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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Par value (bond):

The face value of a bond, generally $1,000 for corporate issues, with higher denominations for many government issues.

Participant contributions:

The dollars that employees contribute to their 401k plans.

Participant-directed investing:

In this case, the employee decides how to invest his or her funds. It is the company's responsibility to offer a variety of investment opportunities so that the employee can make investments according to his or her long term goals and risk.

Payout ratio:

Dividends per share divided by earnings per share. Provides an indication of how well earnings support the dividend payments. The lower the ratio, the more secure the dividend.

PBGC:

Pension Benefit Guarantee Corp. The PBGC is a guarantee fund, established by ERISA, which covers all defined benefit pension plans. Companies with a defined benefit plan must pay premiums into this fund according to the number of employees in the plan and the current ratio of assets to liabilities in the plan.

Portfolio:

The group of individual securities held by a person or an institution.

Premium bond:

A bond that is valued at more than its face amount.

Present value:

The value today of a future payment, or stream of payments, discounted at some appropriate interest rate.

Price-earnings ratio (P/E):

Market price per share divided by the firm's earnings per share. A measure of how the market currently values the firm's earnings growth and risk prospects.

Price-to-book ratio:

Market price per share divided by book value (tangible assets less all liabilities) per share. A measure of stock valuation relative to net assets. A high ratio might imply an overvalued situation; a low ratio might indicate an overlooked stock.

Principal:

The original amount of money invested or lent, as distinguished from profits or interest earned on that money.

Profit margin:

Net earnings after taxes divided by sales. Measures the ability of a firm to generate earnings from sales.

Profit sharing plan:

A defined contribution pension plan that uses a variable level of contributions based on company profits. Profit sharing plans allow firms to limit allocations to a pension fund in lean years. However, they suffer from lower maximum deduction limits than standard plans.

Program trading:

Computer-based trigger points are established in which large volume trades are indicated. The technique is used by institutional investors.

Prospectus:

The written statement that discloses the terms of a securities offering or a mutual fund. Strict rules govern the information that must be disclosed to investors in the prospectus. You should always read the prospectus on any mutual fund before investing.

Prudent Investor Rule:

The latest development in evaluating fiduciary prudence. The current (1992) model uniform act differs from the traditional Prudent Man Rule in that it indicates that: (1) no asset is automatically imprudent, but must be suitable to the needs of the beneficiaries, (2) the entire portfolio is viewed when evaluating the prudence of a fiduciary, and (3) certain actions can be delegated to other agents and fiduciaries. ERISA [ § 404(a)(1)(C) ] generally follows the approach of the Prudent Investor Rule.

Prudent Man Rule:

A rule originally stated in 1830 by the Supreme Judicial Court of Massachusetts in Harvard College v. Amory [ 9 Pick. (Mass.) 446 ], that, in investing, all that can be required of a trustee is that he conduct himself faithfully and exercise a sound discretion and observe how men of prudence, discretion, and intelligence manage their own affairs not in regard to speculation, but in regard to the permanent disposition of their funds considering the probable income as well as the probable safety of the capital to be invested. The current (1959) model uniform rule categorizes certain types of assets as automatically imprudent, looks at each investment separately in determining prudence, and prohibits the delegation of responsibilities. Most states have adopted the Rule as a part of state fiduciary law, usually with certain different specifics from state to state.

Put option:

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

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Qualified Plan:

A private retirement plan that meets the rules and regulations of the Internal Revenue Service. Contributions to such a plan are generally tax-deductible; earnings on such contributions are always tax sheltered until withdrawal.

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Real rate of return:

The annual percentage return realized on an investment, adjusted for changes in the price level due to inflation or deflation.

Relative strength:

Price performance of a stock divided by the price performance of an appropriate index over the same time period. A measure of price trend that indicates how a stock is performing relative to other stocks.

Required rate of return:

The rate of return demanded to induce investors to invest in a security.

Retention ratio:

The percent of earnings retained in the firm for investment purposes.

Return on equity (ROE):

A ratio calculated by dividing common stock equity (net worth) at the beginning of the accounting period into net income for the period after preferred stock dividends, but before common stock dividends. ROE tells common stockholders how effect their money is being employed.

Return:

Consists of income plus capital gains (or losses) relative to investment.

Revenue bond:

A municipal bond supported by the revenue from a specific project, such as a toll road, bridge, or municipal coliseum.

Risk/return trade-off:

The balance an investor must decide on between the desire for low risk and high returns, since low levels of uncertainty (low risk) are associated with low potential returns and high levels of uncertainty (high risk) are associated with high potential returns.

Risk:

Possibility that an investment's actual return will be different than expected; includes the possibility of losing some or all of the original investment. Measured by variability of historical returns or dispersion of historical returns around their average return.

Rollover:

An employee's transfer of retirement funds from one retirement plan to another plan of the same type or to an IRA without incurring a tax liability. The transfer must be made within 60 days of receiving a cash distribution. The law requires 20 percent federal income tax withholding on money eligible for rollover if it is not moved directly to the second plan or an investment company.

Round lot:

The basic trading block for stocks--usually 100 shares.

Glossary provided by:



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