Familiarize yourself with key investment terms
Alpha - The amount of return expected from an investment from its inherent value.
Annual report - The yearly audited record of a corporation or a mutual fund's condition and performance that is distributed to shareholders.
Annualized - A procedure where figures covering a period of less than one year are extended to cover a 12-month period.
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.
Appreciation - The increase in value of a financial asset.
Asset allocation - The process of dividing investments among cash, income and growth buckets to optimize the balance between risk and reward based on investment needs.
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.
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.
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.
Board of Trustees - A governing board elected or appointed to direct the policies of an institution.
Bond - A bond acts like a loan or an IOU that is issued by a corporation, municipality or government. The issuer promises to repay the full amount of the loan on a specific date and pay a specified rate of return for the use of the money to the investor at specific time intervals.
Bond fund - A mutual fund that invests exclusively in bonds.
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.
Capital - The funds invested in a company on a long-term basis and obtained by issuing preferred or common stock, by retaining a portion of the company's earnings from date of incorporation and by long-term borrowing.
Capital gain - The difference between a security's purchase price and its selling price, when the difference is positive.
Capital loss - The amount by which the proceeds from a sale of a security are less than its purchase price.
Capitalization - The market value of a company, calculated by multiplying the number of shares outstanding by the price per share.
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.
Common stock - Securities that represent ownership in a corporation; must be issued by a corporation.
Corporate bond - A long-term bond issued by a corporation to raise outside capital.
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).
Cut-off time - The time of day when a transaction can no longer be accepted for that trading day.
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.
Distribution schedule - A tentative distribution schedule of a mutual fund's dividends and capital gains.
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 yield - 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.
EPS - The portion of a company's profit allocated to each outstanding share of common stock. EPS serves as an indicator of a company's profitability.
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.
Expense ratio - The ratio between a mutual fund's operating expenses for the year and the average value of its net assets.
Federal Funds Rate (Fed Funds Rate) - The interest rate charged by banks with excess reserves at a Federal Reserve district bank to banks needing overnight loans to meet reserve requirements. The most sensitive indicator of the direction of interest rates, since it is set daily by the market, unlike the prime rate and the discount rate, which are periodically changed by banks and by the Federal Reserve Board.
Federal Reserve Board (The Fed) - The governing board of the Federal Reserve System, it regulates the nation's money supply by setting the discount rate, tightening or easing the availability of credit in the economy.
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.
Fund - A pool of money from a group of investors in order to buy securities
Growth investing - Investment strategy that focuses on stocks of companies and stock funds where earnings are growing rapidly and are expected to continue growing.
Growth stock - Typically a well-known, successful company that is experiencing rapid growth in earnings and revenue, and usually pays little or no dividend.
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.
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 grade bonds - 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.
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.
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.
Management fee - The amount paid by a mutual fund to the Portfolio Manager for its services.
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 specified in a note or bond on which the debt is due and payable.
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.
Net Asset Value per share (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 process of calculating the NAV is called pricing.
Number of Holdings - Total number of individual securities in a fund or portfolio.
P/B Ratio - The price per share of a stock divided by its book value (net worth) per share. For a stock portfolio, the ratio is the weighted average price-to-book ratio of the stocks it holds.
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.
Portfolio allocation - Amount of assets in a portfolio specifically designated for a certain type of investment.
Portfolio holdings - Investments included in a portfolio.
Portfolio manager - The person or entity responsible for making investment decisions of the portfolio to meet the specific investment objective or goal of the portfolio.
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.
Price-to-book - The price per share of a stock divided by its book value (net worth) per share. For a stock portfolio, the ratio is the weighted average price-to-book ratio of the stocks it holds.
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.
P/E Ratio (1 yr trailing) (long position) - Price of a stock divided by its earnings from the latest year.
P/E Ratio (1 yr forecast) - Price of a stock divided by its projected earnings for the coming year.
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 regulators, 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.
Quality distribution - The breakdown of a portfolio's assets based on quality rating of the investments.
Ratings - Evaluations of the credit quality of bonds usually made by independent rating services. Ratings generally measure the probability of timely repayment of principal and interest on debt securities.
Recession - A downturn in economic activity, defined by many economists as at least two consecutive quarters of decline in a country's gross domestic product.
Redemption - Sale of mutual fund shares by a shareholder.
Reinvestment option - Refers to an arrangement under which a mutual fund will apply dividends or capital gains distributions for its shareholders toward the purchase of additional shares.
Relative risk and potential return - The amount of potential return from an investment as related to the amount of risk you are willing to accept.
Rights of accumulation - The right to buy over a period of time. For example, this might be done by an institutional investor to avoid making a single substantial purchase that might drive up the market price, or by a retail investor who wants to reduce risk by dollar cost averaging.
Risk tolerance - The degree to which you can tolerate volatility in your investment values.
Sector - A group of similar securities, such as equities in a specific industry.
Sector breakdown - Breakdown of securities in a portfolio by industry categories.
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 better. 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.
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.
Stock - A long-term, growth-oriented investment representing ownership in a company; also known as 'equity.'
Stockholder - The owner of common or preferred stock of a corporation. Also called 'shareholder.'
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.
Top 10 holdings - Ten largest holdings in a portfolio based on asset value.
Top five contributors - Top five industries in a portfolio based on amount of invested assets.
Top five detractors - Five assets in a portfolio that generated largest negative returns (losses).
Top five holdings - Top five securities in a portfolio based on amount of invested assets.
Total return - Accounts for all of the dividends and interest earned before deductions for fees and expenses, in addition to any changes in the value of the principal, including share price, assuming the funds' dividends and capital gains are reinvested. Often, this percentage is presented in a specified period of time (one, five, ten years and/or life of fund). Also, a method of calculating an investment's return that takes share price changes and dividends into account.
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 a government and backed by its full faith and credit.
Treasury bond - Negotiable long-term (10 years or longer) debt obligations issued by a government and backed by its full faith and credit.
Treasury note - Negotiable medium-term (one year to 10 years) debt obligations issued by a U.S. government and backed by its full faith and credit.
Trustee - 1. An organization or individual who has responsibility for one or more accounts. 2. An individual who, as part of a fund's board of trustees, has ultimate responsibility for a fund's activities.
Valuation - An estimate of the value or worth of a company; the price investors assign to an individual stock.
Value investing - A strategy whereby investors purchase equity securities that they believe are selling below estimated true value. The investor can profit by buying these securities then selling them once they appreciate to their real value.
Value stock - Typically an overlooked or underpriced company that is growing at slower rates.
Volatility - The amount and frequency with which an investment fluctuates in value.
Wtd. Avg. Market Cap - Most indexes are constructed by weighting the market capitalization of each stock on the index. In such an index, larger companies account for a greater portion of the index. An example is the S&P 500 Index.
Weighted average maturity - A Fund's WAM calculates an average time to maturity of all the securities held in the portfolio, weighted by each security's percentage of net assets. The calculation takes into account the final maturity for a fixed income security and the interest rate reset date for floating rate securities held in the portfolio. This is a way to measure a fund's sensitivity to potential interest rate changes.
YTD total return - Year-to-date return on an investment including appreciation and dividends or interest.
YTD - Year-to-date return on an investment including appreciation and dividends or interest.
Yield - Annual percentage rate of return on capital. The dividend or interest paid by a company expressed as a percentage of the current price.
Yield to maturity - Concept used to determine the rate of return an investor will receive if a long-term, interest-bearing investment, such as a bond, is held to its maturity date.