Alternative minimum tax (AMT)
A federal tax system created to ensure that wealthy individuals pay a minimal level income tax. The AMT is often triggered when an individual has numerous personal exemptions, such as for state and local taxes; large miscellaneous itemized deductions or medical expenses; or Incentive Stock Option (ISO) plans.
Asset allocation
The strategic process of dividing investment dollars among various asset classes, typically among cash investments, bonds, and stocks, and subsets of these asset classes, to optimize the trade-off between risk and return.
Asset classes
Categories of assets that are fundamentally different in structure, such as stocks, bonds, cash and real estate.
Automatic investment plan
An investment program in which a fixed amount can be invested regularly and automatically, by check or electronic transfer.
Backup withholding
If a fund has not received a shareholder’s certified taxpayer identification number (TIN), or if an investor is subject to backup withholding for other reasons, the IRS requires that withholding tax be applied to federally taxable dividends, capital gain distributions, and the proceeds of redemptions and exchanges (except from money market funds).
Benchmark
A performance standard, for the purpose of comparison. A benchmark is usually an index that is composed of securities that line up with an asset class or investment strategy. The S&P 500 is a common benchmark for U.S. stock market performance. The Lehman Aggregate Index is a common benchmark for U.S. bond market performance.
Beneficiary
An individual that receives, or may become eligible to receive, benefits under a will, insurance policy, retirement plan or other contract.
Capital gain distribution
A distribution to shareholders of net long-term capital gains realized by a fund on the sale of its securities.
Call features
Features that indicate the conditions under which an issuer may redeem a bond prior to its maturity date. In most cases, a bond will be "called" or redeemed at a price slightly above par value. A company will often call a bond if it can reissue the same bonds at a lower interest rate, saving them money. If a bond is called, the bondholder will be notified by mail and have no choice in the matter. Not all bonds are callable.
Capital appreciation
An increase in the market price of an asset. One of the two components of total return Dividend yield is the other component of total return.
Capital gain
The difference between the price at which an asset is sold and its purchase price.
Capital markets
The network for trading debt and equity securities.
Cash equivalents
Assets that can easily be converted into cash, such as bank accounts, banker's acceptances, Treasury bills, money market mutual funds and other securities that mature within 90 days or less.
Closed-end fund
A publicly traded investment company-a mutual fund-sold on a public stock exchange or over the counter. A closed end fund has a fixed number of shares that may trade above or below net asset value.
Compounding
A process whereby the value of an investment increases exponentially over time due to compound interest.
Core fund
A substantial long-term holding in a portfolio. A core holding is bought with the express purpose of being held for a very long time, and is often of high-quality with a history of fairly steady performance.
Coverdell College Savings Account
An investment vehicle, formerly called Education IRA, designed to help parents save for a child's education. Earnings and withdrawals are tax free if used to pay qualified education expenses. The account is transferable among family members. However, the entire account must be disbursed before the beneficiary's 30th birthday. Any withdrawals after this date or for expenses that do not qualify will be subject to income taxes and a penalty.
Credit Default Swap
A credit default swap is similar to an insurance contract, providing the buyer with protection against specific risks. Most often, corporate bond investors buy credit default swaps for protection against a default by the issuer of the corporate bond, but these flexible instruments can be used in many ways to customize exposure to corporate credit.
Currency Future
Contracts in the futures markets for delivery in a major currency, such as the U.S. dollar, the Japanese yen or the British pound. The buyer of a currency futures contract acquires the right to purchase a particular amount of that currency by a specific date at a fixed exchange rate. These contracts are traded on exchanges throughout the world. Often used as a hedging mechanism to offset currency or interest rate risk.
Diversification
The process of dividing investments among a variety of asset categories with different risk, reward, and correlation statistics in order to minimize overall investment risk.
Dividend
A portion of a company's profit paid to common and preferred shareholders. Typically, dividends are paid on a quarterly basis and are determined by the company's board of directors. Companies are not required to pay dividends.
Durable power of attorney
A legal document that enables an individual to designate another person to act on his/her behalf in the event the individual becomes disabled or incapacitated.
Emerging markets
The financial markets of developing economies, such as those in Latin America, Asia (excluding Japan) and Eastern Europe.
Equities
Another term for stock and the stock market, so called because they signify an ownership position in the company's assets and profits.
Equity markets
Also called the stock market, the market for trading equities.
Executor
A distribution to shareholders from tax-exempt interest earned by a fund.
Exempt interest dividend
An individual or institution named in a will and appointed by a court to settle the estate of a deceased.
Financial professional
An individual who helps others set and achieve their long-term financial goals, through investments, tax planning, asset allocation, risk management, retirement planning and estate planning.
Forward
A swap agreement created through the synthesis of two swaps differing in duration for the purpose of fulfilling the specific time-frame needs of an investor. Also referred to as a "forward start swap," "delayed start swap," and a "deferred start swap."
529 plan
A 529 college savings plan is a state-sponsored program designed to help parents finance education expenses. Section 529 plans are administered by certain investment companies and subject to contribution requirements and investment guidelines. Earnings and withdrawals are tax free as long as they are used for higher education purposes. There are no income eligibility requirements to open a 529 plan.
Floating rates
Any interest rate that changes on a periodic basis. The change is usually tied to movement of an outside indicator, such as the prime interest rate.
Global or worldwide fund
A mutual fund that can invest anywhere in the world, including the U.S.
Growth fund
A mutual fund that invests primarily in stocks with a history of and future potential for growth of capitol.
Guardian
A person legally entrusted with the care of, and managing the property and rights of, another person, usually a minor.
High-yield bonds
A bond with a speculative (below investment grade) credit rating. Junk or high-yield bonds offer investors higher yields than bonds of financially sound companies.
Illiquid
A security, fund or other asset that cannot quickly and easily be converted to cash.
Index
An unmanaged selection of securities whose collective performance is used as a standard to measure investment results. The Dow Jones Industrial Average and the Standard & Poor's 500 are two well-known indexes.
Industry, ies
The category describing a company's primary business activity, such as semiconductors or software. This category is usually determined by the largest portion of revenue.
Interest Rate Swap
An agreement between two parties (known as counterparties) where one stream of future interest payments is exchanged for another based on a specified principal amount. Interest rate swaps often exchange a fixed payment for a floating payment that is linked to an interest rate (most often the LIBOR). A company will typically use interest rate swaps to limit, or manage, its exposure to fluctuations in interest rates, or to obtain a marginally lower interest rate than it would have been able to get without the swap.
International fund
A mutual fund that invests in stocks and bonds of companies outside of the U.S.
Investment-grade bonds
A bond whose credit quality is considered to be among the most secure by any independent bond-rating agency. A rating of Baa or higher by Moody's Investors Service or a rating of BBB or higher by Standard & Poor's is considered investment grade.
Investment return
The percentage change in value of the investment over a given period of time, including both capital appreciation and dividends or income. Also called total return.
Investment styles
The overall set of principles or strategies that guide an investor. The two major investment styles are growth and value, but there are others.
IRA
An individual retirement account set up at a financial institution such as a bank, broker, or mutual fund. Contributions may be invested in many types of securities such as stocks, bonds, money market funds, CDs, etc. Any earnings accumulate tax-deferred until withdrawals begin at age 59 1/2 or later (or earlier, with a 10% penalty).
Leverage
The use of debt financing.
Long-term capital gain or loss
A gain or loss on the sale or exchange of a security (including mutual fund shares) that has been held for more than one year.
Market capitalization
A company's total stock market value, calculated by multiplying the price of a single share by the total number of shares outstanding.
Market timing
An investment strategy that attempts to predict short-term price changes in securities and asset classes for the purpose of making investment decisions.
Maturity (maturities)
The date on which the issuer of a bond agrees to repay the principal to the buyer.
Medical power of attorney
A legal document that assigns authority to another individual to act on your behalf regarding health care decisions in the event of your incapacitation.
Net asset value (NAV)
The dollar value of a single mutual fund share, based on the value of the underlying assets of the fund minus its liabilities, divided by the number of shares outstanding. Calculated at the end of each business day.
Non-resident alien (NRA) withholding
The IRS requires that 30% be withheld from ordinary dividends and short-term capital gain distributions in accounts owned by nonresident aliens unless a lower rate is permitted by tax treaty and proper certification has been filed with the fund.
Open-end mutual fund
A mutual fund that has an unlimited number of shares available for purchase and that will redeem shares at any time at net asset value, minus any sales charge. Most mutual funds are open-ended.
Operating expenses
For a mutual fund, the cost of doing business, including fund management and shareholder services.
Peer group
A group of mutual funds with similar objectives and investment strategies. Funds compare themselves to a peer group as a comparative measure of performance.
Portfolio
All the investments held by an individual, including stocks, bonds, mutual funds, and real estate.
Preferred
A type of stock that pays a dividend on a regular schedule and is given preference over common stock in regard to the payment of dividends or any liquidation of the company. Preferred share prices tend to fluctuate less than common stock.
Principal
The original cash put into an investment.
Qualified dividend income
The Jobs and Growth Tax Relief Reconciliation Act of 2003 reduces tax rates on "qualified dividend income" from common stock, certain preferred stock, and certain qualified foreign corporation stock subject to a holding period and hedging requirements. Interest from bonds and other fixed-income instruments, although they are reported as "dividends" on Form 1099-DIV, are not treated as qualifying income. The portion of the federally taxable dividends that qualify for reduced tax rates of 5% or 15% (depending on the shareholder’s overall taxable income) is identified in Box 1b of Form 1099-DIV. Qualified dividends in Box 1b are eligible for a reduced rate providing the shareholder meets certain holding period requirements.
Rating agencies
A company that publishes ratings for securities such as preferred stock and debt issues based on the likelihood of consistent and timely payments. These rankings are arrived at by looking at a variety of balance sheet data. Some rating services, such as Standard & Poor's and Moody's, are very influential, and an upgrade or downgrade can affect their borrowing costs significantly.
Return of capital distribution
A distribution in excess of a fund’s earnings. A return of capital distribution is generally a nontaxable distribution that reduces a shareholder’s cost basis in shares of a mutual fund.
Risk
The degree of uncertainty of return on an asset, often quantified by standard deviation.
Rollover IRA
A tax-free reinvestment of a distribution from a qualified retirement plan into an IRA within a specific time frame, usually 60 days.
Sales charge
A fee charged by a mutual fund to compensate a financial professional for the sale of shares. It represents the difference, if any, between the share purchase price and the share net asset value.
Sector
A way to categorize companies according to their major lines of business, such as utilities, technology or health care. Sectors can be further divided into industry groups, such as pharmaceuticals or medical devices within the health care sector.
Short-term capital gain or loss
A gain or loss on the sale or exchange of a security that has been held one year or less. Net short-term capital gains (short-term gains minus short-term losses) realized by a fund when it sells securities are taxed as ordinary dividends.
Taxable-equivalent yield
The pre-tax yield required from a taxable bond in order to equal the tax-free yield of a municipal bond.
Tax deferred
Accounts in which taxes are not paid on investment growth or earnings until money is withdrawn from the account, such as an Individual Retirement Account or a 401(k) plan.
Tax-exempt
Income that is not subject to federal income tax, such as interest from state and municipal bonds. Tax-exempt income may be subject to state taxes. (Use this instead)
Time horizon
The length of time a sum of money is expected to be invested.
Traditional IRA
An individual retirement account in which contributions may be tax-deductible or non-deductible, depending on an individuals income or participation in another retirement plan. Earnings accrue tax-deferred and are taxed as ordinary income on withdrawal.
Value fund
A mutual fund that invests in stocks that have a lower-than-average price as measured by price-to-earnings or price-to-book ratios. Value investing is often considered the opposite of growth investing, which concentrates on finding companies with above-average sales and earnings growth prospects.
Volatile (volatility)
The variability of return of a stock or other security. A volatile investment is characterized by large price movements, both up and down.
Wash sale
When shares of a fund are exchanged or redeemed at a loss and shares of the same fund are repurchased within the 61-day period beginning 30 days before and ending 30 days after the redemption or exchange.
Will
A legal document that directs the disposal of a decedent's property, also called a testament.
Yield
The percentage rate of return paid on a stock or mutual fund in the form of dividends or interest income or income as a percentage of the market price of a bond, which may be different from its coupon rate.