Glossary of terms

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Glossary of financial terms

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A-E

Account Fee

A fee that some funds separately impose on investors for the maintenance of their accounts. For example, accounts below a specified dollar amount may have to pay an account fee.

Active (Actively Managed)

Funds with an investment adviser who continually researches, monitors, and actively trades the holdings of the fund to seek a higher return than the market.

Adjusted Gross Income (AGI)

Income (including wages, interest, capital gains, income from retirement accounts, alimony paid to you) adjusted downward by specific deductible retirement accounts, alimony paid by you; but not including standard and itemized deductions.

Annual Rate of Return

Annual return on investment. Rate of return may refer to the dividend yield or it may refer to the total return rate.

Annuitization

Choosing regular income payments for life or some other defined period.

Annuity

There are two types of annuities: The first is when you pay a lump sum to a life insurance company and they pay it out to you right away in periodic installments. This type is known as an immediate annuity—the payments to you start immediately. The second, and more common, is where money paid by you accumulates interest over a period of time. If you choose, the accumulated amounts will then be paid out to you in periodic installments, usually when you retire, to supplement your retirement income. This type is known as a deferred annuity—the payments to you are deferred for a number of years. Currently, a deferred annuity may have tax advantages in that the interest credited to your funds is deferred from current taxation. That is to say, income tax is not owed until you start receiving distributions from the annuity.

Annuity Certain (Period Certain Annuity)

A type of annuity in which the insurance company will pay you an income for a specified amount of time (5 years, 10 years, 20 years, etc.). In a Life Annuity with Period Certain, the company will pay you an income for as long as you live; but if you die before the period certain that you choose, the income will be paid to a survivor you designate until the end of the period.

A-Share

In a family of multi-class mutual funds, this is the class that is characterized by a front-load structure. Not all fund companies follow this class structure; however, it is the prominent method of distinction.

Asset Allocation

The process of investing money in predetermined proportions in different types of assets to create a collection of assets with the desired expected return and the desired expected risk characteristics.

Asset Class

A group of similar investment instruments linked by related risk and return features.

Average Annual Return (AAR)

The most common basis for stating the historical return of a mutual fund, AAR is stated after expenses.

Average Annual Yield

Average yearly income on an investment.

Back-End Load (Deferred Sales Charge)

A sales charge investors pay when they redeem (or sell) mutual fund shares, generally used by the fund to compensate brokers.

Balanced Fund

A mutual fund combining bonds (for income) and stocks (for growth).

Bear Market

A prolonged period in which market values are declining. A bear market in stocks is usually brought about by the anticipation of declining economic activity resulting in falling stock prices. A bear market in bonds is caused by rising interest rates resulting in higher yields and lower bond prices.

Beneficiary

An individual, institution, trustee, or estate which receives, or may become eligible at death to receive, benefits under a will, insurance policy, retirement plan, annuity, trust, or other contract.

Blend (Growth & Income)

These mutual funds invest in securities that provide a combination of growth and income. They generally funnel most of their assets into common stocks of well-established companies that pay regular dividends. They may also invest in high-rated bonds.

Bond Funds (Fixed Income Funds)

A mutual fund that buys interest-bearing debt securities. Bond funds typically specify whether their holdings are corporate, U.S. Treasury, municipal, or government-sponsored enterprise bonds.

Breakpoint

A mutual fund may offer you discounts, called breakpoints, on the front-end sales charge if you: want to make a large purchase, already hold other mutual funds offered by the same fund family, or commit to regularly purchasing the mutual fund's shares.

B-Share

A class in a family of multi-class mutual funds. This class is characterized by a rear-end load structure that is paid only when selling the fund.

Buy and Hold

An investment strategy in which stocks are bought and then held for a long period, regardless of the market's fluctuations.

Capital Gain

A capital gain is the appreciation in price of an investment. It is an "unrealized gain" until the investment is sold, at which point it becomes "realized."

Capital Gains Distribution

A capital gain occurs when a mutual fund manager sells a security in the portfolio that has gone up in value. These gains are then distributed to the shareholders of that fund. This distribution is subject to capital gains taxes for all shareholders receiving the distribution.

Capital Loss

A capital loss is the depreciation in price of an investment. It is an "unrealized loss" until the investment is sold, at which point it becomes "realized."

Capitalization

The value of a corporation, which is determined by multiplying the market price per share by the number of outstanding shares. Large capitalization stocks are generally those of companies worth more than $1 billion. Small capitalization stocks are generally those of companies worth less than $1 billion.

Cash Funds

In discussing financial instruments, generally used to include the value of assets that can be converted to cash immediately without a material price impact.

Charitable Contribution

A gift of cash or property to a qualified charity for which a tax deduction is allowed. A receipt is required as proof for any single contribution of $250 or more.

Commission

A fee charged by a broker or agent for his/her service in facilitating a transaction, such as the buying or selling of securities or real estate. In the case of securities trading, brokers can be split into two broad categories depending on the commissions they charge. Discount brokers charge relatively low commissions, but provide no services beyond executing trades. Full service brokers charge higher commissions, but provide research and investment advisory services.

Common Stock

A share of ownership in a corporation, which entitles its owner to all the risks and rewards that go with it. In case of bankruptcy, common stockholders' claims on company assets are inferior to those of bondholders. For contrast, see preferred stock.

Compound Interest

Interest calculated on interest from previous periods as well as on principal.

Confirmation

A detailed, written verification sent by a broker to a client acknowledging that a securities transaction has been completed.

Consumer Price Index (CPI)

An inflationary indicator that measures the change in the cost of a fixed basket of products and services, including housing, electricity, food, and transportation. The CPI is published monthly. It is also called cost-of-living index.

Contract Fee

This is a flat dollar amount charged either once at the time of issue or charged once each year.

C-Share

In a family of multi-class mutual funds, the class that has a constant load structure throughout the life of the fund.

Currency Risk

The risk that an investment's value will be affected by changes in exchange rates. International investments cause investors to face the risk of currency fluctuations. Even in the short term such as one month, one week, or even one day, these shifts can add or subtract percentage points to or from the total return of international securities.

Custodial Fee

The charge for safekeeping or physically holding the securities in the fund.

Defensive Stocks

These are stocks of companies which provide necessary services (such as electric and gas), essentials (such as food), or staples (such as soft drinks). Because of the nature of these products, the stocks potentially provide a degree of stability during periods when the economy is declining.

Deferred Annuity

An annuity which begins payments to an annuitant after a specified period of time has elapsed.

Deferred Compensation

Any plan between an employer and employee that defers compensation into a future year, except for specific plans exempt from Section 409A, such as 403(b) plans.

Deferred Sales Charge (Load)

The category "Deferred Sales Charge (Load)" in the fee table refers to a sales load that investors pay when they redeem fund shares (that is, sell their shares back to the fund). You may also see this referred to as a "deferred" or "back-end" sales load. When an investor purchases shares that are subject to a back-end sales load rather than a front-end sales load, no sales load is deducted at purchase, and all of the investors' money is immediately used to purchase fund shares (assuming that no other fees or charges apply at the time of purchase).

Direct Rollover

A distribution of eligible rollover assets from a qualified plan, 403(b) plan, or a governmental 457 plan to a Traditional IRA, qualified plan, 403(b) plan, or a governmental 457 plan; or a distribution from an IRA to a qualified plan, 403(b) plan, or governmental 457 plan. Direct rollover assets are made payable to the qualified plan or IRA Custodian/Trustee, never to the individual. A direct rollover is reportable but not taxable.

Distribution Fees (12b-1 Fees)

Fees paid out of fund assets to cover expenses for marketing and selling fund shares, including advertising costs, compensation for brokers and others who sell fund shares, and payments for printing and mailing prospectuses to new investors and sales literature to prospective investors. Sometimes referred to as "12b-1 fees."

Diversification

Spreading investment funds among different types of assets to reduce risk and help increase the consistency of returns. At various times in a market cycle some asset classes may do well while others do poorly. By diversifying among a number of investments, investors can lessen the impact of poor performance in any one category.

Dividend

A share of company earnings paid out to stockholders. Dividends are declared by the board of directors and paid quarterly. Most are paid as cash, but they are sometimes paid in the form of additional shares of stock.

Dollar Cost Averaging

An investment strategy that involves investing a fixed dollar amount at regular intervals in one or more financial instruments.

Dow Jones Industrials

A price-weighted average of 30 actively traded blue chip stocks. It is the oldest and most traditionally quoted indicator of changes in the market.

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