Glossary of Financial Terms

401(k) Plan – An employer-sponsored retirement savings plan that gives employees a choice of investment options, typically mutual funds. Employees who participate in a traditional 401(k) plan have a portion of their pre-tax salary invested directly in the option or options they choose. These contributions and any earnings from the 401(k) investments are not taxed until they are withdrawn.

 

529 Education Savings Plan – A type of 529 plan that lets an account owner open an investment account to save for the account beneficiary’s qualified higher education expenses or tuition for elementary or secondary public, private, or religious schools.

 

8-K – Public companies file Form 8-K, known as the "current report," to the SEC to announce major events that shareholders should know about, including bankruptcy proceedings, a change in corporate leadership (such as a new director or officer) and preliminary earnings announcements.

 

Accrued Interest – Interest earned on a security but not yet paid to the investor.

 

Alternative Mutual Fund (Alt Fund) – Alternative mutual funds (sometimes called alt funds or liquid alts) are publicly offered, SEC-registered mutual funds that hold non-traditional investments or use complex investment and trading strategies.  Investors considering alt funds should be aware of their unique characteristics and risks.

 

Annual Meeting – Once-a-year meetings where the chief executive officer reports on the year's results to shareholders. At this meeting, shareholders vote to elect the board of directors and on other corporate business.

 

Annual Report – The annual report to shareholders is a document used by most public companies to disclose corporate information to their shareholders. It is usually a state-of-the-company report, including an opening letter from the Chief Executive Officer, financial data, results of operations, market segment information, new product plans, subsidiary activities, and research and development activities on future programs. Reporting companies must send annual reports to their shareholders when they hold annual meetings to elect directors. Under the proxy rules, reporting companies are required to post their proxy materials, including their annual reports, on their company websites. The annual report on Form 10-K, which must be filed with the SEC, may contain more detailed information about the company’s financial condition than the annual report and will include the annual financial statements of the company.  Companies sometimes elect to send their annual report on Form 10-K to their shareholders in lieu of, or in addition to, providing shareholders with a separate annual report to shareholders.

 

Annual Return – An annual rate of return is the profit or loss on an investment over a one-year period. There are many ways of calculating the annual rate of return. If the rate of return is calculated on a monthly basis, multiplying it by 12 expresses an annual rate of return. This is often called the annual percentage rate (A.P.R.).

 

Annuities – An annuity is a contract between you and an insurance company that is designed to meet retirement and other long-range goals, under which you make a lump-sum payment or series of payments. In return, the insurer agrees to make periodic payments to you beginning immediately or at some future date. Annuities typically offer tax-deferred growth of earnings and may include a death benefit that will pay your beneficiary a specified minimum amount, such as your total purchase payments. While tax is deferred on earnings growth, when withdrawals are taken from the annuity, gains are taxed at ordinary income rates, and not capital gains rates. If you withdraw your money early from an annuity, you may pay substantial surrender charges to the insurance company, as well as tax penalties. There are generally three types of annuities — fixed, indexed, and variable.

 

Asset – Any tangible or intangible item that has value in an exchange. A bank account, a home, or shares of stock are all examples of assets.

 

Asset Allocation – Asset allocation involves dividing your investments among different categories, such as stocks, bonds, and cash.

 

Asset Classes – Investments that have similar characteristics. The three main asset classes are stocks, bonds, and cash.

 

Basis Point – One one-hundredth (.01) of a percentage point. For example, eight percent is equal to 800 basis points.

 

Bear Market – A time when stock prices are declining and market sentiment is pessimistic. Generally, a bear market occurs when a broad market index falls by 20% or more over at least a two-month period.

 

Bid Price/Ask Price – The term "bid" refers to the highest price a buyer will pay to buy a specified number of shares of a stock at any given time.  The term "ask"  refers to the lowest price at which a seller will sell the stock. The bid price will almost always be lower than the ask or “offer,” price.  The difference between the bid price and the ask price is called the "spread."

 

Board of Directors – A group of people elected by shareholders to oversee the management of a corporation.

 

Bond Funds and Income Funds – "Bond funds" and "income funds" are terms used to describe a type of investment company (mutual fund, ETF, closed-end fund or unit investment trust (UIT)) that invests primarily in bonds or other types of debt securities. Depending on its investment objectives and policies, a bond fund may concentrate its investments in a particular type of bond or debt security—such as government bonds, municipal bonds, corporate bonds, convertible bonds, mortgage-backed securities, zero-coupon bonds—or a mixture of types. The securities that bond funds hold will vary in terms of risk, return, duration, volatility and other features.

 

Bonds – A bond is a debt security, similar to an IOU.  Borrowers issue bonds to raise money from investors willing to lend them money for a certain amount of time. When you buy a bond, you are lending to the issuer, which may be a government, municipality, or corporation.  In return, the issuer promises to pay you a specified rate of interest during the life of the bond and to repay the principal, also known as face value or par value of the bond, when it “matures,” or comes due after a set period of time. 

 

Bull Market – A time when stock prices are rising and market sentiment is optimistic. Generally, a bull market occurs when there is a rise of 20% or more in a broad market index over at least a two-month period.

 

Capital Gain – The profit that comes when an investment is sold for more than the price the investor paid for it.

 

Certificate of Deposit (CD) – A certificate of deposit (CD) is a savings account that holds a fixed amount of money for a fixed period of time, such as six months, one year, or five years.  In exchange, the issuing bank or credit union pays you interest.  When you cash in or redeem your CD, you receive the money you originally invested plus any interest. Certificates of deposit are considered to be one of the safest savings options.  A CD bought through a federally insured bank or credit union is insured up to $250,000. 

 

Classes – Different types of shares issued by a single fund, often referred to as Class A shares, Class B shares, and so on. Each class of a fund holds identical investments and shares the same investment objectives and policies. But each class has different shareholder services with different fees and expenses, and therefore, each class will have different performance results.

 

Compound Interest – Interest paid on principal and on accumulated interest.

 

Corporate Governance – A framework which may include rules and regulations, corporate charter and bylaws, formal policies, as well as customs and other processes, that determines the leadership, organization, and direction of a company.

 

Day Trade – FINRA rules define a “day trade” as the purchase and sale, or the sale and purchase, of the same security on the same day in a margin account.  This definition encompasses any security, including options.  Selling short and purchasing to cover a position in the same security on the same day is also considered a day trade.

 

Deferred Annuity – With a deferred annuity, you make payments to an insurance company, which will be free from taxes until you reach a particular age or a date specified in your contact.

 

Derivatives – Financial instruments whose performance is derived, at least in part, from the performance of an underlying asset, security or index. For example, a stock option is a derivative because its value changes in relation to the price movement of the underlying stock.

 

Disclosure – Information about a company’s financial condition and business that it makes public. Investors can use this information to make informed investment decisions about the company’s securities. 

 

Distribution Fees – Fees paid out of fund assets to cover marketing and selling fund shares. These fees may cover advertising costs, compensating brokers and others who sell fund shares, payments for printing and mailing prospectuses to new investors, and providing sales literature to prospective investors. Distribution fees sometimes are referred to as "12b-1 fees."

 

Diversification – Diversification is a strategy that can be neatly summed up as "Don't put all your eggs in one basket." The strategy involves spreading your money among various investments in the hope that if one loses money, the others will make up for those losses.

 

Dividend – A portion of a company's profit paid to shareholders. Public companies that pay dividends usually do so on a fixed schedule although they can issue them at any time. Unscheduled dividend payments are known as special dividends or extra dividends.

 

Dollar-cost Averaging – Dollar-cost averaging means investing your money in equal portions, at regular intervals, regardless of the ups and downs in the market. This investment strategy can help you manage risk by following a consistent pattern of adding new money to your investment over a long period of time.  By making regular investments with the same amount of money each time, you will buy more of an investment when its price is low and less of the investment when its price is high. 

 

Earnings Per Share (EPS) – A public company's net profit divided by the number of its common shares.

 

Fair Disclosure, Reg FD – Regulation FD addresses the selective disclosure of information by publicly traded companies and other issuers. Regulation FD provides that when an issuer discloses material nonpublic information to certain individuals or entities—generally, securities market professionals, such as stock analysts, or holders of the issuer's securities who may well trade on the basis of the information—the issuer must also make public disclosure of that information. In this way, Regulation FD aims to promote full and fair disclosure.

 

Fixed Annuity – An insurance product that promises a minimum rate of interest while your account is growing. The insurance company also guarantees that the periodic payment will be for a set amount for a fixed period, such as 20 years, or an indefinite period, such as your lifetime.

 

Form 10-K – The federal securities laws require publicly reporting companies to disclose information on an ongoing basis. For example, domestic companies must submit annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K for a number of specified events and must comply with a variety of other disclosure requirements. The annual report on Form 10-K provides a comprehensive overview of the company's business and financial condition and includes audited financial statements. Although similarly named, the annual report on Form 10-K is distinct from the “annual report to shareholders,” which a company must send to its shareholders when it holds an annual meeting to elect directors.

 

Form 10-Q – The federal securities laws require publicly reporting companies to disclose information on an ongoing basis. For example, domestic issuers must submit annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K for a number of specified events and must comply with a variety of other disclosure requirements. The Form 10-Q includes unaudited financial statements and provides a continuing view of the company's financial position during the year. The report must be filed for each of the first three fiscal quarters of the company's fiscal year.

 

Form 8-K – In addition to filing annual reports on Form 10-K and quarterly reports on Form 10-Q, publicly reporting companies must report certain material corporate events on a more current basis. Form 8-K is known as a “current report” and it is the report that companies must file with the SEC to announce major events that shareholders should know about. Companies generally have four business days to file a Form 8-K for an event that triggers the filing requirement. However, if the issuer is furnishing a Form 8-K solely to satisfy its obligations under Regulation FD, then the due date might be earlier.

 

Hedge Funds – Like mutual funds, hedge funds pool investors’ money and invest the money in an effort to make a positive return.  Hedge funds typically have more flexible investment strategies than mutual funds.  Many hedge funds seek to profit in all kinds of markets by using leverage (in other words, borrowing to increase investment exposure as well as risk), short-selling and other speculative investment practices that are not often used by mutual funds. Unlike mutual funds, hedge funds are not subject to some of the regulations that are designed to protect investors.  Depending on the amount of assets in the hedge funds advised by a manager, some hedge fund managers may not be required to register or to file reports with the SEC.  Hedge funds, however, are subject to the same prohibitions against fraud as are other market participants, and their managers owe a fiduciary duty to the funds that they manage. Hedge fund investors do not receive all of the federal and state law protections that commonly apply to most mutual funds.  For example, hedge funds are not required to provide the same level of disclosure as you would receive from mutual funds.  Without the disclosure that the securities laws require for most mutual funds, it can be more difficult to fully evaluate the terms of an investment in a hedge fund.  It may also be difficult to verify representations you receive from a hedge fund.

 

Index Fund – An "index fund" describes a type of mutual fund or unit investment trust (UIT) whose investment objective typically is to achieve approximately the same return as a particular market index, such as the S&P 500 Composite Stock Price Index, the Russell 2000 Index or the Wilshire 5000 Total Market Index. An index fund will attempt to achieve its investment objective primarily by investing in the securities (stocks or bonds) of companies that are included in a selected index. Some index funds may also use derivatives (such as options or futures) to help achieve their investment objective. Some index funds invest in all of the companies included in an index; other index funds invest in a representative sample of the companies included in an index. The management of index funds is more "passive" than the management of non-index funds, because an index fund manager only needs to track a relatively fixed index of securities. This usually translates into less trading of the fund’s portfolio, more favorable income tax consequences (lower realized capital gains), and lower fees and expenses than more actively managed funds. Because the investment objectives, policies and strategies of an index fund require it to purchase primarily the securities contained in an index, the fund will be subject to the same general risks as the securities that are contained in the index. Those general risks are discussed in the descriptions of stock funds and bond funds. In addition, because an index fund tracks the securities on a particular index, it may have less flexibility than a non-index fund to react to price declines in the securities contained in the index. Another type of investment company that attempts to track the performance of a market index is an exchange-traded fund (ETF). ETFs are legally classified as either UITs or open-end companies, but they differ from traditional UITs and open-end companies in a number of respects. For example, pursuant to SEC exemptive orders, shares issued by ETFs trade on a secondary market and are only redeemable in very large blocks (blocks of 50,000 shares, for example). ETFs are not considered to be, and may not call themselves, mutual funds.

 

Individual Retirement Account (IRA) – Individual Retirement Accounts (IRAs) provide tax advantages for retirement savings.  You can contribute each year up to the maximum amount allowed by the Internal Revenue Service.  There are several types of IRAs available - traditional IRAs, Roth IRAs, SEP IRAs, and SIMPLE IRAs. 

 

Initial Public Offering (IPO) – An initial public offering, or IPO, generally refers to when a company first sells its shares to the public. For more information about IPOs generally, see our Investor Bulletin. You can also find fast answers on why investors have difficulty getting shares in an IPO, a brokerage firm's IPO eligibility requirements, and lockup agreements.

 

Insider Trading – Illegal insider trading refers generally to buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, on the basis of material, nonpublic information about the security. Insider trading violations may also include "tipping" such information, securities trading by the person "tipped," and securities trading by those who misappropriate such information.

 

Interest – The price paid for borrowing money. It is expressed as a percentage rate over a period of time. Interest rates may be fixed, meaning the rate is set and will not change, or may be variable or "floating," meaning the rate may move higher or lower over time.

 

Issuer – The entity obligated to pay principal and interest on a bond.

 

Large Cap, Mid Cap, Small Cap – Terms used to describe a company’s size and market value (market capitalization).

 

Liquidity – Liquidity generally refers to how easily or quickly a security can be bought or sold in a secondary market. Liquid investments can be sold readily and without paying a hefty fee to get money when it is needed. A stock’s liquidity generally refers to how rapidly shares of a stock can be bought or sold without substantially impacting the stock price. Stocks with low liquidity may be difficult to sell and may cause you to take a bigger loss if you cannot sell the shares when you want to. Liquidity risk is the risk that investors won’t find a market for their securities, which may prevent them from buying or selling when they want. This is sometimes the case with complicated investment products and products that charge a penalty for early withdrawal or liquidation such as a certificate of deposit (CD).

 

Market Capitalization – Market capitalization is the value of a corporation determined by multiplying the current public market price of one share of the corporation by the number of total outstanding shares.

 

Money Market Fund – A money market fund is a type of mutual fund that has relatively low risks compared to other mutual funds and most other investments and historically has had lower returns. Money market funds invest in high quality, short-term debt securities and pay dividends that generally reflect short-term interest rates. Many investors use money market funds to store cash or as an alternative to investing in the stock market.

 

Mutual Funds – A mutual fund is an open-end investment company or fund.  An open-end fund is one of three basic types of investment companies. The other two types of investment companies are closed-end funds and unit investment trusts (UITs). Exchange-traded funds (ETFs) are generally also structured as open-end funds, but can be structured as UITs as well. A mutual fund continuously pools money from many investors and invests the money in stocks, bonds, money market instruments, other securities, or even cash.

 

Net Asset Value (NAV) – "Net asset value," or "NAV," of an investment company is the company's total assets minus its total liabilities. For example, if an investment company has securities and other assets worth $100 million and has liabilities of $10 million, the investment company's NAV will be $90 million. Because an investment company's assets and liabilities change daily, NAV will also change daily. NAV might be $90 million one day, $100 million the next, and $80 million the day after.

 

Net Income – The profit earned by a company after all expenses and taxes have been deducted from revenue. A simple way to think about net income is it’s the price of a widget multiplied by the number of widgets sold (this result is revenue) minus the cost to make and sell the widgets, other expenses and any interest or taxes.

 

Operating Expenses – The costs a fund incurs in running the fund, including management fees, distribution fees, and other expenses.

 

Options – Options are contracts giving the purchaser the right – but not the obligation -- to buy or sell a security at a fixed price within a specific period of time. Stock options are traded on a number of exchanges.

 

Price-earnings (P/E) Ratio – A company's P/E ratio is a way of gauging whether the stock price is high or low compared to the past or to other companies. The ratio is calculated by dividing the current stock price by the current earnings per share. Earnings per share are calculated by dividing the earnings for the past 12 months by the number of common shares outstanding.

 

Principal – The total amount of money being borrowed or lent; the initial amount of money invested.

 

Profit – Revenue minus cost; money made on a transaction.

 

Prospectus – A document that describes the mutual fund to prospective investors. Every mutual fund provides a prospectus with information about the mutual fund's investment objectives, risks, past performance, and expenses. You can get a prospectus from the mutual fund company's website or by mail. A broker or other financial professional also can provide you with a copy.

 

Proxy Statements – A document sent to shareholders letting them know when and where a shareholders’ meeting is taking place and detailing the matters to be voted upon at the meeting.  You can attend the meeting and vote in person or cast a proxy vote. 

 

Public Company – A company that offers its securities through an offering and now has those securities traded on the open market.

 

Quarterly Reports (10Q) – Each quarter, public companies file reports to the SEC containing unaudited financial statements and information about the company's operations in the previous three months.

 

Rebalancing – Rebalancing brings a portfolio back to its original asset allocation mix. This is necessary because over time, some investments will grow faster than others, and holdings may become out of alignment with investment goals.

 

Revenue – The total amount of money, or gross income, generated by a company from selling its goods and services. A simple way to think about revenue is it’s the price of a widget multiplied by the number of widgets sold.

 

Risk – In finance, risk refers to the degree of uncertainty about the rate of return on an asset and the potential harm that could arise when financial returns are not what the investor expected. In general, as investment risks rise, investors seek higher returns to compensate them for taking on such risks.

 

Risk Tolerance – An investor's ability and willingness to lose some or all of an investment in exchange for greater potential returns.

 

Roth 401(k) – An employer-sponsored Roth 401(k) plan is similar to a traditional plan with one major exception. Contributions by employees are not tax deferred but are made with after-tax dollars. Income earned on the account from interest, dividends, or capital gains, is tax-free.

 

Security – An investment instrument such as a stock or bond.

 

Short Sales – A short sale generally involves the sale of a stock you do not own (or that you will borrow for delivery).  Short sellers believe the price of the stock will fall, or are seeking to hedge against potential price volatility in securities that they own. If the price of the stock drops, short sellers buy the stock at the lower price and make a profit.  If the price of the stock rises, short sellers will incur a loss. 

 

Stock – An instrument that signifies an ownership position (called equity) in a corporation, and a claim on its proportional share in the corporation's assets and profits. Most stocks also provide voting rights, which give shareholders a proportional vote in certain corporate decisions, such as the election of corporate directors.

 

Stock Split – An increase in the number of shares of a corporation's stock without a change in the shareholders' equity. Companies often split shares of their stock to make them more affordable to investors. Unlike issuing new shares, a stock split does not dilute the ownership interests of existing shareholders. For example, if you own 100 shares of a company that trades at $100 per share and the company declares a two-for-one stock split, you will own 200 shares at $50 per share immediately after the split. If the company pays a dividend, your dividends paid per share also will fall proportionately.

 

Target Date Fund – A diversified mutual fund that automatically shifts towards a more conservative mix of investments as it approaches a particular year in the future, known as its "target date." A target date fund investor picks a fund with the right target date based on his or her particular investment goal. The managers of the fund then make all decisions about asset allocation, diversification, and rebalancing. Target date funds also are known as lifecycle funds.

 

Treasury Securities – Treasury securities—including Treasury bills, notes, and bonds—are debt obligations issued by the U.S. Department of the Treasury. Treasury securities are considered one of the safest investments because they are backed by the full faith and credit of the U.S. government.  The income from Treasury securities may be exempt from state and local taxes, but not from federal taxes.

 

Variable Annuities – A variable annuity is a contract between you and an insurance company, under which you make a lump-sum payment or series of payments.  In return, the insurer agrees to make periodic payments to you beginning immediately or at some future date.  You can choose to invest your purchase payments in a range of investment options, which are typically mutual funds.  The value of your account in a variable annuity will vary, depending on the performance of the investment options you have chosen.

 

Yield – The annual percentage rate of return earned on a bond calculated by dividing the coupon interest rate by its purchase price.

 

Source: Excerpted from and provided by the U.S. Securities Exchange Commission (SEC)