Education
Glossary
Definitions of Common Financial Terms
Unsure about the meaning of financial term? Find the answer (and increase your vocabulary) with our online glossary.
A
Administrator
the individual or institution appointed by
a court to oversee the settlement of the estate of a person who has died without a
will.
Alpha
measures a fund's risk-adjusted performance and represents
the difference between a fund's actual performance and its expected performance, given
its level of risk.
Amortization
gradual debt reduction. Normally, the reduction
is made according to a pre-determined schedule for installment payments.
Annual Potfolio Turnover
a measure of how frequently assets
within a fund are bought and sold
Annuity
an interest-bearing contract between an individual
and a life insurance company that guarantees periodic payments to the indivdual during
a specific time period.
Appreciation
an increase in value, the opposite of depreciation.
B
Basis Points (bps)
is a unit of measure in quoting yields,
changes in yields or differences between yields; 100 basis points is equal to 1%.
Beneficiary
an individual named as the recipient of the
income or principal of an estate or trust.
Beta
represents the systematic risk of a portfolio and measures
its sensitivity to a benchmark.
Blue Chip Stocks
high-quality, common stock of well-known
companies with extended records of earnings and dividends, well-respected management,
and prospects for continued strong performance. Generally, these stocks are the choice
of investors seeking long-term growth.
Bond
a debt instrument that is a "promise to pay" issued
by corporations, federal and state goverments, and municipalities to raise capital.
The bond issuer promises to pay the holder of the bond the principal amount of the
loan when the bond matures and a fixed rate of interest periodically during the term
of the bond.
Book Value to Price
a ratio used to compare a stock's book
value to its market value. It is calculated by dividing the latest quarter's book
value per share to the current price of the stock.
Borrower
one who receives funds in the form of a loan with
the obligation of repaying the loan in full with interest.
Brent Crude
is a grade of crude oil used as a benchmark
to price European, African and Middle Eastern oil that is exported to the West.
Bull/Bear
terms frequently used to describe the outlook
for short-and long-term market performance:
- bull refers to the belief that stock prices are likely to rise;
- bear refers to the expectation that prices will decline.
C
Capital Gains
the difference between the cost basis and the
amount for which you sold the stock
Capital Gains and Losses
- for tax purposes, the difference between the purchase price and selling price.
- profit or loss that occurs when an investor sells an asset. If the asset's sale price is greater than the original purchase price, a capital gain results. If the asset is sold for less than the original price the investor experiences a capital loss.
Certificate of Deposit
an arrangement between an investor
and a financial institution which calls for the financial institution to pay a specific
rate of interest over a set period of time. Certain deposits are FDIC insured up to
applicable limits.
Common Stock
units of ownership that give voting rights to
shareholders. (See Preferred Stock.)
Consumer Price Index
is a measure that examines the weighted
average of prices of a fixed basket of consumer goods and services (such as food,
transportation, shelter, utilities, and medical care), and is widely used as a cost-of-living
benchmark.
Consumer Sentiment Index
is a statistical measurement of
consumers/investors opinions of the overall health of the economy.
Cost Basis
the purchase price, including commissions and
other expenses, used to determine capital gains and capital losses for tax purposes.
Cyclical Stocks
stocks whose earnings fluctuate according
to the business cycle.
D
Death Taxes
a general term used to refer to taxes against
property or the transfer of assets upon the death of the owner, including all estate
and inheritance taxes. Sometimes referred to as estate taxes.
Debt-To-Income Ratio
debt expenses as a percentage of monthly
income. Lenders use this ratio to qualify borrowers for mortgage loans, typically
setting a maximum debt-to-income ratio of 36 percent.
Deduction
for tax purposes, the portion of an estate that
does not generate tax (such as a marital deduction).
Delta
measures the sensitivity of a derivative (such as
an option or convertible bond) to the underlying asset (such as a stock).
Discount Broker
as opposed to full service brokers, a discount
broker charges a lower fee for executing buy and sell orders at the direction of the
investor. Generally, discount brokers do not provide investment advice.
Diversification
the practice of investing among several
categories of investments (including different industries, countries, or investment
vehicles) to enhance returnand reduce risk.
Dividend
periodic distribution of earnings to stockholders,
in the form of cash or additional shares of stock.
Donee/Donor
the recipient of a gift; the giver of a gift.
Dow Jones Industrial Average
the average performance of
certain blue chip stocks, generally regarded as an indication of how the market at
large is performing.
Down Market Capture
a measure of a manager's performance
in down markets relative to the market.
E
Environmental, Social and Governance (ESG)
three factors
used to evaluate sustainability and ethical impact of an investment in a company or
business.
Excess Return
measures how much the fund returns exceed
its benchmark index.
Executor
the individual named in a will charged with carrying
out the provisions specified in the will. A co-executor serves as executor along with
one or more designated individuals.
F
Fair Market Value
the price at which property is transferred
between a willing buyer and a willing seller, each of whom has reasonable knowledge
of all pertinent facts and neither being under any compulsion to buy or sell.
Federal Housing AdministrationFHA
a division of the Department
of Housing and Urban Development. Its main activity is the insuring of residential
mortgage loans made by private lenders.
Federal Home Loan Mortgage Corporation FHLMC
a private corporation
created by Congress to support the secondary mortgage market. It sells participation
certificates secured by pools of conventional mortgage loans; principal and interest
is guaranteed by the federal government through the FHLMC. Popularly known as Freddie
Mac.
Federal National Mortgage Association FNMA
a private corporation
created by Congress to support the secondary mortgage market. FNMA sells mortgage-backed
securities backed by pools of conventional loans. Payment of principal and interest
on these securities is backed by the US Government. Popularly known as Fannie Mae.
Fiduciary
an individual or institution responsible for acting
in the best interests of another party. A fiduciary is bound by law and duty to put
aside personal interests and act in good faith when making decisions for the benefit
of another.
First Mortgage
a real estate loan that creates a primary
claim against real property.
Fixed-Income Securities
debt obligations issued by corporations,
goverments, or goverment agencies which pay a fixed rate of interest over a defined
time period. Bonds and certain mortgage-backed securities are the most common examples
of fixed-income investments.
G
Grantor
an individual who gives property outright or in
a trust.
Gross Domestic Product (GDP)
is the market value of the
finished goods and services produced within a country's borders in a specific time
period, though GDP is usually calculated on an annual basis. GDP includes consumer
and government spending, private domestic investments, and net exports of goods and
services.
Gross Monthly Income
the amount of consistent and stable
income that an individual receives each month, averaged over a period of time. This
amount includes overtime pay, bonuses, commissions and income from dividends or interest,
provided that the individual can show a consistent history of receiving such income.
Growth Stock
stock of a corporation with a record of faster-than-average
sales and earnings. Growth stock typically appeals to investors who seek a long-term
increase in value.
Guardian
an individual or institution named by a court to
manage the property of a person who is adjudged incapable of handling his or her own
affairs.
H
Heir
one who inherits from the estate of a person who has
died.
Historical 5-Year Earnings Growth
the weighted average of
the growth in earnings for each stock in the fund's portfolio.
I
Income Stock
common stock that pays dividends at a higher-than-average
rate, resulting in a higher yield for stockholders. Income stock frequently in preferred
by investors who seek current income in addition to growth.
Index
any of a number of composites that reflect movement
in financial markets, indicating market prices and shares outstanding of companies
included in the index. Examples are: the Down Jones Industrial Index, the Russell
2000 Index, Standard & Poor's 500 Composite Stock Index, and the EAFE Index.
Index Fund
a fund managed with the objective of duplicating
the performance of securities in a broad-based index by investing in all or most of
the securities included in that index.
Individual Retirement Account (IRA)
a method of planning
for retirement that enables individuals to save up to $2,000 annually. These funds,
called contributions, are in addition to any retirement plan already
in place by the individual's employer. In addition, if an individual's employer has
adopted a Savings Incentive Match Plan for Employees, the employee will be able to
make a pre-tax elective contribution to an IRA of up to $6,000 annually. IRA funds
are tax-deferred, that is, not subject to tax until withdrawals are made, when the
individual may be in a lower tax bracket. (See Tax-Deferred Investment).
Individual Retirement Account "Rollover"
a special IRA that
is established specifically for taxable funds distributing from a tax-qualified retirement
plan. As in the case of a regular IRA, funds are not subject to tax until they are
withdrawn from the account.
Information Ratio
a measure of risk-adjusted relative return.
Interest
- earnings paid by any fixed-income security (a bond, a certificate of deposit, or an annuity, for example.)
- money paid for the use of money -- that is, paid for a loan.
Interest Coverage Ratio
is operating earnings divided by
interest expense; it is one way to examine a company’s ability to service its
debt.
Investment Management Account
an account whereby a financial
institution is given discretionary power with regard to investment decisions on behalf
of the investor. Fees for this service vary, but usually are based on a percentage
of the overall value of the funds under management.
Irrevocable Trust
a type of trust that cannot be revoked
or changed in any way.
Invasion of a Trust
refers to a distribution of assets made
from the principal of a trust.
J
Joint Ownership
also called joint tenancy, this phrase refers
to ownership of property by two or more persons, generally with right of survivorship
(upon the death of one owner, the surviving owner or owners assume ownership).
K
No listed terms for K.
L
Last Will
literally, the will last executed by an individual,
which revokes any former existing wills.
Liquidity
the flexibility of being able to obtain the cash
value of investments without incurring significant loss.
Living Trust
a trust that takes effect while the settlor
is still alive.
Living Will
a legal document in which an individual states,
in advance of final illness or injury, his or her wishes regarding procedures and
equipment designed to extend life.
Load
a sales charge associated with buying shares in some
mutual funds. (See No-Load Fund.)
Loan-To-Value Ratio
the relationship between the amount
of a home loan and the total value of the property. For example, if you receive a
loan of $95,000 on a home that costs $100,000, the loan-to-value ratio is 95 percent.
Lock-In-Rate
a commitment from a lender to make a loan at
a preset interest rate at some future date, usually for not more than 60 days. A fee
may be charged to "lock-in" a rate.
M
Market Value
the highest price that a willing buyer would
pay and the lowest a willing seller would accept.
Money Market
the market for short-term debt instruments.
Money market investments include Treasury bills, short-term certificates of deposit,
commercial paper, and other, similar instrumets.
Money Market Funds
refers to mutual funds investing solely
in money market instruments.
Mortgage
an interest in real property given as security
for the payment of an obligation.
Mortgage Insurance
a policy that allows mortgage lenders
to recover part of their financial losses from an insurance company if a borrower
fails to fully re-pay a loan. Mortgage insurance makes it possible for consumers to
buy a home with as little as 5 percent down.
Mortgage Investor
any person or institution that invests
in mortgages. By buying mortgage loans from lenders, the mortgage investor gives the
lender funds that can be used for more lending.
Mortgage Life Insurance
a type of term life insurance. The
amount of coverage decreases as the mortgage balance declines. In the event that the
borrower dies while the policy is in force, the debt is automatically paid by insurance
proceeds.
Mutual Fund
an investment company that enables investors
to pool their funds in order to invest in a managed portfolio of securities.
N
No-Load Fund
a mutual fund that does not involve a sales
charge when shares are purchased.
O
Option-adjusted spread
measures the yield spread between
similar securities (typically bonds) with different options, such as prepayment or
call options, which are very interest rate sensitive.
Organisation for Economic Co-operation and Development (OECD)
is an international economic organization of 34 countries founded to promote policies
that will improve the economic and social well-being of people around the world.
P
Personal Consumption Expenditures Index (PCE)
is a measure
of price changes in consumer goods and services; it includes data pertaining to durables,
non-durables and services.
PITI
Principal, Interest, Taxes, and Insurance are the components
of a mortgage payment.
Point
a dollar amount paid to a lender for making a loan.
A point is 1 percent of the loan amount. Also called discount points.
Portfolio
the combined investment holdings of an individual
or an institution.
Power of Appointment
the power given by an individual to
another in a will or trust document to determine which persons will receive an interest
in his or her estate.
Power of Attorney
a legal document authorizing one individual
to act as the agent or "attorney" for another (the "principal"). If the attorney is
authorized to act in behalf of another for all matters, he or she has general power
of attorney. Authority to act solely regarding specified situations is special power
of attorney. If the authority granted extends beyond the disability of the principal,
the attorney has durable power of attorney.
Preferred Stock
a class of stock that has preference over
common stock in the event of the liquidation of a company's assets. Typically, preferred
stockholders do not have voting rights. (See Common Stock.)
Price-to-Book Ratio
is a ratio used to compare a stock's
market value to its book value. It is calculated by dividing the current price of
the stock by the latest quarter's book value per share.
Price-to-Earnings Ratio
is the current share price of a
stock divided by its earnings per share
Price-to-Sales Ratio
is calculated by dividing a stock’s
current price by its sales per share over the trailing 12 months.
Prime Rate
the basic rate of interest on loans
charged by commercial banks.
Principal
- the original balance of money loaned, excluding interest. Also, the remaining balance of a loan, excluding interest.
- refers to the assets included in a trust that yield income. In an agency relationship, this word refers to the individual who gives authority to the agent to act on his or her behalf.
Probate
the process through which a will is proved to be
valid.
Prospectus
a booklet that provides full disclosure of relevant
information about a security being offered for sale.
"Prudent Investor" Rule
legal term that refers to the duty
of the fiduciary to invest and manage assets in the best interests of another.
Purchasing Managers’ Index (PMI)
is a measure of the
overall performance of the manufacturing sector, based on a survey conducted with
purchasing managers to determine changes in economic conditions. A reading of 50 indicates
no change, a reading of greater than 50 indicates an expanding economy and a reading
below 50 indicates a contracting economy.
Q
No terms listed for Q.
R
Remainderman
in the case of a trust, this term refers to
the individual who will receive the principal of a trust when final distribution takes
place.
RESPA (Real Estate Settlement Procedures Act)
RESPA is a
federal law that requires lenders to provide home mortgage borrowers with information
about known or estimated settlement costs.
Return
profit earned by a capital investment or other type
of security.
Return-on-Equity (ROE)
is net income as a percentage of
a company's shareholder equity.
Revocable Trust
a type of trust that can be terminated by
the settler (the opposite of an irrevocable trust).
Risk
the chance that an investment could lose or fail to
maintain value.
R-squared
measures the percentage of a fund's movement that
is explained by movements in the market index.
S
Servicer
after a mortgage loan closes, the loan servicer
collects the payments, manages escrow accounts, pays escrowed taxes and insurance,
and manages delinquent payments. Lenders often "release" servicing to another business,
which means that a home buyer will not necessarily send house payments to the original
lender.
Settlement
the closing of a mortgage loan.
Settlor
an individual who establishes a trust in order to
transfer property. (See Grantor)
Share
an individual unit of ownership in a publicly owned
corporation or mutual fund.
10-year Sovereign Yield
is the interest rate a sovereign
entity (e.g. U.S., Germany) is required to pay to borrow for a 10-year period.
Standard Deviation
a statistical measurement of dispersion
about an average, which depicts how widely returns varied over a certain period of
time.
Step Up In Basis
the change in the value of an asset inherited
upon the owner's death. The taxable gain is calculated based on the fair market value
at the time of death, not the fair market value at the time the asset was purchased.
Stock Split
a method of reducing stock price by allocating
newly issued stock to shareholders according to their current holdings.
Successor Trustee or Executor
an individual or institution
taking the place of a trustee or executor unable to continue the responsibilities
designated in the trust agreement or will.
T
Tax-Deferred Investments
an investment whose earnings are
not subject to state or federal tax until the investor assumes possession of them.
Individual Retirment Accounts are common examples.
T-statistic (test statistic)
a statistical measure of confidence,
it is calculated based on a sample and is the basis for accepting or rejecting a given
hypothesis.
Tracking Error
measures the difference between the fund's
performance and that of the index.
Trailing 12-month Price-to-Earnings Ratio
the sum of a company's
price-to-earnings. Calculated by taking the current stock price and dividing it by
the current earnings per share for the past 12 months.
Trust
a legal, fiduciary relationship in which an individual
or institution (the trustee) holds legal title to property with the responsibility
for keeping or managing this property for the benefit of another person or beneficiary.
Trust Agreement
a legal document that establishes a trust
and outlines the rules and guidelines affecting its management and disposition.
Trust Fund
property held in trust. This term originally
applied only to money held in trust, but is frequently used when referring to all
property held in trust.
Trustee
the individual or institution with responsibility
for management of property placed in trust for the benefit of another individual.
U
Uncertainty Indicator
(or policy-related economic uncertainty)
uses two components comprising key newspaper coverage of economic uncertainty as well
as disagreement among economic forecasters.
Unified Credit
a federal tax credit that offsets gift and
estate tax liability.
Up Market Capture
a measure of a manager's performance in
up markets relative to the market.
U.S. Treasury Securities
bebt obligations secured by the
full faith and credit of the U.S. government. Income generated by these securities
is subject to federal tax, but exempt from state and local tax.
V
Veterans Administration VA
an independent agency of the
federal government created in 1930. The VA home loan guaranty program is designed
to encourage lenders to offer long-term, low downpayment mortgages to eligible veterans
by guaranteeing the lender against loss.
W
West Texas Intermediate (WTI)
is a grade of crude oil used
as a benchmark in oil pricing. It is the underlying commodity for the futures contracts
on the Chicago Mercantile Exchange and the New York Mercantile Exchange.
Will
a legal document expressing the wishes of an individual
regarding distribution of his or her property after death.
X
No listed terms for X.
Y
Yield-to-maturity
is the rate of return anticipated on a
bond if it is held until the maturity date.
Yield-to-worst
lowest potential bond yield received without
the issuer defaulting, it assumes the worst-case scenario, or earliest redemption
possible under terms of the bond.
Z
Zoning
city or county laws specifying how property may be
used in specific areas.