Glossary
Numerals
12b-1 fee—A fee for the promotion, sale, or other activity connected with the distribution of a company’s mutual fund shares, determined annually as a flat dollar amount or as a percentage of the company’s average total net asset value during the year.
30-day distribution rate—A figure that indicates what the 12-month yield would be, considering the most recent distribution and the month-end offer price. While yield calculations use the actual distributions over the most recent 12 months, the 30-day distribution rate is calculated by annualizing the last distribution and dividing by its recent offer price.
30-day wash rule—IRS rule stipulating that losses incurred from selling securities may not be used to offset gains if equivalent security is bought within 30 days before or after the date of sale. Selling one S&P 500 fund from one company and buying the same fund, but through a different provider, is not allowed.
A
The asking price—The price at which a dealer is willing to sell a security.
AUV (accumulation unit value) —A unit of measurement to determine the value of a cash subaccount unit, determined by the same process as the net asset value (NAV) of mutual fund shares. The AUV is calculated by taking the NAV and adjusting it for insurance expenses (mortality and expense [M&E] rate and administration expenses).
Average annual total returns—The annualized return for the security, averaged over the specified time.
Average annual turnover ratio—A measure of the amount of buying and selling activity of security. Turnover is defined as the lesser of securities sold or purchased during a year divided by the average monthly net assets. A turnover of 100 percent, for example, implies that positions are held, on average, for about a year.
Average bond quality—The average quality value of all bonds held by the security. Bond quality indicates the likelihood of default by the bond issuer. The default probability is rated from AAA (highly unlikely) to D (in default).
Average duration—The average duration in years for all securities held by the fund or subaccount relative to the risk of rising interest rates. A five-year duration calculation would assume a 5 percent loss if interest rates went up one full percent, or conversely, a 5 percent gain if they fell by 1 percent. Investor emotions, however, would be the final factor in determining the price of the assets.
Average P/B (price/book ratio)—The market price divided by stock equity for all equities held by the fund or subaccount. The ratio shows how much investors are willing to pay for each dollar of company equity.
Average P/E (price/earnings) ratio—The share price of the stock divided by earnings per share (EPS) for all equities held by the fund or subaccount. The ratio shows how much investors are willing to pay for each dollar of the company’s earnings.
B
Basis point—A basis point is equal to .01 percent of bond yield. An increase of 100 basis points is a 1 percent increase in yield.
Beta—A measure of a security’s volatility with the equity market as measured by the market index relative to each security’s investment category. This statistic reflects only the market-related portion of an investment’s risk, and thus it is a narrower measure than the standard deviation, which reflects total risk (market-related and unique). In general, the volatility of the relative market index is 1.00, so a beta of 1.50 would indicate a volatility level 50 percent greater than that of the market. Since this statistic is relative to the market, betas for securities with little or no correlation to the market are less significant. Consider the R-squared as a measure of more significance. Also, see “Squared.”
Bid—the price a mutual fund will pay you to redeem shares, also referred to as NAV (net asset value), or the price a dealer is willing to pay to buy a security.
Bond-rating—A rating method based on the range from AAA (highly unlikely) to D (in default) measures the likelihood of default by the bond issuer.
Book value—The book value is normally considered as the company’s assets minus its liabilities. Intangibles, like goodwill, are usually excluded from assets.
Bottom-up—investing strategy that focuses on good firms or securities first, then the industry and economic trends. The theory supposes that a portfolio of well-chosen securities will have long-term success in any environment.
Breakpoint—A volume-based percentage discount in the commission charged by an investment. Larger investment amounts qualify for increasingly generous discounts.
C
Callable—A bond option that allows the issuing company to redeem (buy back) the security before its scheduled maturity. Bonds are usually called when interest rates drop, allowing companies to issue new bonds at lower rates.
Capital gains—The profit derived from selling a security at a higher price than that paid to acquire it. A mutual fund may distribute all or some of its accumulated capital gains to its shareholders annually.
Closed fund—A mutual fund that no longer issues shares. Normally, a fund will close because the fund’s manager feels there are a limited number of good investments left, or the fund needs to keep net assets low enough to enter and exit holdings quickly.
Clean shares—A fund that does not charge a load (commission) or maintain 12b-1 service fees
Convertibles—Corporate securities such as preferred stock or bonds that can be exchanged at a pre-stated price for a set number of shares of another security, like common stock.
D
Death benefit—If the annuity contract owner dies before annuitization (structured income payout), the insurance company will pay the annuity beneficiary the contract’s accumulated value less any withdrawals, or the number of premiums paid less any withdrawals, whichever is greater. Variable-annuity contracts never pay beneficiaries less than 100 percent of the investment minus previous withdrawals. The death benefit for annuities and life insurance is paid out in full and is tax-free.
Dividends—Distributions resulting from the income and dividends from the mutual funds, index funds, ETFs, and other securities.
Dollar-cost averaging (DCA)—A strategy that diversifies the prices of security by buying a specific amount over set intervals.
E
The exchange-traded fund (ETF) —An investment vehicle through which shares can be bought and sold during trading hours. Assets in this type of fund originally mirrored an index; however, new versions come out every day.
Expense ratio—A mutual fund’s annual expenses (management fees, 12b-1 fees, and other operating expenses) expressed as a percentage of its average net assets. The total return data provided reflects performance after operating expenses are deducted.
F
Future value—The calculated value of a specified current investment compounded at a fixed rate over a set number of years.
Factor investing—A numerical characteristic common across a broad set of securities
G
Global fund—A mutual fund that invests in both foreign and domestic securities. These funds differ from traditional international mutual funds because they can keep a significant portion of their assets in US stocks and bonds.
H
Health savings account (HSA)—A tax-deductible savings account for employees and employers, designed to provide funding for medical-plan deductibles. Contributions to the plan are tax-deductible, and withdrawals for qualified medical expenses are tax-free.
I
Inception date—The date an investment commenced operation.
Income distribution—A distribution to a security’s shareholders of the accumulated net income from investments.
Index—A hypothetical, unmanaged, often weighted portfolio of securities, the performance of which is used as a benchmark in measuring the performance of actual securities. Common examples are the Dow Jones Industrial Average (DJIA) and the Standard & Poor’s (S&P) 500.
Index fund—A fund designed to match the performance of a particular index. For example, an S&P 500 index fund would buy the same companies with the same weightings that are found in the S&P 500. This is more of a passive management style, which should convey lower management fees to investors.
Initial public offering (IPO) —A corporation’s first offering of stock to the public.
Internal rate of return (IRR)—The interest rate at which the net present value of all the cash flows (both positive and negative) from a project or investment equals zero. The internal rate of return is used to evaluate the attractiveness of a project or investment.
Investment category—the stated purpose or goal of a security’s operations. This term often determines the types of investments the security makes, the results expected, and the level of risk with which it is associated.
Investment-grade bonds—Bonds with ratings of BBB or above.
Individual retirement account (IRA)—Originally, IRAs were individual pension accounts available to anyone not covered at work by a qualified pension plan. Effective January 1, 1982, all wage earners, including those already in company pension plans, can make tax-deferred contributions to IRAs, with income limits, however.
J-K
Junk bonds—Bonds with ratings of BB and below.
L
Lateral integration—A mental picture of a horizontal line broken into three stages. One represents investments with noticeably short horizons, like certificates of deposits and money market funds. The second stage is designed to hold investments with moderate risks, like bonds and balanced funds held for an intermediate time frame. And finally, the third stage is made up of long-term investments like stock, real estate, etc.
Leveraged buyout (LBO)—The practice of buying a company by using borrowed funds or replacing existing equity with debt.
M
Management fee—The amount paid by a mutual fund, index fund, or exchange-traded fund to the investment fund manager. The industry-wide average annual fee is about .002 of 1 percent of fund assets.
Market timing—Buying and selling funds (or any security) based on economic indicators or market forecasts, the intent being to outsmart other investors.
Market value—The current share price of a security.
Maximum front-end load—The utmost sales charge that can be assessed upfront to invest in a security. The front-end load fee is assessed at the time of purchase, with the charge amount often dependent on the dollar amount of the purchase.
Moving averages—An average of a security’s prices over a specific period, used with many commodity prices to show trends.
N
Net asset value (NAV)—A mutual, index, or exchange-traded fund’s share price, computed by subtracting total liabilities from total assets and dividing by the number of shares outstanding.
Net assets—The mutual fund’s or variable annuity’s total assets after liabilities.
No-load fund—A Fund without an up-front or back-end sales fee. Also, see “load.”
Negative correlation—Indicates the opposing similarities of an investment fund compared with the general market.
O
Option—The right to buy or sell a security at a certain price within a specified period. The option itself is a contract and entitles the holder to buy or sell if exercised. “Call” options allow the holder to buy a security at a predetermined price whereas “put” options allow the holder to sell a security at a predetermined price.
Other insurance expenses—All insurance-related charges other than the mortality and expense (M&E) charges. The fee also includes administrative charges.
PQ
Policy fee—an expense charged by a variable-annuity contract to cover the maintenance of annuity records.
Portfolio composition—A percentage breakdown of securities holdings in several specified categories.
Preferred stock—Class of stock that pays dividends at a specified rate and that has preference over common stock in the payment of dividends and the liquidation of assets.
Present value—The current value of a future payment or stream of payments, adjusted for fixed-rate compounding.
Prospectus—A document mutual funds are required to send to investors before they can enter the fund. Prospectuses include information regarding fees and expenses, objectives and strategies, buying and selling shares, risk factors, distributions, management and organization history, and other services. (Now available online)
R
Rebalancing—The act of setting a portfolio of securities back to its original target percentages for each asset class.
Redemption fee—A fee charged at the time of redemption; some reduce over time. Mostly assessed to insurance products.
Risk:
Market risk—The risk of change in the general level of market prices for investments, caused by political, social, or economic changes; systematic risk represented by the fund’s beta.
Inflationary risk—The risk that investments will not keep pace with inflation and purchasing power will be reduced.
Currency risk—The risk that currency fluctuations may affect the value of foreign investments or profits when converting them into the investor’s local currency.
Event risk—The risk that a company may become the subject of a takeover bid or leveraged buyout involving additional debt so that its existing bonds are downgraded.
FOMO—Fear of missing out; investors tend to follow trends simply because they want to follow the crowd.
Interest-rate risk—The risk that interest rates may rise and decrease the value of an investment.
Credit risk—The risk that a company, agency, or municipality may have trouble paying its debts.
R-squared (R2)—is a statistical measurement used for investment analysis and research that investors can use to determine an investment’s correlation with (similarity to) a given benchmark. ... R-squared reflects the percentage of a fund's movements that can be explained by movements in its benchmark index. A portfolio with a well-diversified and conservative allocation might have an R-square of 80+, in which case it is hoped it would hold up well if the overall stock market declines.
S
Sales charge—The cost to buy individual securities, mutual funds, annuities, partnerships, etc. It is charged at the time of purchase.
Secondary market—The trading in existing or outstanding shares of securities as opposed to new issues or initial public offerings. Transactions in the secondary market occur either on an exchange or in the OTC market.
Sector fund—A mutual fund that invests in the stocks of industry, such as the airline industry, utilities, technology, gold, etc.
Securities and Exchange Commission (SEC)—A federal agency created in 1934 to regulate the securities industry. The SEC is made up of five commissioners, each appointed by the President for a five-year term. No more than three commissioners from the same political party may serve at any one time.
Self-directed IRA—An IRA that is managed by an account holder or adviser who appoints a custodian to carry out instructions. This kind of IRA is subject to the same types of restrictions and limitations as a regular IRA.
Selling short—The sale of a security that the investor does not own to take advantage of an anticipated decline in the price of the security. To sell short, the investor must borrow the security from the broker to make delivery to the buyer. The short seller will eventually have to buy the security back, or “buy to cover,” to return it to the broker. Selling short is regulated by Regulation T of the Federal Reserve Board (FRB).
Sell stop order—An order to sell a security at the market price once the security trades through a specified price, called the “stop price.”
Senior securities—Securities that have prior claim to a corporation’s assets in the event of bankruptcy. Debt securities and preferred stocks are senior to common stock.
Settlement date—The date when the buyer and seller of security are expected to settle a transaction, as evidenced by the seller delivering the security and the buyer paying for it. Most securities, but not all, settle in three business days.
Shares—A measurement of the amount of ownership in a corporation.
Small-cap—Companies with a market capitalization less than $1 billion.
Spread—The difference between the price you pay for an investment and the markup the seller made.
Standard deviation—A statistical measure of the month-to-month ups and downs of a security’s returns. Money-market securities, which have stable asset values, have standard deviations of zero. Volatile, aggressive-growth portfolios can have standard deviations of 25 percent or more.
Stock ownership—Of a corporation represented by shares.
Style drift—Divergence of investment object from its original design
Subsequent investment—An investment of additional money into an existing account.
Surrender charge period—The time frame in which an insurance company can charge investors or policyholders for early withdrawal.
Surrender value—The amount that the insurer will return to the policyholder upon cancellation of a policy.
Symbol—A five-letter identifier for mutual funds, usually an abbreviation of the fund name; exchange-traded fund may be different.
T
Tax-deferred— Investments whose accumulated earnings are not taxed until the investor takes possession of them. In IRAs, for example, all dividends, interest, and appreciation accumulate until the account owner starts withdrawing funds from the account, usually at age 59½ or later.
Tax-exempt money market fund—A mutual fund that invests in short-term municipal securities that are tax-exempt. The fund distributes the income-tax-free to shareholders.
Tax-exempt security—A debt obligation in which interest is exempt from federal, state, and local taxes--commonly called a “municipal bond” or “municipals.” All tax-exempt bonds are federally tax-exempt, as well as exempt by the state in which the investor resides.
Tax selling—Securities sold to realize a loss that can be used to offset any capital gains of the other positions sold. This is usually done at the end of the year.
Tender—To submit a bid to buy a security, as in a US T-bill auction, or to surrender ownership in a corporation’s securities in response to an offer to buy them at a set price. See “tender offer.”
Tender offer—An offer to buy shares from the target company’s shareholders by another company or organization. The offer may be for cash, securities, or both. Often, the goal is to take control of the target company. The suitor may be hostile or friendly. During a specified time, shareholders are asked to tender (surrender) their shares for a stated value, usually at a premium, subject to the tendering of a minimum and the maximum number of shares.
Testamentary trust—A trust that is established within a person’s will.
Thin market—Market for a security that has too few buy and sell transactions occurring. Large trades can have a marked effect on securities prices, making the security much more volatile. Institutional investors usually avoid buying stocks that have a thin market for this reason--that is, it is hard for them to get in or out of a position without substantially affecting the security’s price.
Ticker symbol—Letters used in trading to identify a corporation’s securities on the ticker tape.
Time deposit (TD)—Certificates of deposit (CDs) or savings accounts that are held in a financial institution for a set amount of time.
Time horizon—The period one can stay invested (e.g., number of years to retirement). Longer time horizons can reduce volatility risk.
Time value—The amount of an option premium that exceeds the intrinsic value. A call option with a strike price of 30, for example, has a premium of 3.
If the underlying stock is at 32, the call has an intrinsic value of 2, and the time value is 1.
Top-down—An investment strategy that looks at the economic outlook and overall industries first, then which companies will benefit the most from a favorable forecast.
Total returns—The annual return on an investment that includes income, capital gains, and interest.
Tracking error—A divergence between the price behavior of a portfolio and the price behavior of a benchmark.
Treasury bill (T-bill)—A short-term debt obligation of the US Government that is purchased at a discounted price and matures to face value. They are sold in denominations of $10,000 to $1 million and have maturities of either 13, 26, or 52 weeks.
Treasury bond (T-bond)—A long-term debt obligation of the US government that has a maturity of more than 10 years. They are issued in $1,000 denominations and pay interest semiannually.
U-V-W-X
Undervalued—A security that is selling beneath its liquidation value or whose price is below what analysts believe it merits. Among other reasons, a stock may be undervalued because the corporation has an inconsistent earnings history or because the corporation is not well-known.
Vertical integration—A mental image of a pyramid structure designed with three equally staged horizontal compartments. The largest compartment at the bottom of the pyramid holds total market index funds; the middle stage holds factor index exchange-traded funds, and the smallest portion at the top is made up of a few managed mutual funds.
Y-Z
Yearly Total Returns—The sum of a security’s return for 12 months corresponding to calendar years.