate The process of verifying a will, after death, at the courthouse. The court gives authorization to an executor (or administrator) to gather assets, pay death taxes and expenses, and then transfer property to the beneficiaries of the will as directed.

producer price index If this index goes up, it means that producers are raising prices on the products they sell. Sometimes these increases are passed along to consumers, but depending on things like competition and the state of the general economy, they may not be.

producer prices These indicate price changes of goods at various stages of production, from crude materials such as raw cotton to finished goods like clothing and furniture. An upward surge may mean higher consumer prices later. Watch for changes in the prices of finished goods. These don’t fluctuate as widely as crude materials, which makes them a better measure of inflationary pressure.

profit sharing plan A qualified, defined contribution plan in which an employer contributes money to employees’ accounts, based on the amount of profit the company has realized that year.

profitability ratios These measure the company’s success, as based on its profit.

prospectus A formal written document related to a new securities offering that delineates the proposed business plan or the data relevant to an existing business plan. Investors need this information to make educated decisions about whether to purchase the security. The prospectus includes financial data, a summary of the firm’s business history, a list of its officers, a description of its operations, and a mention of any pending litigation. A prospectus is an abridged version of the firm’s registration statement, filed with the Securities and Exchange Commission.

qualified pension or profit sharing plan A pension or profit sharing plan sponsored by an employer that meets the ERISA requirements. Usually contributions are with pre-tax dollars.

Qualified State Tuition Plan Investment account set up under section 529 of the IRS Tax Code that permits investing for college in a tax-deferred vehicle. One plan is know as a Prepaid Tuition Plan or Tuition Assistance Plan, the other is a 529 plan.

rate The amount charged to borrow money.

redemption fee A fee charged to an investor if mutual fund shares are sold before the end of a previously agreed upon time period.

refinancing Reapplying for a new mortgage, usually to receive a lower interest rate. Refinancing is done for consolidation, lower interest rate, or additional funding.

renter’s insurance Similar to homeowner’s insurance, it provides insurance protection for a resident’s personal property, along with liability coverage.

residual value The value of a vehicle when it comes off a lease; the value you need to pay to acquire the vehicle.

retail sales These are total sales at the retail level, including everything from cars to groceries. This figure gives a rough clue to consumer attitudes, and can indicate future conditions. A long slowdown in sales can lead to cuts in production. If retail sales are dropping, an investor shouldn’t rush out and buy Gap, The Limited, Sears, and so on.

return on equity (ROE)See return on investment (ROI).

return on investment (ROI) Measures the return to stockholders by relating profit to shareholders’ equity.

return on total assets (ROTA) Looks at the amount of resources by the firm to support operations. Reveals management effectiveness in generating profits from the assets it has available, and is perhaps the single most important measure of return.

reverse mortgage An arrangement in which a lender pays the homeowner a monthly payment with the idea that the lender will be repaid after the property is sold.

rider An addition or amendment to a document.

risk The chance that the value or return on an investment will differ from its expected value. Business risk, financial risk, purchasing power risk, interest rate risk, market risk, default risk, and foreign currency risk are all types of risk associated with investments.

Roth IRA New in 1998, an individual retirement account in which the funds placed into the account are nondeductible. If held more than five years, all funds withdrawn are received tax-free.

round lot The standard unit of trading in a particular type of security. For stocks, a round lot is 100 shares or a multiple thereof, although few inactive issues trade in units of 10 shares.

S corporations S corporations get special tax status from the Internal Revenue Service (IRS), and they don’t pay tax on the corporate level. All profits and losses are passed along to members or shareholders, who have to include the income on their personal tax returns. If there’s a loss, shareholders write it off on their personal taxes.

S&LSee thrifts.

S&P 500 Standard and Poor’s composite of the 500 largest companies in the United States.

sandwich generation A rapidly growing group of middle-aged people, most of them women, who are caring both for children and aging parents.

sector fund Securities or other assets that share a common interest. Sector funds permit an investor to concentrate on a specific investment segment and yet diversify investments among various issuers. Sector funds entail more risk, but offer greater potential returns than funds that diversify their portfolios.

security An investment that represents evidence of debt, ownership of a business, or the legal right to determine the intrinsic interest in a business.

SEC (Securities and Exchange Commission) A federal agency that registers securities and investment advisers. The agency is in charge of the administration of federal securities law. They regulate the organized securities exchanges and over-the-counter markets by extending disclosure requirements to outstanding securities.

SEP-IRA A retirement plan for the self-employed that permits contributions up to $30,000 per year, or 15 percent of your income, whichever is lower. Similar to an IRA, except that the contribution limits are higher.

settlement The settling of property and title on an individual or individuals; the transaction when you purchase a security or property.

shareholder One who holds or owns a share or shares of a corporation.

short-term capital gains Profits that come from the sale of investments that you’ve held for less than a year. Any gain made as a result of the investment is taxed at the same income tax rate as all other income of the taxpayer.

simple interest Interest paid on an initial investment only. Simple interest is calculated by multiplying the principal times the annual rate of interest times the number of years involved.

simple retirement plans A relatively new retirement plan aimed at small employers (fewer than 100 employees). Simple plans are easy and inexpensive to administer. An employer must contribute annually to a simple plan.

simplified employee pension plan (SEP) A special type of joint Keogh–individual retirement account, permitting contributions from employees and employers. The SEP was developed to give small businesses a retirement plan that is easier to establish and administer than an ordinary pension plan.

small-cap stocks Companies which have less than $1 billion capitalization.

speculation Taking above-average risks to achieve above-average returns, generally during a relatively short period of time. Speculation involves buying something on the basis of its potential selling price rather than on the basis of its actual value.

springing power of attorney A document that becomes valid only when the principal is declared to be mentally incompetent.

standard deduction The minimum deduction from income allowed a taxpayer for calculating taxable income. Individuals with few itemized deductions are the standard deduction instead of itemizing deductions.

stock Shares of ownership in a company. These shares include common stock of various classes and any preferred stock outstanding.

stock certificate Physical proof, issued by the corporation, that an investor owns shares in the company. Stock certificates can be certificated (in paper form that you would hold in your lockbox) or in uncertificated form (held in dividend reinvestment plans and with your broker).

stock fund A mutual fund that limits its investments to shares of common stock. Common stock funds vary in risk, from relatively low to quite high, depending on the types of stocks in which the funds invest.

stock market The organized securities exchange for stock and bond transactions.

stockbroker A broker who, for a commission, buys and sells stocks (and commonly other securities) for customers.

stop-loss order An order to sell a stock when its market price reaches or drops below a specified level; a suspended order used primarily to protect the investor against rapid declines in prices and to limit loss.

summary annual report The report provided by your employer describes the firm’s retirement plan’s aggregate financial status.

summary plan description An employer document for the firm’s retirement plan that explains the basic rules and features of the plan. You should receive a copy within 90 days of becoming a participant.

survivor benefits explanation Usually provided annually, a description of your survivor benefits available to your spouse under your retirement plan.

systematic risk Also known as the nondiversifiable risk. The risk of a stock following the market. Systematic risk is attributable to forces that affect all investments and are therefore not unique to a given investment.

target benefit plan An age-weighted retirement plan that’s normally used by a company that wishes to have a specified sum available for an older employee (usually an owner) at the time of retirement.

target price What you anticipate your investment will be worth at a future time. If you expect your $1,000 investment to double in five years, for example, your target price is $2,000.

tax numberSee employer identification number (EIN).

tax preparer An individual who prepares a tax return according to law.

tax-deductible An expense that can be used to offset gross income when calculating your taxable gross income.

tax-deferred Income that is earned but neither received nor taxed until a later date, when the funds are withdrawn or mature. Tax-deferred assets include those within an IRA, 401(k) plan, 403(b) plan, tax-deferred annuity, tax-deferred life insurance, EE savings bonds, and others.

tax-managed A recent concept for specified mutual funds where the tax consequences are taken into consideration when securities within the mutual fund are sold.

taxable income Income that is subject to taxation; adjusted income minus standard or itemized deductions and exemptions.

term insurance Life insurance in which the insurance company pays a specified sum if the insured dies during the coverage period. Term insurance includes no savings, cash value, borrowing power, or benefits at retirement. On the basis of cost, it is the least expensive insurance available, although policy prices can vary significantly among firms.

testamentary trust A trust that is laid out in a person’s will and established after his death.

thrifts These are financial institutions commonly known as savings and loans (S&Ls).

time-share The deed or right to spend a specified amount of time every year at a specific place.

total return Dividend or interest income plus any capital gains, generally considered a better measure of an investment’s return than dividends or interest alone.

trading stock This is different from investing in stock. Trading stock is when you buy and sell stock actively, with the intention of turning a profit. Investing is when you buy stock with the intention of keeping it for a significant period of time.

transaction costs The expense of buying or selling securities.

treasury bond Longer-term (over 10 years), interest-bearing debt of the U.S. Treasury, available through a bank or brokerage firm or directly from the Federal Reserve. Treasury Bonds are quoted and traded in thirty-seconds of a point.

treasury note Intermediate-term (1 to 10 years), interest-bearing debt of the U.S. Treasury. Treasury notes are quoted and traded in thirty-seconds of a point.

treasury stock Shares of a firm’s stock that have been issued and then repurchased. Treasury stock is not considered in paying dividends, voting, or calculating earnings per share. It may be eventually retired or reissued.

trust A legal document/agreement allowing the transfer of ownership of property or money to a person who is designated to manage and distribute the assets according to your instructions, for the benefit of another.

trustee The person who manages a trust.

unemployment Measuring the percentage of the workforce that’s currently involuntarily without jobs, this is a broad indicator of economic health. Another monthly figure available is the number of payroll jobs. This may be a better indicator for spotting changes in business. A decreasing number of jobs is a sign that firms are cutting production.

universal life insuranceSee cash value life insurance.

unrealized losses See unrealized profits.

unsystematic risk The portion of an investor’s portfolio’s risk that can be eliminated by diversification.

value stock A stock in which the price is considered below normal using valuation measures common to the market.

variable interest rate Interest, either paid or received (depending on whether you are borrowing or investing funds), that changes periodically, depending on the initial contract.

variable life insurance An insurance policy, the industry’s answer to the stock market boom of the 1990s. The premium dollars are invested in a variety of mutual funds, growing until needed for the internal cost of insurance. In the early years, your premium is lower than the cost of insurance. In later years, the price of insurance increases, but hopefully the investments have accumulated enough to cover the costs.

wage replacement ratio (WRR) The ratio amount of your Social Security benefit to your pre-retirement income. Knowing this ratio provides an idea of how much other income you will need for retirement.

warranty A statement of promise or assurance in connection with a contract or purchase.

whole life insuranceSee cash value life insurance.

will A legal document directing how your property is to be disposed of after death.

yield The percentage of return on an investment; also known as return. The dividends or interest paid by a company as a percentage of the current price.

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