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Glossary of Financial Terms

Adjusted gross income
Amount of income that is subject to federal income tax. In addition to any other tax credits, contributions to IRAs and 401(k) plans are subtracted from the total.
Aggressive
Relating or referring to an investment philosophy that seeks above-average returns by accepting above-average risk.
American Stock Exchange (AMEX)
Specializes in small-to-medium-size companies.
Annual percentage rate (APR)
A standardized method of calculating interest rates. It permits the comparison of different interest rates just as unit pricing enables comparison shopping at the supermarket.
Annuity
Contract issued by a life insurance company that promises to make periodic payments to the buyer over a set period of time. Payments are made to individuals, referred to as annuitants.
Appreciation
An increase in value of an asset.
Arbitrage
The purchase of assets, such as securities, on one market for immediate resale on another market to take advantage of price differences.
Balanced fund
A type of mutual fund that spreads its investments among stocks and bonds. Essentially, a balanced fund is a middle-of-the-road fund that balances its portfolio to achieve both moderate income and moderate capital growth.
Bear market
An extended period of general price declines in the securities market.
Bellwether
A stock whose performance is indicative of the overall market direction.
Blue chip
A very high-quality investment involving a lower-than-average risk of loss of principal or reduction in income.
Bond
A long-term promissory note that obligates the borrower to make specified payments over a set period of time.
Bull market
An extended period of general price increases in the securities market.
Capital gain
The excess by which proceeds from the sale of a capital asset exceeds the cost.
Capitalization
The company's stock price per share multiplied by the total number of shares outstanding. Small-cap: less than $1.5 billion. Mid-cap: between $1.5 billion and $10 billion. Large-cap: over $10 billion.
Certificate of deposit (CD)
A receipt for a deposit of funds in a financial institution that permits the holder to receive interest plus the deposit at maturity.
Collateral
Assets used as security for a loan.
Commercial paper
A short-term unsecured promissory note issued by a finance company or a large industrial firm. Commonly found in money-market funds.
Common stock
A class of stock that has no preference as to dividends or any distribution of assets.
Compound interest
Interest paid on interest from previous periods in addition to principal.
Consumer price index (CPI)
A measure of the average change over time in the prices paid by urban consumers for a fixed “market basket” of day-to-day expenses.
Correction
Reverse movement in the price of an individual stock, bond, commodity, or index after any long-term move. Can be a movement up or down, but usually refers to a fall in the price.
Depreciation
The decrease in value of a tangible asset because of age, wear, or market conditions. Corporations can choose between several types of depreciation, which affects the value of assets and corporate earnings.
Diversification
Minimizing risk by investing in a wide range of securities invested in many industries.
Dividend
A share of a company's net profits distributed to a class of its stockholders.
Dividend Reinvestment Plan (DRIP)
Automatic plan allowing stockholders to use their dividends to buy additional shares of stock.
Dollar-cost averaging
Investment of an equal amount of money at regular intervals resulting in the purchase of more shares during market downturns and fewer shares during market upturns.
Dow Jones Industrial Average (DJIA)
A widely quoted measure of stock market price movements of 30 large, seasoned industrial firms.
Earnings
Income of a business, typically after-tax income, but it may refer to before-tax income or revenues.
Earnings per share
The amount a stock will pay in income or dividends.
Emerging growth stock
The common stock of a relatively young firm operating in an industry with very good growth prospects. This kind of stock offers unusually high returns and a high risk.
Emerging market
Market in a country that does not have a fully developed economy. Investments in these markets are usually characterized by a high level of risk and possibility of a high return.
Federal funds
Reserve balances above those required that are maintained by commercial banks in the Federal Reserve System.
Federal Reserve Board
The seven governing members of the Federal Reserve System who determine the country's monetary policy.
Federal Reserve System
The independent central bank that influences the U.S.'s supply of money and credit through its control of bank reserves.
Fixed annuity
Annuity that guarantees fixed payments to the annuitant, either for life or for a set period of time.
401(k) plan
Plan in which employees elect to contribute pretax dollars to a qualified, tax-deferred investment plan.
Futures contract
A pact in which a buyer and seller agree to exchange a specific commodity on a certain date.
Futures market
The place where futures contracts are traded, such as the Commodity Exchange in New York, which handles metals, and the Chicago Board of Trade, which deals in grain futures. Other exchanges handle sugar, cotton, and other commodities.
Global fund
A mutual fund that includes at least 25% foreign securities in its portfolio.
Gross national product (GNP)
The dollar output of final goods and services in the economy during a period of time.
Growth stock
The stock of a firm that is expected to have above-average increases in revenues and earnings. These firms normally retain most of their earnings for reinvestment and therefore pay small dividends.
Hedge fund
A very specialized, volatile investment company (mutual fund) that permits the manager to use a variety of investment techniques normally prohibited in other types of funds.
Income fund
An investment company (mutual fund) whose main objective is to achieve current income for its owners; typically, the fund purchases bonds, preferred stocks, and common stocks paying high dividends.
Index
Statistical composite that measures changes in the economy or in financial markets and that can be expressed in percent changes from a base year or from the previous month. Most common are the S&P and the Dow Jones Industrial Average.
Index fund
A mutual fund that keeps a portfolio of securities designed to match the performance of a certain market as a whole.
Individual Retirement Account (IRA)
A custodial account or trust in which individuals may set aside earned income in a tax-deferred retirement plan.
Initial Public Offering (IPO)
The first sale of a corporation's stock to the investing public.
International fund
A mutual fund that invests only outside the country in which it is located.
Junk bonds
Debt issued by a company whose credit rating is below investment grade (BBB for S&P and Baa for Moody's). Because there is a considerable risk, the company must offer a high coupon to make the bond attractive to an investor.
Keogh plan
A federally approved retirement program that permits self-employed people to set aside for savings up to $30,000 or 25% of their income, whichever is lower.
Large-capitalization stock
The stock of a big company that has considerable retained earnings and a large amount of common stock outstanding, typically a market capitalization of over $3 billion.
Liquid asset
A security that can easily be sold for cash.
Load
The sales fee that the buyer pays in order to acquire a security, typically a mutual fund.
Long-term bonds
Debt securities with maturities of 10 to 30 years. The benchmark for this asset class is the Lehman Government Long Bond Index.
Market capitalization
The total value of all of a firm's outstanding shares, calculated by multiplying the market price per share times the total number of shares outstanding.
Money market fund
A mutual fund that purchases short-term, high-quality securities, such as treasury bills, negotiable CDs, and commercial paper.
Money market securities
Low-risk, very liquid securities with maturities of one year or less. Other short-term debt that is scheduled to mature within one year may also be classified as money-market securities.
Moody's
A company rating service issuing ratings denoting the relative investment quality of corporate and municipal bonds.
Mutual fund
An investment company that continually offers new shares and stands ready to redeem existing shares from the owners. Also an investment company.
NASDAQ
The National Association of Securities Dealers' Automated Quotation marketplace, which trades shares electronically. Companies traded on the NASDAQ include many small-to-medium-size firms and many technology companies.
National Association of Securities Dealers
Self-regulatory organization of broker-dealers operating under the auspices of the Securities and Exchange Commission.
Net Asset Value (NAV)
The market value of an investment company's (mutual fund) asset less any liabilities divided by the number of shares outstanding. This is the value of each share if the fund sold all of its assets at their current market value and paid off any outstanding debts.
Net income
Income after all expenses and taxes have been deducted.
New York Stock Exchange
The oldest stock exchange in the U.S., located at 11 Wall Street in New York City. Companies traded on the NYSE are typically the largest in the U.S.
Nikkei Stock Average
Compilation of prices of 225 companies listed on the Tokyo Stock Exchange.
No-load fund
An open-end investment company (mutual fund), shares of which are sold without a sales charge.
Option
A contract that permits the owner, depending on the contract, to purchase or sell a security at a fixed price until a specific date.
Over-the-counter stock
Stock that is traded outside of an organized exchange, usually through telephone or electronic connections.
Rally
A short, but often significant, surge in securities prices following a stagnant or declining market.
Round lot
Standard unit for trading a particular security, generally 100 shares for stock, $1,000 or $5,000 par value for bonds.
Preferred stock
A security that shows ownership in a corporation and gives the holder a claim prior to the claim of common stockholders on earnings and also generally on assets in the event of liquidation.
Price/earnings ratio
Price of a stock divided by its earnings per share.
Prime rate
The interest rate banks charge on loans to their biggest and best customers.
Profit-sharing plan
An agreement that allows employees to share in the corporation's profit. The company makes annual contributions to a profit-sharing fund, which is invested in stocks, bonds, or cash, and generally accumulate tax-free until the employee retires or leaves the company. Do not confuse this plan with investments of 401(k) money in a company's stock.
Prospectus
A formally written document containing information necessary to make an educated decision to purchase a security or not.
Real estate investment trust (REIT)
A trust that either finances or owns and manages income-producing real estate, passing profits on to shareholders.
Sector fund
An investment company that concentrates its holdings among securities or other assets sharing a common interest.
Security
An instrument indicating ownership, in the case of stocks, or representing the debt of a corporation or government agency, in the case of bonds.
Securities and Exchange Commission (SEC)
Federal agency that administers U.S. securities law; created in 1934.
Small-cap stocks
The stock of a relatively small firm with little equity and few shares of common stock outstanding. Small-capitalization stocks tend to be subject to large fluctuations; therefore, the potential for short-term gains and losses is great.
Standard & Poor's 500 (S&P 500)
An inclusive index of 500 stocks, including 400 industrial stocks, 40 utilities, 20 transportation stocks, and 40 financial stocks.
Stock
An ownership share(s) in a corporation; also equity, common stock. See also Preferred stock.
Treasuries
All bonds backed by the U.S. government that are issued through the Department of the Treasury.
Treasury bill
A short-term debt security of the U.S. government that is sold in minimum amounts of $10,000 increments and multiples of $5,000 above this.
Yield to maturity
The total return an investor will get by holding a long-term, interest-bearing instrument (usually a bond) until it matures.
Source: 401 Kafé, www.401kafe.com . Copyright © 1996–2000 mPower. All Rights Reserved.

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