As you plan for your financial future, you will encounter new words, phrases and concepts. Becoming familiar with some basic investment terms will make you a more confident investor and help you through the planning process. This glossary is designed to help you understand some of the more common investment and financial terms you may encounter. Your CFS financial representative can explain these terms more completely and discuss with you those relevant to your situation.
ALPHA – The amount of return expected from an investment from its inherent value.
AMERICAN STOCK EXCHANGE (AMEX) – The second largest stock exchange in the United States, located in the financial district of New York City. (Formerly known as the Curb Exchange from its origin on a Manhattan street.)
ANNUALIZED RATE OF RETURN – The average annual return over a period of years, taking into account the effect of compounding. Annualized rate of return also can be called compound growth rate.
ANNUITY – Contract between an individual and an insurance company. The individual pays money into an account in exchange for a guaranteed payment at or during retirement.
APPRECIATION – The increase in value of a financial asset.
ASSET – Something that has the potential to earn money for you. It is something you own that can reasonably be expected to produce something for you. Assets include stocks, bonds, commodities, real estate, and other investments.
ASSET ALLOCATION – Mix of certificates, stocks, bonds and cash in a retirement account. The proportions aim to balance risk and reward based on the investor’s goals, risk tolerance and investment horizon.
ASSET CLASS – Securities with similar features. The most common asset classes are stocks, bonds and cash equivalents.
AVERAGE MATURITY – For a bond fund, the average of the stated maturity dates of the debt securities in the portfolio. Also called average weighted maturity. In general, the longer the average maturity, the greater the fund’s sensitivity to interest-rate changes, which means greater price fluctuation. A shorter average maturity usually means a less sensitive – and consequently, less volatile – portfolio.
BALANCED FUND – Mutual funds that seek both growth and income in a portfolio with a mix of common stock, preferred stock or bonds. The companies selected typically are in different industries and different geographic regions.
BASIS POINT – One gradation on a 100-point scale representing 1%; used especially in expressing variations in the yields of bonds. Fixed income yields vary often and slightly within one percent and the basis point scale easily expresses these changes in hundredths of 1%. For example, the difference between 12.83% and 12.88% is 5 basis points.
BEAR MARKET – A bear market is a prolonged period of falling stock prices, usually marked by a decline of 20% or more. A market in which prices decline sharply against a background of widespread pessimism, growing unemployment or business recession. The opposite of a bull market.
BENCHMARK – A standard, usually an unmanaged index, used for comparative purposes in assessing performance of a portfolio or mutual fund.
BENEFICIARY – Persons or trust designated to receive plan benefits of a participant in the event of the participant’s death.
BETA – A measurement of volatility where 1 is neutral; above 1 is more volatile; and less than 1 is less volatile.
BLUE CHIP – A high-quality, relatively low-risk investment; the term usually refers to stocks of large, well-established companies that have performed well over a long period. The term Blue Chip is borrowed from poker, where the blue chips are the most valuable.
BOND – Investment vehicle that represents a loan to a corporation, government or municipality. These generally pay a fixed interest rate and return the principal investment at maturity.
BOND FUND – A mutual fund that invests exclusively in bonds.
BREAKPOINT – The level of dollar investment in a mutual fund at which an investor becomes eligible for a discounted sales fee. This level may be achieved through a single purchase or a series of smaller purchases.
BROKER – An agent who handles the public’s orders to buy and sell securities, commodities or other property. A commission is charged for this service. (See: Dealer)
BULL MARKET – Any market in which prices are advancing in an upward trend. In general, someone is bullish if they believe the value of a security or market will rise. The opposite of a bear market.
CASH EQUIVALENT – A short-term money-market instrument, such as a Treasury bill or repurchase agreement, of such high liquidity and safety that it is easily converted into cash.
CERTIFICATE OF DEPOSIT (CD) – Bank instrument enabling a depositor to earn interest on their money during a fixed time period. Rates vary.
COMMISSION – The broker’s basic fee for purchasing or selling securities or property as an agent.
COMMON STOCK -Securities that represent an ownership interest in a corporation. If the company has also issued preferred stock, both common and preferred have ownership rights. Common stockholders assume the greater risk, but generally exercise the greater control and may gain the greater award in the form of dividends and capital appreciation.
COMPOUNDING INTEREST – Interest that is calculated not only on the principal, but also on interest accumulated from prior periods.
CONTINGENT DEFERRED SALES CHARGE (CDSC) – A back-end sales charge imposed when shares are redeemed from a fund. This fee usually declines over time.
CONTRIBUTION – Monetary contribution to a retirement plan, often expressed as a percentage of annual income.
CONVERSION – Movement of assets from a Traditional, SEP or Simple IRA to a Roth IRA.
CUSTODIAN – A bank that holds a mutual fund’s assets, settles all portfolio trades and collects most of the valuation data required to calculate a fund’s net asset value (NAV).
DAILY DIVIDEND FACTOR – Daily dividend distributed by a money market mutual fund.
DEALER – An individual or firm in the securities business who buys and sells stocks and bonds as a principal rather than as an agent. The dealer’s profit or loss is the difference between the price paid and the price received for the same security. The dealer’s confirmation must disclose to the customer that the principal has been acted upon. The same individual or firm may function, at different times, either as a broker or dealer.
DEFAULT – Failure of a debtor to make timely payments of interest and principal as they come due or to meet some other provision of a bond indenture.
DEFINED BENEFIT PLAN – Pension plan that guarantees specific retirement benefits.
DEFINDED CONTRIBUTION PLAN – Pension plan that requires specific rates of contribution but doesn’t guarantee any specific retirement benefit.
DISTRIBUTION – Removal of assets from a retirement account; assets are then paid to the account owner or beneficiary.
DISCRETIONARY ACCOUNT – An account in which the customer gives the broker or someone else discretion to buy and sell securities or commodities, including selection, timing, amount, and price to be paid or received.
DIVERSIFICATION – The process of owning different investments that tend to perform well at different times in order to reduce the effects of volatility in a portfolio, and also increase the potential for increasing returns.
DIVIDEND – A dividend is a portion of a company’s profit paid to common and preferred shareholders. Dividends provide an incentive to own stock in stable companies even if they are not experiencing much growth. Companies are not required to pay dividends.
DIVIDEND YEILD – Annual percentage of return earned by a mutual fund. The yield is determined by dividing the amount of the annual dividends per share by the current net asset value or public offering price.
DOLLAR-COST AVERAGING – Investing the same amount of money at regular intervals over an extended period of time, regardless of the share price. By investing a fixed amount, you purchase more shares when prices are low, and fewer shares when prices are high. This may reduce your overall average cost of investing.
DOW JONES INDUSTRIAL AVERAGE (DOW) – The most commonly used indicator of stock market performance, based on prices of 30 actively traded blue chip stocks, primarily major industrial companies. The Average is the sum of the current market price of 30 major industrial companies’ stocks divided by a number that has been adjusted to take into account stocks splits and changes in stock composition.
EARLY WITHDRAWAL PENALTY – Penalty of ten percent imposed for withdrawal of assets from a qualified retirement plan prior to age 59½.
EQUITIES – Shares issued by a company which represent ownership in it. Ownership of property, usually in the form of common stocks, as distinguished from fixed-income securities such as bonds or mortgages. Stock funds may vary depending on the fund’s investment objective.
EQUITY FUND – A mutual fund/collective fund in which the money is invested primarily in common and/or preferred stock. Stock funds may vary, depending on the fund’s investment objective.
ERISA – The Employee Retirement Income Security Act. Passed in1974, ERISA established the legal standards by which retirement plans are required to be managed.
ESTATE PLAN – Comprehensive plan for the orderly handling, disposition and administration of assets left after an individual’s death.
EXCHANGE-TRADED FUND – More commonly known as ETFs, exchange traded funds are investment vehicles designed to replicate the daily movement of a particular market index or other benchmark. Like stocks, ETFs are listed and traded throughout the day on a public exchange or equity market. Though some recent ETFs have actively managed components, virtually all exchange-traded funds are passively managed.
EXPENSE RATIO – Measures a fund’s annual expenses as a percentage of the fund’s net assets. Expenses include all management and administrative fees, but exclude brokerage costs such as commissions.
FACE VALUE – The value of a bond that appears on the face of the bond, unless the value is otherwise specified by the issuing company. Face value is ordinarily the amount the issuing company promises to pay at maturity. Face value is not an indication of market value. Sometimes referred to as par value. (See: Par)
FINRA – The Financial Industry Regulatory Authority (f/k/a National Association of Securities Dealers), is the largest non-governmental regulator for all securities firms doing business in the United States. FINRA was created in July 2007 through the consolidation of NASD and the member regulation, enforcement and arbitration functions of the New York Stock Exchange.
FIXED INCOME FUND – A fund or portfolio where bonds are primarily purchased as investments. There is no fixed maturity date and no repayment guarantee.
FIXED INCOME SECURITY – A security that pays a set rate of interest on a regular basis.
GAIN – The difference between a security’s purchase price and its selling price, when the difference is positive.
GOVERNMENT BONDS – Obligations of the U.S. Government, regarded as the highest grade securities issues.
GROWTH FUND – Growth funds focus on future gains. A growth fund manager will typically invest in stocks with earnings that outperform the current market. The manager attempts to achieve success by focusing on rapidly growing sectors of the economy and investing in leading companies with consistent earnings growth. The fund grows primarily as individual share prices climb.
GROWTH STOCK – Stock of a company with a record of growth in earnings and revenue at a relatively rapid rate that usually pays little or no dividend.
INCOME BOND – Generally income bonds promise to repay principal but to pay interest only when earned. In some cases unpaid interest on an income bond may accumulate as a claim against the corporation when the bond becomes due. An income bond may also be issued in lieu of preferred stock.
INDEX – An investment index tracks the performance of many investments as a way of measuring the overall performance of a particular investment type or category. The S&P 500 is widely considered the benchmark for large-stock investors. It tracks the performance of 500 large U.S. company stocks.
INDIVIDUAL RETIRMENT ACCOUNT (IRA) – A personal tax-deferred retirement account opened by an individual (or one spouse) with earned income. Contributions limits apply. IRAs permit investment through intermediaries like mutual funds, insurance companies and banks, or directly in stocks and bonds through stockbrokers.
INFLATION – A rise in the prices of goods and services, often equated with loss of purchasing power.
INTEREST RATE – The fixed amount of money that an issuer agrees to pay the bondholders. It is most often a percentage of the face value of the bond. Interest rates constitute one of the self-regulating mechanisms of the market, falling in response to economic weakness and rising on strength.
INTEREST-RATE RISK – The possibility of a reduction in the value of a security, especially a bond, resulting from a rise in interest rates.
INVESTMENT – The use of money to attempt to make, or with the goal of making more money, to gain income, increase capital, or both.
INVESTMENT ADVISOR – An organization employed by a mutual fund to give professional advice on the fund’s investments and asset management practices.
INVESTMENT COMPANY – A corporation, trust or partnership that invests pooled shareholder dollars in securities appropriate to the organization’s objective. Mutual funds, closed-end funds and unit investment trusts are the three types of investment companies.
INVESTMENT GRADE BOND – A bond generally considered suitable for purchase by prudent investors.
INVESTMENT OBJECTIVE – The goal of a mutual fund and its shareholders, e.g. growth, growth and income, income and tax-free income.
JUNK BOND – A lower-rated, usually higher-yielding bond, with a credit rating of BB or lower.
KEOGH PLAN – Tax-advantaged personal retirement program that can be established by a self-employed individual.
LARGE-CAP – The market capitalization of the stocks of companies with market values greater than $10 billion.
LETTER OF INTENT – A letter of intent may also be issued by a mutual fund shareholder to indicate that he/she would like to invest certain amounts of money at certain specified times. In exchange for signing a letter of intent, the shareholder would often qualify for reduced sales charges. A letter of intent is not a contract and cannot be enforced, it is just a document stating serious intent to carry out certain business activities.
LIPPER RATINGS – The Lipper Mutual Fund Industry Average is the performance level of all mutual funds, as reported by Lipper Analytical Services of New York. The performance of all mutual funds is ranked quarterly and annually, by type of fund such as aggressive growth fund or income fund. Mutual fund managers try to beat the industry average as well as the other funds in their category.
LIQUIDITY – The ability to have ready access to invested money. Mutual funds are liquid because their shares can be redeemed for current value (which may be more or less than the original cost) on any business day.
LOADS (back-end, front-end and no-load) – Sales charges on mutual funds. A back-end load is assessed at redemption (see contingent deferred sales charge), while a front-end load is paid at the time of purchase. No-load funds are free of sales charges.
LONG-TERM INVESTMENT STRATEGY – A strategy that looks past the day-to-day fluctuations of the stock and bond markets and responds to fundamental changes in the financial markets or the economy.
LOSS – The amount by which the proceeds from a sale of a security are less than its purchase price.
MANAGEMENT FEE – The amount paid by a mutual fund to the investment advisor for its services.
MARKET – A public place where buyers and sellers conduct transactions, either directly or via intermediaries
MARKET PRICE – The current price of an asset.
MARKET RISK – The possibility that an investment will not achieve its target.
MARKET TIMING – A risky investment strategy that calls for buying and selling securities in anticipation of market conditions.
MATURITY – The date on which a loan or bond comes due and is to be paid off.
MID-CAP – The market capitalization of the stocks of companies with market values between $3 to $10 billion.
MONEY MARKET MUTUAL FUND – A short-term investment that seeks to protect principal and generate income by investing in Treasury bills, CDs with maturities less than one year and other conservative investments.
MORNINGSTAR RATINGS – System for rating open- and closed-end mutual funds and annuities by Morningstar Inc. of Chicago. The system rates funds from one to five stars, using a risk-adjusted performance rating in which performance equals total return of the fund.
MUTUAL FUND – Fund operated by an investment company that raises money from shareholders and invests it in stocks, bonds, options, commodities or money market securities.
NASDAQ Stock Market – NASDAQ is an American stock exchange. It is the second-largest stock exchange in the world by market capitalization, behind only the NYSE located in the same city.
NET ASSET VALUE (NAV) – The current dollar value of a single mutual fund share; also known as share price. The fund’s NAV is calculated daily by taking the fund’s total assets, subtracting the fund’s liabilities, and dividing by the number of shares outstanding. The NAV does not include the sales charge. The process of calculating the NAV is called pricing.
NEW YORK STOCK EXCHANGE (NYSE) – The largest organized securities market in the United States, founded in 1792. The Exchange itself does not buy, sell, own or set the prices of securities traded there. The prices are determined by public supply and demand.
OVER-THE-COUNTER – A market for securities made up of securities dealers who may or may not be members of a securities exchange. The over-the-counter market is conducted using multiple communication options and deals mainly with stocks of companies without sufficient shares, stockholders or earnings to warrant listing on an exchange. Over-the-counter dealers may act either as principals or as brokers for customers. The over-the-counter market is the principal market for bonds of all types
PAR VALUE – Par value is the amount originally paid for a bond and the amount that will be repaid at maturity. Bonds are typically sold in multiples of $1,000.
PORTFOLIO – A collection of investments owned by one organization or individual, and managed as a collective whole with specific investment goals in mind.
PENSION FUND – Fund set up and invested by an employer or union to provide income for workers when they retire. Government and military employees often collect pensions.
PREFERRED STOCK – A class of stock with a fixed dividend that has preference over a company’s common stock in the payment of dividends and the liquidation of assets. There are several kinds of preferred stock, among them adjustable-rate and convertible.
PREMIUM – The amount by which a bond or stock sells above its par value.
POWER OF ATTORNEY (POA) – Authorization of one person to make legal decisions and take other actions on behalf of another person.
PRICE-TO-EARNINGS (P/E) RATIO – A stock’s price divided by its earnings per share, which indicates how much investors are paying for a company’s earning power.
PROSPECTUS – Formal written offer to sell securities that sets forth the plan for proposed business enterprise or the facts concerning an existing one that an investor needs to make an informed decision. Prospectuses are also issued by mutual funds, containing information required by the SEC, such as history, background of managers, fund objectives and policies, financial statement, risks, services and fees.
PROXY – A shareholder vote on matters that require shareholders’ approval.
PUBLIC OFFERING PRICE (POP) – A mutual fund share’s purchase price, including sales charges.
REAL ESTATE INVESTMENT TRUST (REIT) – An organization similar to an investment company in some respects but concentrating its holdings in real estate investments.
REGISTERED INVESTMENT ADVISOR (RIA) – A firm or individual that is registered with the SEC or state securities authority that has been through certain training, and that agrees to abide by certain rules, including ensuring that recommendations, and trades made on your behalf are in your best interest.
REGISTERED REPRESENTATIVE – The man or woman who serves the investor customers of a broker/dealer. A registered representative must be registered with FINRA.
REQUIRED MINIMUM DISTRIBUTION (RMD) – Amount of money the federal government requires you to withdraw each year from retirement accounts after you reach age 70½.
RIGHTS OF ACCUMULATION – The option to purchase additional shares at a reduced sales charge if they reach a certain breakpoint.
RISK TOLERANCE – The degree to which you can tolerate volatility in your investment values.
ROLLOVER – Moving assets from one qualified plan to another or to an IRA within 60 days of distributions, while retaining the tax benefits of a qualified plan.
ROTH IRA – IRAs funded with nondeductible contributions; not taxed upon a qualified withdrawal.
SALES CHARGE – An amount charged for the sale of some fund shares, usually those sold by brokers or other sales professionals. By regulation, a mutual fund sales charge may not exceed 8.5 percent of an investment purchase. The charge may vary depending on the amount invested and the fund chosen. A sales charge or load is reflected in the asked or offering price. See loads.
SECTOR – A group of similar securities, such as equities in a specific industry.
SECURITIES – Another name for investments such as stocks or bonds. The name ‘securities’ comes from the documents that certify an investor’s ownership of particular stocks or bonds.
SHARE – A unit of ownership in an investment, such as a share of a stock or a mutual fund.
SHARE CLASSES – Classes represent ownership in the same fund but charge different fees. This can enable shareholders to choose the type of fee structure that best suits their particular needs.
SHARPE RATIO – A risk-adjusted measure that measures reward per unit of risk. The higher the sharpe ratio, the higher the return compared to a risk free investment. The numerator is the difference between the Fund’s annualized return and the annualized return of the risk-free instrument (T-Bills).
SHORT-TERM INVESTMENT – Asset purchased with an investment life of less than a year.
SMALL-CAP – The market capitalization of the stocks of companies with market values less than $3 billion.
STANDARD & POOR’S INDEX – Broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks commonly known as the Standard & Poor’s 500 or S&P 500.
STANDARD DEVIATION – A statistical measure of the degree to which an individual value in a probability distribution tends to vary from the mean of the distribution.
SECURITIES AND EXCHANGE COMMISSION (SEC) – The federal agency created by the Securities and Exchange Act of 1934 that administers the laws governing the securities industry, including the registration and distribution of mutual fund shares.
SIMPLIFIED EMPLOYEE PENSION (SEP) – An option for business owners and self-employed individuals as a method to contribute toward their employees’ retirement as well as their own retirement savings.
SOCIAL SECURITY – A federal government program of social insurance and benefits including retirement income, disability income, Medicare and Medicaid, and death and survivorship benefits.
STOCK – Share of ownership in a company, traded on one or more exchanges.
TAX DEFERRAL – Taxes are not due on the account’s earnings (and in some cases, contributions made to the account) until they’re withdrawn.
TAX-EXEMPT INCOME – Tax-exempt income is income that is exempt from income taxes. A purchaser of state municipal bonds is exempt from federal taxation on the income earned from the bonds.
TIME HORIZON – The amount of time that you expect to stay invested in an asset or security.
THRIFT SAVINGS PLAN (TSP) – Employer-sponsored retirement plan for federal employees and service members. Employees contribute a portion of their pay, which is matched by the employers.
TRADITIONAL IRA – IRA that allows individuals to contribute pretax income, up to certain annual limits, toward investments that can grow tax-deferred.
TRANSFER AGENT – An agent, usually a commercial bank, appointed to monitor records of stocks, bonds and shareholders. A transfer agent keeps a record of the name of each registered shareholder, his or her address, the number of shares owned, and sees that certificates presented for the transfer are properly canceled and new certificates are issued in the name of the new owner.
TREASURY BILL – Negotiable short-term (one year or less) debt obligations issued by the U.S. government and backed by its full faith and credit.
TREASURY BOND – Negotiable long-term (10 years or longer) debt obligations issued by the U.S. government and backed by its full faith and credit.
TREASURY NOTE – Negotiable medium-term (one year to 10 years) debt obligations issued by the U.S. government and backed by its full faith and credit.
TREASURY SECURITY – Securities issued by the U.S. Treasury Department and backed by the U.S. government.
TRUST – Agreement in which assets are transferred from a grantor to a trustee for the purpose of benefiting one or more beneficiaries.
TRUSTEE – Individual, bank or trust company having fiduciary responsibility for holding plan assets.
VALUATION – An estimate of the value or worth of a company; the price investors assign to an individual stock.
VALUE STOCK – Typically an overlooked or underpriced company that is growing at slower rates.
VARIABLE ANNUITY – A life insurance policy where the annuity premium (a set amount of dollars) is immediately turned into units of a portfolio of stocks. Upon annuitization, the policyholder is paid according to accumulated units, the dollar value of which varies according to the performance of the stock portfolio. Its objective is to preserve, through stock investment, the purchasing value of the annuity which otherwise is subject to erosion through inflation.
VOLATILITY – The extent of fluctuation in share price, interest rates, etc. The higher the volatility, the less certain an investor is of return; therefore, volatility is one measure of risk.
YIELD – Also known as return. The dividends or interest paid by a company expressed as a percentage of the current price. A stock with a current market value of $40 a share paying dividends at the rate of $3.20 is said to return 8% ($3.20÷$40.00). The current yield on a bond is figured the same way.
YIELD TO MATURITY – The yield of a bond to maturity takes into account the price discount from or premium over the face amount. It is greater than the current yield when the bond is selling at a discount and less than the current yield when the bond is selling at a premium.
ZERO COUPON BOND – A bond that pays no interest but is priced, at issue, at a discount from its redemption price.
401(k) – Tax-deferred savings and investment plan in which employees may choose to contribute up to a certain amount. Employers often match a percentage of an employee’s contributions.
403(b) – Employer-sponsored retirement plan offered by some nonprofits, schools and hospitals. Allows employees to contribute a portion of their pay on a pretax basis. May also be offered as a Roth.
457(b) – Employer-sponsored retirement plan offered by some state and local governments and tax-exempt organizations that allow employees to contribute a portion of their pay on a pretax basis. May also be offered as a Roth.
12b-1 FEE – A mutual fund fee, named for the SEC rule that permits it, used to pay for broker-dealer marketing and other distribution costs. If a fund has a 12b-1 fee, it will be disclosed in the fee table of the fund’s prospectus.