This glossary of investment and related terms provides simple definitions of terms that you may need to know.

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A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

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Accrued Interest:

The amount credited to a bond or other fixed-income security between the last payment and when the security is sold, or any intermediate date. The buyer usually pays the seller the security's price plus the accrued interest.

Annuity:

A contract by which an insurance company agrees to make regular payments to someone for life or for a fixed period.

Appreciation:

Increase in the value of an investment over time.

Ask price:

The price a seller is willing to accept for the security; also called the offer price. This price is usually higher than the Bid price.

Asset allocation:

Dividing your investment portfolio among the major asset categories. The most important decision you will make.

Asset Allocation Fund

A common trust fund or mutual fund that spreads its portfolio among a wide variety of investments, including domestic and foreign stocks and bonds, government securities, and real estate stocks. This gives small investors far more diversification than they could get allocating money on their own. Some of these funds keep the proportions allocated between different sectors relatively constant, while others alter the mix as market conditions change.

Asset:

A resource that has economic value to its owner. Examples of an asset are cash, accounts receivable, inventory, real estate, and securities.

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Balance sheet:

The firm's financial statement that provides a picture of its assets, debts, and net worth at a specific point in time.

Balanced Fund

A common trust fund or mutual fund that maintains a balanced portfolio, generally 50% bonds or preferred stocks and 50% common stocks, but this percentage can and does vary.

Beta:

A measure of a stock's risk relative to the market, usually the Standard & Poor's 500 index. The market's beta is always 1.0; a beta higher than 1.0 indicates that, on average, when the market rises, the stock will rise to a greater extent and when the market falls, the stock will fall to a greater extent. A beta lower than 1.0 indicates that, on verage, the stock will move to a lesser extent than the market. The higher the beta, the greater the risk.

Bid price:

The price a buyer is willing to pay for a security. This price is usually lower than the Ask price.

Bond:

A certificate of debt issued by a company or the government. Bonds generally pay a specific rate of interest and pay back the original investment after a specified period of time.

Book value per share:

The accounting value of a share of common stock. It is determined by dividing the net worth of the company (common stock plus retained earnings) by the number of shares outstanding.

Business and industry risk:

Uncertainty of an investment's return due to a fall-off in business that is firm-related or industry-wide.

Buy-and-hold:

A strategy in which the stock portion of your portfolio is fully invested in the stock market at all times.

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Call option:

The right to purchase stock at a specified (exercise) price within a specified time period.

Callable bond:

A bond that can be redeemed by the issuer prior to its maturity. Usually a premium is paid to the bond owner when the bond is called.

Cash Balance Plan:

A defined benefit plan in which each participant has an account that is credited with a dollar amount that resembles an employer contribution, generally determined as a percentage of pay. Each participant's account is credited with earned interest. The plan provides the benefits in the form of a lump-sum distribution or annuity.

Cash or Deferred Arrangement (CODA):

See Salary Reduction Plan.

Capital gain:

An increase in the value of a capital asset such as common stock. If the asset is sold, the gain is a "realized" capital gain. A capital gain may be short-term (one year or less) or long-term (more than one year).

Certificate of Deposit:

A bank deposit that pays a specified rate of interest for a certain period of time.

Collective Trust Fund:

Work and act much like a mutual fund. Collective trust (also known as a common trust fund) funds offer investors many of the same benefits as mutual funds, such as portfolio diversification, professional management and investment flexibility. But since collective funds do not impose the same administrative fees and do not have some of the regulatory requirements that mutual funds do, they generally have lower operating expenses.

Commission:

Broker's fee for buying or selling securities.

Common Stock:

An investment representing ownership interest in a corporation.

Compliance testing:

Testing required by the IRS to make sure that the 401(k) plan is fair to both highly compensated and ordinary employees.

Compounding:

The ability of an asset to generate earnings that are then reinvested and generate their own earnings (earnings on earnings).

Conversion premium:

The amount, expressed as a dollar value or as a percentage, by which the price of the convertible security exceeds the current market value of the common stock into which it may be converted.

Critical Mass:

A state of freedom from worry and anxiety about money due to the accumulation of assets which make it possible to live your life as you choose without working if you prefer not to work or just working because you enjoy your work but don't need the income. Plainly stated, the Land of Critical Mass is a place in which individuals enjoy their own personal financial nirvana. Differentiation between earned income and assets is a fundamental lesson to learn when thinking in terms of critical mass. Earned income does not produce critical mass......critical mass is strictly a function of assets.

Current ratio:

Current assets, including cash, accounts receivable and inventory, divided by current liabilities, including all short-term debt. A rough measure of financial risk: the smaller current assets relative to current liabilities,the greater the risk of credit failure.

Current yield:

Annual income (interest or dividends) divided by the current price of the security. For stocks, this is the same as the dividend yield.

Custodian

The bank or trust company that maintains a retirement plan's assets, including its portfolio of securities or some record of them. Provides safekeeping of securities, but has no role in portfolio management.

Cyclical industry:

An industry, such as automobiles, whose performance is closely tied to the condition of the general economy.

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