Glossary of Financial Terms

410(k) Plan- A type of "defined contribution" retirement plan in which employees contribute a portion of their wages on a pre-tax basis. The employer usually has some form of "match" contribution and may make additional contributions. Employees usually have some decision-making authority over how the funds are invested.

Annual Report- Yearly record of a publicly held company's financial condition. It includes a description of the firm's operations, its balance sheet, income statement and some historical information. The SEC requires a more detailed report called a 10-K which is available from the company.

Annuity- A form of contract issued by an insurance company. A fixed annuity earns a fixed interest rate for a certain period. Variable annuities have separate accounts that are similar to mutual funds. Earnings within annuities are tax deferred until the money is paid out. Additional taxes may be due if the money is withdrawn before age 59 1/2.

Arbitrage- A trading strategy in which one tries to profit from differences in the prices of a security that is traded on more than one market.

Average Maturity- The average length of time until maturity of bonds held by a mutual fund. Changes in interest rates have greater impact on funds with longer average maturities.

Basis- The price an investor pays for a security plus any commissions. It is used to determine capital gains or losses for tax purposes when the security is sold.

Basis Points- Refers to the yield on bonds. Each percentage point of yield equals 100 basis points. If a bond yield changes from 7.25% to 7.39%, that's a rise in yield of 14 basis points.

Bear Market- A bear market is a prolonged period when stock prices generally fall.

Blue Chip- Common stocks of large, solid and well-known companies like GM, Exxon, GE or Procter & Gamble.

Bonds- A fixed income investment. Bonds are really loans to companies or government entities. The issuer of bonds promises to pay interest until the bond matures.

Bull Market- A bull market is a prolonged period when stock prices generally rise.

Capital Gains- When a stock is sold for a profit, it's the difference between the net sales price of the security and it's net cost, or original basis. Net capital gains are taxed.

Capital Loss- The difference between the net cost of a security and the net sale price, if that security is sold at a loss. The deductibility of net capital losses may be limited.

Certificate of Deposit- A deposit for a specific period of time at a bank. The deposit earns interest but there may be a penalty for early withdrawal.

Churning- Excessive trading in a brokerage account. This can be done to increase the broker's commissions.

Commission- The fee paid to the broker to execute a trade. Commissions are usually based on number of shares, bonds, options and their dollar value. Commissions can be charged on the purchase and sale of securities.

Common Stock- Shares of ownership issued by corporations to raise capital. Holders of common stock are entitled to receive dividends and to participate in some corporate decisions such as electing the board of directors.

Coupon Rate- For bonds, notes or other fixed income securities, the stated percentage rate of interest. Interest on bonds is usually paid twice a year.

Defined Benefit Plan- A type of retirement plan in which employees receive a certain amount when they retire. The amount of the retirement benefit is usually based on the employee's income level and length of employment.

Dividend- Distribution of a portion of a company's earnings to shareholders. Dividends are usually paid in cash and are subject to tax.

Dividend Reinvestment Plan- Automatic reinvestment of dividends into more shares of stock. Dividend reinvestment plans are a convenient ways to accumulate more shares.

Dow Jones Industrial Average- An index of the performance of 30 well known stocks on the New York Stock Exchange. The Dow Jones Industrial Average is commonly reported as an indication of whether prices on the New York Stock Exchange rose or fell.

Earnings- Net income for the company during the period after income taxes, but before dividends.

Earnings per share- Net income for a company for the past 12 months, divided by the number of common shares outstanding. The company often uses a weighed average of shares outstanding over the reporting term.

Employee Stock Owning Plan- A type of qualified plan in which employees can participate in the ownership of the company.

Expense Ratio- For mutual funds, the percent of the assets that were spent to run the fund. This includes expenses such as management fees, overhead costs and 12-b fees.

Good `Til Canceled Order- Sometimes simply called "GTC", it is an order for the broker to buy or sell stock that remains in effect until it is executed or canceled.

Guaranteed Insurance Contract- An investment option in a retirement plan that pays a certain interest rate for a stated period. GIC's are issued by insurance companies.

Hedging- An investment strategy designed to reduce investment risk using "call" options, "put" options, "short" selling, or futures contracts. Hedging is usually used by professional investors and institutions.

Index- A statistical measure to show movement in price or rate of return over certain time periods. Well known indexes include the S & P 500 and the Dow Jones Industrial Average.

Index Mutual Fund- A relatively new type of mutual fund that tries to match the return of a certain index by owning the securities that make up the index. This is a form of passive investment management.

Individual Retirement Account- A tax advantaged type of retirement plan for individuals. Contributions are limited, deductibility is limited and earnings within the IRA are tax deferred.

Initial Public Offering- A company's first sale of stock to the public. Securities offered in an IPO are often, but not always, those of young, small companies seeking outside equity capital. IPO's are usually considered high-risk investments.

Keogh Plan- A special type of retirement plan for self employed individuals and partnerships. Contributions are tax deductible and taxes on earnings are deferred until money is withdrawn.

Load Mutual Fund- A mutual fund with shares sold at a price that includes sales charge. Commissions are usually 4% to 9% of the net amount invested.

Margin Account- A brokerage account where the brokerage firm will lend money to help purchase securities. The loan in a margin account is collateralized by the securities in the account. If the value of the stock drops, the owner will be asked to either put in more cash, or sell a portion of the stock.

Market Capitalization- The dollar value of the outstanding shares of a company. It is calculated by multiplying the number of outstanding shares by the current price.

Market Cycle- The period between the 2 latest bull or bear markets.

Market Order- An order to a broker to buy or sell a stock at the existing price.

Money Market Fund- A mutual fund that invests short-term instruments such as Treasury bills, banker's acceptances or Certificates of Deposit. Money market funds are a way to keep funds in a brokerage account earning interest.

Mutual Fund- A type of investment that pools investors' money to invest in a portfolio of stocks, bonds or other securities. The investment decisions are made by the portfolio manager.

Net Asset Value- The value of a mutual fund's investments. The value of all the fund's investments is divided by the number of shares outstanding.

No Load Mutual Fund- A mutual fund, shares of which are sold without a sales charge. There can be other charges, however, such as management fees and other operating expenses.

Option- An investment that gives the buyer the right, but not the obligation, to buy or sell stock at a set price on or before a given date. Trading options can be a speculative strategy.

Price/Earnings Ratio- Shows the "multiple" of earnings at which a stock sells. The P/E ratio is determined by dividing current price by the most recent four quarters' earnings per share.

Profit Margin- Indicator of a company's profitability. Determined by dividing net income by revenue for the same 12-month period. Result is shown as a percent.

Prospectus- A legal document used to sell securities. A prospectus includes a description of the business and the risk factors. It is "required reading" for informed investors.

Return on Equity- Indicator of profitability. ROE is determined by dividing net income by common stockholders' equity. The result is shown as a percentage.

Rollover- The movement of funds from one qualified retirement plan to another without incurring an income tax liability. The most common rollover is the transfer of funds from a company retirement plan to an IRA when an employee leaves the company.

Sales Charge- The maximum commission charged by a mutual fund when purchasing shares. A 4% sales charge on a $1000 mutual fund purchase will result in buying $960 worth of fund shares.

Selling Short- If an investor think the price of a stock is going down, the investor could borrow the stock from a broker and sell it.

Sell Stop Order- An order to a broker to sell stock when the price falls to a specified level.

Shareholders equity- The portion of a company's balance sheet that includes the par value of issued shares, additional paid in capital and accumulated earnings.

Stock Dividend- Payment of a corporate dividend in the form of additional stock rather than cash. A stock dividend may also be shares in a subsidiary being spun off to the shareholders.

Yield- The percentage rate of return paid on a stock in the form of dividends, or the rate of interest paid on a bond or note. The yield is calculated by dividing the dividend or interest by the current value. Yield is expressed as a percentage.

Zero Coupon Bond- A bond that pays no interest but is fully paid off at par at maturity. Zero coupon bonds are bought at a discount to par value. Zero coupon bonds have a higher interest rate risk than bonds that pay interest currently.