Common Investment Terms
The Staton Institute is a financial education and counseling center that has helped thousands take control of their finances and build life-long wealth. Established in 1986, The Staton Institute® is a financial education and coaching center that has demystified finances and investment for thousands of individuals and families. Our goal is to help you take charge of your financial affairs and build life-long wealth.At The Staton Institute®, we don't believe in elaborate formulas or complicated systems, because we know mastery over money is the result of easy-to-understand, time-proven principles. As you begin to take control of your finances, we hope you'll find this plain-English guide to common investment terms helpful. Glossary of Common Investment Terms
Account executive
The title given by some brokerage firms to their stockbrokers. Other variations on the title include registered representative, financial counselor and financial consultant.
After-tax proceeds
Money received from a sale after deducting commissions, fees, taxes and any other expenses.
Annual report
This document contains information about the performance of a company or mutual fund. For a company, it contains a record of the company's financial condition, including earnings and operating expenses. For a fund, it shows the fund's performance, how it invests shareholders' money to achieve those results, what the fund is currently doing and its future plans. It should also include performance charts that calculate returns for hypothetical investments and managers' analysis.
Annuity
A series of regular payments, usually from an insurance company, guaranteed to continue for a specific time, usually the annuitant's lifetime, in exchange for a single payment or a series of payments to the company.
Bearish
A bear thinks the market is going to go down. Bearish is the opposite of bullish.
Beneficiary
A person or organization designated to receive the funds or other property from an annuity, insurance policy, retirement account, trust, will or other contract.
Blue chip
Describes stocks of companies known for high quality management or products that have a long history of stable earnings and/or dividend growth.
Bond
An interest-bearing security that obligates the issuer to pay a specified amount of interest for a specified time, usually several years, and then repay the bondholder the face amount of the bond. Bonds issued by corporations are backed by corporate assets; in case of default, the bondholders have a legal claim on those assets. Bonds issued by government agencies may or may not be collateralized. Interest from corporate bonds is taxable; interest from municipal bonds, which are issued by state and local governments, is free of federal income taxes and, usually, income taxes of the issuing jurisdiction. Interest from Treasury bonds, issued by the federal government, is free of state and local income taxes but subject to federal taxes.
Book value
The net-asset value of a company, determined by subtracting its liabilities from its assets. Dividing the result by the number of shares of common stock issued by the company yields the book value per share, which can be used as a relative gauge of the stock's value.
Bullish
A bull is someone who thinks the market is going to go up, which makes bullish the opposite of bearish.
Capital gain
The difference in value between what you originally paid for an investment and the higher price at which it was sold. The opposite of Capital Loss.
Cost basis
Cost basis is used to determine capital gains and losses. Generally, cost basis is the original price of a security, including commissions and applicable fees. There are special rules for determining basis in some situations (i.e., property received by gift or bequest, as compensation or in a tax-free exchange).
Current yield
The annual interest on a bond divided by the current market price or the annual cash dividend divided by the current price of a stock.
Custodial account
An account for the benefit of a minor with an adult as the custodian.
Defined-contribution plan
A company retirement plan such as a 401 (k) or 403 (b), in which the employee elects to defer salary into the plan and directs the investments of that deferral.
Dividend
A distribution of company earnings to shareholders. Dividends are typically paid to you in cash or stock. You may choose automatic Dividend Reinvestment to buy more shares.
Earnings
The amount of profit a company realizes over a given time period after all costs, expenses, and taxes have been paid.
Exchange
A marketplace, or any organization or group that provides or maintains a marketplace for trading securities, options, futures, or commodities. Examples of exchanges: New York Stock Exchange (NYSE) or the American Stock Exchange (AMEX).
Expense ratio
A mutual fund's cost of doing business passed on to shareholders -- expressed as a percentage of assets.
Fixed-income securities
Debt securities or IOUs for borrowed money. They obligate the borrower to pay the owner interest during the term of the loan and to return the principal or face value, when the loan matures. A variety of institutions issue debt obligations including the U.S. government, state and local governments, publicly held companies, banks, and savings and loans.
Index
A statistical composite that measures changes in the economy or financial markets. Some indexes are used as benchmarks that economic or financial performance is measured against. Some well-known market indexes include: Standard & Poor's 500, Dow Jones industrial average, NASDAQ, Consumer Price (CPI), and Russell 2000. Indexes cannot be invested in directly, are unmanaged and do not incur management fees, costs or expenses.
Individual retirement account (IRA)
A tax-deferred retirement account for individuals, which allows them to earn potential income on their investments and defer the taxes until withdrawals begin. Those who meet certain participation and income qualifications can make deductible contributions to an IRA. (Such contributions qualify as a deduction against earned income.) All others can contribute on a non-deductible basis.
Investment objective
The outcome desired by an investor or a mutual fund. For example, "current income" or "capital appreciation" are types of investment objectives.
Keogh plan
Tax-deferred, qualified retirement account for self-employed persons and employees of unincorporated businesses. Contributions and earnings are deductible from gross income and grow tax-deferred until withdrawn (certain restrictions apply). Qualified plans meet the requirements of the Internal Revenue Code, making them eligible for favorable tax treatment.
Leverage
The degree to which a company or individual is using borrowed money.
Liabilities
The sum of all outstanding debts -- what a company or individual owes its creditors.
Long-term capital gains
Gains from the sale or exchange of a capital asset held more than one year (at least one year and one day from the purchase date). Long-term capital gains are taxed at more favorable rates than short-term gains.
Long-term debt
Liabilities that are repayable after one year or longer.
Market capitalization
The total value of a company's stock.
Municipal bond
A bond issued by a state, municipality, or revenue district. Municipal bonds (also called "munis") are exempt from federal and, in some cases, state and city taxes. Some investors in bonds or bond funds may be subject to the Alternative Minimum Tax.
Mutual fund
An investment company that pools money from shareholders and invests in a variety of securities, including stocks, bonds and money market instruments. A mutual fund stands ready to buy back (redeem) its shares at their current net asset value, which depends on the total market value of the fund's investment portfolio at the time of redemption. As open-end investments, most mutual funds continuously offer new shares to investors.
Net income
For a business this is the total revenue minus total expenses, which is the same as its net profit or earnings.
No-load mutual fund
A mutual fund that has no sales charge when shares are bought or sold.
Operating expenses
The business expenses that mutual fund companies pass on to shareholders, including management fees and 12b-1 fees. These costs are paid from a fund's assets before earnings are distributed to shareholders.
Ordinary income
Income other than a capital gain. For example, ordinary income includes wages, dividends and interest earned on savings.
Price/earnings (P/E) ratio
Price of a stock divided by earnings per share.
Profit-sharing plan
A plan that enables employers to share profits with employees, at the employer's discretion. The compensation may be stocks, bonds or cash and can be immediate or deferred until retirement.
Prospectus
A legal document offering securities or mutual fund shares for sale. When you invest in a mutual fund, the prospectus will provide valuable information about the specific goals, fees, and practices of the fund. Federal and state securities regulators require that the prospectus include the fund's investment objectives, policies and restrictions, fees and expenses, and how shares can be bought and sold. It should be read carefully prior to investing.
Registered investment advisor (RIA)
An individual who is registered with the Securities Exchange Commission (SEC) in accordance with the Investment Advisors Act of 1940. Advisors are required to register annually with the SEC and to disclose any potential conflicts of interest they have concerning recommendations made for their clients.
Return
The change in value of an investment over a given period of time, expressed as a percentage of the total amount invested (including reinvestment of any dividends and capital gains distributions).
Risk
The possibility for loss of some or all of the money you invest. Also, the degree of probability for such a loss.
Rollover IRA
A tax-free transfer of assets from one qualified retirement plan to another.
Roth IRA
A type of Individual Retirement Account that allows retirement savings to grow tax-free. You pay taxes on contributions, but not on withdrawals (subject to certain rules). To participate in a Roth IRA, taxpayers are subject to certain income limits.
S&P 500 (Standard & Poor's 500 Index)
Considered to be a benchmark of the overall U.S. stock market. This index is comprised of 500 widely held, Blue Chip stocks representing industrial, transportation, utility and financial companies with a heavy emphasis in industrials.
Securities Exchange Commission (SEC)
A government regulatory agency that oversees and enforces the securities laws of the United States, publishes rules and guidance for the securities industry, and provides investor education.
SEP IRA (Simplified Employee Pension IRA)
Simplified Employee Pension IRA. An individual retirement account set up by a small business employer or by a self-employed person, providing certain requirements are met and there is no 401(k) plan in place. A SEP-IRA is funded by contributions from the employer for his/her own benefit and of any employees.
SIMPLE IRA (Savings Incentive Match Plan IRA)
Savings Incentive Match Plan IRA. A retirement plan for employees of companies that do not have a 401(k) plan and which employ fewer than 100 people. A SIMPLE IRA allows the employees to set aside a percentage of their pre-tax wages into a special individual retirement account. The employer is required to contribute to the employee's plan. Employer contributions may vary from year to year. All contributions and earnings grow tax-deferred until withdrawn.
Surrender charges
Fees for terminating a Certificate of Deposit (CD), insurance or annuity contract before it matures.
Tax-deferred
A provision that allows taxes to be postponed until a later date. Generally this applies to investments in retirement plans, annuities, savings bonds and Employee Stock Option Plans.
Time horizon
The amount of time, usually years, that you expect to keep an amount of money invested.
Total assets
The combined value of all items of monetary value owned by an individual or business. A company's assets include tangible assets, such as equipment, inventory and real property, and intangible assets such as goodwill (the value of a company's name in the market), patents and other intellectual property, which are owned by a company and given monetary value in the company's balance sheet.
Total revenue
Total of all sales and income generated by a company.
Trade confirmation
Written statement acknowledging a securities transaction and its details.
Traditional IRA
Another name for a standard Individual Retirement Account. This name more clearly distinguishes it from other types of IRAs, such as a Roth IRA.
Treasury bill
A short-term debt security of the U.S. government, also known as a "T-Bill." T-Bills are usually held for a short time period (i.e., three months to one year) and can easily be converted into cash. T-Bills are typically sold at a discount and are exempt from state and local taxes. The money you will make on a T-Bill is the difference between the face value of the T-Bill and what you paid for it. T-Bills are sold in $1000 increments.
Treasury note
A mid-term debt security of the U.S. Government, with maturities ranging from two to ten years that pay a fixed rate of interest every six months and returns its face value at maturity. Minimum denomination is $5,000 plus $1,000 increments for a two to three year maturity, or $1,000 plus $1,000 for a four to ten year maturity.
Treasury security
Debt obligations of the U.S. Government that are issued through the Department of the Treasury. Since they are backed by the full faith and credit of the U. S. Government, they are considered virtually free from risk of default. For individual investors, the income of Treasuries is exempt from state and local taxes.
Vested
The percentage of ownership in a retirement plan's assets.
Volatility
The magnitude and frequency of changes in a security's value within a short period. The more volatile an investment, the higher its risk and potential return. Volatility is usually measured by calculating the annualized standard deviation of daily change in price.
Volume
The daily number of shares traded in a security.
Yield
The annual rate of return of an investment paid in dividends or interest, expressed as a percentage. For a mutual fund, the yield is the rate of return earned by the securities in the fund's portfolio, less the funds expenses during a specified period. A fund's yield is expressed as a percentage of the maximum offering price per share on a specified date.
12b-1 Fee
A fee charged by the Mutual Fund Company to pay for marketing, advertising and distribution services. The 12b-1 distribution fee ranges from 0.25% to 1.0% of the fund's assets.
401(k)
A type of salary deferral retirement plan that allows employees to make pre-tax contributions from earned income, which reduce their taxable income. Employers can match some or all contributions subject to maximum.
403(b)
A qualified retirement plan similar to 401 (k) plans designed for non-profit organizations. Qualified plans meet the requirements of the Internal Revenue Code, making them eligible for favorable tax treatment.
457 plan
A qualified retirement plan for state employees and employees of certain tax-exempt organizations, which allows them to make systematic, pre-tax contributions to their individual retirement savings accounts. Contributions in a 457 Plan grow tax-deferred.
