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401(k) Glossary


The Securities and Exchange Commission (SEC) requires that all publicly traded companies file a Form 10-k every year. The filing date, ranging from 60 to 90 days after the end of a company's fiscal year, depends on the value of the publicly held shares. The 10-k discloses detailed information about a company's finances, including total sales, sales by product line or division for the past five years, revenue, operating income, earnings per share, and equity, as well as other corporate information such as by-laws, organizational structure, holdings, subsidiaries, lawsuits in which the company is involved, and the company's history. A company's Form 10-k becomes public information once it is filed, and you can find the report in the SEC's database. As an investor, you can learn more about a company from its 10-k than from its less detailed annual report.

12b-1 fee

A number of load and no-load mutual funds levy 12b-1 fees on the value of your mutual fund account to offset the fund's promotional and marketing expenses. These asset-based fees, which get their name from the Securities and Exchange Commission (SEC) ruling that describes them, typically amount to somewhere between 0.5% and 1% annually of the net assets in the fund. A fund that charges 12b-1 fees must detail those expenses, along with other fees it imposes, in its prospectus.


You participate in a 401(k) retirement savings plan by deferring part of your salary into an account set up in your name. Any earnings in the account are federal income tax deferred. If you change jobs, 401(k) plans are portable, which means that you can move your accumulated assets to a new employer's plan, if the plan allows transfers, or to a rollover IRA. With a traditional 401(k), you defer pretax income, which reduces the income tax you owe in the year you make the contribution. You pay tax on all withdrawals at your regular rate, determined by your filing status and tax bracket. With the newer Roth 401(k), which is offered by some but not all employers who offer traditional 401(k)s, you contribute after-tax income. Earnings accumulate tax deferred, but your withdrawals are completely tax free if your account has been open at least five years and you're at least 59 1/2. In either type of 401(k), you can defer up to the federal cap, plus an annual catch-up contribution if you're 50 or older. However, you may be able to contribute less than the cap if you're a highly compensated employee (HCE) or if your employer limits contributions to a percentage of your salary. Your employer may match some or all of your contributions, based on the terms of the plan you participate in, but matching isn't required. With a 401(k), you are responsible for making your own investment decisions by choosing from among investment alternatives offered by the plan. These alternatives may include mutual funds, variable annuity separate accounts, fixed-income investments, and sometimes company stock. Your plan may also offer a brokerage window that allows you to select among a wide range or investments through a designated account. You may owe an additional 10% federal tax penalty if you withdraw from a 401(k) before you reach 59 1/2. You must normally begin to take minimum required distributions by April 1 of the year following the year you turn 70 1/2 unless you're still working. When you retire or leave your job for any reason you may roll over your traditional 401(k) assets into a traditional IRA and your Roth 401(k) assets into a Roth IRA. You may also rollover your traditional 401(k) to a Roth IRA and pay the tax that is due on the combined value of your contributions and earnings.


A 403(b) plan, sometimes known as a tax-sheltered annuity (TSA) or a tax-deferred annuity (TDA), is an employer sponsored retirement savings plan for employees of not-for-profit organizations, such as colleges, hospitals, foundations, and cultural institutions. Some employers offer 403(b) plans as a supplement to -- rather than a replacement for -- defined benefit pensions. Others offer them as the organization's only retirement plan. Your contributions to a traditional 403(b) are tax deductible, and any earnings are tax deferred. Contributions to a Roth 403(b), which some but not all employers offer, are made with after-tax dollars, but the withdrawals are tax free if the account has been open at least five years and you're 59 1/2 or older. There's an annual contribution limit, but you can add an additional catch-up contribution if you're 50 or older. Other catch-up provisions may apply as well. With a 403(b), you may be responsible for making your own investment decisions by choosing among investment alternatives offered by the plan, though not all plans offer choice. You can roll over your assets to another employer's plan if the plan allows transfers or an IRA when you leave your job, or to an IRA when you retire. You may roll your traditional 403(b) into a traditional IRA without tax consequences. You may also roll a traditional 403(b) to a Roth IRA and pay the tax that's due on your combined contributions and earnings. You may withdraw without penalty once you reach 59 1/2, or sometimes earlier if you retire. You must begin required withdrawals by April 1 of the year following the year you turn 70 1/2 unless you are still working. In that case, you can postpone withdrawals until April 1 following the year you retire.


The tax-deferred retirement savings plans known as 457 plans are available to state and municipal employees. Like traditional 401(k) and 403(b) plans, the money you contribute and any earnings that accumulate in your name are not taxed until you withdraw the money, usually after retirement. The contribution levels are set each year at the same level that applies to 401(k)s and 403(b)s, though 457s may allow larger catch-up contributions. You also have the right to roll your plan assets over into another employer's plan, including a 401(k) or 403(b), or an individual retirement account (IRA) when you leave your job.


The Securities and Exchange Commission (SEC) requires that all publicly traded companies use Form 8-k to report anything that could have a significant effect on the financial position of the company or the value of its shares. Events and changes that must be reported -- in most cases within four days -- include bankruptcy, mergers, acquisitions, amendments to the corporate charter or by-laws, a change of directors, a change in the fiscal year, and even a change of name or address of the company. A company's Form 8-k becomes public information once it is filed, and you can find the report in the SEC's database. These 8-k filings are designed to level the playing field between general investors and investors who have special access to information about a company.

Account balance

Your account balance is the amount of money you have in one of your financial accounts. For example, your bank account balance refers to the amount of money in your bank accounts. Your account balance can also be the amount of money outstanding on one of your financial accounts. Your credit card balance, for example, refers to the amount of money you owe a credit card company. With your 401(k), your account balance, also called your accrued benefit, is the amount your 401(k) account is worth on a date that it's valued. For example, if the value of your account on December 31 is $250,000, that's your account balance. You use your 401(k) account balance to figure how much you must withdraw from your plan each year, once you start taking required distributions after you turn 70 1/2. Specifically, you divide the account balance at the end of your plan's fiscal year by a divisor based on your life expectancy to determine the amount you must take during the next fiscal year.

Accredited investor

An accredited investor is a person or institution that the Securities and Exchange Commission (SEC) defines as being qualified to invest in unregistered securities, such as privately held corporations, private equity investments, and hedge funds. The qualification is based on the value of the investor's assets, or in the case of an individual, annual income. Specifically, to be an accredited investor you must have a net worth of more than $1 million excluding the value of the investor's primary residence, or a current annual income of at least $200,000 with the anticipation you'll earn at least that much next year. If you're married, that amount is increased to $300,000. Institutions are required to have assets worth $5 million to qualify as accredited investors. The underlying principle is that investors with these assets have the sophistication to understand the risks involved in the investment and can afford to lose the money should the investment fail.

Accrued interest

Accrued interest is the interest that accumulates on a fixed-income security between one interest payment and the next. The amount is calculated by multiplying the coupon rate, also called the nominal interest rate, times the number of days since the previous interest payment. Interest on most bonds and fixed-income securities is paid twice a year. On corporate and municipal bonds, interest is calculated on 30-day months and a 360-day year. For government bonds, interest is calculated on actual days and a 365-day year. When you buy a bond or other fixed-income security, you pay the bond's price plus the accrued interest and receive the full amount of the next interest payment, which reimburses you for the accrued interest payment you made when you purchased the bond. Similarly, when you sell a bond, you receive the price of the bond, plus the amount of interest that has accrued since you received the last interest payment. On a zero-coupon bond, interest accrues over the term of the bond but is paid in a lump sum when you redeem the bond for face value. However, unless you hold the bond in a tax-deferred or tax-exempt account, you owe income tax each year on the amount of interest that the government calculates you would have received, had it been paid.

Accumulation period

The accumulation period refers to the time during which earnings are added to the premiums you deposit in a deferred annuity and before the date that payouts based on your account balance begin. Because annuities are federal income tax deferred, all earnings are reinvested to increase the base on which future earnings accumulate, so you have the benefit of compounding. When you buy a deferred fixed annuity contract, the company issuing the contract promises a fixed rate of return during the accumulation period regardless of whether market interest rates move up or down. With a deferred variable annuity, the amount you accumulate depends on the performance of the investment alternatives, known as subaccounts, investment funds, or separate account funds, which you select from among those offered in the contract. At the end of the accumulation period, you can choose to annuitize, agree to some other method of receiving income, or roll over your account value into an immediate annuity. The years in which you receive annuity income are sometimes called the distribution period.

Accumulation unit

Accumulation units are the shares you own in the separate account funds of a variable annuity during the period you're putting money into your annuity. If you own the annuity in a 401(k) or similar plan, each time you make a contribution that amount is added to one or more of the separate account funds to buy additional accumulation units. The value of your annuity is figured by multiplying the number of units you own by the dollar value of each unit. During the accumulation phase, that value changes to reflect the changing performance of the underlying investments in the separate account funds.

Accumulation/distribution line

The accumulation/distribution line is a technical indicator used to predict price movements and the sustainability of current trends. It's a volume indicator, which means it measures the number of shares traded over a given period. When the current close is higher than the close from the day before, volume is said to have accumulated and a new, higher, data point is created. Volume is said to have distributed when the current close is lower than the close from the day before, and a new, lower, data point is created. Positive and negative divergences are considered important. If prices are falling, but the accumulation/distribution line is consistently rising, this is known as a positive divergence. A positive divergence could be a sign that prices will soon begin to rise. A negative divergence, which occurs when prices are rising but the indicator is simultaneously falling, could be a sign that the trend will reverse and that prices may soon begin to fall.


If a company buys another company outright, or accumulates enough shares to take a controlling interest, the deal is described as an acquisition. The acquiring company's motive may be to expand the scope of its products and services, to make itself a major player in its sector, or to fend off being taken over itself. To complete the deal, the acquirer may be willing to pay a higher price per share than the price at which the stock is currently trading. That means shareholders of the target company may realize a substantial gain, so some investors are always on the lookout for companies that seem ripe for acquisition. Sometimes acquisitions are described, more bluntly, as takeovers and other times, more diplomatically, as mergers. Collectively, these activities are referred to as mergers and acquisitions, or M&A, to those in the business.

Actively managed fund

Managers of actively managed mutual funds buy and sell investments to achieve a particular goal, such as providing a certain level of return or beating a relevant benchmark. As a result, they generally trade much more frequently than managers of passively managed funds whose goal is to mirror the performance of the index a fund tracks. While actively managed funds may provide stronger returns than index funds in some years, they typically have higher management and investment fees.

Activist investor

An activist investor attempts to force a corporation to make changes in management, board structure, investment policies, use of retained earnings, or other practices, often by introducing shareholder proposals or putting forward alternative directors. Activist investors may be hedge funds, institutional investors, such as money managers or pension funds, wealthy individual investors, or groups of investors with a common cause. Some activists deliberately accumulate substantial stakes in undervalued companies to force changes that will increase the share price so they can sell at a profit. Others, such as long-time or majority stakeholders, may object to current management practices, prefer an independent board of directors, or want a voice in executive pay. While they seek improvement to the bottom line, they may also be committed to strengthening the company in other ways. Activist methods vary as well. Some wage public relations and proxy wars while others seek to implement their proposals through negotiation. In recent years activists have achieved a number of goals including increased respect for their power to effect change.

Adjusted gross income (AGI)

Your AGI is your gross, or total, income from taxable sources minus certain deductions. Income includes salary and other employment income, interest and dividends, and long- and short-term capital gains and losses. Potential deductions include, among others, unreimbursed business expenses, interest on education loans, contributions to a deductible individual retirement account (IRA), and alimony you pay. You figure your AGI on page one of your federal tax return, and it serves as the basis for calculating the income tax you owe. Your modified AGI is used to establish your eligibility for certain tax or financial benefits, such as deducting your IRA contribution or qualifying for certain tax credits.


401(k) Plan Administration and Recordkeeping are ongoing services to help ensure that a 401(k) plan is run in the manner it was designed, complies with governing body regulations, and that transactions are accounted to individual accounts. Administration and Recordkeeping services include, but are not limited to the following services: setup and issuance of new plans and documents, performance of plan compliance and testing, tracking participant contributions and earnings, preparation of required tax documents.

Adoption Agreement

In a prototype plan, the part containing the options from which an employer may choose. Options include choices in participation requirements, vesting schedules and allocation formulas.

Advance-decline (A-D) line

The advance-decline line graphs the ratio of stocks that have risen in value -- the advancers -- to stocks that have fallen in value -- the decliners -- over a particular trading period. The direction and steepness of the A-D line gives you a general idea of the direction of the market. For example, a noticeable upward trend, which is created when there are more advancers than decliners, indicates a growing market. A downward slope indicates a market in retreat. At times, however, there may be no clear trend in either direction.


Stocks that have gained, or increased, in value over a particular period are described as advancers. If more stocks advance than decline -- or lose value -- over the course of a trading day, the financial press reports that advancers led decliners. When that occurs over a period of time, it's considered an indication that the stock market is strong.

After-hours market

Securities, such as stocks and bonds, may change hands on organized markets and exchanges after regular business hours, in what is known as the after-hours market. These electronic transactions help explain why a security may open for trading at a different price from the one it closed at the day before. There's also trading in benchmark indexes such as Standard & Poor's 500 Index (S&P 500) and the Dow Jones Industrial Average (DJIA) before US stock markets open. The level of activity and the direction of the trading -- up or down -- is widely interpreted as an early indicator of what's likely to happen in the market during the day.

After-tax contribution

An after-tax contribution is money you put into your 401(k) or other employer sponsored retirement savings plan either instead of or in addition to your pretax contribution. You make an after-tax contribution if you've chosen to participate in a Roth 401(k) or Roth 403(b) arrangement rather than your employer's traditional tax-deferred 401(k) or 403(b). When you eventually withdraw from your account, the after-tax contributions are not taxed again. Neither are the earnings if you follow the withdrawal rules for these accounts. You also make after-tax contributions to Roth individual retirement accounts (Roth IRAs), education savings accounts, and 529 plans. The contributions are not taxed at withdrawal and neither are the earnings if you follow the rules that apply. If you make what are known as excess deferrals, or after-tax contributions to a tax-deferred account, that money is not taxed at withdrawal either. However, since pretax contributions and all earnings in the account are tax deferred, figuring the tax that's due on your distributions may be more complicated than if you had made only pretax contributions.

After-tax income

After-tax income, sometimes called post-tax dollars, is the amount of income you have left after federal income taxes (plus state and local income taxes, if they apply) have been withheld. If you contribute to a Roth IRA or a 529 college savings plan, purchase an annuity, or invest in a taxable account, you are using after-tax income.

Agency bond

Some federal agencies, including Ginnie Mae (GNMA) and the Tennessee Valley Authority (TVA), raise money by issuing bonds and short-term discount notes for sale to investors. The money raised by selling these debt securities is typically used to make reduced-cost loans available to specific groups, including home buyers, students, or farmers. Interest paid on the securities is generally higher than you'd earn on Treasury issues, and the bonds are considered nearly as safe from default. In addition, the interest on some -- but not all -- of these securities is exempt from certain income taxes. Securities issued by former federal agencies that are now public corporations, including mortgage-buyers Fannie Mae and Freddie Mac, are also sometimes described as agency bonds.


An agent is a person who acts on behalf of another person or institution in a transaction. For example, when you direct your stockbroker to buy or sell shares in your account, he or she is acting as your agent in the trade. Agents work for either a set fee or a commission based on the size of the transaction and the type of product, or sometimes a combination of fee and commission. Depending on the work a particular agent does, he or she may need to be certified, licensed, or registered by industry bodies or government regulators. For instance, insurance agents must be licensed in the state where they do business, and stockbrokers must pass licensing exams and be registered with FINRA. In a real estate transaction, a real estate agent represents the seller. That person may also be called a real estate broker or a realtor if he or she is a member of the National Association of Realtors. A buyer may be represented by a buyer's agent.

Aggressive-growth fund

Aggressive-growth mutual funds buy stock in companies that show rapid growth potential, including start-up companies and those in hot sectors. While these funds and the companies they invest in can increase significantly in value, they are also among the most volatile. Their values may rise much higher -- and fall much lower -- than the overall stock market or the mutual funds that invest in the broader market.

All or none order (AON)

When a trading order is marked AON, the broker who is handling the order must either fill the whole order or not fill it at all. For example, if you want to buy 1,500 shares at $20 a share and only 1,000 are available at that price, your order won't be filled. However, the order will remain active until you cancel it, and so may be filled at some point in the future.


Alpha measures risk-adjusted return, or the actual return an equity security provides in relation to the return you would expect based on its beta. Beta measures the security's volatility in relation to its benchmark index. If a security's actual return is higher than its beta, the security has a positive alpha, and if the return is lower it has a negative alpha. For example, if a stock's beta is 1.5, and its benchmark gained 2%, it would be expected to gain 3% (2% x 1.5 = 0.03, or 3%). If the stock gained 4%, it would have a positive alpha. Alpha also refers to an analyst's estimate of a stock's potential to gain value based on the rate at which the company's earnings are growing and other fundamental indicators. For example, if a stock is assigned an alpha of 1.15, the analyst expects a 15% price increase in a year when stock prices are generally flat. One investment strategy is to look for securities with positive alphas, which indicates they may be undervalued.

Alternative minimum tax (AMT)

The alternative minimum tax (AMT) was designed to ensure that all taxpayers pay at least the minimum federal income tax for their income level, no matter how many deductions or credits they claim. The AMT is actually an extra tax, calculated separately and added to the amount the taxpayer owes in regular income tax. Some items that are usually tax exempt become taxable and special tax rates apply. For example, income on certain tax-free bonds is taxable. Increasing numbers of taxpayers trigger the AMT if they deduct high state and local taxes or mortgage interest expenses, exercise a large number of stock options, or have significant tax-exempt interest.

American depositary receipt (ADR)

Shares of hundreds of major overseas-based companies, including names such as British Petroleum, Sony, and Toyota, are traded as ADRs on US stock markets in US dollars just like shares of US companies. ADRs are actually receipts issued by US banks that hold actual shares of the companies' stocks. They let you diversify into international markets without having to purchase shares on overseas exchanges or through mutual funds. The issuing banks handle tax, dividends, and other matters. While hundreds of ADRs are listed on the major exchanges, the majority are traded over the counter, usually because they're too small to meet exchange listing requirements.

American depositary share (ADS)

When a company based overseas wants to sell its shares in the US markets, it can offer them through a US bank, which is known as the depositary. The depositary bank holds the issuing company's shares, known as American depositary shares (ADSs), and offers them to investors as certificates known as American depositary receipts (ADRs). Each ADR represents a specific number of ADSs. ADRs are quoted in US dollars and trade on US markets just like ordinary shares. While hundreds are listed on the major exchanges, the majority are traded over the counter, usually because they're too small to meet exchange listing requirements.


Amortization is the gradual repayment of a debt over a period of time, such as monthly payments on a mortgage loan or credit card balance. To amortize a loan, your payments must be large enough to pay not only the interest that has accrued but also to reduce the principal you owe. The word amortize itself tells the story, since it means "to bring to death."


A financial analyst tracks the performance of companies and industries, evaluates their potential value as investments, and makes recommendations on specific securities. When the most highly respected analysts express a strong opinion about a stock, there is often an immediate impact on that stock's price as investors rush to follow the advice. Some analysts work for financial institutions, such as mutual fund companies, brokerage firms, and banks. Others work for analytical services, such as Value Line, Inc., Morningstar, Inc., Standard & Poor's, or Moody's Investors Service, or as independent evaluators. Analysts' commentaries also appear regularly in the financial press, and on radio, television, and the Internet.

Annual Audit

Federal law requires that all ERISA-covered plans with more than 100 participants be audited by an independent auditor. It is also common to refer to a DOL or IRS examination of a plan as a plan audit.

Annual report

By law, each publicly held corporation must provide its shareholders with an annual report showing its income and balance sheet. In most cases, it contains not only financial details but also a message from the chairman, a description of the company's operations, and an overview of its achievements. Most annual reports are glossy affairs that also serve as marketing pieces. Copies are generally available from the company's investor relations office or can be downloaded from the company's website. The company's 10-K report is a more comprehensive look at its finances.


An annuitant is a person who receives income from an annuity. If you receive a distribution from an annuity that you or your employer buys with your 401(k) assets, you're the annuitant. Similarly, you're the annuitant if you take distributions from a tax-deferred individual retirement annuity or from an individual annuity you buy with after-tax income. If your beneficiary receives annuity income after your death, he or she becomes the annuitant. It's also possible to buy an annuity naming someone other than the buyer -- a disabled child, for example -- as the annuitant.


Annuitization means that you convert part or all of the money in a qualified retirement plan or nonqualified annuity contract into a stream of regular income payments, either for your lifetime or the lifetimes of you and your joint annuitant. Once you choose to annuitize, the payment schedule and the amount is generally fixed and can't be altered. If you have a qualified retirement plan, such as a 401(k), you generally have three major options when you retire. You can annuitize, roll over the account balance to an IRA, or take the money all at once as a lump sum distribution. If you have a nonqualified deferred annuity, you have a choice of annuitizing, taking a lump sum, setting up a systematic withdrawal plan, or arranging some other payout method that the contract allows.


When you annuitize, you choose to convert the assets in your deferred annuity or other retirement savings account into a stream of regular income payments that are guaranteed to last for your lifetime or the combined lifetimes of yourself and another person, called your joint annuitant. You typically annuitize when you retire. But, if you own a nonqualified annuity, you may begin receiving income at 59 1/2 without risking an early withdrawal penalty, or you can postpone the decision to annuitize well beyond normal retirement age. One reason people may give for choosing not to annuitize is that they're afraid if they die shortly after they begin receiving payments, they will forfeit a large portion of the annuity's value. To avoid that situation, some people choose to annuitize with what's called a period certain payout, guaranteeing that they or their beneficiaries will receive income for at least a minimum period, typically 5, 10, or 20 years. You should be aware that the promise to pay lifetime income is contingent on the claims-paying ability of the company providing the annuity contract. That's why you'll want to check the ratings that independent analysts give your annuity company before you annuitize your contract.


Originally, an annuity simply meant an annual payment. That's why the retirement income you receive from a defined benefit plan each year, usually in monthly installments, is called a pension annuity. But an annuity is also an insurance company product that's designed to allow you to accumulate tax-deferred assets that can be converted to a source of lifetime annual income. When a deferred annuity is offered as part of a qualified plan, such as a traditional 401(k), 403(b), or tax-deferred annuity (TDA), you can contribute up to the annual limit and typically begin to take income from the annuity when you retire. You can also buy a nonqualified deferred annuity contract on your own. With nonqualified annuities, there are no federal limits on annual contributions and no required withdrawals, though you may begin receiving income without penalty when you turn 59 1/2. An immediate annuity, in contrast, is one you purchase with a lump sum when you are ready to begin receiving income, usually when you retire. The payouts begin right away and the annuity company promises the income will last your lifetime. With all types of annuities, the guarantee of lifetime annuity income depends on the claims-paying ability of the company that sells the annuity contract.

Annuity contract

An annuity contract is the legal agreement between the insurance company issuing an annuity and the consumer who purchases the annuity. The contract spells out the terms and conditions of the agreement, including the guarantees the issuer provides, the way the return is calculated, the premiums and payment schedule, and the payout provisions.

Annuity principal

The annuity principal is the sum of money you use to buy an annuity and the base on which annuity earnings accumulate. If you're buying a deferred annuity, you may make a one-time -- or single premium -- purchase, or you may build your annuity principal with a series of regular or intermittent payments. For example, if you own an annuity in an employer-sponsored retirement plan, you add to your principal each time you defer some of your income into your account -- typically every time you're paid. When you buy an immediate annuity, you commit your annuity principal as a lump sum, and that amount is one of the key factors that determines the amount of your annuity income.

Annuity unit

Annuity units are the shares you own in variable annuity subaccounts, also called annuity funds or separate account funds, during the period you're receiving income from the annuity. The number of your annuity units is fixed at the time that you buy the income annuity contract, or when you annuitize your deferred variable annuity. While the number of units does not change, the value of each unit fluctuates to reflect the performance of the underlying investments in the subaccount. That's why the income you receive from a variable annuity may differ from month to month.


When an asset such as stock, real estate, or personal property increases in value without any improvements or modification having been made to it, that's called appreciation. Some personal assets, such as fine art or antiques, may appreciate over time, while others -- such as electronic equipment -- usually lose value, or depreciate. Certain investments also have the potential to appreciate. A number of factors can cause an asset to appreciate, among them inflation, uniqueness, or increased demand.


Arbitrage is the technique of simultaneously buying at a lower price in one market and selling at a higher price in another market to make a profit on the spread between the prices. Although the price difference may be very small, arbitrageurs, or arbs, typically trade regularly and in huge volume, so they can make sizable profits. But the strategy, which depends on split-second timing, can also backfire if interest rates, prices, currency exchange rates, or other factors move in ways the arbitrageurs don't anticipate.


Arbitration is a way to resolve conflicts between parties or individuals, and may be considered a middle ground between the more cooperative, informal nature of mediation and the more expensive, involved, and lengthy process of litigation. When you open a brokerage account, you may be required to sign an agreement to use arbitration to resolve possible conflicts with the firm and waive the right to sue for damages in court. Arbitration is binding, which means you can't appeal the decision or try for a different result by going to court. Most investment-related arbitration claims are handled by FINRA, the Financial Industry Regulatory Authority, which is the self-regulatory organization for brokers. In arbitration, a trained impartial arbitrator or panel of arbitrators reviews the evidence, decides on the outcome, and sets any award. While arbitration is usually less expensive than litigation, arbitration and attorney fees make it a more expensive option than mediation.

Arithmetic index

An arithmetic index gives equal weight to the percentage price change of each stock that's included in the index. In computing the index, the percentage changes of all the stocks are added, and the total is divided by the number of stocks. The percentage price changes of large companies aren't counted more heavily, as they are in a market-capitalization weighted index. An arithmetic index is a more accurate measure of total stock market performance than an index that stresses relatively few high-priced or large-company stocks. However, some analysts point out that it may also produce higher total return figures than other indexing methods. The best known arithmetic index in the United States is the one computed by Value Line, Inc., which tracks the approximately 1,700 stocks. Standard & Poor's also calculates an arithmetic version of its 500 index.


An arranger is an investment bank, financial services company, or other entity that bundles a pool of loans into a debt security that can be sold to investors. This process is known as securitization. In a securitization, the arranger takes responsibility for determining the terms and conditions, including interest rates and payment structures. For many types of investments, including collateralized debt obligations (CDOs), the arranger also oversees the division of the security into tranches, or slices with different levels of credit quality. To limit their liability, arrangers often create a special purpose entity (SPE) to carry out the business of gathering the underlying loans or assets, selling the securities, and distributing cash flows to investors.


The ask price (a shortening of asked price) is the price at which a market maker or broker offers to sell a security or commodity. The price another market maker or broker is willing to pay for that security is called the bid price, and the difference between the two prices is called the spread. Bid and ask prices are typically reported to the media for commodities and over-the-counter (OTC) transactions. In contrast, last, or closing, prices are reported for exchange-traded and national market securities. With open-end mutual funds, the ask price is the net asset value (NAV), or the price you get if you sell, minus the sales charge, if one applies.


Assets are everything you own that has any monetary value, plus any money you are owed. They include money in bank accounts, stocks, bonds, mutual funds, equity in real estate, the value of your life insurance policy, and any personal property that people would pay to own. When you figure your net worth, you subtract the amount you owe, or your liabilities, from your assets. Similarly, a company's assets include the value of its physical plant, its inventory, and less tangible elements, such as its reputation.

Asset allocation

Asset allocation means dividing your assets on a percentage basis among different broad categories of investments, including stocks, bonds and cash. Asset allocation is a strategy for reducing the risk associated with investing. Since your portfolio is spread among different asset classes, it's less likely that they will all perform badly at the same time. Finding the right mix of assets depends on your age, your assets, your financial objectives and your risk tolerance.

Asset class

Different categories of investments that provide returns in different ways are sometimes described as asset classes. Stocks, bonds, cash and cash equivalents, real estate, collectibles and precious metals are among the primary asset classes.

Asset management account (AMA)

All-in-one asset management accounts provide the financial advantages of an investment account combined with the convenience of an interest-bearing checking account. AMAs generally offer check-writing and ATM privileges, credit cards, direct deposit, and automatic transfer between accounts, as well as access to reduced-rate loans and other perks. There are usually annual fees and minimum account requirements. AMAs are offered by many brokerage firms and mutual fund companies, and are also known as central asset accounts (CAAs) or cash management accounts (CMAs).

Asset Management Fee

An on-going price typically charged to 401(k) plan participants for a 401(k) advisor providing investment services for a 401(k) plan. Services may include the selection of investments suitable for a retirement plan and the on-going monitoring of these and other investment alternatives, management of model portfolios or target date funds, and other investment guidance information provided to employers and employees.

Asset-backed bond

Asset-backed bonds, also known as asset-backed securities, are secured by loans or by money owed to a company for merchandise or services purchased on credit. For example, an asset-backed bond is created when a securities firm bundles debt, such as credit card or car loans, and sells investors the right to receive the payments made on those loans.

Auction market

Auction market trading, sometimes known as open outcry, is the way the major exchanges, such as the New York Stock Exchange (NYSE) and the Chicago Mercantile Exchange (CME), have traditionally handled buying and selling. Brokers acting for buyers compete against each other on the exchange floor, as brokers acting for sellers do, to get the best price. While the trading can be quite intense, it is orderly because the participants adhere to exchange rules.

Auction-rate security

An auction-rate security has a term of 20 or 30 years but pays interest at an adjustable rate. The rate is reset on a fixed schedule every 7, 14, 28, or 35 days in a modified Dutch auction. The process is similar to the way rates are set when new US Treasury bills are auctioned. Municipalities and not-for-profit institutions have used these securities successfully to reduce the cost of borrowing for long-term financing. However, because auction-rate securities are vulnerable to lowered credit ratings, rising interest rates, and lack of liquidity, auctions for these securities can fail in certain situations. Failed auctions, in which there are too few buyers, affect both owners and issuers. Bondholders who wish to sell what they assume to be liquid investments cannot do so. At the same time, issuers are forced to pay substantially higher default rates, which are set when the bond is initially sold. This added cost can increase local tax rates. Some issuers may refinance to conventional long-term bonds when credit tightens. In addition, in 2008, the Securities and Exchange Commission (SEC) ruled that municipal bond issuers can legally bid on their own issues to prevent an auction from failing, provided they disclose their participation.


An audit is a professional, independent examination of a company's financial statements and accounting documents following generally accepted accounting principles (GAAP). An IRS audit, in contrast, is an examination of a taxpayer's return, usually to question the accuracy or acceptability of the information the return reports.

Audit committee

The corporate audit committee is the liaison between the company's management, the board of directors, internal and external auditors, and any other accounting experts advising the company on audit issues. In particular, the audit committee is responsible for hiring and managing external auditors. Since 2002, when Congress passed the Sarbanes-Oxley Act, implementing stringent financial oversight regulations, the role of the audit committee has become increasingly important. An audit committee is composed of a subgroup from the corporation's board of directors. Members of the audit committee must be independent, which means they have no ties to the company's management team. In general, they cannot receive any compensation, such as consulting or advisory fees, except for a board of director's fee. They may not be able to own shares in the company or be affiliated in any other way with the company. Nor can they be affiliated with or have an interest in the external auditing company.

Authorized participant

An authorized participant is an institutional investor who takes part in the creation of exchange traded fund (ETF) shares. The ETF sponsor selects authorized participants to assemble creation units, which are baskets of securities in the index that underlies the ETF. Each creation unit corresponds to a fixed number of shares in the ETF. The authorized participant transfers the creation unit to the ETF sponsor in exchange for shares in the ETF, which can then be sold to other investors. Authorized participants may also redeem ETF shares by trading them back to the ETF sponsor for corresponding baskets of securities. Since ETFs exchange shares only for corresponding baskets of securities and don't buy back shares investors wish to sell, they don't have to keep cash on hand or liquidate securities to meet redemption demands. As a result, ETFs are able to track the underlying index more closely and achieve tax efficiency.

Authorized stock

Authorized stock, also known as authorized shares, is the largest number of shares a corporation is permitted to issue. The limit is set in the company's articles of incorporation, though it may be increased subject to shareholder approval. A company isn't required to issue all the shares or all of the classes of shares that are authorized.

Automatic enrollment

Your employer has the right to sign you up for your company's 401(k) plan, in what's known as an automatic enrollment. If you don't want to participate, you must refuse, in writing, to be part of the plan. In an automatic enrollment, the company determines the percentage of earnings you contribute and how your contribution is invested, choosing among a number of potential alternatives. You have the right to change either or both of those choices if you stay in the plan.


A stock market average is a mathematical way of reporting the composite change in prices of the stocks that the average includes. Each average is designed to reflect the general movement of the broad market or a certain segment of the market and often serves as a benchmark for the performance of individual stocks in its sphere. A true average adds the prices of the stocks it covers and divides that amount by the number of stocks. However, many averages make adjustments in the divisor to account for changes in the companies that are included in the average, for stock splits, and other factors. The Dow Jones Industrial Average (DJIA), which tracks the performance of 30 large-company stocks and adjusts its divisor, is the most widely followed market indicator in the United States.

Average annual yield

Average annual yield is the average yearly income on an investment, expressed as a percentage. You can calculate the average annual yield by adding all the income you received on an investment and dividing that amount by the number of years the money was invested. So if you receive $60 interest on a $1,000 bond each year for ten years, the average annual yield is 6% ($60 divided by $1,000 = 0.06 or 6%).

Average Daily Balance

A finance/accounting method where the value of assets in the entire 401(k) plan for a period of time (typically a quarter) is used to determine the asset management fee. The asset average daily balance is used versus the value at an end of quarter because the average balance is more representative of asset values of the account during the period.

Average Directional Movement Index

The Average Directional Movement Index (ADX) is a technical indicator used to measure the strength of a price trend. The indicator doesn't show what direction the trend is moving, but rather how strong it is. The ADX fluctuates between the values 0 and 100. Ratings below 20 denote a weak trend and anything over 40 represents a strong trend. Readings above 60 are relatively rare.

Average Directional Movement Index Rating

In technical analysis, the Average Directional Movement Index Rating (ADXR) measures the strength of the Average Directional Movement Index (ADX). Similar to the ADX, the ADXR moves between values of 0 to 100 and shows the strength of a current price trend.

Back test

A back test simulates the investment return that an investment strategy would have produced over a specific period. For example, someone who wanted to evaluate a strategy of buying after stock splits might test the effect of having purchased 500 additional shares in the large-cap stocks in a hypothetical portfolio each time one of the stocks split during the period from 1957 to the present. Back testing is sometimes used to support a current investment strategy by demonstrating that it would have produced strong past performance. Critics point out that the testing period that's chosen has a significant impact on the results and that past performance doesn't guarantee future returns.

Back-end load

Some mutual funds impose a back-end load, or a contingent deferred sales charge, if you sell shares in the fund during the first six or seven years after you purchase them. The charge is a percentage of the value of the assets you're selling. The percentage typically declines each year the charge applies and then is dropped. However, the annual asset-based management fee is higher on back-end load funds, also known as Class B shares, than on front-end load funds, where you pay the sales charge at the time you purchase.

Back-up withholding

Back-up withholding is triggered when a bank, brokerage firm, or other institution pays interest, dividends, or other income that must be reported on IRS Form 1099 to a payee who does not provide a tax identification number (TIN), typically a Social Security number, or provides an incorrect number. While income that's reported on Form 1099 is not normally subject to withholding, in this instance, the payer must withhold 28% of the gross amount as income tax. You can avoid back-up withholding in most cases by providing a correct TIN using IRS form W-9. But if the IRS determines you have underreported your investment income, it may require back-up withholding even if the payer has your TIN.


If the price of a futures contract is higher than the price of a contract with the same terms that expires at a later date, the relationship between the two is called backwardation. More typically, the contract with the longer-term expiration commands a higher price. This relationship is called contango.


In some cases, a bailout is a rescue. For example, the federal government bailed out banks, insurance companies, and corporations in the aftermath of the market meltdown of 2008. This type of bailout may be handled by providing loan guarantees, cash infusions, or debt forgiveness. Any amounts that aren't repaid are borne by taxpayers. In other cases, a bailout is a shift in position to limit financial losses. For example, you might bail out of a bad investment by selling it quickly even if you lose money on the transaction because you think you might lose even more if you held on. Similarly, people underwater on their mortgages may bail out by walking away from their loans -- and their homes.

Balance Inquiry

Fee that may be charged each time a participant inquires about his or her balance.

Balance of trade

The difference between the value of a country's imports and exports during a specific period of time is called the balance of trade. If a country exports more than it imports, it has a surplus, or favorable balance of trade. A trade deficit, or unfavorable balance, occurs when a country imports more than it exports.

Balance sheet

A balance sheet is a statement of a company's financial position at a particular moment in time. This financial report shows the two sides of a company's financial situation -- what it owns and what it owes. What the company owns, called its assets, is always equal to the combined value of what the company owes, called its liabilities, and the value of its shareholders' equity. Expressed as an equation, a company's balance sheets shows assets = liabilities + shareholder value. If the company were to dissolve, then its debts would be paid, and any assets that remained would be distributed to the shareholders as their equity. Bankruptcy occurs in situations where there is nothing left to distribute to the shareholders, and the company balance sheet is in fact unbalanced because the company owes more than it owns.

Balanced fund

Balanced funds are mutual funds that invest in a portfolio of common stocks, preferred stocks, and bonds to meet their investment goal of seeking a strong return while moderating risk. Balanced funds generally produce more income than stock funds, though their total return may be less than stock fund returns in a strong stock market. In a flat or falling stock market, however, disappointing returns on equity investments may be offset by a stronger performance from a balanced fund's fixed-income investments. Balanced funds are sometimes described as a type of asset allocation fund, which provides the opportunity to spread your money among asset classes with one investment.


Bankruptcy means being insolvent, or unable to pay your debts. In that case, you can file a bankruptcy petition to seek a legal resolution. Chapter 7 bankruptcy, which allows you to discharge your unsecured debts but may result in your losing your home, car, or other secured debt, is available only to those whose earn less than the median for their state or qualify because of special circumstances. With Chapter 11 bankruptcy, also called reorganization bankruptcy, you work with the court and your creditors to repay debt over three to five years. However, some debts are not reduced by a declaration of bankruptcy, including past due federal income taxes, alimony, and higher education loans. Similarly, when you hear that a company is reorganizing or is "in Chapter 11," it means it has filed for bankruptcy.

Bar chart

A bar chart is one type of price chart that technical analysts use to track price data for a particular security over a set period of time, typically a day. Each day's result is included in a graph that tracks the security's price movement over a longer period, such as the previous week or month. All bar charts show the high, low, and closing prices for the security being tracked. The top of the bar signifies the high, the bottom the low, and a tick mark extending from the bar to the right indicates the close. Some bar charts also include a security's opening price with a short horizontal line that extends from the bar to the left.

Barbell strategy

When you use a barbell strategy, you invest equivalent amounts in short-term and long-term bonds, creating the shape that gives the strategy its name. The goal is to earn more interest than intermediate-term bonds would provide without taking more risk. For example, you might buy a portfolio of bonds, with some that mature within a year or two and an equal number that mature in 30 years. When the shorter-term bonds come due, you replace them with other short-term bonds. It's a different approach from laddering your bond investment, often with a portfolio of intermediate-term bonds, so that your bonds mature in a rolling pattern every few years.


Basis is the total cost of buying an investment or other asset, including the price, commissions, and other charges. If you sell the asset, you subtract your basis, also known as your cost basis, from the selling price to determine your capital gain or capital loss. If you give the asset away, the recipient's basis is the same amount as yours. But if you leave an asset to a beneficiary in your will, the person receives the asset at a step-up in basis, which means the basis of the asset is reset to its market value as of the time of your death.

Basis point

Yields on bonds, notes, and other fixed-income investments fluctuate regularly, typically changing only a few hundredths of a percentage point. These small variations are measured in basis points, or gradations of 0.01%, or one-hundredth of a percent, with 100 basis points equaling 1%. For example, when the yield on a bond changes from 6.72% to 6.65%, it has dropped 7 basis points. Similarly, small changes in the interest rates charged for mortgages or other loans are reported in basis points, as are the fees you pay on various investment products, such as annuities and mutual funds. For example, if the average management fee is 1.4%, you might hear it expressed as 140 basis points. Your percentage of ownership in certain kinds of investments may also be stated in basis points, and in this case each basis point equals 0.01% of the whole investment.

Basis price

When you sell a security, such as a stock or bond, or real estate, the price you use to calculate your capital gain is known as your basis price. In the case of a security, it includes the purchase price plus any commissions you paid to buy or sell. For real estate, it includes purchase price, certain closing costs at purchase and sale, and the costs of qualifying improvements to the property.


A basket is a group of securities that have been put together for a specific investment purpose and are traded as a unit. Authorized ETF participants accumulate baskets that include all of the securities tracked by a specific index. The baskets then become creation units for an ETF that tracks that index. Basket also refers to a group of 15 or more securities with a combined value of $1 million that institutional investors and arbitrageurs assemble to use in program trading. The program trading is driven by sophisticated computer software that may automatically trigger trading when prices, or spreads between prices, hit predetermined levels. Since baskets represent large values, basket trading can cause abrupt price changes in a stock or group of stocks included in a basket and may even have a dramatic effect on the overall market.

Bear market

A bear market is sometimes described as a period of falling securities prices and sometimes, more specifically, as a market where prices have fallen 20% or more from the most recent high. A bear market in stocks is triggered when investors sell off shares, generally because they anticipate worsening economic conditions and falling corporate profits. A bear market in bonds is usually the result of rising interest rates, which prompts investors to sell off older bonds paying lower rates.

Bearer bond

A bearer bond is a certificate that states the security's par value, the rate at which interest will be paid, and the name of the bond's owner. In the past, bearer bonds came with detachable coupons that had to be presented to the issuer to receive the interest payments. That practice explains why a bond's interest rate is often referred to as its coupon rate. Unlike most bonds issued in the United States since 1983, which are registered electronically, a bearer bond isn't registered, and there's no record of ownership. This means it can be sold or redeemed by the person or organization that holds it.

Bearer form

When securities are issued as paper certificates and the issuing corporation has no record of the owner, the securities are in bearer form. The bearer, or holder, of the certificate is considered the owner, and when ownership changes hands a physical transfer of the certificate is required. The securities may have attached coupons, which the holder must present or send in to the issuer or issuer's agent -- typically a bank or brokerage firm -- to receive interest or dividend payments. Bearer securities are rare in the United States today because of the convenience, simplicity, and added security of electronic registration, either in book-entry form or through a direct registration system (DRS). When book entry securities are traded, records of ownership are electronically updated, and the buyer's and seller's brokerage accounts are automatically debited and credited, similar paying bills online.

Behavioral finance

Behavioral finance combines psychology and economics to explain why and how investors act and to analyze how that behavior affects the market. Behavioral finance theorists point to the market phenomenon of hot stocks and bubbles, from the Dutch tulip bulb mania that caused a market crash in the 17th century to the more recent examples of junk bonds in the 1980s and Internet stocks in the 1990s, to validate their position that market prices can be affected by the irrational behavior of investors. Behavioral finance is in conflict with the perspective of efficient market theory, which maintains that market prices are based on rational foundations, like the fundamental financial health and performance of a company.

Beige Book

Beige book is the colloquial name for the Federal report that is formally titled Summary of Commentary on Current Economic Conditions by Federal Reserve District. The beige book is prepared eight times per year by the Federal Reserve Board, in preparation for the Federal Open Market Committee (FOMC) meetings, at which its members discuss the state of the economy and determine whether any changes ought to be made to the discount rate and whether the money supply should be tightened or loosened. The report is based on information provided by each Federal Reserve Bank on its particular district and includes opinion and analysis from economists, bank directors, business people, and other market experts in each district. Economic forecasters use the beige book to predict whether and how the Fed will act after the FOMC meeting.


A market bellwether is a security whose changing price is considered a signal that the market is changing direction. It gets its name from the wether, or castrated ram, that walks at the head of a shepherd's flock. The distinctive tone of the bell around the wether's neck signals the flock's position. There's not an official list of these trend setters, or market barometers, and they do change as the overall markets and the fortunes of individual companies change.


An investment benchmark is a standard against which the performance of an individual security or group of securities is measured. For example, the average annual performance of a class of securities over time is a benchmark against which current performance of members of that class and the class itself are measured. When the benchmark is an index tracking a specific segment of the market, the changing value of the index not only measures the strength or weakness of its segment but is used to evaluate the performance of individual investments within the segment. For example, the Standard and Poor's 500 Index (S and P 500) and the Dow Jones Industrial Average (DJIA) are the most widely followed benchmarks for large-company US stocks and the funds that invest in those stocks. There are other indexes that serve as benchmarks for both broader and narrower segments of the US equities markets, of international markets, and of other types of investments such as bonds, mutual funds, and commodities. In a somewhat different way, the changing yield on the 10-year US Treasury bond is a benchmark of investor attitudes. A lower yield is an indication that investors are putting money into bonds, driving up the price, possibly because they expect stock prices to drop. Conversely, a higher yield indicates investors are investing elsewhere. Originally the term benchmark was a surveyor's mark indicating a specific height above sea level.

Beneficial owner

The beneficial owner is the true, or actual, owner of a security. As beneficial owner, you have the right to collect dividends or interest if the security pays them and to sell when you wish. If the security is a common stock, you also have the right to vote on certain items at the corporation's annual meeting or by proxy. As beneficial owner you may also be the registered owner of the security if you hold it in certificate form or through a direct registration system (DRS). However, when you buy stock through your brokerage firm, you are typically recorded on the firm's books as the beneficial owner but the security is registered in the name Cede & Co., the nominee name of The Depository Trust Company (DTC). Holding securities in nominee name makes it easier to sell, since the transfer is handled electronically. You don't have to deliver the certificates within the required timeframe. It also eliminates the problem of lost or stolen certificates.


A beneficiary is the person or organization who receives assets that are held in your name in a retirement plan, or are paid on your behalf by an insurance company, after your death. If you have established a trust, the beneficiary you name receives the assets of the trust. A life insurance policy pays your beneficiary the face value of your policy minus any loans you haven't repaid when you die. An annuity contract pays the beneficiary the accumulated assets as dictated by the terms of the contract. A retirement plan, such as an IRA or 401(k), pays your beneficiary the value of the accumulated assets or requires the beneficiary to withdraw assets either as a lump sum or over a period of time, depending on the plan. Some retirement plans require that you name your spouse as beneficiary or obtain his or her notarized written permission to name someone else. You may name any person or institution -- or several people and institutions -- as beneficiary or contingent beneficiary of a trust, a retirement plan, annuity contract, or life insurance policy. A contingent beneficiary is one who inherits the assets if the primary beneficiary has died or chooses not to accept them.


Beta is a measure of an investment's relative volatility. The higher the beta, the more sharply the value of the investment can be expected to fluctuate in relation to a market index. Assuming the Standard and Poor's 500 Index has a beta coefficient (or base) of 1, if the index moves 2% in either direction, a stock with a beta of 1 would also move 2%. Under the same market conditions, however, a stock with a beta of 1.5 would move 3% (2% increase x 1.5 beta = 0.03, or 3%). But a stock with a beta lower than 1 would be expected to be more stable in price and move less. Betas as low as 0.5 and as high as 4 are fairly common, depending on the sector and size of the company. However, in recent years, there has been a lively debate about the validity of assigning and using a beta value as an accurate predictor of stock performance.


The bid is the price a market maker or broker is willing to pay for a security, such as a stock or bond, at a particular time. In the real estate market, a bid is the amount a buyer offers to pay for a property.

Bid and ask

Bid and ask is better known as a quotation or quote. Bid is the price a market maker or broker offers to pay for a security, and ask is the price at which a market maker or dealer offers to sell. The difference between the two prices is called the spread.

Big Board

The Big Board is the nickname of the New York Stock Exchange (NYSE), the oldest traditional stock exchange in the United States and the one with the largest trading floor.

Blind trust

A blind trust is created when a third party, such as an investment adviser or other trustee, assumes complete control of the assets held in a trust. Elected officials often set up blind trusts to reassure the public that political decisions are not being made for personal financial benefit.

Block trade

When at least 10,000 shares of stock or bonds valued at $200,000 or more are bought or sold in a single transaction, it is called a block trade. Institutional investors, including mutual funds and pension funds, typically trade in this volume, and most individual investors do not.

Blue chips

Blue chips are the stocks of large, widely held, and well-regarded corporations with a history of steady growth and regular dividend payments. As a result, their per-share prices tend to be higher than those of smaller or more volatile companies. The list of blue chips is not official and is redefined over time to reflect the changing fortunes of its components. Companies may move from start-up to blue-chip status, or from blue chip to has-been, over a period of time. The term blue chip is a reference to poker, where the most valuable chips are blue. In the United Kingdom, the comparable term is alpha stock.

Blue sky laws

Blue sky laws require companies that sell stock, mutual funds, and other financial products to register new issues with the appropriate public agency. The companies must also provide financial details of each offering in writing so that investors have the information they need to make informed buy and sell decisions. These laws are state rather than federal laws, and owe their origin -- at least in legend -- to a frustrated judge who equated the value of a worthless stock offering to a patch of blue sky.

Board of Directors Resolution

Depending on the structure of your company the adoption of a 401(k) plan may require a Board of Director Resolution. A sample resolution is provided for your convenience.

Boiler room

A boiler room is a location used by con artists to contact potential victims out-of-the-blue -- an approach known as cold calling -- in an attempt to sell high-risk investments that may or may not be legitimate. Boiler room scammers typically use high-pressure tactics to close an immediate sale and are unwilling to provide written information about either the investment they are pushing or themselves.


Boilerplate is the sometimes-derogatory term for the standard language of legal documents. It's typically characterized by the use of several words to convey what seems to be a single concept. This language continues to evolve to cover not only past but current usage. For example, contracts between authors and publishers now include a reference to electronic media rights.

Bollinger bands

Bollinger bands are used to measure the volatility of a security. Bollinger bands are composed of three bands, or lines, plotted on a graph. The first band represents an average of the security's price over a certain period of time, known as a simple moving average (SMA). The second and third bands are each two standard deviations -- a statistical measure of volatility -- from the first. The wider apart the second and third bands from the SMA, the more volatile the security. Bollinger bands can be used to make price predictions. For instance, prices close to the upper bank could signal a security is overbought, and that the price may soon begin to fall. Similarly, prices close to the lower band could indicate a security is oversold, and that the price may soon rise.


Bonds are debt securities issued by corporations and governments. Bonds are, in fact, loans that you and other investors make to the issuers in return for the promise of being paid interest, usually but not always at a fixed rate, over the loan term. The issuer also promises to repay the loan principal at maturity, on time and in full. Because most bonds pay interest on a regular basis, they are also described as fixed-income investments. While the term bond is used generically to describe a variety of debt securities, bonds are specifically long-term issues, with maturities longer than ten years.

Bond fund

A bond mutual fund invests in a portfolio of bonds to meet its investment objective -- typically to provide regular income to its shareholders. The appeal of bond funds is that you can usually invest a much smaller amount of money than you would need to buy a portfolio of bonds, making it easier to diversify your fixed-income investments. Unlike individual bonds, however, bond funds have no maturity date and no guaranteed interest rate because their portfolios aren't fixed. Also unlike individual bonds, they don't promise to return your principal. You can choose among a variety of bond funds with different investment strategies and levels of risk. Some funds invest in long-term, and others in short-term, bonds. Some buy government bonds, while others buy corporate bonds or municipal bonds. Finally, some buy investment-grade bonds, while others focus on high-yield bonds.

Bond rating

Independent agencies, such as Standard & Poor's and Moody's Investors Service, assess the creditworthiness of bond issuers and how likely they are to default on their loans or interest payments. Ratings systems differ from one agency to another but usually have at least 10 categories, ranging from a high of AAA (or Aaa) to a low of D. Bonds ranked BBB (or Baa) or higher are considered investment-grade bonds.

Bond swap

In a bond swap, you buy one bond and sell another at the same time. For example, you might sell one bond at a loss at year's end to get a tax write-off while buying another to keep the same portion of your portfolio allocated to bonds. You may also sell a bond with a lower rating to buy one with a higher rating, or sell a bond that's close to maturity so you can buy a bond that won't mature for several years.

Book value

Book value is the net asset value (NAV) of a company's stocks and bonds. Finding the NAV involves subtracting the company's short- and long-term liabilities from its assets to find net assets. Then you divide the net assets by the number of shares of common stock, preferred stock, or bonds to get the NAV per share or per bond. Book value is sometimes cited as a way of determining whether a company's assets cover its outstanding obligations and equity issues. Further, some investors and analysts look at the price of a stock in relation to its book value, which is provided in the company's annual report, to help identify undervalued stocks. Other investors discount the relevance of this information.

Book-entry security

Book-entry securities are stocks, bonds, and similar investments whose ownership is recorded electronically rather than in certificate form. When you sell the security, the records are updated, deleting you as an owner and adding the purchaser. This means you don't have to keep track of paper documents, and they can't be lost or stolen.


A boom is a period of economic expansion typically followed by a period of contraction sometimes described as a bust.

Bottom fishing

Investors using a bottom-fishing strategy look for stocks that they consider undervalued because the prices are low. The logic of bottom fishing is that stock prices sometimes fall further than a company's actual financial situation warrants, especially in the aftermath of bad news. Bottom-fishing investors hope the stock will rebound dramatically and provide a healthy profit.

Bottom-up investing

When you use a bottom-up investing strategy, you focus on the potential of individual stocks, bonds, and other investments. Using this approach, for example, means you pay less attention to the economy as a whole, or to the prospects of the industry a company is in, than you do to the company itself. If your investing method is bottom up, you read research reports, examine the company's financial stability, and evaluate what you know about its products and services in great detail.


Bourse is the French term for a stock exchange. The national stock market of France, a totally electronic market, is known as the Paris Bourse. The term is used throughout Europe and worldwide as a synonym for stock exchange, though it generally isn't used in the United States. The literal English translation is purse.


Stock prices fluctuate constantly, but each stock typically moves within a fairly narrow range. That means the stock's average price changes gradually, if at all. But sometimes a stock's price breaks out of its limits, and jumps or tumbles suddenly. Usually the breakout is fueled by a particular event. The company may realize a commercial success, such as a drug company discovering a new cure for a major disease. Or a breakout may reflect a financial development, such as a new alliance with a successful partner.


A breakpoint is the mutual fund account balance you need to qualify to pay a reduced front-end load or sales charge on new purchases in the fund. In many cases, the first breakpoint is $25,000, with further reductions for each additional $25,000 or $50,000. For example, if the standard load were 5.5%, it might drop to 5.25% at $25,000, to 5% at $50,000, and perhaps as low as 2.5% if your account value reached $250,000. Fund companies may offer this cost saving. They are not required to do so, but if they do use breakpoints, they must ensure that all clients who qualify get the discount. In calculating breakpoints, some fund companies combine the value of all of your investments in the mutual funds they offer. Other companies also count the investments of all the members of your household or give you credit for purchases you intend to make in the future.

Brokerage account

To buy and sell securities, you establish a brokerage account with a broker-dealer, also known as a brokerage firm. In a full-service firm, your account executive handles your buy and sell instructions and offers recommendations on your portfolio. If your account is with a discount firm, you are more likely to place your orders online or give them to the rep who answers the telephone when you call. In some cases, your brokerage account may be part of a larger package of financial services known as an asset management account or something similar.

Brokerage Commission

A fee paid to a broker or other intermediary for executing a trade.

Brokerage window

A 401(k) account that permits its plan participants to buy and sell investments through a designated brokerage account is said to offer a brokerage window. Any securities trades you authorize for your account are made through this brokerage account. Transaction fees are subtracted as those orders are executed.


See FINRA BrokerCheck


A broker-dealer (B/D) is a license granted by the Securities and Exchange Commission (SEC) that entitles the licensee to buy and sell securities for its clients' accounts. The firm may also act as principal, or dealer, trading securities for its own inventory. Some broker-dealers act in both capacities, depending on the circumstances of the trade or the type of security being traded. For example, your order to purchase a particular security might be filled from the firm's inventory. That's perfectly legal, though you must be notified that it has occurred. B/Ds range in size from independent one-person offices to large brokerage firms.

Bucket shop

A bucket shop is an illegal brokerage firm whose salespeople pose as legitimate brokers and attempt to sell you securities. Typically, a bucket shop broker doesn't actually purchase the securities you agree to buy and that you pay for. Rather, the con artists pocket your money and move on, disappearing before you realize you have been scammed.


A budget is a written record of income and expenses during a specific time frame, typically a year. You use a budget as a spending plan to allocate your income to cover your expenses and to track how closely your actual expenditures line up with what you had planned to spend. An essential part of personal budgeting is creating an emergency fund, which you can use to cover unexpected expenses. You also want to budget a percentage of your income for saving and investing, just as you budget for food, housing, and clothing. Businesses and governments also create budgets to govern their expenditures for a fiscal year -- though like individuals they make regular adjustments to reflect financial reality. And, like individuals, businesses and governments can find themselves in trouble if their spending outpaces their income.

Bull market

A prolonged period when stock prices as a whole are moving upward is called a bull market, although the rate at which those gains occur can vary widely from bull market to bull market. The duration of a bull market, the severity of the falling market that follows, and the time that elapses until the next upturn are also different each time. Well-known bull markets began in 1923, 1949, 1982, and 1990.

Bundled Services

Arrangements whereby plan service providers offer 401(k) plan establishment, investment services and administration for an all-inclusive fee. Bundled services by their nature are priced as a package and cannot be priced on a per service basis.

Business cycle

The business cycle is a recurring pattern of economic expansion and contraction. In the phase of above-average growth, employment, income, and production increase. Inflation may increase as well. After a peak, there's a phase of slow or no growth in which production slows, unemployment increases, and income drops. The economy hits a bottom, or trough. Then expansion begins again. The cycle is predictable but the duration of the phases, the height of the peak, and the depth of the trough are not.

Buy side

Institutional money managers, such as mutual funds, pension funds, and endowments, are the buy side of Wall Street. Buy-side institutions use proprietary research to make investments for the portfolios they manage and don't interact with or make recommendations to individual investors. In contrast, sell-side institutions such as brokerage firms act as agents for individual investors when they buy and sell securities, and make their research available to their clients.


Buy-and-hold investors take a long-term view of investing, generally keeping a bond from date of issue to date of maturity and holding onto shares of a stock through bull and bear markets. Among the advantages of following a buy-and-hold strategy are increased opportunity for your assets to compound and reduced trading costs. Among the risks are continuing to hold investments that are no longer living up to reasonable expectations.


When a company purchases shares of its own publicly traded stock or its own bonds in the open market, it's called a buyback. The most common reason a company buys back its stock is to make the stock more attractive to investors by increasing its earnings per share. While the actual earnings stay the same, the earnings per share increase because the number of shares has been reduced. Companies may also buy back shares to pay for acquisitions that are financed with stock swaps or to make stocks available for employee stock option plans. They may also want to decrease the risk of a hostile takeover by reducing the number of shares for sale, or to discourage short-term trading by driving up the share price. Companies may buy back bonds when they are selling at discount, which is typically the result of rising interest rates. By paying less than par in the open market, the company is able to reduce the cost of redeeming the bonds when they come due.


When you make an up-front cash payment to reduce your monthly payments on a mortgage loan, it's called a buydown. In a temporary buydown, your payments during the buydown period are calculated at a lower interest rate than the actual rate on your loan, which makes the payments smaller. For example, if you prepay $6,000, your rate might be reduced by a total of six percentage points, or one percent for each thousand dollars, spread over three years. Instead of an 8% rate in the first year, it would be 5%. In the second year, it would be 6%, and in the third year 7%. On a $100,000 loan with a 30-year term, a reduction from 8% to 5% would reduce your monthly payments in the first year from about $734 to about $535. The extra cash you prepaid would be used to make up the difference between the amounts due calculated at the lower rates and the actual cost of borrowing -- in this case about $200 a month in the first year. Then, in the fourth year, you would begin to pay at the actual loan rate and your payments would increase. In a permanent buydown, which is less common, your rate might be reduced by about 0.25% for each thousand dollars, or point, you prepaid, but the reduction would last for the life of the loan. You might choose to do a buydown if you had extra cash at the time you were ready to buy, but a smaller income than would normally allow you to qualify to buy the home you want. In most cases, lenders require that your housing costs be no more than 28% of your income. You might be able to reach that level if your initial payments were less at the time of purchase. In other cases, a home builder who is having trouble selling new properties might offer buydowns through a local lender to encourage reluctant buyers to take advantage of lower payments in the first years they own their homes.


Bylaws are the self-imposed rules governing an incorporated company. The bylaws cover details such as the structure of the company, what the company's goals are, and how often shareholders meet. They also explain the voting process and how officers, committees, and board members are chosen. A company can put almost any provisions in its bylaws, as long as the rules don't break federal or local law.

Callable bond

A callable bond can be redeemed by the issuer before it matures if that provision is included in the terms of the bond agreement, or deed of trust. Bonds are typically called when interest rates fall, since issuers can save money by paying off existing debt and offering new bonds at lower rates. If a bond is called, the issuer may pay the bondholder a premium, or an amount above the par value of the bond.

Candlestick chart

A candlestick chart is a type of price chart that technical analysts use to track price data for a particular security over a set period of time, typically a day. Each day's result is included in a graph that tracks the security's price movement over a longer period, such as the previous week or month. Candlestick charts show the open, high, low, and closing prices for the security being tracked. The candlestick is black if the open is higher than the close and white if the open is lower than the close. As a result, some analysts contend these charts are easier to read than bar charts, which provide similar information.


A cap is a ceiling, or the highest level to which something can go. For example, an interest rate cap limits the amount by which an interest rate can be increased over a specific period of time. A typical cap on an adjustable rate mortgage (ARM) limits interest rate increases to two percentage points annually and six percentage points over the term of the loan. In a different example, the cap on your annual contribution to an individual retirement account (IRA) is $5,000 in 2011, provided you have earned at least that much. If you're 50 or older, you can make an additional catch-up contribution of $1,000 each year.


Capital is money that is used to generate income or make an investment. For example, the money you use to buy shares of a mutual fund is capital that you're investing in the fund. Companies raise capital from investors by selling stocks and bonds and use the money to expand, make acquisitions, or otherwise build the business. The term capital markets refers to the physical and electronic environments where this capital is raised, either through public offerings or private placements.

Capital appreciation

Any increase in a capital asset's fair market value is called capital appreciation. For example, if a stock increases in value from $30 a share to $60 a share, it shows capital appreciation. Some stock mutual funds that invest for aggressive growth are called capital appreciation funds.

Capital gain

When you sell an asset at a higher price than you paid for it, the difference is your capital gain. For example, if you buy 100 shares of stock for $20 a share and sell them for $30 a share, you realize a capital gain of $10 a share, or $1,000 in total. If you own the stock for more than a year before selling it, you have a long-term capital gain. If you hold the stock for less than a year, you have a short-term capital gain. Most long-term capital gains are taxed at a lower rate than your other income while short-term gains are taxed at your regular rate. There are some exceptions, such as gains on collectibles, which are higher than the rate on gains on securities. You are exempt from paying capital gains tax on profits of up to $250,000 on the sale of your primary home if you're single and up to $500,000 if you're married and file a joint return, provided you meet the requirements for this exemption.

Capital gains distribution

When mutual fund companies sell investments that have increased in value, the profits, or capital gains, are passed on to their shareholders as capital gains distributions. These distributions are made on a regular schedule, often at the end of the year. If they are short-term gains on assets held less than a year, which is typical, you pay tax on the gain at the same rate you pay on ordinary income unless the funds are held in a tax-deferred or tax-free account. Most funds offer the option of automatically reinvesting all or part of your capital gains distributions to buy more shares.

Capital gains tax (CGT)

A capital gains tax is due on profits you realize on the sale of a capital asset, such as stock, bonds, or real estate. Long-term gains, on assets you own more than a year, are taxed at a lower rate than ordinary income while short-term gains are taxed at your regular rate. In 2011, long-term capital gains tax rates on most investments is 15% for anyone whose marginal federal tax rate is 25% or higher, and 0% for anyone whose marginal rate is 10% or 15%. There are some exceptions. For example, long-term gains on collectibles are taxed at 28%. You may be exempt from capital gains tax on profits of up to $250,000 on the sale of your primary home if you're single and up to $500,000 if you're married and file a joint return, provided you meet the requirements for this exemption.

Capital loss

When you sell a capital asset for less than you paid for it, the difference between the two prices is your capital loss. For example, if you buy 100 shares of stock at $30 a share and sell when the price has dropped to $20 a share, you will realize a capital loss of $10 a share, or $1,000. Although nobody wants to lose money on an investment, there is a silver lining. You can use capital losses to offset capital gains in computing your income tax. However, you must use short-term losses to offset short-term gains and long-term losses to offset long-term gains. If you have a net capital loss in any year -- that is, your losses exceed your gains -- you can usually deduct up to $3,000 of this amount from regular income on your tax return. You may also be able to carry forward net capital losses and deduct on future tax returns.

Capital market

Capital markets are the physical and electronic environments where equity and debt securities and other investment products are sold. When you place an buy order through a brokerage firm or use a dividend reinvestment plan (DRIP), you're participating in a capital market. In primary markets, businesses and governments seek capital from investors by issuing securities and other financial products. In secondary capital markets, investors buy and sell these issues to make a profit, which they can reinvest to make the primary market more robust. The stronger and more liquid a country's capital market is, the more easily economic growth and expansion can be achieved.

Capital preservation

Capital preservation is a strategy for protecting the money you have available to invest by choosing insured accounts or fixed-income investments that promise return of principal. The downside of capital preservation over the long term is that by avoiding the potential risks of more aggressive investing, you exposure yourself to greater inflation risk. That's the case because your investments are unlikely to increase enough in value to offset the gradual loss of purchasing power that's a result of even moderate inflation.

Cash balance plan

A cash balance retirement plan is a defined benefit plan that has many of the characteristics of a defined contribution plan. The benefit that you'll be entitled to builds up as credits in a hypothetical account that accumulates hypothetical earnings, based on a percentage of your current pay. These plans are portable, which means you can roll them over from one employer to another when you change jobs if the new employer accepts this type of rollover.

Cash basis accounting

Cash basis accounting is one of two ways of recording revenues and expenses. Using this method, a company records income on its books when it receives a payment and expenses when it makes a payment. In accrual accounting, by comparison, a company counts revenue as it's earned and expenses as they're incurred. For example, when a magazine company sells annual subscriptions, it receives the cash for the subscriptions at the beginning of the year, but it doesn't earn the whole amount of the subscription cost until it has sent the subscriber a full year's issues of the magazine. In cash basis accounting, paid subscriptions are recorded as revenue when the company receives the payments. In accrual accounting, the company records revenue only as the subscription is fulfilled. A $24 subscription for 12 monthly issues of a magazine would result in immediate revenue of $24 in cash basis accounting, versus an accrual of $2 of revenue each month under accrual accounting.

Cash equivalent

Short-term, low-risk investments, such as US Treasury bills or short-term certificates of deposit (CDs), are considered cash equivalents. The Financial Accounting Standards Board (FASB) defines cash equivalents as highly liquid securities with maturities of less than three months. Liquid securities typically are those that can be sold easily with little or no loss of value.

Cash flow

Your personal cash flow includes the money coming into your accounts and the money you are spending over a specific period such as a year. To determine if your cash flow is positive or negative, you subtract the money you receive (from wages, investments, and other income) from the money you spend on expenses (such as housing, transportation, and other costs). If there's money left over, your cash flow is positive. If you spend more than you have coming in, it's negative. Cash flow is a measure of changes in a company's cash account during an accounting period, specifically its cash income minus the cash payments it makes. For example, if a car dealership sells $100,000 worth of cars in a month and spends $35,000 on expenses, it has a positive cash flow of $65,000. But if it takes in only $35,000 and has $100,000 in expenses, it has a negative cash flow of $65,000. Investors often consider cash flow when they evaluate a company, since without adequate money to pay its bills, the company will have a hard time staying in business.

Cash market

In a cash market, buyers pay the market price for securities, currency, or commodities "on the spot," just as you would pay cash for groceries or other consumer products. Cash markets are also called spot markets. A cash market is the opposite of a futures market, where commodities or financial products are scheduled for delivery and payment at a set price at a specified time in the future. In a cash market, ownership is transferred promptly, and payment is made upon delivery.

Cash settlement

To settle a futures contract where the underlying asset is a financial instrument, such as a stock index or interest rate rather than a physical commodity, you deliver cash. In contrast, when you settle a futures contract on other commodities, you deliver the physical product. But because index values or interest rates are intangible, physical delivery is not possible. The way you calculate the amount due is defined in the contract. When the underlying instrument is an index, this usually involves multiplying the value of the index times a fixed amount. For example, the cash settlement of a contract on the Standard & Poor's MidCap 400 Index is determined by multiplying the value of the index times $500. However, in the vast majority of cases, futures contracts are offset before the settlement date, and no delivery is required.

Cash value

Cash value is the amount that an account is worth at any given time. For example, the cash value of your 401(k) or IRA is what the account is worth at the end of a period, such as the end of a business day, or at the end of the plan year, often December 31. The cash value of an insurance policy is the amount the insurer will pay you, based on your policy's cash reserve, if you cancel your policy. The cash value is the difference between the amount you paid in premiums and the actual cost of insurance plus other expenses.

Cash value account

If you have a permanent life insurance policy, part of each premium you pay goes into a tax-deferred account called the cash value account. You can borrow against the money that accumulates in this account, though any outstanding balance at the time of your death reduces the death benefit your beneficiary receives. If you cancel or surrender your policy, or if you stop paying the premiums, you are entitled to receive a portion of your cash value account. That amount is your cash surrender value.

Catch-up contribution

You are entitled to make an annual catch-up contribution to your employer sponsored retirement savings plan and individual retirement account (IRA) if you're 50 or older. The catch-up amounts, which are larger for employer plans than for IRAs, increase from time to time based on the rate of inflation. You are eligible to make catch-up contributions whether or not you have contributed the maximum amount you were eligible for in the past. And if you participate in an employer plan and also put money in an IRA, you are entitled to use both catch-up options. Earnings on catch-up contributions accumulate tax deferred, just as other earnings in your account do. And when your primary contributions are tax deferred, so are your catch-up contributions. Health savings accounts (HSAs), which you're eligible to open if you have a high deductible health plan (HDHP), allow catch-up contributions if you're at least 55.


A ceiling is an upper limit, or cap, on either what you can earn or what you can be required to pay. For example, there may be a ceiling on the interest rate you can earn on certain annuity contracts or market-rate certificates of deposit. There may also be a ceiling on the interest rate you can be charged on an adjustable-rate loan even if interest rates in general rise higher than the interest-rate ceiling on your loan. However, according to the terms of some loans, lenders can add some of the interest they weren't allowed to charge you because of the ceiling to the total amount you owe. This is known as negative amortization. That means, despite a ceiling, you don't escape the consequences of rising rates, though repayment is postponed, often until the end of the loan's original term. Ceiling can also refer to a cap on the amount of interest a bond issuer is willing to pay on a new bond. It can also be the highest price a futures contract can reach on any single trading day before the market locks up, or stops trading, that contract.

Central bank

Most countries have a central bank, which issues the country's currency and holds the reserve deposits of other banks in that country. It also either initiates or carries out the country's monetary policy, including keeping tabs on the money supply. In the United States, the 12 regional banks that make up the Federal Reserve System act as the central bank. This multibank structure was deliberately developed to ensure that no single region of the country could control economic decision-making.

Central Registration Depository (CRD)

The Central Registration Depository (CRD) is an automated database maintained by FINRA, the Financial Industry Regulatory Authority. The database contains records and information about registered representatives, better known as stockbrokers. The CRD includes a represntative's employment history, licensing status, the firm where he or she works, and certain disciplinary actions or arbitration awards. You can access the CRD free of charge through FINRA's BrokerCheck service at You can generally obtain even more extensive information from the CRD through your state's securities regulator.

Certificate of Accrual on Treasury Securities (CATS)

CATS are US Treasury zero-coupon bonds that are sold at deep discount to par, or face value. Like other zeros, the interest isn't actually paid during the bond's term but accumulates so that you receive face value at maturity. Similar to other zeros, CATS prices can be volatile, so you risk losing some of your principal if you sell before maturity. And like other federal government issues, the interest is free of state and local income tax but subject to federal income tax. However, you may purchase CATS in a tax-deferred or Roth IRA or a tax-free Roth IRA or Coverdell education savings account (ESA) to postpone or avoid the tax entirely, provided you follow the withdrawal rules that apply to the specific accounts.

Certificate of deposit (CD)

Certificates of deposit (CDs) are time deposits, which means you agree to leave your money on deposit for a fixed term. On traditional CDs, you earn compound interest at a fixed rate, which is determined by the current interest rate and the CD's term. Adjustable-rate and market-rate CDs may also be available, though specific terms and conditions apply. Terms on bank CDs may range from a week to five years. CDs sold by brokers and other intermediaries may have terms up to 20 years. When you purchase a CD from a bank, your account is insured by the Federal Deposit Insurance Corporation (FDIC) up to the per depositor limit. The insurance may not apply to CDs you purchase through a third party. You usually face a penalty if you withdraw funds before your CD matures. With a bank CD, you often forfeit the interest that has accrued up to the time you make the withdrawal. Penalties are usually steeper on other CDs, and you may have trouble liquidating your investment before the end of the term.

Chaikin money flow

Chaikin money flow is a volume indicator that measures the buying and selling pressure on a stock, based on accumulation/distribution line data. The accumulation/distribution line is a technical indicator used to predict price movements and the sustainability of current trends. Technical analysts use the Chaikin money flow to signal bullish and bearish movements. The more positive the indicator, the stronger the bullish signal. And, conversely, the more negative the Chaikin money flow, the stronger the bearish signal.

Chaikin's volatility

Chaikin's volatility is a technical indicator that measures price volatitily. It does this by comparing the difference between a series of a security's high and low prices. In general, larger spreads between prices reflect greater volatility. Interpretations of Chaikin's volatility vary, but many analysts believe that changes in volatility are important indicators of potential trend reversals.


If a broker buys and sells securities in your investment account at an excessive rate or at a rate that's inconsistent with your investment goals or the amount of money you have, this behavior is known as churning. Your account value generally suffers, but the broker benefits by generating extra commissions. In fact, one indication of potential churning may be that you're paying more in commissions than you are earning on your investments. Churning is illegal but is often hard to prove.

Circuit breaker

After the stock market crash of 1987, stock and commodities exchanges established a system of trigger-point rules known as circuit breakers. They temporarily restrict trading in stocks, stock options, and stock index futures when prices fall too far, too fast. Currently, trading on the New York Stock Exchange (NYSE) is halted when the Dow Jones Industrial Average (DJIA) drops by 10%, 20%, or 30%. A 10% drop before 2 p.m. results in a one-hour halt. A similar drop between 2 p.m. and 2:30 p.m. results in a 30-minute halt, but if that drop occurs after 2:30 p.m., there is no halt in trading. The actual number of points the DJIA would need to drop to hit the trigger is set four times a year, at the end of each quarter, based on the average value of the DJIA in the previous month. In 2010, following a steep, quick drop in prices when trading continued in some markets though not on the NYSE, the Securities and Exchange Commission (SEC) introduced a trial program that would shut down trading across all markets in certain stocks in such a situation. Final rules are being developed.


A clawback occurs when tax, salary, or other benefits must be repaid because you failed to meet the terms under which the benefit was paid or permitted. For example if you claim a capital loss on your tax return and it is disallowed under the wash sale rule, the amount you deducted or used to offset losses can be clawed back by the Internal Revenue Service (IRS) -- though it does not use the term clawback. Companies and governments often include a clawback provision in contracts that cover a wide range of relationships, including performance-based compensation. The provision protects their financial interests if the contract is breached. In case of fraud, individuals who profited from an illegal operation may be subject to a clawback of the profits they realized even though they are unaware that fraud has occurred. If a security's price drops after a period in which it increased, the drop is sometimes described as a clawback.


Clearance is the first half of the process that completes your order to buy or sell a security. During clearance, the details on both sides of the transaction are compared electronically to ensure that the order to buy and the order to sell correspond. For example, in a stock transaction, the Committee on Uniform Securities Identification Procedures (CUSIP) number, the number of shares, and the price per share must match. If the terms do not agree, the discrepancy must be settled between the firms that are involved in the trade. Next, transactions within each broker-dealer are netted down by offsetting client buy orders against clients sell orders. After netting, the firm's records are updated to reflect the new ownership and account balances. Transactions may also be netted among a group of affiliated firms. Any orders that remain after internal netting are forwarded to the National Securities Clearing Corporation (NSCC), which nets buy and sell orders for each security across all firms with transactions in that security. At the end of the process, each firm is either a net seller or a net buyer. NSCC instructs net sellers to provide the relevant securities and net buyers to transmit the necessary cash so that the transactions can be settled by its affiliate, The Depository Trust Company (DTC).

Clearing firm

Clearing firms handle the back-office details of securities transactions for broker-dealers who do not clear their own trades. In brief, when a broker's order to buy or sell a security has been filled, the clearing firm electronically verifies the details of the trade, which is then forwarded to the Depository Trust & Clearing Corporation (DTCC) for settlement. The clearing firm is responsible for delivery or receipt of securities and cash payments due after the netting process has offset the vast majority of transactions.


Clearing corporations, or clearinghouses, provide operational support for securities and commodities exchanges. They also help ensure the integrity of listed securities and derivatives transactions in the United States and other open markets. For example, when an order to buy or sell a futures or options contract is executed, the clearinghouse compares the details of the trade. Then it delivers the product to the buyer and ensures that payment is made to settle the transaction.

Closed-end fund

Closed-end mutual funds are actively managed funds that raise capital only once, by issuing a fixed number of shares. Like other mutual funds, however, fund managers buy and sell individual investments in keeping with their investment objectives. The shares are traded on an exchange and their prices fluctuate throughout the trading day, based on supply, demand, and the changing values of their underlying holdings. Most single country funds are closed-end funds.

Closely held

A closely held corporation is one in which a handful of investors, often the people who founded the company, members of the founders' families, or sometimes the current management team, own a majority of the outstanding stock.

Closet index fund

A closet index fund is an actively managed mutual fund whose portfolio includes many of the securities in its benchmark index but whose expense ratio is higher than that of a true index fund or exchange traded fund (ETF) tracking the same index. As the name suggests, a closet index fund may not publicize how closely its portfolio tracks its benchmark index. But the investment objectives listed in the fund's prospectus may reveal that the fund seeks to provide results at least as good as its benchmark. One way to identify a closet index fund is to consider the fund's R-square, which measures the extent to which the fund's return is determined by changes in its benchmark. The closer to 100 the R-square is, the greater the parallels between a fund's portfolio and the components of the index.


Assets with monetary value, such as stock, bonds, or real estate, which are used to guarantee a loan, are considered collateral. If the borrower defaults and fails to fulfill the terms of the loan agreement, the collateral, or some portion of it, may become the property of the lender. For example, if you borrow money to buy a car, the car is the collateral. If you default, the lender can repossess the car and sell it to recover the amount you borrowed. Loans guaranteed by collateral are also known as secured loans.

Collateralized debt obligation (CDO)

Collateralized debt obligations (CDOs) are derivative investments backed by pools of assets, such as mortgages or credit card receivables. For example, a residential mortgage-backed security (RMBS) is a type of CDO that is backed by a pool of mortgages and divided into tranches, or slices. Each tranche has a different risk level, interest rate, and payment schedule.


When you invest in objects rather than in capital assets such as stocks or bonds, you are putting your money into collectibles. Collectibles can run the gamut from fine art, antique furniture, stamps, and coins to baseball cards and Barbie dolls. Their common drawback, as an investment, is their lack of liquidity. If you need to sell your collectibles, you may not be able to find a buyer who is willing to pay what you believe your investment is worth. In fact, you may not be able to find a buyer at all. On the other hand, collectibles can provide a sizable return on your investment if you have the right thing for sale at the right time.

Collective Investment Fund

A tax-exempt pooled fund operated by a bank or trust company that commingles the assets of trust accounts for which the bank provides fiduciary services.

Commercial bank

Commercial banks offer a full range of retail banking products and services, such as checking and savings accounts, loans, credit cards, and lines of credit to individuals and businesses. Most commercial banks also sell certain investments and many offer full brokerage and financial planning services.

Commercial paper

To help meet their immediate needs for cash, banks and corporations sometimes issue unsecured, short-term debt instruments known as commercial paper. Commercial paper usually matures within a year and is an important part of what's known as the money market. It can be a good place for investors -- institutional investors in particular -- to put their cash temporarily. That's because these investments are liquid and essentially risk-free, since they are typically issued by profitable, long-established, and highly regarded corporations.


Securities brokers and other sales agents typically charge a commission, or sales charge, on each transaction. With traditional, full-service brokers, the charge is usually a percentage of the total cost of the trade, though some brokers may offer favorable rates to frequent traders. Online brokerage firms, on the other hand, usually charge a flat fee for each transaction, regardless of the value of the trade. The flat fee may have certain limits, however, such as the number of shares being traded at one time. The commissions on some transactions, such as stock trades, are reported on your confirmation slip. But commissions on other transactions are not reported separately. In the case of cash value life insurance, for example, the commission may be as large as a year's premium.

Committee on Uniform Securities Identifying Procedures (CUSIP)

The Committee on Uniform Securities Identifying Procedures (CUSIP) assigns a unique nine-digit code to all stocks and corporate, government, and municipal bonds registered in the United States and Canada. The CUSIP identification number is used to track the securities when they are bought and sold. You'll find the CUSIP number on a confirmation statement from your broker, for example, and on the face of a stock certificate.


Commodities are bulk goods and raw materials, such as grains, metals, livestock, oil, cotton, coffee, sugar, and cocoa, that are used to produce consumer products. The term also describes financial products, such as currency or stock and bond indexes. Commodities are bought and sold on the cash market, and they are traded on the futures exchanges in the form of futures contracts. Commodity prices are driven by supply and demand. When a commodity is plentiful -- tomatoes in August, for example -- prices are comparatively low. When a commodity is scarce because of a bad crop or because it is out of season, the price will generally be higher. You can buy options on many commodity futures contracts to participate in the market for less than it might cost you to buy the underlying futures contracts. You can also invest through commodity funds.

Commodity Channel Index

In technical analysis, the Commodity Channel Index (CCI) helps identify when a cyclical price reversal from a period of highs to a period of lows, or conversely, from lows to highs, is going to occur. The CCI was designed so that its readings would fall between the values of -100 and +100 80% of the time. CCI may be used to show when a security is overbought or oversold, to generate buy and sell signals, and to predict price trend reversals. While CCI was developed to evaluate commodities, it's used today to study a broader range of assets, including stocks, bonds, and currencies.

Commodity Futures Trading Commission (CFTC)

The CFTC is the federal agency that regulates the US futures markets, as the Securities and Exchange Commission (SEC) regulates the securities markets. The agency's five commissioners are appointed by the US president for staggered five-year terms. The agency is responsible for maintaining fair and orderly markets, enforcing market regulations, and ensuring that customers have the information they need to make informed decisions. Commodity exchanges also regulate themselves, but any changes they want to make must be approved by the CFTC before they go into effect.

Commodity indexes

A commodity index tracks the performance of specific bulk goods or raw materials. Commodity indexes may measure the price of a physical basket of commodities, but many indexes are based on the prices of futures contracts currently trading on an organized commodity market. The value of a commodity index fluctuates based on the performance of its underlying products or instruments, such as agricultural products, precious metals, or currencies. Different indexes have various ways of categorizing commodities, and some indexes are weighted so that the most valuable materials have the greatest impact. Individual and institutional investors can purchase shares in commodity funds that seek to replicate the performance of specific commodity indexes, just as they can purchase index funds and ETFs that track securities indexes. A primary attraction of commodity funds is that they enable investors to enter the commodities market without directly purchasing physical commodities or futures contracts.

Common stock

When you own common stock, your shares represent ownership in a corporation and give you the right to vote for the company's board of directors and benefit from its financial success. You may receive a portion of the company's profits as dividend payments if the board of directors declares a dividend. You also have the right to sell your stock and realize a capital gain if the share value increases. But if the company falters and the price falls, your investment could lose some of or all its value.

Community property

In nine US states, any assets, investments, and income that are acquired during a marriage are considered community property. That is, they are owned jointly by the married couple. For example, if you're married, live in one of these states, and buy stock, half the value of that stock belongs to your spouse even if you paid the entire cost of buying it. In a divorce, the value of the community property is divided equally. However, property you owned before you married or that you received as a gift is generally not considered community property. The community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.


Compensation is the salary, wages, commissions, bonuses, and other benefits, whether monetary or not, that an employer pays you for work you do. All compensation is taxable. Workers' compensation, also known as workmen's compensation, is financial support an employer provides if you become ill, are injured, or die as the result of doing your job. It may include income, healthcare coverage, and rehabilitation services. The amount is generally based on your earnings, but laws vary from place to place.

Competitive trader

Competitive traders, also known as registered competitive traders or floor traders, buy and sell stocks for their own accounts on the floor of an exchange. Traders must follow very specific rules governing when they can buy and sell. But since they trade in large volumes and do not pay commissions on their transactions, they can profit from small differences between the prices at which they buy and sell.

Compound interest

When the interest you earn on an investment is added to form the new base on which future interest accumulates, it is compound interest. For example, say you earn 5% compound interest on $100 every year for five years. You'll have $105 after one year, $110.25 after two years, $115.76 after three years, and $127.63 after five years. Without compounding, you earn simple interest, and your investment doesn't grow as quickly. For example, if you earned 5% simple interest on $100 for five years, you would have $125. A larger base or a higher rate provide even more pronounced differences. Compound interest earnings are reported as annual percentage yield (APY), though the compounding can occur annually, monthly, or daily.


Compounding occurs when your investment earnings or savings account interest is added to your principal, forming a larger base on which future earnings may accumulate. As your investment base gets larger, it has the potential to grow faster. And the longer your money is invested, the more you stand to gain from compounding. For example, if you invested $10,000 earning 8% annually and reinvested all your earnings, you'd have $21,589 in your account after 10 years. If instead of reinvesting you withdrew the earnings each year, you would have collected $800 a year, or $8,000 over the 10 years. The $3,589 difference is the benefit of 10 years of compound growth.

Comptroller of the Currency

The Office of the Comptroller of the Currency, housed in the US Department of the Treasury, charters, regulates, and oversees national banks. The comptroller ensures bank integrity, fosters economic growth, promotes competition among banks, and guarantees that people have access to adequate financial services. The comptroller does this by enforcing the Community Reinvestment Act and federal fair lending laws, which mandate that access. The comptroller is appointed by the US president and confirmed by the Senate.

Conduit IRA

A conduit IRA is another name for a rollover IRA, which you establish with money you roll over from a 401(k), 403(b), or other retirement savings plan. It doesn't include contributions you have made directly to an individual retirement account. Assets in a conduit IRA continue to be tax deferred until they are withdrawn and may be transferred into a new employer's plan if the plan allows transfers.

Conference calls

Conference calls are one of the primary methods that corporate executives use to make presentations to investment analysts and respond to their questions. In general, conference calls are set to correspond with the imminent release of quarterly corporate earnings, and are intended to put the results in the best possible light. Conference calls may also deal with other matters, including mergers, acquisitions, stock splits or reverse splits, or relevant political or economic developments. To ensure accessibility and comply with Securities and Exchange Commission (SEC) Regulation FD (for Fair Disclosure), calls are scheduled in advance and are open to all legitimate analysts following the company.


When you buy or sell a stock or bond, your brokerage firm will send you a confirmation, or document, with the details of the transaction. Confirmations include the price, any fees, and the trade and settlement dates. Stock confirmations also include the commission if it applies. These documents are your backup for calculating capital gains and losses. You'll also receive a confirmation to reaffirm orders you place, such as a good 'til canceled order to buy or sell a certain stock at a stop or limit price. In addition, activity in your trading account, such as stock splits, spinoffs, or mergers will trigger a confirmation notice.


A conglomerate is a corporation whose multiple business units operate in different, often unrelated, areas. A conglomerate is generally formed when one company expands by acquiring other firms, which it brings together under a single management umbrella. In some, but not all, cases, the formerly independent elements of the conglomerate retain their brand identities, though they are responsible to the conglomerate's management. Some conglomerates are successful, with different parts of the whole contributing the lion's share of the profits in different phases of the economic cycle, offsetting weaker performance by other units. Other conglomerates are never able to meld the parts into a functioning whole. In those cases, the parent company may sell some units or spin off certain divisions into new independent companies.

Conscience fund

Conscience funds, also known as socially responsible funds, allow you to invest in companies whose business practices are in keeping with your personal values. For example, you can choose mutual funds that invest in companies that have exceptional environmental or social records, or that refuse to invest in companies that manufacture certain products or have certain employee benefit practices. Each fund explains the principles it follows in its prospectus and describes the screens, or set of criteria, it uses to identify acceptable underlying investments.

Consensus recommendation

A consensus recommendation for an individual stock compiles ratings from a number of analysts who track that stock. The recommendation is expressed as either the mean or median of the separate recommendations. Calculating the consensus is a multi-step process that involves grouping the terms that analysts use to recommend buying, selling, or holding, generally into three or five categories, assigning a scale, and computing the result either by averaging the numbers for the mean or identifying the median, which is the point at which half the views are higher and half are lower. A consensus recommendation provides a snapshot of current thinking about a stock, so it can serve as a benchmark against which you can compare a single analyst's opinion to gauge how mainstream it is. But like any statistical mean or median, a consensus recommendation can distort strong differences at either end of the scale. Further, if the report accompanying the consensus view doesn't point out significant differences in the viewpoints of the various analysts it includes, you won't be able to tell where the most respected analysts stand on the stock. In addition, you should be aware that the consensus recommendation for any given stock might differ from one research company to the next. This is because the mathematical formula that assigns weights to the individual recommendations will vary, based in part on how many levels of differentiation the research company uses and how it interprets the words that analysts use to express their opinions.

Consumer confidence index

The consumer confidence index is released each month by the Conference Board, an independent business research organization. It measures how a representative sample of 5,000 US households feel about the current state of the economy, and what they anticipate the future will bring. The survey focuses specifically on the participants' impressions of business conditions and the job market. Economic observers follow the index because when consumer attitudes are positive they are more likely to spend money, contributing to the very economic growth they anticipate. But if consumers are worried about their jobs, they may spend less, contributing to an economic slowdown.

Consumer price index (CPI)

The consumer price index (CPI) is compiled monthly by the US Bureau of Labor Statistics and is a gauge of inflation that measures changes in the prices of basic goods and services. Some of the things it tracks are housing, food, clothing, transportation, medical care, and education. The CPI is used as a benchmark for making adjustments in Social Security payments, wages, pensions, and tax brackets to keep them in tune with the buying power of the dollar. It's often incorrectly referred to as the cost-of-living index.

Contingent beneficiary

A contingent beneficiary receives the proceeds of an insurance policy, term-certain annuity, individual retirement account (IRA), employer-sponsored retirement savings plan, will, or trust if the primary beneficiary dies before the benefit is paid or if he or she declines to accept the benefit. For example, if you name your spouse as the primary beneficiary of your IRA, you might name your children as contingent beneficiaries. Then, if your spouse is not alive at your death, your children inherit your IRA directly. It's often a good idea to name as contingent beneficiary someone who is younger than you and your primary beneficiary, increasing the chances that the contingent beneficiary will outlive you. Or, if you choose, you might name an institution or a trust as contingent beneficiary. You have the right to change your designation of contingent beneficiaries, except in the case of an irrevocable trust or a life insurance policy whose terms and conditions were established in a court ruling. A contingent beneficiary may also be someone who is entitled to inherit assets if he or she meets the terms of the will or trust granting those assets.

Contingent deferred sales load

A contingent deferred sales load, also called a back-end load, is a sales charge you may pay on some mutual funds purchases if you sell shares in the fund within a certain period of time after you buy them. In most cases, you have not paid a sales charge at the time you purchased the fund. The shares on which back-end loads may apply are typically identified as Class B shares, and the period that the load applies is often as long as seven to ten years, as determined by the fund. The charge is a percentage of the amount of the investment you're liquidating. It typically begins at a certain level -- say 7% -- and drops by a percentage point each year until it disappears entirely. Information about the charge and how long it's levied is provided in the fund's prospectus.

Contingent order

A contingent order to buy or sell a security or other investment product is one that has strings attached. Specifically, it is an order, such as a stop order, a stop-limit order, or an all-or-none order, that is to be executed only if the condition or conditions that the order specifies are met. For example, if you gave a stop-limit order to sell a particular stock if the price fell to $30 -- the stop price -- but not to sell if the transaction price were less than $27 -- the limit price -- execution would be contingent on the stock price being between $27 and $30. Broker-dealers aren't required to accept contingent orders, but if they do accept them they are required to abide by the terms of the order.

Continuous net settlement

Continuous net settlement (CNS) is a fully automated book-entry accounting system used to manage all phases of the three-day settlement cycle for US securities transactions through the National Securities Clearing Corporation (NSCC) and The Depository Trust Company (DTC), two subsidiaries of The Depository Trust and Clearing Corporation (DTCC). Through CNS, a brokerage firm's clients' orders to buy and sell are offset, or matched against each other, so that at the end of the cycle only a small number must be delivered to DTC to complete the settlement process. In a simplified example, if a firm's clients sold 1,000 shares of stock XYZ and purchased 800 shares of the same stock, just 200 are due to DTC. Amounts a firm owes if its clients purchased more securities overall than they sold is also netted into a single payment due.

Contract Administration Charge

An omnibus charge for costs of administering the insurance/annuity contract, including costs associated with the maintenance of participant accounts and all investment-related transactions initiated by participants.

Contract Termination Charge

A charge to the plan for "surrendering" or "terminating" its insurance/annuity contract prior to the end of a stated time period. The charge typically decreases over time.


An investor who marches to a different drummer is sometimes described as a contrarian. In other words, if most investors are buying large-cap growth stocks, a contrarian is concentrating on building a portfolio of small-cap value stocks. This approach is based, in part, on the idea that if everybody expects something to happen, it probably won't. In addition, the contrarian believes that if other investors are fully committed to a certain type of investment, they're not likely to have cash available if a better one comes along. But the contrarian would. Contrarian mutual funds use this approach as their investment strategy, concentrating on building a portfolio of out-of-favor, and therefore often undervalued, investments.


A payment made by an employee or employer to a qualified plan.

Controlled Group

Employees of corporations that are treated as employed by a single employer for plan qualification purposes. Certain tests must be met to qualify as one of the three types of control groups which are: 1) the parent-subsidiary controlled group, 2) the brother-sister controlled group, and 3) the combined group.


The process of changing from one service provider to another.

Conversion price

A conversion price is the predetermined price, set at the time of issue, at which you can exchange a convertible bond or other convertible security for common stock. The number of shares that you'll receive at conversion is calculated by dividing the face value of the security by the conversion price. However, that number changes if the stock has split or has paid dividends.

Convertible bond

Convertible bonds are corporate bonds that give you the alternative of converting their value into common stock of that company or redeeming them for cash when they mature. The details governing the conversion, such as the number of shares of stock you would receive, are set when the bonds are issued. A convertible bond has a double appeal for investors. Its market value goes up if the stock price rises, but falls only to what it would be as a conventional bond if the stock price falls. In other words, the upside potential is considered greater than the downside risk. While convertible bonds typically provide lower yields than conventional bonds from the same issuer, they may provide higher yields than the underlying stock. You can buy convertibles through a broker or choose a mutual fund that invests in them.

Convertible hedge

When you use a convertible hedge, you buy a convertible bond that you can exchange under certain circumstances for shares of the company's common stock. At the same time, you sell short the common stock of the same company. As in any hedge, your goal is to make more money on one of the transactions than you lose on the other. For example, if the price of the stock falls, you're in a position to make money on the short sale while at the same time knowing that the convertible bond will continue to be at least as valuable as other bonds the company has issued. On the other hand, if the stock gains value, you hope to be able to realize more profit from either selling the convertible or exchanging it for shares you can sell than it costs you to have borrowed and repaid the shares you sold short. There are no guarantees this strategy or any other hedging strategy will work, especially for an individual investor who faces the challenge of identifying an appropriate security to hedge and the appropriate time to act.

Cook the books

When a company cooks the books, it is deliberately -- and illegally -- providing false information about its financial situation to bolster its stock price, often by overstating profits and hiding losses. A company may also cook the books to reduce its tax liability, but then it stirs in the opposite direction by underreporting profits and overstating losses.

Cooling-off period

In the financial industry, a cooling-off period applies when a new issue is being brought to market. During this time, also known as the quiet period, investment bankers and underwriters aren't permitted to discuss the issue with the public. In the consumer world, during a cooling-off period, you can cancel your obligation to purchase a product or take a loan without penalty if you change your mind. Different kinds of transactions are governed by different cooling-off rules. For example, one federal rule allows you to cancel home improvement loans and second mortgages within three days of signing. Another gives you three days to return purchases you make at places other than a merchant's usual place of business, such as at a trade show. The law governing your cooling-off rights, sometimes known as buyers' remorse rules, is included in the fine print on any agreement you sign.

Core earnings

Core earnings report the performance of a corporation's core business operations, including producing and marketing the primary goods or services it sells, the cost of granting stock options, restructuring charges for ongoing operations, and meeting pension obligations. Equally important, core earnings exclude gains in the value of a company's pension account portfolio, certain one-time sources of income, such as the sale of an asset, and goodwill.

Cornering the market

If someone tries to buy up as much of a particular investment as possible in order to control its price, that investor is trying to corner the market. Not only is it difficult to make this strategy work in a complex economic environment, but the practice is illegal in US markets.

Corporate bond

Corporate bonds are debt securities issued by publicly held corporations to raise money for expansion or other business needs. Corporate bonds typically pay a higher rate of interest than federal or municipal government bonds, but the interest you earn is generally fully taxable. You may be able to buy corporate bonds at issue through your brokerage firm, usually at the offering price of $1,000 per bond, though you may have to buy several bonds of the same issue rather than just one. You can buy bonds on the secondary market at their current market price, which may be higher or lower than par. However, many individual investors buy corporate bonds though a mutual fund that specializes in those issues.


A correction is a drop -- usually a sudden and substantial one of 10% or more -- in the price of an individual stock, bond, commodity, index, or the market as a whole. Market analysts anticipate market corrections when security prices are high in relation to company earnings and other indicators of economic health. When a market correction is greater than 10% and the prices do not begin to recover relatively promptly, some analysts point to the correction as the beginning of a bear market.


In investment terms, correlation is the extent to which the returns on different types of investments move in tandem with one another in response to changing economic and market conditions. Correlation is measured on a scale of - 1 to +1. Investments with a high correlation of + 0.5 or more tend to have strong or weak returns in the same phase of an economic cycle. Investments with a low correlation of - 0.5 to - 1 are more likely to provide strong or weak returns in opposing cycles. For example, in most economic environments stocks and bonds have a low correlation. The returns on investments that are noncorrelated are impacted by different factors or conditions.


A correspondent is a financial institution, such as a bank or brokerage firm, that handles transactions on behalf of another financial institution that it can't complete on its own. For example, if a US bank has a client who needs to make a payment to a supplier located overseas, the US bank would use its relationship with a correspondent bank in the supplier's home country to credit the supplier's bank account with money from its own client's account. The money itself is transferred through an international payment system.

Cost basis

The cost basis is the original price of an asset -- usually the purchase price plus commissions. You use the cost basis to calculate capital gains and capital losses, depreciation, and return on investment. If you inherit assets, such as stocks or real estate, your cost basis is the asset's value on the date the person who left it to you died (or the date on which his or her estate was valued). This new valuation is known as a step-up in basis. For example, if you buy a stock at $20 a share and sell it for $50 a share, your cost basis is $20. If you sell, you owe capital gains tax on the $30-a-share profit. If you inherit stock that was bought at $20 a share but valued at $50 a share when that person died, your cost basis would be $50 a share, and you'd owe no tax if you sold it at that price.

Cost-of-living adjustment (COLA)

A cost-of-living adjustment (COLA) results in a wage or benefit increase that is designed to help you keep pace with increased living costs that result from inflation. COLAs are usually pegged to increases in the consumer price index (CPI). Federal government pensions, some state pensions, and Social Security are usually adjusted annually, but only a few private pensions provide COLAs.

Council of Economic Advisors (CEA)

The Council of Economic Advisors' job is to assist and advise the president of the United States on economic policy. The CEA differs from other government agencies in its academic orientation and emphasis on contemporary developments in economic thought. The Council consists of a chairman and two staff members, appointed by the president and confirmed by the Senate, plus a staff of about ten economists and ten younger scholars. The Council's chairman frequently speaks on behalf of the administration on economic issues and policies.

Countercyclical stock

Stocks described as countercyclical tend to continue to maintain their value and provide regular income when the economy is slowing down or staying flat. Companies whose stocks fit into this category are those whose products are always in demand, such as food or utilities. They may also be companies whose services reduce the expenses of other companies, such as providers of temporary office help. Or they could be financial services companies that specialize in cash equivalent or other stable value investments. By including some countercyclical stocks in your equity portfolio, you can balance the potential volatility of cyclical investments.


In any financial contract, the persons or institutions entering the contract on the opposite sides of the transaction are called the counterparties. For example, if you sign a contract to sell an item that you produce to a buyer, you and the buyer are counterparties to the contract. Similarly, the counterparties in financial transactions known as forwards or swaps are the banks or corporations that make deals between themselves to protect future cash flows or currency values.


Originally, bonds were issued with coupons, which you clipped and presented to the issuer or the issuer's agent -- typically a bank or brokerage firm -- to receive interest payments. Bonds with coupons are also known as bearer bonds because the bearer of the coupon is entitled to the interest. Although most new bonds are electronically registered rather than issued in certificate form, the term coupon has stuck as a synonym for interest in phrases like the coupon rate. When interest accumulates rather than being paid during the bond's term, the bond is known as a zero coupon.

Coupon rate

The coupon rate is the interest rate that the issuer of a bond or other debt security promises to pay during the term of a loan. For example, a bond that is paying 6% annual interest has a coupon rate of 6%. The term is derived from the practice, now discontinued, of issuing bonds with detachable coupons. To collect a scheduled interest payment, you presented a coupon to the issuer or the issuer's agent. Today, coupon bonds are no longer issued. Most bonds are registered, and interest is paid by check or, increasingly, by electronic transfer.

Coverdell education savings account (ESA)

You can put up to $2,000 a year into a Coverdell education savings account (ESA) that you establish in the name of a minor child. The assets in the account can be invested any way you choose. There is no limit to the number of accounts you can set up for different beneficiaries, but no more than a total of $2,000 can be contributed in a single beneficiary's name in any one year. If you choose, you may switch the beneficiary of an ESA to another member of the same extended family. Your contribution is not tax deductible. But any earnings that accumulate in the account can be withdrawn tax free if they're used to pay qualified educational expenses for the beneficiary until he or she reaches age 30. The costs can be incurred at any level, from elementary school through a graduate degree, or at a qualified post-secondary technical or vocational school. There are no restrictions on using ESA money in the same year the student uses other tax-free savings, or the student, parent, or guardian uses tax credits for educational expenses. But you can't take a credit for expenses you covered with tax-free withdrawals. To qualify to make a full $2,000 contribution to an ESA, your modified adjusted gross income (MAGI) must be $95,000 or less, and your right to make any contribution at all is phased out if your MAGI is $110,000 if you're a single taxpayer. The comparable range if you're married and file a joint return is $190,000, phased out at $220,000.

Covered bond

A covered bond is a secured debt instrument. It's issued by a bank and backed by assets held on the issuer's balance sheet in a segregated cover pool. Those assets are usually residential assets but may be public sector loans. The issuer pays interest from its general cash flow and manages the cover pool to ensure the continuing quality of this collateral. The pool's value must always be larger than the stated value of the covered bond. If the bank defaults, investors have recourse first to the collateral in the cover pool and then to the bank's assets on the same basis as its unsecured creditors. Covered bonds differ from mortgage-backed securities (MBS) in several ways, though both are backed by mortgage loans. Each of those differences, including the source of the interest payments, how the underlying loans are held, the fluid versus static nature of the mortgage pool, and the access to collateral in the case of default, tend to make covered bonds less risky. While covered bonds have a long history in Europe, they are relatively new in the United States.


A crash is a sudden, steep drop in stock prices. The downward spiral is intensified as more and more investors, seeing the bottom falling out of the market, try to sell their holdings before these investments lose all their value. The two great US crashes of the 20th century, in 1929 and 1987, had very different consequences. The first was followed by a period of economic stagnation and severe depression. The second had a much briefer impact. While some investors suffered huge losses in 1987, recovery was well under way within three months. In the aftermath of each of these crashes, the federal government instituted a number of changes designed to reduce the impact of future crashes.

Creation unit

A creation unit is a basket of securities that corresponds to a specific number of shares in an exchange traded fund (ETF). The securities in the creation unit are those that are included in the ETF's underlying index. An authorized participant in an ETF -- typically an institutional investor -- assembles the relevant basket of securities and transfers that creation unit to the ETF sponsor in exchange for fund shares, which can then be sold to other investors.


Credit generally refers to the ability of a person or organization to borrow money, as well as the arrangements that are made for repaying the loan and the terms of the repayment schedule. If you are well qualified to obtain a loan, you are said to be creditworthy. Credit is also used to mean positive cash entries in an account. For example, your bank account may be credited with interest. In this sense, a credit is the opposite of a debit, which means money is taken from your account.

Credit bureau

The three major credit bureaus -- Equifax, Experian, and TransUnion -- collect information about the way you use credit and make it available to anyone with a legitimate business need to see it, including potential lenders, landlords, and current or prospective employers. The bureaus keep records of the credit accounts you have, how much you owe, your payment habits, and the lenders and other businesses that have accessed your credit report. Credit bureaus, also known as credit reporting agencies, store other information about you as well, such as your present and past addresses, Social Security number, employment history, and information in the public record, including bankruptcies, liens, and any judgments against you. However, there are certain things, by law, your credit report can't include, including your age, race, religion, political affiliation, or health records. You are entitled to a free copy of your credit report from each of the three major credit bureaus once a year, but you have to request them through the Annual Credit Report Request Service ( or 877-322-8228). If you've recently been denied credit, are unemployed, on public assistance, or have a reason to suspect identity theft or credit fraud, you're also entitled to a free report. In those cases, you should contact the relevant credit bureau or bureaus directly.

Credit default swap (CDS)

A credit default swap (CDS) is a derivative financial product frequently likened to an insurance contract. A CDS transfers the risk of potential default by a debt instrument, such as a loan, bond, or mortgage, from the investor who buys the instrument plus a CDS to a third party that sells the CDS. For example, if a bond issuer defaults, CDS seller covers the loss the CDS buyer would otherwise incur. The third party could be a bank, investment firm, hedge fund, or other financial institution. In return for providing the protection, CDS sellers charge a fee, typically paid in installments over the course of the contract's term. The fee varies, based on perceived risk, but may be only a tiny fraction of the value of the transaction. This introduces the risk that an overextended CDS seller could default, a threat that was a key factor in the credit crisis of 2008 and the bailout that followed. The CDS market is huge -- more than twice the value of the US stock market -- but has been unregulated in both US and international markets. It is also opaque. Contracts are negotiated between the parties rather than traded on organized exchanges. Serious efforts are underway to make significant changes in CDS markets, including requiring that CDS be cleared and settled through a central clearinghouse to increase transparency and reduce counterparty risk.

Credit enhancement

A credit enhancement is a form of additional protection that may help offset the risk of a debt obligation. For example, bond issuers and structured finance arrangers may use insurance or guarantees to boost the credit quality of their securities. Another common form of credit enhancement is known as overcollateralization -- the inclusion of additional collateral to protect against potential losses. In this case, a cushion of additional assets enhances the quality of the securitized debt obligation. For example, the arranger of a securitization may protect against potential defaults in some of the underlying loans by adding an extra $10 million in collateral to a $100 million obligation.

Credit quality

Credit quality is a measure of the financial strength of a specific debt security, such as a corporate or government bond or a securitized debt obligation, and of the likelihood that its issuer will default. Credit quality is expressed in relative terms by credit rating agencies, using rating scales that group issues by the level of risk they pose.

Credit rating

A credit rating is an independent evaluation of the credit risk, or likelihood of default, posed by an issuer of debt or by a specific debt issue. These opinions are based on the financial and nonfinancial criteria set by the credit rating agency making the assessment. A debt issuer's credit rating, sometimes described as its creditworthiness, is an assessment of its ability and willingness to pay interest and repay principal in a timely way, based on the terms of its obligations. A debt issue's credit rating, sometimes described as its credit quality, is based on the creditworthiness of its issuer, the terms of the obligation, and other factors. Credit rating scales generally range from AAA or Aaa at the high end to D (for default) at the low end.

Credit rating agency

Credit rating agencies assess the creditworthiness of corporations and governments who issue debt securities. Agencies also rate the credit quality of specific issues, such as individual bonds and securitized debt obligations. The focus of an agency's assessment is the relative risk that an issuer or a security will default. Some agencies may also consider the potential for investors to recover their assets if default occurs. Ratings serve as a resource for individual and institutional investors seeking debt securities that match their risk tolerance. Issuers rely on credit ratings to help determine the interest rates they must pay to attract investors. In addition, a business or financial institution may use credit ratings to assess counterparty risk, which is the potential that another institution, with which it is doing business, will default. Agencies may be paid for their services by collecting a fee from the issuers or arrangers of the debts they are rating. Alternately, they may operate under a subscription model and charge users for access to their findings.

Credit report

A credit report is a summary of your financial history. Potential lenders will use your credit report to help them evaluate whether you are a good credit risk. The three major credit-reporting agencies are Experian, Equifax, and Transunion. These agencies collect certain types of information about you, primarily your use of credit and information in the public record, and sell that information to qualified recipients. As a provision of the Fair and Accurate Credit Transaction Act (FACT Act), you are entitled to a free copy of your credit report each year from each of the credit reporting agencies. You also have a right to see your credit report at any time if you have been turned down for a loan, an apartment, or a job because of poor credit. You may also question any information the credit reporting agency has about you and ask that errors be corrected. If the information isn't changed following your request, you have the right to attach a comment or explanation, which must be sent out with future reports.

Credit risk

Credit risk is the possibility that the issuer of a debt security will default, or fail to meet its obligation to make interest payments and repay principal to investors. Because investors may lose some or all of their investment in a default, evaluating the relative credit risk an issuer poses is an important consideration in evaluating potential debt security investments.

Credit score

Your credit score is a number, calculated based on information in your credit report, that lenders use to assess the credit risk you pose and the interest rate they will offer you if they agree to lend you money. Most lenders use credit scores rather than credit reports since the scores reduce extensive, detailed information about your financial history to a single number. There are actually two competing credit scoring systems, FICO, which has been the standard, and VantageScore, which was developed by the three major credit bureaus. Their formulas give different weights to particular types of credit-related behavior, though both emphasize paying your bills on time and the amount of credit you are using in relation to your credit limits. They also have different scoring systems, ranging from 300 to 850 for FICO to 501 to 999 for AdvantageScore. The best -- or lowest -- interest rates go to applicants with the highest scores. Because your credit score and credit report are based on the same information, it's very unlikely that they will tell a different story. It's smart to check your credit report at least once a year, which you can do for free at or by calling 877-322-8228. It may be a good idea to review your score if you anticipate applying for a major loan, such as a mortgage, in the next six months to a year. That allows time to bring your score up if you fear it's too low.

Credit union

Credit unions are financial cooperatives set up by employee and community associations, labor unions, church groups, and other organizations. They provide affordable financial services to members of the sponsoring organization. In some cases, they're created in rural or economically disadvantaged areas, where commercial banks may be scarce or prohibitively expensive. Because they are not-for-profit, credit unions tend to charge lower fees and interest rates on loans than commercial banks while paying higher interest rates on savings and investment accounts. The services offered at large credit unions can be as comprehensive as those at large banks. At smaller credit unions, however, services and hours may be more limited, and a few deposits may not be insured. Assets in most credit unions are insured by the National Credit Union Share Insurance Fund on the same terms that deposits in national and state banks are insured by the Federal Deposit Insurance Corporation (FDIC).


A person or company who provides credit to another person or company functions as a creditor. For example, if you take a mortgage or car loan at your bank, then the bank is your creditor. But if you buy a bond, you are the creditor because the money you pay to buy the bond is actually a loan to the issuer.

Cumulative voting

With cumulative voting for a corporation's board of directors, you may cast the total number of votes you're entitled to any way you choose. For example, you can either split your votes equally among the nominees, or you can cast all of them for a single candidate. Generally, you receive one vote for each share of company stock you own times the number of directors to be elected. Cumulative voting is designed to give individual stockholders greater influence in shaping the board. They can designate all their votes for a single candidate who represents their interests instead of spreading their votes equally among the candidates, as is the case with statutory voting.

Currency fluctuation

A currency has value, or worth, in relation to other currencies, and those values change constantly. For example, if demand for a particular currency is high because investors want to invest in that country's stock market or buy exports, the price of its currency will increase. Just the opposite will happen if that country suffers an economic slowdown, or investors lose confidence in its markets. While some currencies fluctuate freely against each other, such as the Japanese yen and the US dollar, others are pegged, or linked. They may be pegged to the value of another currency, such as the US dollar or the euro, or to a basket, or weighted average, of currencies.

Currency swap

In a currency swap, the parties to the contract exchange the principal of two different currencies immediately, so that each party has the use of the different currency. They also make interest payments to each other on the principal during the contract term. In many cases, one of the parties pays a fixed interest rate and the other pays a floating interest rate, but both could pay fixed or floating rates. When the contract ends, the parties re-exchange the principal amount of the swap. Originally, currency swaps were used to give each party access to enough currency to make purchases in a market other than its home market. Increasingly, parties arrange currency swaps as a way to enter new capital markets or to provide predictable revenue streams in another currency.

Currency trading

The global currency market is the largest financial market in the world. Banks, other financial institutions, and multinational corporations buy and sell currencies in enormous quantities to handle the demands of international trade. In some cases, traders seek profits from minor fluctuations in exchange rates or speculate on currency fluctuations.

Current return

Current return, also called current yield, is the earnings you collect on an investment in a given year, expressed as a percent of the current market price. With a bond, the current return will, in most cases, not be the same as the coupon rate, or the interest rate the bond pays calculated as a percentage of its par value. For example, if the par, or face value, of a bond is $1,000 and the coupon rate is 5%, then the interest, or annual income, from the bond is $50 per year. If, however, the bond is trading at $900, then that $50 annual income is actually a current return of 5.6%. If you own a stock, its current return is the annual dividend divided by its market price. Current return does not take capital gains or losses into account, so it is not a reflection of the total return on your investment.

Current yield

Current yield is a measure of your rate of return on an investment, expressed as a percentage. With a bond, current yield is calculated by dividing the interest you collect by the current market price. For example, if a bond paying 5% interest, or $50, is selling for $900, the current yield is 5.6%. If the market price is $1,200, the current yield is 4.2%. And if bond is selling exactly at par, or $1,000, the current yield is 5%, the same as the coupon rate. If you own a stock, its current yield is the annual dividend divided by its market price.

Custodial account

If you want to make investments on a minor's behalf, or transfer property you own to that person, you can open a custodial account with a bank, brokerage firm, mutual fund company, or insurance company. You name an adult custodian for the account -- either yourself or someone else -- who is responsible for managing the account until the child reaches the age of majority. That age may be 18, 21, or 25 depending on the state and the type of account you choose. At majority, the child has the legal right to control the account and use the assets as he or she chooses. There may be some estate and income tax advantages in transferring assets to a minor. Gifts you make to the account are no longer part of your estate, which may reduce vulnerability to estate taxes. However, it's wise to review your plans about the size of the annual gift and whether you should be the custodian with your legal and tax advisers. In addition, once the beneficiary is 19, or 24 if a full-time student, investment earnings are taxed at his or her marginal tax rate, which may be lower than your rate or the parents' rate. One drawback of a custodial account is that the assets, as the property of the child, may reduce the amount of financial aid that he or she qualifies for when enrolling in a college or university.


A custodian is legally responsible for ensuring that an item or person is safe and secure. In investment terms, a custodian is the financial services company that maintains electronic records of financial assets or has physical possession of specific securities. The custodian's client may be another institution, such as a mutual fund, a corporation, or an individual. For example, with an individual retirement account (IRA), the custodian is the bank, brokerage firm, or other financial services company that holds your account. Similarly, The Depository Trust Company, a subsidiary of The Depository Trust & Clearing Corporation (DTCC), is the custodian of millions of stock certificates held in its vaults.

Cyclical stock

Cyclical stocks tend to rise in value during an upturn in the economy and fall during a downturn. They usually include stock in industries that flourish in good times, including airlines, automobiles, and travel and leisure. In contrast, stock in industries that provide necessities such as food, electricity, gas, and healthcare products tend to be more price-stable, as do companies that provide services that reduce the expenses of other companies. Those stocks are sometimes called countercyclicals.

Daily trading limit

The daily trading limit is the most that the price of a futures contract can rise or fall in a single session before trading in that contract is stopped for the day. Trading limits are designed to protect investors from wild price fluctuations and the potential for major losses. They're comparable to the circuit breakers established by stock exchanges to suspend trading when prices fall by a specific percentage.

Daily Valuation

The value of each investment is determined on a daily basis. Although ETF index funds are bought and sold like stocks throughout the market day, with the ShareBuilder 401(k) index funds are purchased and valued once a day.

Dark liquidity pools

Dark liquidity pools are private alternative trading systems or platforms. Prices aren't published, and participants can make anonymous trades faster and at a lower cost than they can on a public exchange. Most dark-pool transactions are between institutional investors, including mutual funds and hedge funds, which trade in large volumes. Their interest in anonymity is either because they want to protect the privacy of their investment choices or because they fear a major transaction could affect stock prices and disrupt normal market trading. Dark liquidity pools must register with the Securities and Exchange Commission (SEC) as either national securities exchanges or broker-dealers. The broker-dealers must follow the rules laid out in SEC Regulation ATS, which governs fair access and a requirement to publish prices for trades in certain securities under specific circumstances.

Date of maturity

The date of maturity, or maturity date, is the day on which a bond's term ends, and its issuer repays the principal and makes the final interest payment. When the phrase is used in connection with mortgages or other personal loans, the date of maturity is the day your last payment is due and your debt is repaid.

Day order

A day order is an instruction you give to your broker to buy or sell a security at the market price or at a particular price you name before the end of the trading day. The order expires if it isn't filled. In contrast, a good 'til canceled (GTC) order remains open on the broker's books until it's filled, you cancel it, or the brokerage firm's time limit for GTCs expires.

Day trader

When you continuously buy and sell investments within a very short time, perhaps a few minutes or hours, and rarely hold them overnight, you're considered a day trader. The strategy is to take advantage of rapid price changes to make money quickly. The risk is that as a day trader you can lose substantial amounts of money since no one can predict how or when prices will change. This risk is compounded by the fact that technology does not always keep pace with investors' orders. So if you authorize a sale at one price, the price at which the trade is actually executed at may be higher or lower, wiping out potential profit. In addition, you pay transaction costs on each buy and sell order. Your gains must be large enough to offset those costs if you're going to come out ahead.


Dealers, or principals, buy and sell securities for their own accounts, adding liquidity to the marketplace and seeking to profit from the spread between the prices at which they buy and sell. In the over-the-counter market, in most cases, it is dealers -- also called market makers -- who provide the bid and ask quotes you see when you look up the price of a security. Those dealers are willing to commit their capital to specific securities and are ready to trade the securities at the quoted prices.


A debenture is an unsecured bond. Most bonds issued by corporations are debentures, which are backed by the issuer's reputation rather than by any collateral, such as buildings or inventory. Although debentures sound riskier than revenue bonds, that's not the case when they're issued by well-established companies with good credit ratings.


A debit is the opposite of a credit. A debit may be an account entry representing money you owe a lender or money that has been taken from your account. For example, your bank debits your checking account for the amount of a check you've written, and your broker debits your investment account for the cost of a security you've purchased. Similarly, a debit card authorizes the bank to take money out of your bank account electronically, either as cash or as an on-the-spot payment to a merchant. That's different from a credit card, which authorizes you to borrow the money from the card issuer.

Debit balance

A debit balance is what you owe. It's entered as accounts receivable on the books of the lender and appears on your account statement as a liability. For example, if you have a margin account and borrow money to buy stock, your monthly brokerage statement will show a debit balance for the amount of the margin loan.


A debt is an obligation to repay an amount you owe. Debt securities, such as bonds or commercial paper, are forms of debt that bind the issuer, such as a corporation, bank, or government, to repay the security holder. Debts are also known as liabilities.

Debt consolidation

When you consolidate debt, you take a new loan to pay off your existing loans. Instead of several loans with different rates and terms, you have a single loan. Often the term of the new loan is longer than at least some of your existing loans, and the monthly payments are smaller than the total of your former payments. This makes your debt affordable but means repayment may cost you more in the long term. The interest rate is determined by current market rates and your creditworthiness. You can get advice about debt consolidation by contacting your creditors or working with a nonprofit agency, such the National Foundation for Consumer Credit (NFCC). Organizations called debt consolidators charge a fee for collecting money from you and paying your various creditors. They're unlikely to save you money and at worst may not make the necessary payments. Some people also consolidate debt by transferring balances from several credit cards to a single card to take advantage of a low promotional rate. This approach also has drawbacks, which can end up increasing rather than reducing your debt.

Debt security

Debt securities are interest-paying bonds, notes, bills, or money market instruments that are issued by governments or corporations. Some debt securities pay a fixed rate of interest over a fixed time period in exchange for the use of the principal. In that case, that principal, or par value, is repaid at maturity. Some are pass-through securities, with principal and interest repaid over the term of the loan. Still other issues are sold at discount, with interest included in the amount paid at maturity. US Treasury bills, corporate bonds, commercial paper, and mortgage-backed bonds are all examples of debt securities.

Debt service

Debt service is the combined cost of the monthly interest payments you must make to stay current on your outstanding loans and lines of credit. In the case of bond issuers, debt service includes the cash required to make the interest and principal payments due during the year.


A debtor owes money on one or more loans or lines of credit. While the term has negative overtones that suggest lack of financial responsibility, it is actually simply the opposite of creditor.

Debt-to-equity ratio (D/E)

A company's debt-to-equity ratio (D/E) indicates the extent to which the company is leveraged, or financed by credit. A higher ratio is a sign of greater leverage. You find a company's debt-to-equity ratio by dividing its total long-term debt by its total assets minus its total debt. You can find these figures in the company's income statement, which is provided in its annual report. Average ratios vary significantly from one industry to another, so what is high for one company may be normal for another company in a different industry. From an investor's perspective, the higher the ratio, the greater the risk you take in investing in the company. But your potential return may be greater as well if the company uses the debt to expand its sales and earnings.

Debt-to-income ratio

A debt-to-income (DTI) ratio is determined by dividing the amount of your outstanding debt by your total income. It is stated as a percentage. Mortgage lenders often require that your overall DTI ratio is no larger than 36%, with no more that 28% attributable to housing costs. Those costs include payments for principal, interest, taxes, and insurance, known as PITI. A DTI ratio over 40% is often seen as a danger signal for serious financial problems.

Decimal pricing

US stocks, derivatives linked to stocks, and some bonds trade in decimals, or dollars and cents. That means that the spread between the bid and ask prices can be as small as one cent. The switch to decimal stock trading, which was completed in 2001, was the final stage of a conversion from trading in eighths, or increments of 12.5 cents. Trading in eighths originated in the 16th century, when North American settlers cut European coins into eight pieces to use as currency. In an intermediary phase during the 1990s, trading was handled in sixteenths, or increments of 6.25 cents.


Stocks that have dropped, or fallen, in value over a particular period are described as decliners. If more stocks decline than advance, or go up in value, over the course of a trading day, the financial press reports that decliners led advancers. The indexes that track the market may decline as well. If decliners dominate for a period of time, the market may also be described as bearish.


A deduction is an amount you can subtract from your gross income or adjusted gross income to lower your taxable income when you file your income tax return. Certain deductions, such as money contributed to a traditional IRA or interest payments on a college loan, are available only to taxpayers who qualify for these deductions based on specific expenditures or income limits, or both. Other deductions are more widely available. For example, you can take a standard deduction, an amount that's fixed each year. And if your expenses for certain things, such as home mortgage interest, real estate taxes, and state and local income taxes, total more than the standard deduction, it may pay for you to itemize deductions instead. However, if your adjusted gross income is above the limit Congress sets for the year, you may lose some of or all these deductions.

Deep discount bond

Deep discount bonds are originally issued with a par value, or face value, of $1,000. But they have declined in value by at least 20% -- to a market value of $800 or less -- typically because interest rates have increased. They may also decline if people believe the issuer may have difficulty making the interest payment or repaying the principal. Either way, investors will no longer pay full price for the bond. Deep discount bonds are different from original issue discount bonds, which are sold at less than par value and accumulate interest until maturity, when they can be redeemed for par value. Zero-coupon bonds are an example of original issue discount bonds.


If a person or institution responsible for repaying a loan or making an interest payment fails to meet that obligation on time, that person or institution is in default. If you are in default, you may lose any property that you put up as collateral to get the loan. For example, if you fail to repay your car loan, your lender may repossess the car. Defaulting has a negative impact on your credit history and your credit score, which generally makes it difficult to borrow again in the future. In fact, failure to pay on time is a major contributor to a poor credit history. A bond issuer who defaults may not pay interest when it comes due or repay the principal at maturity, or both.

Default risk

Default risk is the probability that a borrower will fail to repay principal, interest, or both on an outstanding debt obligation. Lenders use your credit score to assess the default risk you pose as a borrower. If that risk seems higher than average, the lender may refuse your loan or credit card application or may charge you a higher-than-average interest rate. Investors use the ratings that credit rating agencies assign to corporate and government issuers and issues to evaluate the default risk of a particular investment.

Defensive security

Defensive securities tend to remain more stable in value than the overall market, especially when prices in general are falling. Defensive securities include stocks in companies whose products or services are always in demand and are not as price-sensitive to changes in the economy as other stocks. Some defensive securities could be stock in food, pharmaceuticals, and utilities companies. Defensive securities are also known as countercyclicals.

Deferred annuity

A deferred annuity contract allows you to accumulate tax-deferred earnings during the term of the contract and sometimes add assets to your contract over time. In contrast, an immediate annuity starts paying you income right after you buy. Your deferred annuity earnings can be either fixed or variable, depending on the way your money is invested. Deferred annuities are designed primarily as retirement savings accounts, so you may owe a penalty if you withdraw principal, earnings, or both before you reach age 59 1/2.

Defined benefit plan

A defined benefit plan -- popularly known as a pension -- provides a specific benefit for retired employees, either as a lump sum or as income for the rest of their lives. Sometimes the employee's spouse receives the benefit for life as well. The pension amount usually depends on the employee's age at retirement, final salary, and the number of years on the job. All the details are spelled out in the plan. However, an employer may end its defined benefit plan or replace this traditional source of retirement income with defined contribution or cash balance plans.

Defined contribution plan

In a defined contribution retirement plan, the benefits -- that is, what you can expect to accumulate and ultimately withdraw from the plan -- are not predetermined, as they are with a defined benefit plan. Instead, the retirement income you receive will depend on how much is contributed to the plan, how it is invested, and what the return on the investment is. One advantage of defined contribution plans, such as 401(k)s, 403(b)s, 457s, and profit-sharing plans, is that you often have some control over how your retirement dollars are invested. Your choice may include stock or bond mutual funds, annuities, guaranteed investment contracts (GICs), company stock, cash equivalents, or a combination of these choices. An added benefit is that, if you switch jobs, you can take your accumulated retirement assets with you, either rolling them into an IRA or a new employer's plan if the plan accepts transfers.


Deflation, the opposite of inflation, is a gradual drop in the cost of goods and services, usually caused by a surplus of goods and a shortage of cash. Although deflation seems to increase your buying power in its early stages, it is generally considered a negative economic trend. That's because it is typically accompanied by rising unemployment, falling production, and limited investment.

Depositary bank

A US bank that holds American depositary shares (ADSs), or shares of corporations based outside the United States, and sells American depositary receipts (ADRs) to US investors is called a depositary bank. Each ADR represents a specific number of ADSs, based on the bank's agreement with the issuing corporation. The depositary bank ensures that investors receive dividends and capital gains and handles tax payments that may be due in the country where the share-issuing company is headquartered.

Depository Trust & Clearing Corporation (DTCC)

The Depository Trust & Clearing Corporation (DTCC) provides trade matching, clearing, netting, and settlement services for corporate, government, and municipal securities transactions in the United Services and elsewhere in the world. It is also the world's largest securities depository, holding trillions of dollars in assets for the members of the financial industry. The DTCC, a member of the Federal Reserve System, was created in 1999. It has a number of subsidiaries, including The Depository Trust Company (DTC), the National Securities Clearing Corporation (NSCC), and the Fixed Income Clearing Corporation (FICC).


Certain assets, such as buildings and equipment, depreciate, or decline in value, over time. Corporations and other business entities, such as partnerships and limited liability companies (LLCs), can amortize, or write off, the cost of such an asset over its estimated useful life, thereby reducing taxable income without reducing cash on hand. If you invest in direct participation programs (DPP), such as nontraded real estate investment trusts (REITs), equipment leasing, and energy exploration and development, you may also be entitled to depreciate assets owned by the DDP.


A depression is a severe and prolonged downturn in the economy. Prices fall, reducing purchasing power. There tends to be high unemployment, lower productivity, shrinking wages, and general economic pessimism. Since the Great Depression following the stock market crash of 1929, the governments and central banks of industrialized countries have monitored their economies and, when required, adjusted their economic policies to prevent another financial crisis of this magnitude. The most recent, and perhaps the most severe threat, occurred in 2008 in the wake of the subprime mortgage meltdown.


Devaluation is a deliberate decision by a government or central bank to reduce the value of its own currency in relation to the currencies of other countries. Governments often opt for devaluation when there is a large current account deficit, which may occur when a country is importing far more than it is exporting. When a nation devalues its currency, the goods it imports and the overseas debts it must repay become more expensive. But its exports become less expensive for overseas buyers. These competitive prices often stimulate higher sales and help to reduce the deficit.


A DIAMOND is an index-based unit investment trust (UIT) that holds the 30 stocks in the Dow Jones Industrial Average (DJIA). It's similar in structure to an exchange traded fund (ETF). Investors buy shares, or units, of the trust, which is listed on NYSE Amex as DIA. The share price changes throughout the day as investors buy and sell, just as share prices of stocks do. That's in contrast to open-end mutual funds whose share prices change just once a day, when trading in their underlying investments ends for the day. Part of the appeal of DIAMOND shares is that the trust mirrors the performance of its benchmark index yet buying shares costs dramatically less than the cost of buying shares in all 30 stocks in the DJIA. A DIAMOND share trades at about 1/100 the value of the DJIA. So, for example, if the DJIA is at 10,000, shares in the trust will be priced around $100.


Dilution occurs when a company issues additional shares of stock, and as a result the earnings per share and the book value per share decline. This happens because earnings per share and book value per share are calculated by dividing the total earnings or book value by the number of outstanding shares. The larger the number of shares, the lower the value of each share. Lower earnings per share may trigger a sell-off in the stock, lowering its price. That's one reason a company may choose to issue bonds rather than new stock to raise additional capital. Similarly, if companies merge or one buys another, earnings may be diluted if they don't increase proportionately with the combined number of shares in the newly created company. Dilution can also occur if warrants and stock options on a stock are exercised, and if convertible bonds and preferred stock the company issued are converted to common stock. Companies must report the worst-case potential for such dilution, or loss of value, to their shareholders as diluted earnings per share.

Direct deposit

Direct deposit is the electronic transfer of money from a payer, such as your employer or a government agency, directly into an account you designate. Direct deposit is faster and cheaper than sending a check and also more secure, which is why both payers and financial institutions prefer this system. In fact, banks often provide free checking or other benefits if your paychecks are deposited directly. Similarly, mutual funds may reduce the minimum amount you must invest with each purchase.

Direct investment

You can make a direct investment in a company's stock through dividend reinvestment plans (DRIPs) and direct purchase plans (DPPs). If a company in which you own stock offers a DRIP, you have the opportunity to reinvest cash dividends and capital gains distributions in more stock automatically each time they are paid. In the case of DPPs, also known as direct stock purchase plans (DSPs), companies can sell their stock directly to investors without using a brokerage firm as intermediary. Direct investment also refers to long-term investments in limited partnerships that invest in real estate, leased equipment, and energy exploration and development. In this type of investment, you become part owner of the hard assets of the enterprise. You realize income from your investment by receiving a portion of the business's profits, for example, from rents, contractual leasing payments, or oil sales. In some cases you realize capital gains at the end of the investment term, if the business sells its assets. These DPPs are largely nontraded and have no formal secondary markets. This means you will often have to hold the investment for terms of eight years or more, with no guarantee that any of the income or capital gains will materialize. Many people make direct investments because there can be significant tax benefits, such as tax deferral and tax abatement, depending on the investment.

Direct purchase plan (DPP)

Some publicly held companies offer a direct purchase plan that lets you purchase their stock directly without using a broker. You may pay a small commission or transaction fee -- smaller than if you purchased the shares through a retail broker -- although some DPPs charge no fee at all. Direct purchase plans are similar to dividend reinvestment plans, or DRIPs, with the added benefit that you can make the initial purchase of the company's stock through the plan rather than having to purchase stock first, through a broker, in order to be eligible for a DRIP. It's easy to open a DPP account, and because it lets you purchase fractional shares of the company's stock, you can decide whether to invest a lump sum or make small, regular purchases on a set schedule to build your investment. Your shares are registered on the company's books, and you can sell your shares through the plan as well.

Directional Movement Index

In technical analysis, the Directional Movement Index (DMI) is used both to show if a trend exists, and, if one does, the trend's strength. DMI fluctuates between values of 0 and 100. The probability of a trend is thought to increase as DMI increases. DMI is composed of three lines: +DI, which shows buying pressure, -DI, which shows selling pressure, and the Average Directional Movement Index (ADX), which measures the spread between +DI and -DI and helps to show the strength of the trend. Some technical analysts use +DI and -DI to make buy and sell recommendations. For instance, when +DI crosses above -DI, it may be viewed as a good time to buy. And, when +DI passes below the -DI line, it may be interpreted as a good time to sell. Since ADX measures the strength of a trend, significantly decreasing ADX levels could signify that the security isn't trending.


A disclosure document explains how a financial product or offering works. It also details the terms to which you must agree in order to buy it or use it, and, in some cases, the risks you assume in making such a purchase. For example, publicly traded companies must provide all available information that might influence your decision to invest in the stocks or bonds they issue. Mutual fund companies are required to disclose the risks and costs associated with buying shares in the fund. Government regulatory agencies, such as the Securities and Exchange Commission (SEC), self-regulating organizations, state securities regulators, and FINRA require such disclosures. Similarly, federal and local governments require lenders to explain the costs of credit, and banks to explain the costs of opening and maintaining an account. Despite the consumer benefits, disclosure information isn't always easily accessible. It may be expressed in confusing language, printed in tiny type, or so extensive that consumers choose to ignore it.


When bonds sell for less than their face value, they are said to be selling at a discount. Bonds sell at a discount when the interest rate they pay is lower than the rate on more recently issued bonds or when the financial condition of the issuer weakens. In the case of rising interest rates, demand for older, lower-paying bonds drops as investors put their money into newer, higher-paying alternatives, so the prices of the older bonds drop. If a rating agency reduces a bond's rating, the market price tends to drop because investors demand a higher yield for the additional risk they take in buying the bond. Similarly, closed-end mutual funds may trade at a discount to their net asset value (NAV) as a result of weak investor demand or other market forces. Preferred stocks may also trade at a discount. In contrast, certain bonds, called original issue discount bonds, or deep discount bonds, are issued at a discount to par value, or full face value, but are worth par at maturity.

Discount brokerage firm

Discount brokerage firms charge lower commissions than full-service brokerage firms when they execute investors' buy and sell orders but may provide fewer services to their clients. For example, they may not offer investment advice or maintain independent research departments. Because of the information and online account access on most brokerage websites, differences between full-service and discount firms are less apparent to the average investor.

Discount point

Some lenders require you to prepay a portion of the interest due on your mortgage as a condition of approving the loan. They set the amount due at one or more discount points, with each discount point equal to 1% of the mortgage loan principal. For instance, if you must pay one point on a $100,000 mortgage, you owe $1,000. From your perspective, the advantages of paying discount points are that your long-term interest rate is lowered slightly for each point you pay, and prepaid interest is tax deductible. The advantage, from the lenders' point of view, is that they collect some of their interest earnings up front.

Discount rate

The discount rate is the interest rate the Federal Reserve charges on loans it makes to banks and other financial institutions. The discount rate becomes the base interest rate for most consumer borrowing as well. That's because a bank generally uses the discount rate as a benchmark for the interest it charges on the loans it makes. For example, when the discount rate increases, the interest rate that lenders charge on home mortgages and other loans increases. And when the discount rate is lowered, the cost of consumer borrowing eventually decreases as well. The term discount rate also applies to discounted instruments like US Treasury bills. In this case, the rate is used to identify the interest you will earn if you purchase at issue, hold the bill to maturity, and receive face value at maturity. The interest is the difference between what you pay to purchase the bills and the amount you are repaid.

Discounted cash flow (DCF)

Discounted cash flow (DCF) is the present value of a company's future cash flows. DCF is calculated by dividing projected annual earnings over an extended period by an appropriate discount rate, which is the weighted cost of raising capital by issuing debt or equity. The discount rate is lower for stable, well-established companies than for those considered at potential risk. Some analysts use only projected dividend income in calculating future cash flow. Others include projected earnings that would be available for stock buybacks.

Discretionary account

A discretionary account is a type of brokerage account in which clients authorize their brokers to buy and sell securities on their behalf without prior consent for each transaction. A client may set guidelines for the account, such as the types of securities the broker may purchase. However, the broker can buy and sell shares at his or her discretion. Managed accounts -- also called separate accounts and wrap accounts -- are one type of discretionary account.

Discretionary Contribution

An employer contribution made to a 401(k) or profit sharing plan that is allocated on the basis of compensation or in some manner other than on the basis of elective contributions.


Disinflation is a slowdown in the rate of price increases that historically occurs during a recession, when the supply of goods is greater than the demand for them. Unlike a period of deflation, when prices for goods actually drop, in a period of disinflation prices do not usually fall, but the rate of inflation becomes negligible.

Dispute resolution

Dispute resolution -- sometimes called alternative dispute resolution -- refers to methods of resolving conflicts between parties or individuals that doesn't involve litigation. Mediation and arbitration are two forms of dispute resolution that are frequently used when conflicts arise between investors and the brokers or investment advisers with whom they work. If you have a conflict that you've been unable to resolve by talking with your broker and the firm, you can file a complaint with FINRA, the self-regulatory body that regulates brokerage firms and uses mediators and arbitrators to help resolve disputes. If your conflict is with a registered investment adviser, you should contact the Securities and Exchange Commission (SEC). Advocates of dispute resolution note that it tends to be quicker, cheaper, and less confrontational than litigation.


A distribution is money a mutual fund pays its shareholders either from the dividends or interest it earns or from the capital gains it realizes on the sale of securities in its portfolio. Unless you own the fund through a tax-deferred or tax-free account, you owe federal income tax on most distributions, the exception being interest income from municipal bond funds. That tax is due whether or not you reinvest the money to buy additional shares in the fund. You'll owe tax at your regular rate on short-term gains and on income from interest. The tax on qualifying dividends and long-term gains is calculated at your long-term capital gains rate. Your end-of-year statement will indicate which income belongs to each category. The term distribution is also used to describe certain actions a corporation takes. For example, if a corporation spins off a subsidiary as a standalone company, it will issue shares in that subsidiary to current stockholders. That's considered a distribution. Corporate dividends may also be described as distributions.

Distribution Expense

The costs typically associated with processing paperwork and issuing a check for a distribution of plan assets to a participant. May include the generation of IRS Form 1099R. This fee may apply to hardship and other in-service withdrawals as well as to separation-from-service or retirement distributions.


Diversification is an investment strategy. When you diversify, you spread your investment dollars among different sectors, industries, and securities within a number of asset classes. A well-diversified stock portfolio, for example, might include small-, medium-, and large-capitalization domestic stocks, stocks in six or more sectors or industries, and international stocks. The goal is to protect the value of your overall portfolio in case a single security or market sector takes a serious downturn. Finding the diversification mix that's right for your portfolio depends on your age, your assets, your tolerance for risk, and your investment goals. Diversification can help insulate your portfolio against market and management risks without significantly reducing the level of return you realize. But it does not guarantee you will realize a profit or insure you against losses in a market downturn.


Corporations may pay part of their earnings as dividends to you and other shareholders as a return on your investment. These dividends, which are often declared quarterly, are usually in the form of cash, but may be paid as additional shares or scrip. You may be able to reinvest cash dividends automatically to buy additional shares if the corporation offers a dividend reinvestment program (DRIP). Dividends are taxable unless you own the investment through a tax-deferred account, such as an employer sponsored retirement plan or individual retirement account. That applies whether you reinvest them or not. However, dividends on most US and many international stocks are considered qualifying dividends. That means you owe tax at your long-term capital gains rate, provided you have owned the stocks the required length of time. Dividends on real estate investment trusts (REITs), mutual savings banks, and certain other investments aren't considered qualifying and are taxed at your regular rate.

Dividend payout ratio

You can calculate a dividend payout ratio by dividing the dividend a company pays per share by the company's earnings per share. The normal range is 25% to 50% of earnings, though the average is higher in some sectors of the economy than in others. Some analysts think that an unusually high ratio may indicate that a company is in financial trouble but doesn't want to alarm shareholders by reducing its dividend.

Dividend reinvestment plan (DRIP)

Many publicly held companies allow shareholders to reinvest dividends in company stock or buy additional shares through dividend reinvestment plans, or DRIPs. Enrolling in a DRIP enables you to build your investment gradually, taking advantage of dollar cost averaging and usually paying only a minimal transaction fee for each purchase. Many DRIPs will also buy back shares at any time you want to sell, in most cases for a minimal sales charge. One potential drawback of purchasing through a DRIP is that you accumulate shares at different prices over time, making it more difficult to determine your cost basis -- especially if you want to sell some of but not all your holdings.

Dividend yield

If you own dividend-paying stocks, you figure the current dividend yield on your investment by dividing the dividend being paid on each share by the share's current market price. For example, if a stock whose market price is $35 pays a dividend of 75 cents per share, the dividend yield is 2.14% ($0.75 ' $35 = 0.0214, or 2.14%). Dividend yield increases as the price per share drops and drops as the share price increases. But it does not tell you what you're earning based on your original investment or the income you can expect to earn in the future. However, some investors seeking current income or following a particular investment strategy look for high-yielding stocks.

Dogs of the Dow

If you follow a Dogs of the Dow investment strategy, you buy the ten highest-yielding stocks in the Dow Jones Industrial Average (DJIA) on the first of the year and hold them for a year. According to this theory, the dogs will, over the year, produce a total return, or combination of dividends plus price appreciation, that's higher than the return on the DJIA as a whole. The increasing price is the result of demand for the high-yielding stock. On the anniversary of your purchase, the stocks are no longer dogs because their higher prices reduce their current yield even if the dividend remains the same. So you sell them and buy the next batch of dogs.

Dollar cost averaging

Dollar cost averaging means adding a fixed amount of money on a regular schedule to an investment account, such as a mutual fund, retirement account, or a dividend reinvestment plan (DRIP). Since the share price of the investment fluctuates, you buy fewer shares when the share price is higher and more shares when the price is lower. The advantage of this type of formula investing, which is sometimes called a constant dollar plan, is that, over time, the average price you pay per share is lower than the actual average price per share. But to get the most from this approach, you have to invest regularly, including during prolonged downturns when the prices of the investment drop. Otherwise you are buying only at the higher prices. Despite its advantages, dollar cost averaging does not guarantee a profit and doesn't protect you from losses in a falling market.


Your domicile is your permanent residence, which you demonstrate by using it as your primary home, holding a driver's license using that address, and registering to vote in that district. Your domicile affects your state and local income taxes, state estate and inheritance taxes, and certain other tax benefits or liabilities.

Domini Social Index 400

The Domini Social Index 400 is a market capitalization weighted index that tracks the performance of companies that meet a wide range of social and environmental standards. For instance, the index screens out companies that manufacture or promote alcohol, tobacco, gambling, weapons, and nuclear power. It includes others that have outstanding records of social responsibility. About half the stocks included in the Standard & Poor's 500 Index (S&P 500), on which the Domini Index is modeled, make the cut, including giants like Microsoft and Coca-Cola. The other stocks are selected based on the industries they represent and their reputations for socially conscious business practices. The index is considered a benchmark for measuring the effect that selecting socially responsible stocks has on a financial portfolio's performance. This practice is also called social screening.

Double bottom

Double bottom is a term that technical analysts use to describe a stock price pattern that, when depicted on a chart, shows two drops to the same dollar amount separated by a rebound. For example, if a stock that had been trading at about $28 a share dropped to $18, rebounded to trade at about $22 for several weeks, and then dropped to $18 again, analysts would identify $18 as a double bottom. An analyst observing this pattern might conclude that investors were comfortable paying $18 for the stock, and that the price might not drop below that level in the near term. In technical terms, the analyst would say that there is support for the price at $18. However, there's no guarantee that it might not drop further and hit a new low.

Double top

Double top is a term that technical analysts use to describe a stock price pattern that, when depicted on a chart, shows two gains to the same dollar level separated by a price drop. For example, if a stock that had been trading at about $28 a share rose to $35, dropped back to trade at about $28 for several weeks, and then rose to $35 again, analysts would identify $35 as a double top. An analyst observing this pattern might conclude that investors were comfortable paying $35 for the stock, and that the price might not rise above that level in the near term. In technical terms, the analyst would say that there was resistance above that price. However, there's no way to predict whether the price would in fact remain at $35 or gain value and hit a new high.

Dow Jones 65 Composite Average

This composite of three Dow Jones averages tracks the stock performance of 65 companies in two major market sectors and the benchmark DJIA. Those averages are the Dow Jones Industrial Average (DJIA), the Dow Jones Transportation Average, and the Dow Jones Utility Average.

Dow Jones Industrial Average (DJIA)

The Dow Jones Industrial Average (DJIA), sometimes referred to as the Dow, is the best-known and most widely followed market indicator in the world. It tracks the performance of 30 blue chip US stocks. Though it is called an average, it actually functions more like an index. The DJIA is quoted in points, not dollars. It's computed by totaling the weighted prices of the 30 stocks and dividing by a number that is regularly adjusted for stock splits, spin-offs, and other changes in the stocks being tracked. The companies that make up the DJIA are changed from time to time at the discretion of the editors of The Wall Street Journal.

Dow Jones Transportation Average

The Dow Jones Transportation Average tracks the performance of the stocks of 20 airlines, railroads, and trucking companies. It is one of the components of the Dow Jones 65 Composite Average.

Dow Jones Utility Average

The Dow Jones Utility Average tracks the performance of the stocks of 15 gas, electric, and power companies, and is one of the components of the Dow Jones 65 Composite Average.

Dow Jones Wilshire 5000 Index

The Dow Jones Wilshire 5000, a market capitalization weighted index, is the broadest US stock market index. It tracks all the stocks traded on the New York Stock Exchange (NYSE), the NYSE Amex, the Nasdaq Stock Market (Nasdaq), and other US based stocks for which data is readily available. The difference between the index's name (the 5000) and the number of stocks the index tracks at any one time occurs because the number of stocks being traded changes all the time.

Dow theory

Dow theory maintains that major market trends depend on how the Dow Jones Industrial Average (DJIA) and the Dow Jones Transportation Average behave. They must move simultaneously in the same direction until they both hit a new high or a new low in order for a trend to continue. Some experts discount the relevance of this approach as a useful guideline, arguing that waiting to invest until a trend is confirmed can mean losing out on potential growth.


When a security sells at a lower price than its previous sale price, the drop in value is called a downtick. For example, if a stock that had been trading at 25 sells at 24.99 the next time it trades, the 1 cent drop is a downtick.

Durable power of attorney

You can grant a durable power of attorney to an agent of your choice, giving that person -- called the attorney-in-fact -- the right to make legal decisions for you if you aren't able to do so. Your attorney-in-fact also has the right to buy and sell property on your behalf and to handle your financial affairs. You retain the right to revoke the power or name a new agent at any time. An agent with durable power of attorney continues to have the power to act on your behalf if you become incompetent. However, not all states allow durable powers.


In simplified terms, a bond's duration measures the effect that each 1% change in interest rates will have on the bond's market value. Unlike the maturity date, which tells you when the issuer has promised to repay your principal, duration, which takes the bond's interest payments into account, helps you to evaluate how volatile the bond's price will be over time. Basically, the longer the duration -- expressed in years -- the more volatile the price. So a 1% change in interest rates will have less effect on the price of a bond with a duration of 2 than it will on the price of a bond with a duration of 5.

Dutch auction

A Dutch auction opens at the highest price and drops gradually until there's a buyer willing to pay the amount being asked. The transaction is completed at that price. The only securities auctions in US markets that are conducted as Dutch auctions are the competitive bids for US Treasury bills, notes, and bonds. In contrast, a conventional commercial auction begins with the lowest price, which gradually increases as potential buyers bid against each other. The selling price is determined when no bidder will top the last offer on the table. A double-action auction -- the system in place on US stock exchanges -- features many buyers and sellers bidding against each other to close a sale at a mutually agreed-upon price.

EAFE Index

The Morgan Stanley Capital International (MSCI) EAFE Index tracks the performance of the world's major stock markets outside the United States -- specifically in Europe, Australasia, and the Far East. The EAFE Index is an important benchmark, comparable to the Standard & Poor's 500 Index (S&P 500) for US large-company stocks. Managers of international stock portfolios use the EAFE to monitor the ups and downs of developed markets and evaluate their own investment performance in relation to that standard. Investors can purchase index mutual funds, exchange traded funds (ETFs), options contracts, and financial futures contracts linked to the EAFE to gain exposure to worldwide equities markets. The strong performance of the EAFE Index between 1982 and 1996 is often credited with generating increased US interest in investing overseas.

Early withdrawal

If you withdraw assets from a fixed-term investment, such as a certificate of deposit (CD), before it matures, it is considered an early withdrawal. Similarly, if you withdraw from a tax-deferred or tax-free retirement savings plan before you turn 59 1/2, in most cases, it's considered early. If you withdraw early, you usually have to pay a penalty imposed by the issuer (in the case of a CD) or the government (if it's an IRA or other tax-deferred or tax-free savings plan). However, you may be able to use the money in your account without penalty under certain circumstances. For example, if you withdraw IRA assets to pay for higher education, to buy a first home, or for other qualified reasons, the penalty is waived. But taxes will still be due on the tax-deferred portion of the withdrawal.

Earned income

Earned income is pay you receive for work you perform, and includes salaries, wages, tips, and professional fees. Your earned income is included in your gross income, along with unearned income from interest, dividends, and capital gains. If you have earned income, you're eligible to contribute to an individual retirement account (IRA).

Earned income credit (EIC)

The earned income tax credit (EIC) reduces the income tax that certain low-income taxpayers would otherwise owe. It's a refundable credit, so if the tax that's due is less than the amount of the credit, the difference is paid to the taxpayer as a refund. To qualify for the EIC, a taxpayer must work, earn less than the government's ceiling for his or her filing status and family situation, meet a set of specific conditions, and file the required IRS schedules and forms.


Corporate earnings are a company's profits after expenses have been paid. Earnings history is one of the key indicators that fundamental analysts use to evaluate a company. However, there are several ways to report earnings. The broadest is reported earnings, which is defined by generally accepted accounting principles (GAAP). Others include pro forma earnings, EBITDA, free cash flow, and core earnings. Each method produces different results because of the data that is included in the calculation. The variations make it difficult to make meaningful comparisons among the earnings of different companies. Your earnings, on the other hand, include salary and other compensation for work you do, as well as income from assets you own, such as interest, dividends, and capital gains.

Earnings estimate

Professional stock analysts use mathematical models that weigh companies' financial data to predict their future earnings per share on a quarterly, annual, and long-term basis. Investment research companies, such as Thomson Financial and Zacks, publish averages of analysts' estimates for specific companies. These averages are called consensus estimates.

Earnings momentum

When a company's earnings per share grow from year to year at an ever-increasing rate, that pattern is described as earnings momentum. One example might be a company whose earnings grow one year at 10%, the next year at 18%, and a third year at 25%. In many cases, this momentum triggers an increase in the stock's share price as well, because investors identify the stock as one they expect to continue to grow and increase in value.

Earnings per share (EPS)

Earnings per share (EPS) is calculated by dividing a company's total earnings by the number of outstanding shares. For example, if a company earns $100 million in a year and has 50 million outstanding shares, the earnings per share are $2. Earnings per share can also be calculated on a fully diluted basis, by adding outstanding stock options, rights, and warrants to the outstanding shares. The results report what EPS would be if all of those options, rights, and warrants were exercised and the company had to issue more shares to meet its obligations. Earnings and other financial measures are provided on a per share basis to make it easier for you to analyze the information and compare the results to those of other investments.

Earnings surprise

When a company's earnings report either exceeds or fails to meet analysts' estimates, it's called an earnings surprise. An upside surprise occurs when a company reports higher earnings than analysts predicted and usually triggers an increase in the stock price. A negative surprise, on the other hand, occurs when a company fails to meet expectations and often causes the stock's price to fall. Companies try hard to avoid negative surprises since even a small deviation can create a big stir.


Earnings before interest, taxes, depreciation, and amortization are commonly shortened to EBITDA. EBITDA reports a company's profits before these expenses are subtracted. EBITDA is used to compare the profitability of a company with other companies of the same size in the same industry but which may have different levels of debt or different tax situations.

Economic cycle

An economic cycle is a period during which a country's economy moves from strength to weakness and back to strength. This pattern repeats itself regularly, though not on a fixed schedule. The length of the cycle isn't predictable either and may be measured in months or in years. The cycle is driven by many forces -- including inflation, the money supply, domestic and international politics, and natural events. In developed countries, the central bank uses its power to influence interest rates and the money supply to prevent dramatic peaks and deep troughs, smoothing the cycle's highs and lows. This up and down pattern influences all aspects of economic life, including the financial markets. Certain investments or categories of investment that thrive in one phase of the cycle may lose value in another. As a result, in evaluating an investment, you may want to look at how it has fared through a full economic cycle.

Economic indicator

Economic indicators are statistical measurements of current business conditions. Changes in leading indicators, including those that track factory orders, stock prices, the money supply, and consumer confidence, forecast short-term economic strength or weakness. In contrast, lagging indicators, such as business spending, bank interest rates, and unemployment figures, move up or down in the wake of changes in the economy. The Conference Board, a nonprofit business research firm, releases its weighted indexes of leading, lagging, and coincident indicators every month. Though the individual components are also reported separately throughout the month, the indicators provide a snapshot of the economy's overall health.

Education savings account (ESA)

You can put up to $2,000 a year into a Coverdell education savings account (ESA) that you establish in the name of a minor child. The assets in the account can be invested any way you choose. There is no limit to the number of accounts you can set up for different beneficiaries, but no more than a total of $2,000 can be contributed in a single beneficiary's name in any one year. If you choose, you may switch the beneficiary of an ESA to another member of the same extended family. Your contribution is not tax deductible. But any earnings that accumulate in the account can be withdrawn tax free if they're used to pay qualified educational expenses for the beneficiary until he or she reaches age 30. The costs can be incurred at any level, from elementary school through a graduate degree, or at a qualified post-secondary technical or vocational school. There are no restrictions on using ESA money in the same year the student uses other tax-free savings, or the student, parent, or guardian uses tax credits for educational expenses. But you can't take a credit for expenses you covered with tax-free withdrawals. To qualify to make a full $2,000 contribution to an ESA, your modified adjusted gross income (MAGI) must be $95,000 or less, and your right to make any contribution at all is phased out if your MAGI is $110,000 if you're a single taxpayer. The comparable range if you're married and file a joint return is $190,000, phased out at $220,000.

Effective tax rate

Your effective tax rate is the rate you actually pay on all of your taxable income. You find your annual effective rate by dividing the tax you paid in the year by your taxable income for the year. Your effective rate will always be lower than your marginal tax rate, which is the rate you pay on the income that falls into the highest tax bracket you reach. For example, if you file your federal tax return as a single taxpayer, had taxable income of $75,000, and paid $15,332 in federal income taxes, your federal marginal tax rate would be 28% but your effective rate would be 20.4%. That lower rate reflects the fact that you paid tax on portions of your income at the 10%, 15%, and 25% rates, as well as the final portion at 28%.

Efficient market

When the information that investors need to make buy, sell, or hold decisions is widely available, thoroughly analyzed, and regularly used, they are trading in an efficient market. This is the case with securities traded on the major US stock markets. The assumption is that the price of a security is a clear indication of its value at the time it is traded. Conversely, an inefficient market is one in which there is limited information available for making rational investment decisions and limited trading volume.

Efficient market theory

Proponents of the efficient market theory believe that a stock's current price accurately reflects what investors know about the stock. They also maintain that you can't predict a stock's future price based on its past performance. Their conclusion, which is contested by other experts, is that it's not possible for an individual or institutional investor to outperform the market as a whole. Index funds, which are designed to match, rather than beat, the performance of a particular market segment, are in part an outgrowth of efficient market theory.


Economic Growth And Tax Relief Reconciliation Act of 2001 made some important changes to retirement plans.


An Employer Identification Number (EIN), also known as a Federal Tax ID, is a nine-digit number issued by the Internal Revenue Service for banking, tax filing, and other business purposes.

Electronic communications network (ECN)

An ECN is an alternative securities trading system that collects, displays, and executes orders electronically without a middleman, such as a specialist or market maker. Trading on an ECN allows institutional and individual investors to buy and sell anonymously. Further, ECNs facilitate extended, or after-hours, trading. ECN trade execution can be faster and less expensive than trades handled through screen-based or traditional markets, though the volume is sometimes thin. However, some ECNs have been approved for official stock exchange status, expanding the number of stocks that can be traded on their systems.

Electronic Data Gathering, Analysis, and Retrieval System (EDGAR)

EDGAR is an electronic database that contains all the corporate financial reports filed with the Securities and Exchange Commission (SEC). Any company with more than $10 million in assets and over 500 shareholders, or that is listed on a major exchange in the United States or quoted on the Over the Counter Bulletin Board (OTCBB) is required to file prospectuses, an annual 10-K -- or audited financial report -- three unaudited 10-Qs, notices of insider trades, tender offers, and other detailed company information. Smaller companies may file voluntarily. You can access all EDGAR filings free of charge on the SEC website (

Electronic funds transfer (EFT)

Electronic funds transfer (EFT) allows financial institutions to exchange billions of dollars every day without physically moving paper money. The system covers all electronic credit and debit transactions, direct deposits, ATM transactions, online bill payments, and wire transfers. According to the US Department of the Treasury, it costs the federal government only nine cents to issue an EFT payment but 86 cents to make a traditional check payment.

Eligible Employee

Any employee who is eligible to participate in and receive benefits from a plan.

Emergency fund

An emergency fund is designed to provide financial back-up for unexpected expenses or for a period when you aren't working and need income. To create an emergency fund, you generally accumulate three to six months' worth of living expenses in a secure, liquid account so that the money is available if you need it. It's a good idea to keep your emergency fund separate from other savings or investment accounts and replenish it if you withdraw. But you don't have to limit yourself to low-interest savings accounts, and might consider other liquid accounts, such as money market funds, that may pay higher interest. If you're single or have sole responsibility for one or more dependents, you may want to consider an even bigger emergency fund, perhaps large enough to cover a year's worth of ordinary expenses.

Emerging market

Countries in the process of building market-based economies are broadly referred to as emerging or developing markets. However, there are major differences among the countries included in this category. Some emerging-market countries, including Russia, have only recently relaxed restrictions on a free-market economy. Others, including Indonesia, have opened their markets more widely to overseas investors, and still others, including Mexico, are expanding industrial production. Their combined stock market capitalization is less than 3% of the worldwide total.

Emerging markets fund

Emerging markets mutual funds invest primarily in the securities of countries in the process of building a market-based economy. Some funds specialize in the markets of a certain region, such as Latin America or Southeast Asia. Others invest in a global cross-section of countries and regions.

Employee Retirement Income Security Act (ERISA)

This comprehensive law, best known by the acronym ERISA, governs qualified retirement plans, including most private-company defined benefit and defined contribution plans, and protects the rights of the employees who participate in the plans. ERISA also established individual retirement arrangements (IRAs), made it easier for self-employed people to set up retirement plans, and made employee stock ownership plans part of the tax code. Among ERISA requirements are that plan participants receive a detailed document that explains how their plan operates, what employee rights are -- including qualifying to participate and uniform vesting schedules -- and what the grievance and appeals process is. In addition, ERISA assigns fiduciary responsibility to those who sponsor, manage, and control plan assets. This means they must act in the best interests of the plan participants. ERISA rules do not apply to plans provided by federal, state, or local governments, church plans, or certain other plans. ERISA has been amended several times since it was passed in 1974, making some provisions more flexible and others more restrictive. Among the changes were the Consolidated Omnibus Budget Reconciliation Act (COBRA), which provides continuing access to coverage, for a fee, when an employee leaves an employer who offers health insurance, and the Health Insurance Portability and Accountability Act (HIPAA), which protects access to health insurance coverage for employees and their families with pre-existing medical conditions when the employee leaves a job that provided coverage and moves to a new job where coverage is also offered.

Employee stock ownership plan (ESOP)

An ESOP is a trust to which a company contributes shares of newly issued stock, shares the company has held in reserve, or the cash to buy shares on the open market. The shares go into individual accounts set up for employees who meet the plan's eligibility requirements. An ESOP may be part of a 401(k) plan or separate from it. If it's linked, an employer's matching contribution may be shares added to the ESOP account rather than cash added to an investment account. If you're part of an ESOP and you leave your job, you have the right to sell your shares on the open market if your employer is a public company. If it's a privately held company, you have the right to sell them back at fair market value. The vast majority of ESOPs are offered by privately held companies.

Employer-sponsored retirement plan

Employers may offer their employees either defined benefit or defined contribution retirement plans, or they may make both types of plans available. Any employer may offer a defined benefit plan, but certain types of defined contribution plans are available only through specific categories of employers. For example, 403(b) plans may be offered only by tax-exempt, nonprofit employers, and 457 plans only by state and municipal governments. SIMPLE plans, on the other hand, can only be offered by employers with fewer than 100 workers. Corporate employers who contribute to a retirement plan can take a tax deduction for the amount of their contribution and may enjoy other tax benefits. However, the plan must meet certain Internal Revenue Service (IRS) guidelines. Offering a retirement plan may also make the employer more attractive to potential employees. However, employers are not required to offer plans. If they do, they can make the plan as generous or as limited as they choose as long as the plan meets the government's nondiscrimination guidelines.

Enhanced index fund

An enhanced index fund chooses selectively among the stocks in a particular index in order to produce a higher return than the index. The goal is to narrowly beat the index from a fraction of a percent to two percentage points, but not more. A wider spread would classify the enhanced fund as an actively managed mutual fund rather than an index fund. Enhanced index fund managers may achieve higher returns by identifying the undervalued stocks in the index. Or they might adjust holdings to include a larger proportion of securities in higher performing sectors, or use other investment strategies, such as buying derivatives. While enhanced index funds may expose you to the risk of greater losses than their plain-vanilla counterparts, they may also offer an opportunity for higher returns.


The process by which an eligible employee becomes a participant in the plan.

Enterprise value

A company's enterprise value may describe either its acquisition cost or its worth as a functioning entity. You calculate enterprise value by adding a company's total long- and short-term debt to its market capitalization and subtracting its liquid assets, including cash, cash equivalents, and investments. In some formulas, preferred stock and minority interest in the company are included as debt while current account receivables and inventory are included as cash. From an investor's perspective, considering enterprise value as well as market cap and the customary ratios, such as price/earnings (P/E) and earnings per share, can provide greater insight into the company's potential long-term worth. From a buyer's perspective, the more debt and the less cash a company has, the more expensive owning it will be since the debts must be paid off and there's little cash to offset interest on the debt. This reduces the price the acquirer is willing to pay.


In technical analysis, envelopes, or trading bands, help to define the upper and lower limits of a security's trading range. Envelopes are created with two bands, between which 90% of a security's price range should occur. In a ranging market, when prices tend to move sideways, prices tend to move between the two bands. In a trending market, prices tend to stay within the upper half of the range in an upward trending market and in the lower half of the range in a downward trending market. Some technical analysts believe sell signals are generated when a security's price reaches the upper band and buy signals occur when a security's price nears the lower band.

Equal Credit Opportunity Act (ECOA)

The Equal Credit Opportunity Act (ECOA) is designed to ensure that all qualified people have access to credit. It forbids lenders from rejecting credit applicants on the basis of race, gender, marital status, age, or national origin and requires lenders to consider public assistance in the same light as other forms of income. The act says that creditors must approve or reject your application within 30 days if you've filed a complete application, and, if you ask within 60 days, must provide an explanation for turning you down. The ECOA requires creditors to provide specific reasons for rejecting you and forbids indefinite or vague explanations. If you feel you're being discriminated against and the lender does not respond to your complaints, you can contact the attorney general of your state or the government agency that oversees the creditor. By law, the creditor must provide that information. If you can't get the information from the creditor, you can contact the Federal Trade Commission at


In the broadest sense, equity gives you ownership. If you own stock, you have equity in, or own a portion -- however small -- of the company that issued the stock. Having equity is the opposite of owning a bond or commercial paper, which is a debt the company must repay to you. Equity also refers to the difference between an asset's current market value -- the amount it could be sold for -- and any debt or claim against it. For example, if you own a home currently valued at $300,000 but still owe $200,000 on your mortgage, your equity in the home is $100,000. The same is true if you own stock in a margin account. The stock may be worth $50,000 in the marketplace, but if you have a loan balance of $20,000 in your margin account because you financed the purchase, your equity in the stock is $30,000.

Equity fund

Equity funds invest primarily in stock. The stock a fund buys -- whether in small, up-and-coming companies or large, well-established firms -- depends on the fund's investment objectives and management style. The general approach may be implied by the fund's name or the category in which it places itself, such as large-cap growth or small-cap value. However, a fund's manager may have the flexibility to invest more broadly to meet the fund's objectives.

Equivalent taxable yield

While taxable bonds normally pay higher interest rates than tax-exempt bonds, they sometimes provide a lower overall yield. Finding the equivalent taxable yield lets you determine the minimum interest rate a taxable bond must pay to equal the yield of a comparable tax-exempt bond. The formula for the equivalent taxable yield is tax-exempt interest rate divided by 100 minus your marginal tax rate. So, for example, if a municipal bond pays an annual interest rate of 4%, and your marginal tax rate is 35%, the equivalent taxable yield would be 4 ' (100 - 35) = 0.0615 or 6.2%. That means that in order to be as attractive an investment as the 4% municipal bond, a taxable bond would need to pay an annual interest rate of 6.2% or more.

ERISA 3(38) Advisor

An advisor that is delegated by an employer to serve as the 401(k) plans "investment manager" to select, monitor and replace investments for the company's retirement plan. An ERISA 3(38) Advisor takes on this fiduciary duty and is legally responsible to manage the investment roster and/or model portfolios in line with the best interest of the plan participants, typically as defined in an established Investment Policy.


Your estate includes everything you own in your own name and your share of anything you own with other people. Following your death, your assets, which may include cash, investments, retirement accounts, business interests, real estate, precious objects and antiques, and personal effects, are valued to determine your gross estate. Then outstanding debts, which may include income taxes, loans, or other obligations, are paid, and tax-exempt bequests plus any costs of settling the estate are subtracted to find the taxable estate. If the value of your taxable estate is larger than the exempt amount established by the uniform tax credit for the year of valuation, federal estate taxes are due. Depending on the state where you live and the size of your taxable estate, state taxes may be due as well.

Estate tax

An estate owes estate tax if its taxable value is larger than the exempt amount, which determines how much you are permitted to leave to your heirs tax free. This amount is determined at the federal level by the uniform tax credit set by Congress and at the state level by each legislature. In 2011 and 2012, each person can leave an estate worth up to $5 million free of federal tax. The top federal estate tax rate on estate values over that amount is 35%. Unless these provisions are extended or a new law is adopted before 2013, the estate tax will be reinstated at 2001 levels on January 1, 2013. If your estate may be vulnerable to this tax, you may want to reduce the estate's value. You may do this using a number of tax planning strategies, including making nontaxable gifts and creating irrevocable trusts. If you're married to a US citizen and leave your entire estate to your spouse, there are no federal estate taxes due, no matter how much the estate is worth. However, estate taxes may be due when your surviving spouse dies if the value of the estate exceeds the exempt amount.


The euro is the common currency of the European Monetary Union (EMU). The national currencies of the participating countries were replaced with euro coins and bills on January 1, 2002.


A eurobond is an international bond sold outside the country in whose currency it is denominated, or issued. For example, a Korean automobile company might sell eurobonds issued in US dollars to investors living in European countries. Multinational companies and national governments, including governments of developing countries, use eurobonds to raise capital in international markets.


Eurocurrency is any major currency that is deposited by a national government or corporation based outside the country where the bank receiving the funds is located. For example, Japanese yen deposited in a British bank by a Japanese car manufacturer is considered eurocurrency. Eurocurrency is used in international trade and to make international loans.


Eurodollars are US currency deposited in banks outside the United States but not always in Europe. Certain debt securities are issued in eurodollars and pay interest in US dollars into non-US bank accounts. Eurodollars are a form of eurocurrency.

European Central Bank (ECB)

The European Central Bank is the central bank of the European Monetary Union (EMU), whose member countries use the euro as their currency. The ECB, which is based in Frankfurt, Germany, issues currency, sets interest rates, and oversees other aspects of monetary policy for the EMU. The EMU's National Central Banks (such as the Banque de France and the Deutsche Bundesbank), together with the ECB, form the European System of Central Banks. They play an important role in implementing monetary policy, conducting foreign exchange operations, and maintaining the foreign reserves of member states.

Excess contribution

An excess contribution occurs when you put more money into your individual retirement account (IRA) than the law allows. You can withdraw the excess amount plus earnings by the date your tax return is due for the year, including extensions. You'll owe tax on the excess in the year you deposited it in your account but no penalty. Earnings are taxed in the year you receive them. If you leave the excess in the IRA, you'll owe a 6% excise tax on that amount every year it remains in the account. If you miss the deadline for taking the money out without penalty, one solution may be to contribute less the following year so that your combined contributions are less than the total for the two years. The term excess contributions may also be used to describe after-tax contributions that employees may legally make to their employer-sponsored retirement plans. This situation may arise if your yearly contribution to the plan, based on the percentage of salary your employer permits, is less than the annual federal limit. Finally, plan sponsors may owe a 10% tax penalty if their plans do not distribute or correct excess contributions within two and a half months after the end of the plan year.

Excess deferral

An excess deferral is a contribution that exceeds the tax-deductible amount you can add to an employer sponsored retirement plan in a particular year. Your plan may allow excess deferrals to be distributed to you. If so, you must make the request by April 15 of the following year. If the amount and any earnings are returned to you by that date, the excess is taxed in the year it went into the plan and the earnings are taxed in the year they are distributed. There's no 10% tax penalty for early withdrawal. For example, if you contribute too much in 2009, you must request distribution by April 15, 2010. If the distribution is made by April 15, 2010 you report the excess as income for 2009 and the earnings as income for 2010. If the distribution is not made before the deadline, the excess is taxed in the year it was made and also when it is distributed.

Exchange rate

The exchange rate is the price at which the currency of one country can be converted to the currency of another. Although some exchange rates are fixed by agreement, most fluctuate or float from day to day. Daily exchange rates are listed in the financial sections of newspapers and can also be found on financial websites.

Exchange traded fund (ETF)

Exchange traded funds (ETFs) resemble open-ended mutual funds but are listed on a stock exchange and trade like stock through a brokerage account. You buy shares of the fund, which in turn owns a portfolio of stocks, bonds, commodities, or other investment products. You can use traditional stock trading techniques, such as buying long, selling short, and using stop orders, limit orders, and margin purchases. The ETF doesn't redeem shares you wish to sell, as a mutual fund does. Rather, you sell in the secondary market at a price set by supply and demand. ETF prices change throughout the trading day rather than being set at the end of the trading day, as open-end mutual fund prices are. Each ETF has a net asset value (NAV), which is determined by the total market capitalization of the securities or other products in the portfolio, plus dividends but minus expenses, divided by the number of shares issued by the fund. The market price and the NAV are rarely the same, but the differences are typically small for the most widely traded conventional ETFs. That's due to a unique process that allows institutional investors to buy or redeem large blocks of shares at the NAV with in-kind baskets of the fund's securities or other products. Most ETFs are linked to a market index, which determines the fund's portfolio. While the majority of the indexes are traditional, some are described as fundamental. In those indexes, components of the index are identified on the basis of selective criteria, such as their performance, rather than their market capitalization.

Exchange traded notes

Exchange traded notes (ETNs) are debt securities issued by a financial institution, listed on a stock exchange, and traded in the secondary market. Unlike regular bonds, there are no periodic interest payments, and your principal isn't protected. So you could lose some of or all the amount you invest. You can sell your ETN in the secondary market at its current price or hold it until maturity, though that may be 30 years in the future. The price in the secondary market is determined by supply and demand, the current performance of the market index to which the ETN is linked, and the credit rating of the ETN issuer. At maturity, the issuer pays a return tied to the performance of the market index, minus the issuer's annual fee.


You must own a security by the record date the company sets to be entitled to the dividend it will pay on the payable date. The period between those dates -- anywhere from a week to a month or more -- during which new investors in the security are not entitled to that dividend is called the ex-dividend period. On the day the ex-dividend period begins, which is the first trade date that will settle after the record date, the stock is said to go ex-dividend. Generally, the price of a stock rises in relation to the amount of the anticipated dividend as the ex-dividend date approaches. It drops back on the first day of the ex-dividend period to reflect the amount that is being paid out as dividend.


When you die, your executor administers your estate and follows the directions provided in your will. Among the executor's duties are collecting and valuing your assets, paying taxes and debts out of those assets, and distributing the remaining assets to your heirs. You may want to appoint a family member or close friend as executor. Or you may choose a professional, such as a lawyer or bank trust officer. What some people do is name a professional and a friend or family member to work together, especially if the estate is large or there are potential complications. Executors are entitled to be paid for their work, which ends when your estate is settled, usually anywhere from one to three years after your death. Professional executors always charge, while friends and family may or may not.


An exemption is a fixed dollar amount that you can subtract from your adjusted gross income to reduce your taxable income. The per-person exemption amount is set by Congress each year, and typically increases from year to year. You may take an exemption for each eligible dependent, for whom you must provide a Social Security number.

Expense ratio

An expense ratio is the percentage of a mutual fund's or variable annuity's total assets deducted to cover operating and management expenses. Those expenses include employee salaries, custodial and transfer fees, distribution, marketing, and other costs of offering the fund or contract. However, they don't cover trading costs or commissions. For example, if you own shares in a fund with a 1.25% expense ratio, your annual share is $1.25 for every $100 in your account, or $12.50 on an account valued at $1,000. Expense ratios vary from one fund company to another and among different types of funds. Typically, international equity funds have among the highest expense ratios, and index funds among the lowest. Similar differences in expense ratios are characteristic of different variable annuity investment accounts.

Face value

Face value, or par value, is the dollar value of a bond or note, generally $1,000. That is the amount the issuer has borrowed, usually the amount you pay to buy the bond at the time it is issued, and the amount you are repaid at maturity, provided the issuer doesn't default. However, bonds may trade at a discount, which is less than face value, or at a premium, which is more than face value, in the secondary market. That's the bond's market value, and it changes regularly, based on supply and demand. The face value of a life insurance policy is the amount the beneficiary receives when the insured person dies. It's also known as the policy's death benefit.

FACT Act (Fair and Accurate Credit Transactions Act)

Designed to help consumers check their credit reports for accuracy and detect identity theft early, the FACT Act gives every consumer the right to request a free report from each of the three major credit bureaus -- Equifax, Experian, and TransUnion -- once a year. To obtain your free reports, you must request them through the Annual Credit Report Request Service ( or 877-322-8228). If you request your credit report directly from one of the three credit reporting agencies or through another service, you'll pay a fee. Most experts recommend staggering your requests for the free reports -- for instance, ordering one in January, the second in May, and the third in September -- so that you can keep an eye on your credit throughout the year. It's also a good idea to check your report at least two months before you anticipate applying for a major loan or a job, so you can notify the credit bureau if you find any inaccuracies. You're also entitled to a free report directly from the credit reporting bureaus if you've recently been denied credit, have been turned down for a job, are on public assistance, or have reason to suspect that you're a victim of credit fraud or identity theft.

Fail to deliver

A fail to deliver occurs when a broker-dealer representing a seller does not meet its obligation to provide the securities being sold on or before the transaction's settlement date. That deadline is T+3, or three days after the trade date for stocks and corporate or municipal bonds. In most cases settlement is handled by The Depository Trust Company (DTC), a subsidiary of the Depository Trust & Clearing Corporation (DTCC). Delivery must be made to the appropriate account at DTC. The deliveries are usually electronic but may involve a paper certificate that the seller has held in his or her own name. Securities and Exchange Commission (SEC) Rule 204 requires that all fails to deliver must be resolved by the morning of the day following T+3, with only a few exceptions. The SEC and the self-regulatory bodies of the exchange where the transaction took place can force a resolution for those exceptions. The trade does not settle until delivery is made, but the buyer's broker-dealer may buy-in, or purchase, the security from another firm or on the open market and charge the selling firm if the price is higher than the price at which the trade was cleared.

Fair market value

Fair market value is the price you would have to pay to buy a particular asset or service on the open market. The concept of fair market value assumes that both buyer and seller are reasonably well informed of market conditions. It also assumes that neither is under undue pressure to buy or sell, and that neither intends to defraud the other.

Fallen angel

Corporate or municipal bonds that were investment-grade when they were issued but have been downgraded are called fallen angels. Bonds are downgraded by a rating service, such as Moody's Investors Service, Fitch Ratings, or Standard & Poor's (S&P). Downgrading may occur if the issuer's financial situation weakens, or if the rating service anticipates financial problems that could lead to default. The term fallen angel is sometimes used more generically, to refer to stocks or other securities that are out of favor with investors.

Family of funds

Many large mutual fund companies offer a variety of stock, bond, and money market funds with different investment strategies and objectives. Together, these funds make up a family of funds. If you own one fund in a family, you can usually transfer assets to another fund in the same family without sales charges. The transaction is known as an exchange. But unless the funds are in a tax-deferred or tax-free retirement or education savings plan, you'll owe capital gains taxes on increases in value of the fund you're selling. Investing in a family of funds can make diversification and asset allocation easier, provided there are funds within the family that meet your investment criteria. Investing in a family of funds can also simplify recordkeeping in the sense that you receive just one account statement.

Fannie Mae

Fannie Mae has a dual role in the US mortgage market. Specifically, the corporation buys mortgages that meet its standards from mortgage lenders around the country. It then packages those loans as debt securities, which it offers for sale, providing the investment marketplace with interest-paying bonds. The money Fannie Mae raises by selling these bonds pays for purchasing more mortgages. Lenders use the money they realize from selling mortgages to Fannie Mae to make additional loans, making it possible for more potential homeowners to borrow at affordable rates. Because lenders want to ensure their mortgage loans are eligible for purchase, most adopt Fannie Mae guidelines in evaluating mortgage applicants. Fannie Mae is described as a quasi-government agency because of its special relationship with the federal government. It's also a shareholder-owned corporation whose shares trade on the New York Stock Exchange (NYSE). However, in September 2008, the Federal Housing Finance Agency placed Fannie Mae in conservatorship to stabilize its operations and reduce risk of collapse. As a result, equity investments in the GSE lost much of their value.

Fast market

A fast market is one with heavy trading and rapidly changing prices in some but not necessarily all of the securities listed on an exchange or market. In this volatile environment, which might be triggered by events such as an initial public offering (IPO) that attracts an unusually high level of attention or an unexpectedly negative earnings report, the rush of business may substantially delay execution times. The probable result is that you end up paying much more or selling for much less than you anticipated if you gave a market or stop order. While choosing not to trade in a fast market is one way to reduce your risk, you might also protect yourself while seeking potential profit by giving your broker limit or stop-limit orders. That way, you have the possibility of buying or selling within a price range that's acceptable to you, but are less exposed to the frenzy of the marketplace. The term fast market is also used to describe a marketplace -- typically an electronic one -- where trades are executed rapidly.

Federal Deposit Insurance Corporation (FDIC)

The Federal Deposit Insurance Corporation (FDIC) insures deposits in banks and thrift institutions, assuring bank customers that their savings and checking accounts are safe. Through December 2013, the coverage is up to $250,000 per depositor per bank for individual, joint, and trust accounts, and for individual retirement accounts (IRAs). Business accounts are also insured. You qualify for more than $250,000 coverage at a single bank, provided your assets are deposited in different types of accounts or are registered in different ways. For example, you are insured for up to $250,000 in accounts registered in your own name and for another $250,000 for your share of jointly held accounts. In addition, your individual retirement account (IRA) is insured up to $250,000 if the money is invested in bank products, such as certificates of deposit (CDs). So is a trust account you may establish at the bank. However, if you purchase mutual funds, annuities, or other investment products through your bank, those assets are not insured by the FDIC even if they carry the bank name. The FDIC, which is an independent agency of the federal government, also regulates more than 5,000 state chartered banks that are not members of the Federal Reserve System.

Federal funds

When a bank has more cash than it's required to hold in its reserve account, it can deposit the money in a Federal Reserve bank or lend it to another bank overnight. That money is called federal funds, and the interest rate at which the banks lend to each other is called the federal funds rate. The term also describes money the Federal Reserve uses to buy government securities when it wants to take money out of circulation. It might do this to tighten the money supply in the hope of forestalling an increase in inflation.

Federal Open Market Committee (FOMC)

The Open Market Committee (FOMC) of the Federal Reserve Board meets eight times a year to evaluate the threat of inflation or recession. Based on its findings, the 12-member FOMC determines whether to change the discount rate or alter the money supply to curb or stimulate economic growth. For example, the FOMC may raise the discount rate, which the Federal Reserve charges member banks to borrow, with the goal of tightening credit and limiting inflationary growth. It may lower rates to encourage borrowing and economic expansion. Or it may take no action. Changes in the discount rate result in virtually immediate changes in the short-term rates that banks charge consumers -- and each other -- to borrow. The Federal Reserve Bank of New York implements FOMC decisions to alter the money supply. It buys government securities to put more money into circulation and loosen credit or it sells securities to take money out of the market and tighten credit.

Federal Reserve Fedwire

Fedwire is an electronic transfer system owned and operated by the 12 Federal Reserve Banks that enables participants to move money from an account they maintain with the Federal Reserve to the account of another participant in real time during operating hours. The payments are final and irrevocable, either when the amount is credited to the recipient's account or when the payment order is sent to the participant, whichever occurs first. Fedwire, which operates on the Federal Reserve's national communications network (FEDNET), connects the Federal Reserve Banks, their branches, the US Department of the Treasury, banks that are members of the Federal Reserve and those that aren't, and branches or agencies of banks based abroad. The system is used both to handle internal banking business, such as shifting balances to reflect money transferred by check, and to facilitate commercial transactions between bank clients.

Federal Reserve System

The Federal Reserve System, sometimes known as the Fed, is the central bank of the United States. The Federal Reserve System, which was established in 1913 to stabilize the country's financial system, includes 12 regional Federal Reserve banks, 25 Federal Reserve branch banks, all national banks, and some state banks. Member banks must meet the Fed's financial standards. Under the direction of a chairman, a seven-member Federal Reserve Board oversees the system and determines national monetary policy. Its goal is to keep the economy healthy and its currency stable. The Fed's Open Market Committee (FOMC) sets the discount rate and establishes credit policies. The Federal Reserve Bank of New York puts those policies into action by buying and selling government securities.

Fibonacci arcs

In technical analysis, Fibonacci arcs are used to illustrate potential levels of support and resistance -- respectively the lowest and highest price data points on a price chart -- for a security's price. They are also used to establish price targets for that security. Arcs are plotted on a price chart so that the center of each arc falls on the last peak or trough of a trend line to show potential levels of resistance and support. A peak is the highest point and a trough is the lowest. The arcs intersect the original trend line at each of the Fibonacci levels -- 38%, 50%, and 62%. Arcs are usually plotted along with Fibonacci retracements, though they don't have to be.

Fibonacci numbers

Fibonacci numbers are a sequence of integers (1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144 ...), where the sum of each set of two consecutive numbers equals the next number in the sequence. In addition, the result of dividing any of the numbers in the sequence by the preceding integer equals approximately 1.618 (eg., 8 ' 5). And, if any number is divided by the following integer, the result is about 0.618 (eg., 8 ' 13). There are three important Fibonacci ratios that play significant roles in technical analysis. The first is 0.618, the second is 0.5, and the third is the ratio of a number divided by the number two places to the right, or about 0.382 (eg., 13 ' 55). These ratios are usually used as percentages: 61.8%, which may be rounded up to 62%, 50%, and 38.2%, which may be rounded down to 38%. The ratios 0.236, or 23.6%, the result of a number being divided by the number three places to the right (eg., 13 ' 55) and 100% are also used. The Fibonacci numbers form the foundation for a variety of indicators in the field of technical analysis. These include Fibonacci retracements, Fibonacci arcs, and Fibonacci time zones.

Fibonacci retracements

In technical analysis, a retracement occurs when a security's price is trending upward or downward and then retraces, or moves in the opposite direction before reverting to the original trend line. For example, if a stock's price moves from $5 to $10 and experiences a 50% retrenchment, its price would fall to $7.50 before resuming its rise in value. When the retracements are plotted on a price chart, the Fibonacci levels of 38% and 62% tend to act as levels of support and resistance, indicating respectively the lowest and highest price data point on the price chart.

FICO score

Created by the Fair Isaac Corporation, FICO is the best-known credit scoring system in the United States. Based on the information in your credit report, your FICO score is calculated using complex, proprietary formulas that weigh the amount of debt you carry relative to your available credit, the timeliness of your payments, the type of debt you carry, and a great many other factors to assign you a credit score between 300 and 850. The top 20% of credit profiles receive a score over 780 and the lowest 20% receive scores under 620. Lenders use your credit score to assess your credit risk, or the likelihood that you will default on a loan and offer the best -- or lowest -- interest rates to credit applicants with the highest scores. The Equal Credit Opportunity Act (ECOA) prohibits factors such as race, color, gender, religion, national origin, or marital status from being considered in any credit scoring system, including FICO.


A fiduciary is an individual or organization legally responsible for managing assets on behalf of someone else, usually called the beneficiary. The assets must be managed in the best interests of the beneficiary, not for the personal gain of the fiduciary. However, the concept of acting responsibly can be broadly interpreted, and may mean preserving principal to some fiduciaries and producing reasonable growth to others. Executors, trustees, guardians, and agents with powers of attorney are examples of individuals with fiduciary responsibility. Firms known as registered investment advisers (RIAs) are also fiduciaries.

Filing status

A filing status is one of five categories of taxpayer defined by the Internal Revenue Service (IRS). Filing status depends primarily on whether or not you are married, and it determines your standard deduction, whether you are eligible for certain credits and deductions, and based on your taxable income, the federal tax you owe. The five filing statuses are single, married, married filing separately, head of household, and qualifying widow(er) with dependent child. Your status is determined by your situation on December 31 of the tax year for which you file a return. You must use the status that most accurately describes you, though if you qualify for two or more you may select the one that would require you to pay the least tax. For example, if your spouse died last year and you have a dependent daughter, this year you could be considered single, head of household, or qualifying widow(er).

Fill-or-kill (FOK)

If an investor places a fill-or-kill (FOK) order, the broker must cancel, or kill, the order if it can't be filled immediately. This type of order is typically used as part of a trading strategy requiring a series of transactions to occur simultaneously.

Financial Accounting Standards Board (FASB)

The Financial Accounting Standards Board (FASB) is an independent, self-regulatory board that establishes and interprets generally accepted accounting principles (GAAP). It operates under the principle that the economy and the financial services industry work smoothly when credible, concise, and clear financial information is available. FASB periodically revises its rules to make sure corporations are following its principles. The corporations are supposed to fully account for different kinds of income, avoid shifting income from one period to another, and properly categorize their income.

Financial adviser

Financial adviser is a generic designation for someone who provides financial advice. There is no credential or accreditation associated specifically with the term, though people who describe themselves as advisers may have some other credential, such as registered representative (RR) or certified financial planner (CFP).

Financial future

When a futures contract is linked to a financial product, such as a stock index, Treasury notes, or a currency, the contract is described as a financial future. In most cases, the hedgers who use financial futures contracts are banks and other financial institutions that want to protect their portfolios against sudden changes in value. The changing prices of a financial futures contract reflect the perception that investors have of what may happen to the market value of the underlying instrument. For example, the price of a contract on Treasury notes changes in anticipation of a change in interest rates. Expected increases in the rate produce falling contract prices, while anticipated drops in the rate produce rising contract prices.

Financial institution

Any institution that collects money and puts it into assets such as stocks, bonds, bank deposits, or loans is considered a financial institution. There are two types of financial institutions: depository institutions and nondepository institutions. Depository institutions, such as banks and credit unions, pay you interest on your deposits and use the deposits to make loans. Nondepository institutions, such as insurance companies, brokerage firms, and mutual fund companies, sell financial products. Many financial institutions provide both depository and nondepository services.

Financial instrument

A financial instrument is a physical or electronic document that has intrinsic monetary value or transfers value. For example, cash is a financial instrument, as is a check. Listed and unlisted securities, loans, insurance policies, interests in a partnership, and precious metals are also financial instruments. A contractual obligation is also a financial instrument as is a deed that records home ownership.

Financial plan

A financial plan is a document that describes your current financial status, your financial goals and when you want to achieve them, and strategies to meet those goals. You can use your plan as a benchmark to measure the progress you're making and update your plan as your goals and time frame change. Financial planners and other investment professionals can help you create a plan, identify appropriate investments and insurance, and monitor your portfolio. You may pay a one-time fee to have a plan created, or it may be included as part of a fee-based account with an investment adviser or financial planner.

Financial planner

A financial planner evaluates your personal finances and helps you develop a financial plan to meet both your immediate needs and your long-term goals. Some, but not all, planners have credentials from professional organizations. Some well-known credentials are Certified Financial Planner (CFP), Chartered Financial Consultant (ChFC), Certified Investment Management Analyst (CIMA), and Personal Financial Specialist (PFS). A PFS is a Certified Public Accountant (CPA) who has passed an exam on financial planning. Some planners are also licensed to sell certain investment or insurance products. Fee-only financial planners charge by the hour or collect a flat fee for a specific service, but don't sell products or earn sales commissions. Other planners don't charge a fee but earn commissions on the products they sell to you. Still others both charge fees and earn commissions but may offset their fees by the amount of commission they earn.

Financial pyramid

Many investors structure their portfolios in the form of a financial pyramid. The base of the pyramid is made up of nonvolatile, liquid assets. The next level includes securities that provide both income and long-term capital growth. At the third level, a smaller portion of the portfolio is allocated to more volatile investments with higher potential returns and greater risk. And at the top level, the smallest percentage of the overall portfolio is invested in ventures that have the highest potential return but also pose the greatest investment risk. This strategic approach gives you the potential to realize significant returns if some of your speculative investments succeed without risking more than you can afford to lose.


FINRA, the acronym of the Financial Industry Regulatory Authority, is the largest self-regulatory organization (SRO) in the United States. It writes and enforces rules governing the securities industry as well as enforcing federal securities laws. FINRA has jurisdiction over all broker-dealers and registered representatives, and has authority to discipline firms and individuals who violate the rules. It regulates trading in stocks, mutual funds, variable annuities, corporate bonds, and futures and options contracts on securities. It also acts as the SRO for a number of securities exchanges. FINRA reviews materials that investment companies provide to their clients and prospective clients to ensure those materials comply with the relevant guidelines. The FINRA website also provides investor education and alerts on current issues of importance to investors. Through its BrokerCheck database, FINRA provides a resource for investors to check the credentials of people and firms. In addition, FINRA resolves disputes between broker-dealers and their clients, through either mediation or arbitration. FINRA was created in 2007 by the merger of NASD (formerly the National Association of Securities Dealers) and the regulatory and enforcement divisions of the New York Stock Exchange (NYSE).

Firm quote

A firm quote includes a bid and ask price at which a market maker is willing to trade a specific quantity -- 100 shares of stock, for example. For example, a firm quote of 42.50/42.70 means that the market maker will pay $42.50 for 100 shares and is willing to sell them for $42.70. But those prices would not apply to trades larger than 100 shares. Then prices would have to be negotiated.

Fixed annuity

A fixed annuity is an insurance company contract that allows you to accumulate earnings at a fixed rate during a build-up period. You pay the required premium, either in a lump sum or in installments. The insurance company invests its assets, including your premium, so it will be able to pay the rate of return that it has promised to pay. At a time you select, usually after you turn 59 1/2, you can choose to convert your account value to retirement income. Among the alternatives is receiving a fixed amount of income in regular payments for your lifetime or the lifetimes of yourself and a joint annuitant. That's called annuitization. Or, you may select some other payout method. The contract issuer assumes the risk that you could outlive your life expectancy and therefore collect income over a longer period than it anticipated. You take the risk that the insurance company will be able to meet its obligations to pay.

Fixed-income investment

Fixed-income investments typically pay interest or dividends on a regular schedule and may promise to return your principal at maturity, though that promise is not guaranteed in most cases. Among the examples are government, corporate, and municipal bonds, preferred stock, and guaranteed investment contracts (GICs). The advantage of holding fixed-income securities in an investment portfolio is that they provide regular, predictable income. But a potential disadvantage of holding them over an extended period, or to maturity in the case of bonds, is that they may not increase in value the way equity investments may. As a result, a portfolio overweighted with fixed-income investments may make you more vulnerable to inflation risk.

Flat tax

A flat tax, also known as a regressive tax, applies to everyone at the same rate, as a sales tax does. Advocates of a flat income tax for the United States say it's simpler and does away with the kinds of tax breaks that tend to favor the wealthy. Opponents say that middle-income taxpayers would carry too large a proportion of the total tax bill.


In investment terms, a float is the number of outstanding shares a corporation has available for trading. If there is a small float, stock prices tend to be volatile, since one large trade could significantly affect the availability and therefore the price of these stocks. If there is a large float, stock prices tend to be more stable. In banking, the float refers to the time lag between your depositing a check in the bank and the day the funds become available for use. For example, if you deposit a check on Monday, and you can withdraw the cash on Friday, the float is four days and works to the bank's advantage. Float is also the period that elapses from the time you write a check until it clears your account, which can work to your advantage. However, as checks are increasingly cleared electronically at the point of deposit, this float is disappearing. In a credit account, float is the amount of time between the date you charge a purchase and the date the payment is due. If you have paid your previous bill in full and on time, you don't owe a finance charge on the amount of the purchase during the float.

Floating an issue

When a corporation or public agency offers new stocks or bonds to the public, making the offering is called floating an issue. In the case of stocks, the securities may be an initial public offering (IPO) or additional issues of a company that has already gone public. In that case, they're called secondary offerings.

Floating rate

A debt security or corporate preferred stock whose interest rate is adjusted periodically to reflect changing money market rates is known as a floating rate instrument. These securities, for example five-year notes, are initially offered with an interest rate that is slightly below the rate being paid on comparable fixed-rate securities. But because the rate is adjusted from time to time, its market price generally remains very close to the offering price, or par. When a nation's currency moves up and down in value against the currency of another nation, the relationship between the two is described as a floating exchange rate. For example, the US dollar is worth more Japanese yen in some periods and less in others. That movement is usually the result of what's happening in the economy of each of the nations and in the economies of their trading partners. A fixed exchange rate, on the other hand, means that two (or more) currencies, such as the US dollar and the Bermuda dollar, always have the same relative value.

Floating shares

Floating shares are shares of a public corporation that are available for trading in a stock market. The number of floating shares may be smaller than the company's outstanding shares if founding partners, other groups with a controlling interest, or the company's pension fund, employee stock ownership plan (ESOP), or similar programs hold shares in their portfolios that they aren't interested in selling. Some equity index providers, including Standard & Poor's, use floating shares rather than outstanding shares in calculating their market-capitalization weighted indexes on the grounds that a float-adjusted index is a more accurate reflection of market value.


A floor establishes the lowest rate, wage, or baseline that can apply to interest, earnings, or other measures. For example, governments set a minimum wage, which is the lowest hourly wage an employee can legally be paid. There may be a floor dictating the minimum interest rate you can earn on certain annuity contracts or market-rate certificates of deposit. In addition, an adjustable rate mortgage (ARM) loan may have an interest rate floor that determines the lowest interest rate that the borrower could pay over the course of the loan's life. A business might set a price floor, requiring its product or service to be sold for that amount or more. In a different usage, a floor is the physical location where securities are traded at a traditional exchange or brokerage firm.

Floor broker

Floor brokers at a securities or commodities exchange handle client orders to buy or sell through a process known as a double action auction, in which brokers bid against each other to secure the best price. The orders these brokers execute are sent to the floor of the exchange from the trading department or order room of the brokerage firms they work for. When a transaction is completed, the floor broker relays that information back to the firm, and the client is notified.

Floor trader

Unlike floor brokers, who fill client orders, floor traders buy and sell stocks or commodities for their own accounts on the floor of an exchange. Floor traders don't pay commissions, which means they can make a profit on even small price differences. But they must still abide by trading rules established by the exchange. One of those rules is that client orders take precedence over floor traders' orders.

Foreign exchange (FOREX)

Any type of financial instrument that is used to make payments between countries is considered foreign exchange. The list of instruments includes electronic transactions, paper currency, checks, and signed, written orders called bills of exchange. Large-scale currency trading, with minimums of $1 million, is also considered foreign exchange and can be handled as spot price transactions, forward contract transactions, or swap contracts. Spot transactions close at the market price within two days, and the others are set to close at an agreed-upon price and an agreed-upon date in the future.

Form ADV

All investment advisory firms must register by filing a Form ADV either with the Securities and Exchange Commission if they manage $25 million or more in client assets or with the state securities regulator in the state where they principally work. The form is divided into two sections. Part 1 provides information about past disciplinary actions, if any, against the adviser. Part 2 summarizes the adviser's background, investment strategies, services, and fees. If an advisory firm is registered with the SEC, you can obtain copies of Form ADV at the SEC's Investment Adviser Public Disclosure (IAPD) website ( Otherwise, you can request it directly from the adviser or your state securities regulator. You can find contact information on the website of the North American Securities Administrators Association (

Formula investing

When you invest on a set schedule, you're using a technique known as formula investing. You're formula investing when you dollar cost average, or make investments to maintain a predetermined asset allocation. One appeal of this approach, for investors who follow it, is that it eliminates having to agonize over when to buy or sell. It also encourages regular investing. But it does not guarantee your portfolio will grow in value or that you won't lose money.

Forward contract

A forward contract is similar to a futures contract in the sense that both types of contracts cover the delivery and payment for a specific commodity at a specific future date at a specific price. The difference is that a futures contract has fixed terms, such as delivery date and quantity, and it's traded on a regulated futures exchange. A forward contract is traded over the counter and all details of the contract are negotiated between the counterparties, or partners to the agreement. The price specified in the forward contract for foreign currency, government securities, or other commodities may be higher or lower than the actual market price at the time of delivery, known as the spot price. But the participants have locked in a price early specifically so they know what they will receive or pay for the product, eliminating market risk.

Forward price-to-earnings ratio

Stock analysts calculate a forward price-to-earnings ratio, or forward P/E, by dividing a stock's current price by estimated future earnings per share. Some forward P/Es are calculated based on estimated earnings for the next four quarters. Others use actual earnings from the past two quarters with estimated earnings for the next two. A forward P/E may help you evaluate the current price of a stock in relation to what you can reasonably expect to happen in the near future. In contrast, a trailing P/E is based exclusively on past performance. For example, a stock whose price seems high in relation to the last year's earnings may seem more reasonably priced if earnings estimates are higher for the next year. On the other hand, the expectation of lower future earnings may make the current price higher than you are willing to pay.

Fourth market

Institutional investors, including mutual fund companies and pension funds, who trade large blocks of securities among themselves are operating in what's called the fourth market. Usually, the transactions are handled through electronic communications networks (ECNs). Among the appeals of using an ECN are reduced trading costs, the ability to trade after hours, and the fact that offers to buy and sell are matched anonymously.

Fractional share

If you reinvest your dividends or invest a fixed dollar amount in a stock dividend reinvestment plan (DRIP) or mutual fund, the amount may not be enough to buy a full share. Alternately, there may be money left over after buying one or more full shares. The excess amount buys a fractional share, a unit that is less than one whole share. In a DRIP, a fractional share gives you credit toward the purchase of a full share. With a mutual fund, in contrast, the fractional share is included in your account value.

Freddie Mac

Freddie Mac was chartered in 1970 to increase the supply of mortgage money that lenders are able to make available to homebuyers. To do its job, Freddie Mac buys mortgages from banks and other lenders, packages them as securities, and sells the securities to investors. The money it raises by selling these bonds pays for purchasing the mortgages. Lenders use the money they realize from selling mortgages to Freddie Mac to make additional loans. Lenders must be approved in order to participate in the program. Loans must meet Freddie Mac qualifications to be eligible for purchase. To facilitate the lending process, Freddie Mac provides lenders with an automated underwriting tool to help them evaluate mortgage applications. Freddie Mac guarantees the securities it issues, but the bonds aren't federal debts and aren't federally guaranteed. Like its sister corporation Fannie Mae, Freddie Mac is described as a quasi-government agency (GSE) and is shareholder owned. However, in September 2008, both were placed in conservatorship by the Federal Housing Financial Authoriy to stabilize their operations and reduce pressure on the national financial system. As a result, equity investments in these GSEs have lost most of their value.

Free cash flow

A business's free cash flow statement may differ significantly from its cash flow statement. The cash flow statement generally represents earnings before interest, taxes, depreciation, and amortization (EBITDA). Cash flow and EBITDA focus specifically on the profitability of the company's actual business operations, independent of outside factors such as debt and taxes. Free cash flow, however, reports the net movement of cash in and out of the company. To determine free cash flow, equity analysts add up all the company's incoming cash and then subtract cash that the company is obligated to pay out, which includes all expenses, debt service, preferred dividends, and capital expenditures. The result tells you how much cash was left over or how short of cash the company was at the end of the fiscal period.

Front running

Front running occurs when a broker trades stock or other security before executing a client's order for that security or before his or her brokerage firm recommends a buy or sell for the security. It's illegal, though it can be hard to detect. Similarly analysts who trade on information that isn't available to the general public are front running. It may also be described as insider trading and is also illegal. The temptation of front running, which is also known as forward trading, is that it is impossible to realize major profits or prevent major losses by acting in advance of a major move in a security's price.

Front-end load

The load, or sales charge, that you pay when you purchase shares of a mutual fund or annuity is called a front-end load. Some mutual funds identify shares purchased with a front-end load as Class A shares. The drawback of a front-end load is that a portion of your investment pays the sales charge rather than being invested. However, the annual asset-based fees on Class A shares tend to be lower than on shares with back-end or level loads. In addition, if you pay a front-end load, you may qualify for breakpoints, or reduced sales charges, if the assets in your account reach a certain milestone, such as $25,000.

Full faith and credit

Federal and municipal governments can promise repayment of debt securities they issue because they can raise money through taxes, borrowing, and other sources of revenue. That power is described as full faith and credit.

Full-service brokerage firm

Full-service brokerage firms usually offer their clients a range of services in addition to executing their buy and sell orders. These firms usually have full-time research departments and investment analysts who provide information the firm's brokers share with clients. In addition, some employees of the firm may be qualified to provide investment advice, develop financial plans, or design strategies for meeting financial goals. Full-service firms tend to charge higher commissions and fees than discount brokerage firms or firms that operate only online. However, some full-service firms offer online services and reduce their fees for transactions handled though a client's online account.

Fund family

A fund family, or family of funds, is a group of mutual funds controlled by a single investment company, bank, or other financial institution. The various funds within the family have different investment objectives, such as growth or income. If you invest in several funds in a family, you can transfer assets from one fund to another by phone or online. If it's a family of load funds, there may or may not be a sales charge for the transfer. If it's a no-load fund, no sales charges apply. You will owe capital gains taxes on any profit you realize from selling fund shares that have increased in value even if the money is reinvested in another fund. However, if the shares have lost value when you sell, you'll have a capital loss that you can use to offset other investment gains. The only way you'll avoid taxes when you sell fund shares is if you own the funds in a tax-deferred or tax-free account. In that case, though, you can not claim a capital loss if the fund shares have lost value before you sell.

Fund flows

Fund flows are the traffic of money into and out of mutual funds or between funds that invest in various sectors. This flow of money is considered an indicator of the direction the markets are headed. For example, large inflows of money into mutual funds may be interpreted as a bullish indicator for the stock market or for a specific sector, while dramatic outflows may signify an impending downturn. However, if investors chase past performance or follow the currently hot sectors in deciding where to invest, large inflows may in fact precede disappointing performance.

Fund network

Fund networks, sometimes called fund supermarkets, offer access to thousands of different mutual funds from many of the major fund families. Investing through a fund network can make it easier to diversify your portfolio, or put your assets into a variety of investments, since you have access to all the funds through one account. And you can usually -- although not always -- transfer assets from one fund family in the network to another without an exchange fee, although sales charges may apply with some funds. In addition, capital gains taxes may be due if you're investing through a taxable account and the shares of the fund you're leaving have increased in value. Similarly, you might have a capital loss on shares that have lost value since purchase. In a tax-free or tax-deferred account, there is no tax on gains and no write-off for losses.

Fund of funds (FOF)

A fund of funds is a pooled investment, such as a mutual fund or a hedge fund, whose underlying investments are other funds rather than individual securities. Despite some major differences, what all funds of funds have in common is an emphasis on diversification for its potential to reduce risk without significantly reducing return. They're also designed to simplify the investment process by offering one-stop shopping. Many mutual fund FOFs are asset allocation funds and typically include both stock and bond funds in a particular combination that the FOF manager has chosen to meet a specific objective. A mutual fund FOF may select all its funds from a single fund family or it may choose funds offered by different investment companies. A hedge fund FOF, which owns stakes in other hedge funds, allows investors to commit substantially less money to gain exposure to this investment category than it would cost to invest in even one fund. A major drawback with all funds of funds is that the fees tend to be higher than you would pay owning the underlying funds directly.

Fund overlap

Fund overlap may occur if more than one mutual fund or exchange traded fund (ETF) in your portfolio invests in the same underlying security or securities. For example, you might own an ETF and an actively managed mutual fund that both hold a large number of shares in the same group of stocks. The result is that your portfolio may not be as diversified as you intend. To prevent excessive overlap, it's always a good idea to review the major holdings listed in a fund's prospectus or on the fund company's website, making sure that you're not overweighting your portfolio with a security you already own through another investment.

Fundamental analysis

Fundamental analysis is one of two main methods for analyzing a stock's potential return. Fundamental analysis involves assessing a corporation's financial history and current standing, including earnings, sales, and management. It also involves gauging the strength of the corporation's products or services in the marketplace. A fundamental analyst uses these details as well as the current state of the economy to assess whether the stock is likely to increase or decrease in value in the short- and long-term and whether the stock's current price is an accurate reflection of its value.


When two or more things are interchangeable, can be substituted for each other, or are of equal value, they are described as fungible. For example, shares of common stock issued by the same company are fungible at any point in time since they have the same value no matter who owns them. Forms of money, such as dollar bills or euros, are fungible since each can be exchanged or substituted for another of the same currency. Similarly, listed put and call futures contracts on the same commodity that expire on the same date are fungible since a contract to buy -- a call -- can offset, or neutralize, a futures contract to sell -- a put. On the other hand, multiple classes of the same stock may not be fungible. For example, in some markets citizens of the country are eligible to buy one class of stock and noncitizens a different class. Typically, the shares have different prices and may not be exchanged for each other.

Future value

The future value of a sum of money is the amount it will be worth at a date in the future, assuming it is invested today and earns compound interest. For example, the future value of $5,000 15 years from now ' with a 4% interest rate, compounded monthly ' is $9,102. Among other things, you can use a future value calculation to determine how much you need to save in the present to have a certain amount of money in the future. Future value is sometimes called the time value of money.

Futures contract

Futures contracts, when they trade on regulated futures exchanges, obligate you to buy or sell a specified quantity of the underlying product for a specific price on a specific date. The underlying product could be a commodity, stock index, security, or currency. Because all the terms of a listed futures contract are structured by the exchange, you can offset your contract and get out of your obligation by buying or selling an opposing contract before the settlement date. Futures contracts provide some investors, called hedgers, a measure of protection from price volatility on the open market. For example, wine manufacturers are protected when a bad crop pushes grape prices up on the spot market if they hold a futures contract to buy the grapes at a lower price. Grape growers are also protected if prices drop dramatically -- if, for example, there's a surplus caused by a bumper crop -- provided they have a contract to sell at a higher price. Unlike hedgers, speculators use futures contracts to seek profits on price changes. For example, speculators can make (or lose) money, no matter what happens to the grapes, depending on what they paid for the futures contract and what they must pay to offset it.


Stocks that increase in value over the course of the trading day are described as gainers or advancers. Those that increase the most in relation to their opening price are called percentage gainers, or percentage winners. Those that go up the greatest number of points are called net gainers, or dollar winners. On a day that the stock market indexes go up, there are typically more gainers than there are losers or laggards -- stocks that have lost value. And on a day where there's little change, there are likely to be similar numbers of gainers and losers.

General Agreement on Tariffs and Trade (GATT)

A General Agreement on Tariffs and Trade was signed in 1947 to provide an international forum to encourage free trade, reduce tariffs, and provide a mechanism for resolving trade disputes. The Uruguay Round Agreements Act was ratified by Congress in 1994 to foster trade by cutting international tariffs, standardizing copyright and patent protection, and liberalizing trade legislation. The Act also created the World Trade Organization (WTO), which among other things implements GATT.

General obligation (GO) bond

State and local governments issue general obligation (GO) municipal bonds and pay the interest and repay the principal from general revenues. GO bonds are considered somewhat less risky , and so pay slightly lower rates, than the same municipality's revenue bonds, which are backed by income from a specific project or agency. A municipality's general revenues come from the taxes it is able to raise and money it can borrow. Those powers are sometimes described as its full faith and credit.

Generally Accepted Accounting Principles (GAAP)

Generally Accepted Accounting Principles (GAAP) are the rules that governments and public, private, and nonprofit companies follow to prepare, present, and report financial information in their financial statements. The Securities and Exchange Commission (SEC) requires that registrants, or public companies, present financial statements in conformity with United States GAAP (US GAAP). In 2009, US GAAP was codified by the Financial Accounting Standards Board (FASB) into a single authoritative source. The codification is designed to strengthen the economic system by organizing standards from various sources into approximately 90 accounting topics and providing uniform criteria for communicating data. The Governmental Accounting Standards Board (GASB) establishes a different set of GAAP for state and local governments. The Federal Accounting Standards Advisory Board (FASAB) does the same for the federal government.

Gift tax

A gift tax is a tax on the combined total value of the taxable gifts you make that exceed your lifetime federal tax-exempt limit of $1 million. The tax is figured as a percentage of the value of your gifts over that amount. For example, if during your lifetime you make taxable gifts of money and property valued at $1.2 million, you will owe federal gift tax on $200,000. You might also owe state gift tax, depending on where you live. However, you can make annual tax-free gifts to as many individuals as you like. As long as the value of the gifts to each individual is less than the annual limit set by Congress, that amount doesn't count against your lifetime tax-free limit. Gifts to qualifying nonprofits are not taxed and don't count against your lifetime limit either. If you're married, you can give your spouse gifts of any value at anytime, totally tax free, provided he or she is a US citizen. There are limits on spousal gifts when the spouse is not a citizen. You are not required to report the tax-free gifts on your tax return, but you must report taxable gifts whose value exceeds the annual tax-free limit on IRS Form 709 for the year you make them. The tax becomes due when the cumulative total exceeds $1 million.

Glide path

The methodology, or process, a target date fund uses to reallocate its portfolio is described as its glide path. Each fund company's glide path varies somewhat from those of its competitors, based on the company's investment strategy and risk profile. What is similar is that all target date funds have a specific time horizon. They invest to achieve growth in the early phases of their life span, gradually reallocating to produce income and protect principal as their target dates approach. What differs is the rate and timing of the reallocation, in particular how much of the fund remains invested for growth at the target date. Target date funds are often retirement investments, using target dates such as 2025 or 2040. Or they may be used in 529 college savings plans, where they are described as age-based tracks.

Global depositary receipt (GDR)

To raise money in more than one market, some corporations use global depositary receipts (GDRs) to sell their stock on markets in countries other than the one where they have their headquarters. The GDRs are issued in the currency of the country where the stock is trading. For example, a Mexican company might offer GDRs priced in pounds in London and in yen in Tokyo. Individual investors in the countries where the GDRs are issued buy them to diversify into international markets. GDRs let you do this without having to deal with currency conversion and other complications of overseas investing. However, since GDRs are frequently offered by newer or less-known companies, the prices are often volatile and the stocks may be thinly traded. That makes buying GDRs riskier than buying domestic stocks.

Global fund

Global, or world, mutual funds invest in US securities as well as those of other countries. In that way, they differ from international funds, which invest only in non-US markets. Although global funds may keep as much as 75% of their assets invested in the United States, fund managers are able to take advantage of opportunities they see in various overseas markets.

Go public

A corporation goes public when it issues shares of its stock in the open market for the first time, in what is known as an initial public offering (IPO). That means that at least some of the shares will be held by members of the public rather than exclusively by the investors who founded and funded the corporation initially or the current owners or management.

Gold fund

Gold funds are mutual funds or exchange traded funds (ETFs) that purchase shares in gold mining companies, companies that process and distribute gold, and sometimes the gold itself. Investors purchase gold funds as a hedge against inflation and international instability -- both economic and political. Since the performance of gold as an asset class is not correlated to the performance of stocks, bonds, and cash, by adding such a fund to your portfolio you can help protect it against systemic risk. Gold funds tend to be extremely volatile, so fund managers try to minimize risk by investing in a diversified portfolio, often purchasing shares in companies that operate in different regions of the world.

Gold standard

The gold standard is a monetary system that measures the relative value of a currency against a specific amount of gold. It was developed in England in the early 18th century when the scientist Sir Isaac Newton was Master of the English Mint. By the late 19th century, the gold standard was used throughout the world. The United States was on the gold standard until 1971, when it stopped redeeming its paper currency for gold.

Good 'til canceled (GTC)

If you want to buy or sell a security at a specific price, you can ask your broker to issue a good 'til canceled (GTC) order. When the security reaches the price you've indicated, the trade will be executed. This order stays in effect until it is filled, you cancel it, or the brokerage firm's time limit on GTC orders expires. A GTC, also called an open order, is the opposite of a day order, which is automatically canceled at the end of the trading day if it isn't filled. In addition, some firms offer good through month (GTM) or good through week (GTW) orders.

Good will

When the term good will is used in connection with evaluating a company, it covers the intangible value of its reputation, its satisfied clients, and its productive work force. Those factors are all considered evidence of the corporation's potential to produce strong earnings.

Government bond

The term government bond is used to describe the debt securities issued by the federal government, such as US Treasury bills, notes, and bonds. They're also known as government obligations. You can buy and sell these issues directly using a Treasury Direct account or through a broker. Treasurys are backed by the full faith and credit of the US government, and the interest they pay is exempt from state and local, though not federal, income taxes. The cash raised by the sale of Treasurys is used to finance a variety of government activities. Debt instruments issued by government agencies are also described as government bonds, or government securities, though they may or may not be backed by the government's promise to repay. For example, bonds issued by the Government National Mortgage Association (Ginnie Mae) and the Tennessee Valley Authority (TVA) are government bonds.

Government National Mortgage Association (Ginnie Mae)

The Government National Mortgage Association, known as Ginnie Mae, guarantees mortgage-backed securities issued by approved private institutions and marketed to investors through brokerage firms. The agency's dual mission is to provide affordable mortgage funding while creating high-quality investment securities that offer safety, liquidity, and an attractive yield. Ginnie Mae securities are backed by mortgages that are insured by either the Federal Housing Administration (FHA) or the Rural Housing Service (RHS), or guaranteed by the Department of Veterans Affairs (VA). Ginnie Mae securities are sold in large denominations -- usually $25,000. But you can buy Ginnie Mae mutual funds, which allow you to invest more modest amounts. Ginnie Mae is an agency of the US Department of Housing and Urban Development (HUD).

Government security

A government security is bond or other debt obligation issued by a government to raise money. There are three types of government securities in the United States: Treasury securities, agency securities, and municipal bonds. The US Treasury issues bonds, notes, and bills to raise funds to pay for the difference between what it spends and what it collects in taxes and other revenues. Treasury debt is backed by the full faith and credit of the government, which means a Treasury security, unlike most debt instruments, involves virtually no credit risk. Interest income from Treasury securities is exempt from state and local taxes, but is subject to federal income tax. Federal agency bonds, which are issued to fund agency projects or mandates, are also backed by the US government's full faith and credit. Municipal bonds, widely known as munis, are a way for governments below the federal level, such as states, cities, and counties, to fund ongoing activities, new projects, and improvements. Public enterprises, agencies, and authorities, such as public hospitals, toll roads and bridges, universities, and public utilities may issue munis as well. Interest may be paid from tax revenue, as is the case with general obligation bonds, or with fees and other monies collected by the issuer, such as tolls on a bridge, in the case of revenue bonds. The tax treatment of traditional munis makes them attractive to investors in the higher tax brackets. In most cases, the interest isn't subject to federal income tax, or to state or local income tax if you live in the issuing municipality, though there are some exceptions. However, munis tend to pay lower interest rates than comparable corporate or Treasury bonds, and the interest may be subject to the alternative minimum tax. In contrast, a newer type of municipal bonds, called Build America Bonds, do not provide tax-exempt interest but generally pay a higher rate.

Grantor trust

An exchange traded fund (ETF) may be structured as a grantor trust. Such a trust holds a fixed portfolio of assets and issues shares based on the value of those assets. Shares in grantor trust ETFs are traded on the stock market throughout the day as other ETFs are. But unlike ETFs that are structured as investment company funds or unit investment trusts (UITs), grantor trusts aren't securities, don't track an index, and aren't rebalanced from time to time. Grantor trusts may own commodities -- such as gold or a currency -- or a portfolio of securities.

Green fund

A mutual fund that selects investments based on a commitment to environmental principles may be described as a green fund. Not all green funds stress exactly the same values. A fund that seeks environmentally friendly businesses -- say those that use alternative fuels -- may not be concerned about what those companies manufacture. Another fund may avoid any company in what it considers an unacceptable industry, despite the company's individual environmental record. In every case, the fund's approach is described in its prospectus.

Gross domestic product (GDP)

The total value of all the goods and services produced within a country's borders is described as its gross domestic product. When that figure is adjusted for inflation, it is called the real gross domestic product, and it's generally used to measure the growth of the country's economy. In the United States, the GDP is calculated and released quarterly by the Department of Commerce.

Gross earnings

When calculating the income tax you owe, gross earnings are your total income before you take any adjustments, exemptions, or deductions for which you qualify. You subtract adjustments from your gross income to find your adjusted gross income (AGI). Those adjustments are specific amounts you spent for a number of clearly defined expenses. To find your taxable income, you subtract exemptions and deductions from your AGI.

Gross margin

Gross margin is the percentage by which profits exceed production costs. To find gross margin you divide sales minus production costs by sales. For example, if you want to calculate your gross margin on selling handmade scarves, you need to know how much you spent creating the scarves, and what you collected by selling them. If you sold 10 scarves at $15 a piece, and spent $8 per scarf to make them, your gross margin would be 46.7%, or $150 in sales minus $80 in production costs divided by $150. Gross margin is not the same as gross profit, which is simply sales minus costs. In this example, it's $70, or $150 minus $80. If you're doing research on a company you're considering as an investment, you can look at the gross margin to help you see how efficiently it uses its resources. If the company has a higher gross margin than its competition, it can command higher prices or spends less on production. That might mean it can allocate more resources to developing new products or pursuing other projects.

Gross national product (GNP)

The gross national product is a measure of a country's economic output -- the total value of all the goods and services that it produces in a particular year. The GNP is similar to the gross domestic product (GDP), but not exactly the same. Unlike the GDP, the GNP includes the income generated by investments owned outside the country by its citizens, and excludes any income earned on domestic soil by noncitizens or organizations based elsewhere.

Gross spread

In an initial public offering (IPO), the gross spread is the difference between what the underwriters pay the issuing company per share and the per share price that investors pay. It's usually about 7%. For example, if a stock is to be offered to the public at $10 a share, the underwriters may pay the issuing company around $9.30 per share. With millions of shares being sold, the 70 cents per share adds up to millions of dollars for the investment bank.


Growth is an increase in the value of an investment over time. Unlike investments that produce income, those that are designed for growth don't necessarily provide you with a regular source of cash. A growth company is more likely to reinvest its profits to build its business. If the company prospers, however, its stock typically increases in value. Stocks, stock mutual funds, and real estate may all be classified as growth investments, but some stocks and mutual funds emphasize growth more than others.

Growth and income fund

Growth and income mutual funds invest in securities that provide, as their name suggests, a combination of growth and income. This type of fund generally funnels assets into common stocks of well-established companies that pay regular dividends and increase in value at a regular, if modest, rate. The balance of the fund's portfolio is in high-rated bonds and preferred stock.

Growth fund

A growth fund seeks to provide its shareholders with long-term capital appreciation. Growth funds seek to achieve that objective by investing in growth stocks -- companies that reinvest earnings to build their business through expansion, acquisition, or research and development. Growth funds, which may focus on companies of the same size -- say all small-caps -- or include companies of different sizes in their portfolios, tend to be more volatile than funds with more conservative goals, such as providing regular if modest income. Not surprisingly, the greater the potential for profit that a growth fund may provide the greater the potential risk of losing capital.

Growth rate

A growth rate measures the percentage increase in the value of a market, company, or operation. For example, a stock research firm typically tracks the rate at which a company's sales and earnings have grown as one of the factors in evaluating whether to recommend that investors purchase, hold, or sell its shares. Similarly, the rate at which the US gross domestic product grows is a measure of the strength of the US economy. If you want to compare the vigor of entities or elements of different sizes, it's more accurate to look at growth rate than it is to look at the actual numerical change in value. For example, an emerging market might be growing at a much faster rate than a developed one even though the size of those economies is vastly different.

Guaranteed investment contract (GIC)

A guaranteed investment contract, or GIC (pronounced gick), promises to preserve your principal and to provide a fixed rate of return. You can invest in a GIC through an employer-sponsored retirement plan, such as a 401(k) or 403(b) sponsored by your employer, provided that investment option is offered. Because of their fixed rates, GIC returns are vulnerable to inflation. And you may have to pay a penalty if you decide to move your money out of a GIC into a different investment. Insurance companies that offer GICs assume the risk that the rate they earn on their investments will outperform the rates they've guaranteed on the GICs.


A guardian is someone designated to be legally responsible for a minor child or others who are unable to take care of themselves. You may name the guardian for your children or other dependents in your will, to assume responsibility at your death, or you may identify a guardian while you are still alive. In most cases, a guardian makes both personal and financial decisions for his or her ward. However, you may name two guardians with different areas of responsibility -- perhaps one for financial matters if you have a substantial estate. If you become disabled or otherwise unable to manage your own affairs, and you have not granted a durable or springing power of attorney, the appropriate court in your state may name a guardian for you.


Guidance, or earnings guidance, occurs when the executives of a publicly traded corporation estimate projected earnings in an open conference call or Web cast before its quarterly earnings are released. Goals for providing guidance include underplaying expectations to avoid negative surprises, serving as a counterpoint to stock analysts' consensus estimates, reducing stock price volatility when actual results are announced, and potentially shifting investor focus from short-term results to long-term perspectives. Corporations also provide guidance to the investing community as a whole because they are prohibited by Securities and Exchange Commission (SEC) Rule FD (for Fair Disclosure) from providing important and previously nonpublic information selectively, as they did before the rule was enacted in 2000. Those who advocate providing this type of guidance argue that the more information investors have the better. Detractors say guidance doesn't reduce volatility or achieve other goals.


A haircut, in the financial industry, is a percentage discount that's applied informally to the market value of a stock or the face value of a bond in an attempt to account for the risk of loss that the investment poses. So, for example, a stock with a market value of $30 may get a haircut of 20%, to $24, when an analyst or money manager tries to anticipate what is likely to happen to the price. Similarly, when a group of securities is used as collateral, the organization requiring the collateral will discount the market value of individual securities to prevent potential losses if the provider of the collateral should default on its obligations. When a broker-dealer calculates its net capital to meet the 15:1 ratio of debt to liquid capital permissible under Securities and Exchange Commission (SEC) rules, it typically gives volatile securities in its portfolio a haircut to reduce the potential for being in violation. The only securities that consistently escape a haircut are US government bonds because they are considered free of default risk.

Hard assets

Hard assets are the tangible property of a company or partnership, such as the buildings, furniture, real estate, and other equipment it owns. When you make a direct investment in hard assets, as you do when you invest in a direct participation program (DPP), you have an ownership interest in the actual assets rather than in shares of the corporation. The profit, if any, that you realize from hard assets is dependent on their ability to produce revenue, as a rental property, natural gas well, or a leased airplane might.

Hardship withdrawal

A hardship withdrawal, also known as a hardship distribution, occurs when you take money out of your 401(k) or other qualified retirement savings plan to cover pressing financial needs. You must qualify to withdraw by meeting the conditions your plan imposes in keeping with Internal Revenue Service (IRS) guidelines. For example, you may have to demonstrate how urgent the situation is and prove you have no other resources. Some qualifying situations are purchasing your primary home, covering out-of-pocket medical expenses for yourself or a dependent, and paying college tuition for yourself or a dependent. However, if you're younger than 59 1/2, you must pay a 10% tax penalty plus income tax on the amount you withdraw. You also will not be permitted to contribute to the plan again for six months.

Head of household

Head of household is an IRS filing status that you can use if you are unmarried or considered unmarried on the last day of a tax year and provide at least half the cost of maintaining a home for one or more qualifying dependents. That may be your child, grandchild, or other relative who lives in your home for more than half the year, or a parent whether or not he or she lives in your home. The advantage of filing as head of household is that you can take a higher standard deduction than if you filed as a single taxpayer, and you owe less federal income tax than you would as a single, assuming all other details are the same. Filing as head of household also means you qualify for certain deductions and credits that would not be available to you if you used the married- filing-separate-returns status.

Hedge fund

Hedge funds are private investment partnerships open to institutions and wealthy individual investors. These funds pursue returns through a number of investment strategies. Those might include holding both long and short positions, investing in derivatives, using arbitrage, and speculating on mergers and acquisitions. Many hedge funds use leverage, which means investing borrowed money to boost returns. Because of the substantial risks associated with hedge funds, securities laws limit participation to accredited investors whose assets meet or exceed Securities and Exchange Commission (SEC) guidelines.


Hedgers in the futures market try to offset potential price changes in the spot market by buying or selling a futures contract. In general, they are either producers or users of the commodity or financial product underlying that contract. Their goal is to protect their profit or limit their expenses. For example, a cereal manufacturer may want to hedge against rising wheat prices by buying a futures contract that promises delivery of September wheat at a specified price. If, in August, the crop is destroyed, and the spot price increases, the manufacturer can take delivery of the wheat at the contract price, which will probably be lower than the market price. Or the manufacturer can trade the contract for more than the price it paid to purchase the contact and use the extra cash to offset the higher spot price of wheat.


An heir is an individual who is entitled, either by law or by the terms of a will, to inherit another individual's estate. You have the right to leave assets you own individually or as a tenant in common to any heir you select. You also have the right to exclude people who think they should inherit. But you must leave your spouse assets whose value equals at least the percentage required by the laws of your state. In some states your children also have a right to a portion of your estate.

Highly compensated employee (HCE)

Highly compensated employees (HCEs)are people whose on-the-job earnings are higher than the level the government has established to differentiate this category of worker. For 2019, that amount is $125,000. It is increased from time to time to reflect the impact of inflation. HCEs may also be defined as the top 20 earners in a company or as 5% owners of a company. The major consequence of being an HCE is that the percentage of earnings that you may contribute to your retirement savings plan is determined by the contribution rates of other plan participants who earn less, or NHCEs. If lower-paid employees contribute an average of 2% or less, higher-paid employees may contribute up to twice that percentage. If the average is 3% to 8%, higher-paid employees may contribute two percentage points more than the average. And if the average is 8% or higher, the maximum for highly compensated employees is 1.25 times that average. However, HCE contributions are not limited if the plan in which they participate is a Safe Harbor 401(k) or similar plan than avoids nondiscrimination testing.


A securities analyst's recommendation to hold appears to take a middle ground between encouraging investors to buy and suggesting that they sell. However, in an environment where an analyst makes very few sell recommendations, you may interpret that person's hold as an indication that it is time to sell. Hold is also half of the investment strategy known as buy-and-hold. In this context, it means to keep a security in your portfolio over an extended period, perhaps ten years or more. The logic is that if you purchase an investment with long-term potential and keep it through short-term ups and downs in the marketplace, you increase the potential for building portfolio value.

Holding company

By acquiring enough voting stock in another company, a holding company, also called a parent company, can exert control over the way the target company is run without actually owning it outright. The advantages of this approach, provided that the holding company owns at least 80% of the voting shares, are that it receives tax-free dividends if the subsidiary prospers and can write off some of the operating losses if the subsidiary falters. Because of its shareholder status, however, the holding company is insulated to some extent from the target company's liabilities.

Holding period

A holding period is the length of time you keep an investment. In some cases, a specific holding period is required in order to qualify for some benefit. For example, you must hold US savings bonds for a minimum of five years to collect the full amount of interest that has accrued.

Hot issue

If a newly issued security rises steeply in price after its initial public offering (IPO) because of intense investor demand, it is considered a hot issue.


Hypothecation means pledging an asset as collateral for a loan. If you use a margin account to buy on margin or sell short, for example, you pledge securities (stocks, bonds, or other financial instruments) as collateral for the debt. If the brokerage firm issues a margin call that you don't meet, it can sell those securities to cover its losses. Similarly, if you arrange a mortgage on your home, you give the lender the right to sell your home if you fail to meet your obligation to make mortgage payments. Hypothecation may make it easier for you to secure a loan, but you do run the risk of losing the asset if for some reason you default on your obligation to repay according the terms of the agreement.

Identity theft

Identity theft is the unauthorized use of your personal information, such as your name, address, Social Security number, or credit account information. People usually steal your identity to make purchases or obtain credit, though they may also use the data to apply for a driver's license or other form of official identification.

Immediate annuity

You buy an immediate annuity contract with a lump-sum purchase. You begin receiving income from the annuity either right away or within 13 months. A fixed immediate annuity guarantees the amount of income you'll receive in each payment, based on the annuity's price, your age (and your joint annuitant's age if you name one), the term length, and the specific details of the contract. Your actual receipt of the income is also based on the claims paying ability of the insurance company selling the contract. A variable immediate annuity pays income based on the performance of the annuity funds, or subaccounts, you select from those available through the contract. Immediate annuities appeal to people who want to convert a sum of money to a source of regular income, either for themselves or for another person. One way they're frequently used is as a source of retirement income.

Imputed interest

Imputed interest is interest you are assumed to have collected even if that interest was not paid. For example, you pay income tax on the imputed interest of a zero-coupon bond you hold in a taxable account even though the interest is not paid until the bond matures. Similarly, you may be required to pay income tax on imputed interest if you make an interest-free loan, even if that loan is to your children or another member of your family. The government's position, in this case, is that you should have charged interest even though you didn't do so.

Incentive stock option (ISO)

Corporate executives may be granted incentive stock options (ISOs), also called qualifying stock options. These options aren't taxed when they're granted or exercised, but only when the underlying shares are sold. If, after exercising the options, participating executives keep the shares for the required period, any earnings from selling the shares are taxed at the owner's long-term capital gains rate. However, stock option transactions may make sellers vulnerable to the alternative minimum tax (AMT).

Income annuity

An income annuity, sometimes called an immediate annuity, pays an annual income, usually in monthly installments. Your income is based on the annuity's price, your age (and your joint annuitant's age if you name one), the term length, and the specific details of the contract. It's also dependent on the annuity provider's ability to meet its obligations. You might buy an income annuity with assets from your 401(k) plan, or your plan may buy an income annuity on your behalf. In that case, the annuity provider guarantees an income that will satisfy your minimum required distribution each year after you turn 70 1/2.

Income fund

Income funds are mutual funds whose investment objective is to produce current income rather than long-term growth, typically by investing in bonds or sometimes a combination of bonds and preferred stock. Investors, especially those who have retired or are about to retire, may prefer income funds to potentially more volatile growth funds. The amount of income a fund may generate is related to the risk posed by the investments that the fund makes and the return they generate. A fund that buys lower-grade bonds may provide substantially more income than a fund buying investment-grade bonds. But the same fund may also put your principal, or investment amount, at substantial risk.

Income in respect of a decedent

Any income your beneficiary receives after your death that would have gone to you if you were still alive is described as income in respect of a decedent. One example is the income your beneficiary gets as a minimum required distribution from your 401(k) or IRA. In this case, your beneficiary pays tax on that income at his or her ordinary rate, as you would have.

Income statement

An income statement, also called a profit and loss statement, shows the revenues from business operations, expenses of operating the business, and the resulting net profit or loss of a company over a specific period of time. In assessing the overall financial condition of a company, you'll want to look at the income statement and the balance sheet together, as the income statement captures the company's operating performance and the balance sheet shows its net worth.

Income stock

Stock that pays income in the form of regular dividends over an extended period is often described as income stock. The advantage of owning income stock is that it can supplement your budget or provide new capital to invest. Unless you own the stock in a tax-deferred or tax-free account, you'll owe income tax each year on the dividends you receive. But dividends on qualifying stock, including most US stock and some international stock, are usually taxed at your lower long-term capital gains rate. Income stock is an important component of most equity income funds and growth and income funds.


When a business incorporates, it receives a state or federal charter to operate as a corporation. A corporation has a separate and distinct legal and tax identity from its owners. In fact, in legal terms, a corporation is considered an individual -- it can own property, earn income, pay taxes, incur liabilities, and be sued. Incorporating can offer many advantages to a business, among them limiting the liability of the company's owners. This means that shareholders are not personally responsible for the company's debts. Another advantage is the ability to issue shares of stock and sell bonds, both ways to raise additional capital. You know that a business is a corporation if it includes the word "Incorporated" -- or the short form, "Inc." -- in its official name.


An indenture is a written contract between a bond issuer and bond holder that is proof of the bond issuer's indebtedness and specifies the terms of the arrangement, including the maturity date, the interest rate, whether the bond is convertible to common stock, and, if so, the price or ratio of the conversion. The indenture, which may be called a deed of trust, also includes whether the bond is callable -- or can be redeemed by the issuer before it matures -- what property, if any, is pledged as security, and any other terms.


An index reports changes up or down, usually expressed as points and as a percentage, in a specific financial market, in a number of related markets, or in an economy as a whole. Each index -- and there are a large number of them -- measures the market or economy it tracks from a specific starting point. That point might be as recent as the previous day or many years in the past. For those reasons, indexes are often used as performance benchmarks against which to measure the return of investments that resemble those tracked by the index. A market index may be calculated arithmetically or geometrically. That's one reason two indexes tracking similar markets may report different results. Further, some indexes are weighted and others are not. Weighting means giving more significance to some elements in the index than to others. For example, a market capitalization weighted index is more influenced by price changes in the stock of its largest companies than by price changes in the stock of its smaller companies.

Index fund

An index fund is designed to mirror the performance of a stock or bond index, such as Standard & Poor's 500 Index (S&P 500) or the Russell 2000 Index. To achieve this goal, the fund purchases all the securities in the index, or a representative sample of them, and adds or sells investments only when the securities in the index change. Each index fund aims to keep pace with its underlying index, not outperform it. This strategy can produce strong returns during a bull market, when the index reflects increasing prices and sometimes reinvested dividends. But it may produce disappointing returns during economic downturns, when an actively managed fund might take advantage of investment opportunities if they arise to outperform the index. Because the typical index fund's portfolio is not actively managed, most index funds have lower-than-average management costs and smaller expense ratios. However, not all index funds tracking the same index provide the same level of performance, in large part because of different fee structures.

Index of Leading Economic Indicators

This monthly composite of ten economic measurements was developed to track and help forecast changing patterns in the economy. It is compiled by The Conference Board, a business research group. The components are adjusted from time to time to help improve the accuracy of the index. In the past, it has successfully predicted major downturns, although it has also warned of some that did not materialize. Consumer-related components include the number of building permits issued, manufacturers' new orders for consumer goods, and the index of consumer expectations. Financial components include the S&P 500 Index of widely held stocks, the real money supply, and the interest rate spread. Business-related components include the average work week in the manufacturing sector, average initial claims for unemployment benefits, nondefense plant and equipment orders, and vendor performance, which reflects how quickly companies receive deliveries from suppliers.

Indexed annuity

An indexed annuity is a deferred annuity whose return is tied to the performance of a particular equity market index. Your investment principal is usually protected against severe market downturns, in that you may have an annual return of 0% but not less than 0%. However, earnings are generally capped at a fixed percentage, so any index gains that are above the cap are not reflected in your annual return. Indexed annuity contracts generally require you to commit your assets for a particular term, such as 5, 10, or 15 years. Some but not all contracts limit your participation rate, which means that only a percentage of your premium has a potential to earn a rate higher than a guaranteed rate.

Individual 401(k)

The individual 401(k) -- also known as a solo 401(k) or indy-k -- is a variation of the 401(k) designed for people who are self-employed or operate a small business with a partner, spouse, or other immediate family members. The annual contribution limit is the same as it is for other 401(k) plans, and catch-up contributions are allowed for participants 50 and older. The plans are easier and less expensive to administer than traditional 401(k)s, and they have certain potential advantages over other retirement plans for small businesses as well, including high contribution limits, access to tax-free loans, and the ability to roll over savings from most other retirement plans. Most business entities qualify to set up an individual 401(k), including partnerships, corporations, S-corporations, limited liability partnerships (LLPs), limited liability companies (LLCs), and sole proprietorships.

Individual retirement account (IRA)

Individual retirement accounts are one of two types of individual retirement arrangements (IRAs) that provide tax advantages as you save for retirement. The other is an individual retirement annuity. Both have the same annual contribution limits, catch-up provisions if you're 50 or older, and withdrawal requirements. In addition, both are available in two varieties: traditional, also known as tax deferred, and Roth. The primary difference between the two is in the tax treatment. Earnings withdrawn from a traditional IRA are taxed at the same rate as your ordinary income. So are the contributions if you qualified to deduct them for the year they were added to your account. Earnings in a Roth IRA are income tax free at withdrawal if you are at least 59 1/2 and your account has been open at least five years. Contributions to a Roth IRA are never deductible. You open an individual retirement account with a financial services firm, such as a bank, brokerage firm, or investment company, as custodian. The accounts are self-directed, which means you can choose among the investments available through your custodian. In common practice, however, perhaps because more people have individual retirement accounts, the acronym IRA tends to be used to refer to an account rather than annuity or arrangement.

Individual retirement annuity (IRA)

An individual retirement annuity is one type of individual retirement arrangement. It resembles the better-known individual retirement account in most ways, such as annual contribution limits, catch-up provisions if you're 50 or older, and withdrawal requirements. In addition, the two share a common acronym -- IRA -- and come in two varieties: traditional, also known as tax deductible, and Roth. The key difference between the two varieties of IRA is that with an individual retirement account you may invest your contributions in any of the alternatives available through your account custodian. With an individual retirement annuity, your money goes into either a fixed or variable annuity offered by the insurance company you have chosen as custodian.

Individual retirement arrangement (IRA)

An individual retirement arrangement (IRA), which may be set up as either an account or an annuity, allows people with earned income to contribute to a tax-deferred traditional IRA or a tax-free Roth IRA. Your contribution can be as much as the annual cap, though it can't be more than you earn. If you are 50 or older, you can make an additional catch-up contribution. You can contribute to a traditional IRA regardless of your income, and you may qualify to deduct your contribution if your modified adjusted gross income (MAGI) is less than the ceiling for your tax filing status. You may also qualify if you're not eligible to participate in an employer sponsored plan where you work. You qualify for a Roth if your MAGI is less than the ceiling for your filing status. If you open a traditional IRA, you usually can't withdraw without penalty before you turn 59 1/2 and you must begin required minimum distributions (RMDs) by April 1 of the year following the year you turn 70 1/2. Income taxes figured at your regular rate are due on your earnings and on any contributions you deducted on your tax return in the year for which you made them. With a Roth IRA your withdrawals are free of federal income tax provided you're at least 59 1/2 and your account has been open at least five years. There are no required withdrawals.

Individually Managed Account

An investment account managed for a single plan.


An industry is a subdivision of a market sector and includes companies producing the same or similar goods and services. These companies often compete with each other for customers and investors. For example, within the consumer staples sector, companies that manufacture household appliances, such as dishwashers and refrigerators, are part of the same industry. The fundamentals of any single company in an industry can be measured against the industry as a whole, revealing where the company stands in relation to its peers.

Inefficient market

In an inefficient market, investors may not have enough information about the securities in that market to make informed decisions about what to buy or the price to pay. Markets in emerging nations may be inefficient, since securities laws may not require issuing companies to disclose relevant information. In addition, few analysts follow the securities being traded there. Similarly, there can be inefficient markets for stocks in new companies, particularly for new companies in new industries that aren't widely analyzed. An inefficient market is the opposite of an efficient one, where enormous amounts of information are available for investors who choose to use it.


Inflation is a persistent increase in prices, often triggered when demand for goods is greater than the available supply or when unemployment is low and workers can command higher salaries. Moderate inflation typically accompanies economic growth. But the US Federal Reserve Bank and central banks in other nations try to keep inflation in check by decreasing the money supply, making it more difficult to borrow and thus slowing expansion. Hyperinflation, when prices rise by 100% or more annually, can destroy economic, and sometimes political, stability by driving the price of necessities higher than people can afford. Deflation, in contrast, is a widespread decline in prices that also has the potential to undermine the economy by stifling production and increasing unemployment.

Inflation rate

The inflation rate is a measure of changing prices, typically calculated on a month-to-month and year-to-year basis and expressed as a percentage. For example, each month the Bureau of Labor Statistics calculates the inflation rate that affects average urban US consumers, based on the prices for about 80,000 widely used goods and services. That figure is reported as the Consumer Price Index (CPI).

Inflation-adjusted return

Inflation-adjusted return is what you earn on an investment after accounting for the impact of inflation. For example, if you earn 7% on a bond during a period when the inflation rate averages 3%, your inflation-adjusted return is 4%. Inflation-adjusted return is also known as real return. Since inflation diminishes the buying power of your money, it's important that the rate of return on your overall investment portfolio be greater than the rate of inflation. That way, your money grows rather than shrinks in value over time.

Inflation-protected security (TIPS)

US Treasury inflation-protected securities (TIPS) adjust the principal twice a year to reflect inflation or deflation measured by the Consumer Price Index (CPI). The interest rate is fixed and is paid twice a year on the adjusted principal. So if your principal is larger because of inflation you earn more interest. If it's lower because of deflation, you earn less. You can buy TIPS with terms of 5, 10, or 20 years at issue using a Treasury Direct account or in the secondary market. At maturity you receive either the adjusted principal or par value, whichever is greater. You owe federal income tax on the interest you earn and on inflation adjustments in each year they're added even though you don't receive the increases until the security matures. However, TIPS earnings are exempt from state and local income taxes. These securities provide a safeguard against deflation as well as against inflation since they guarantee that you'll get back no less than par, or face value, at maturity.

Inherited IRA

An inherited IRA is an IRA that passes to a beneficiary at the death of the IRA owner. If you name your spouse as the beneficiary of your IRA, your spouse inherits the IRA at your death. At that point, your spouse can choose to convert it to his or own property. But if you name anyone other than your spouse, that beneficiary inherits the right to income from your IRA, which is registered in your name as deceased owner and the beneficiary's name, using the beneficiary's Social Security number. You may also name one or more contingent beneficiaries who would inherit if your primary beneficiary died before you did or chose to refuse the bequest.

Initial public offering (IPO)

When a company reaches a certain stage in its growth, it may decide to issue stock, or go public, with an initial public offering (IPO). The goal may be to raise capital, to provide liquidity for the existing shareholders, or a number of other reasons. Any company planning an IPO must register its offering with the Securities and Exchange Commission (SEC). In most cases, the company works with an investment bank, which underwrites the offering. That means marketing the shares being offered to the public at a set price with the expectation of making a profit.

Insider trading

If managers of a publicly held company, members of its board of directors, or anyone who holds more than 10% of the company trades its shares, it's considered insider trading. This type of trading is perfectly legal, provided it's based on information available to the public. It's only illegal if the decision is based on knowledge of corporate developments, such as executive changes, earnings reports, or acquisitions or takeovers that haven't yet been made public. It is also illegal for people who are not part of the company, but who gain access to private corporate information, to trade the company's stock based on this inside information. The list includes lawyers, investment bankers, journalists, or relatives of company officials.

Installation Fee

One-time fee for initiating a new plan or initiating new services. (See Setup Fee)


Instinet is the world's largest agency brokerage firm. As an agency firm, it doesn't trade stock for its own account as traditional brokerage houses do. That way, it doesn't bid against the mutual funds, insurance companies, pension funds, and other institutional investors who are its primary clients. Using Instinet's sophisticated electronic network, these investors can trade directly and anonymously with each other in more than 40 global markets. Or, using Instinet brokers, the investors can place orders on all US exchanges and many overseas exchanges, including those that aren't automated.

Institutional fund

An institutional fund is a mutual fund that's available to large investors, such as pension funds and not-for-profit organizations, with substantial amounts to invest. Typical institutional funds have higher minimum investments but lower fees than the retail funds that are available to the general public. Among the reasons institutional funds may cost less to operate is that they tend to have low turnover rates and their investors redeem shares less often than retail investors.

Institutional investor

Institutional investors buy and sell securities in large volume, typically 10,000 or more shares of stock, or bonds worth $200,000 or more, in a single transaction. In most cases, the investors are organizations with large portfolios, such as mutual funds, banks, university endowment funds, insurance companies, pension funds, and labor unions. Institutional investors may trade their own assets or assets that they are managing for other people.

Insured bond

An insured bond is a municipal bond whose interest and principal payments are guaranteed by a triple-A rated bond insurer. Insurance protects municipal bondholders against default by the issuer and protects bonds in case they're downgraded by ratings agencies, which can decrease market value. Insured bonds generally offer a slightly lower rate of interest than uninsured bonds.


Interest is what you pay to borrow money using a loan, credit card, or line of credit. It is calculated at either a fixed or variable rate that's expressed as a percentage of the amount you borrow, pegged to a specific time period. For example, you may pay 1.2% interest monthly on the unpaid balance of your credit card. Interest also refers to the income, figured as a percentage of principal, that you're paid for purchasing a bond, keeping money in a bank account, or making other interest-paying investments. If it is simple interest, earnings are figured on the principal. If it is compound interest, the earnings are added to the principal to form a new base on which future interest is calculated. Interest is also a share or right in a property or asset. For example, if you are half-owner of a vacation home, you have a 50% interest.

Interest rate

Interest rate is the percentage of the face value of a bond or the balance in a deposit account that you receive as income on your investment. If you multiply the interest rate by the face value or balance, you find the annual amount you receive. For example, if you buy a bond with a face value of $1,000 with a 6% interest rate, you'll receive $60 a year. Similarly, the percentage of principal you pay for the use of borrowed money is the loan's interest rate. If there are no other costs associated with borrowing the money, the interest rate is the same as the annual percentage rate (APR).

Interest-rate risk

Interest-rate risk describes the impact that a change in current interest rates is likely to have on the value of your investment portfolio. You face interest-rate risk when you own long-term bonds or bond mutual funds because their market value will drop if interest rates increase. That loss of value occurs because investors will be able to buy bonds with a new, higher interest rate, so they won't pay full price for an older bond paying a lower interest rate.

Intermediate-term bond

Intermediate-term bonds mature in two to ten years from the date of issue. Typically, the interest on these bonds is greater than that on short-term bonds of similar quality but less than that on comparably rated long-term bonds. Intermediate-term bonds work well in an investment strategy known as laddering. Laddering involves buying bonds with sequential annual maturity dates so that portions of your fixed income portfolio mature in a stepped pattern over a number of years. For example, you might buy bonds maturing in 2012, 2013, 2014, and so on. As each bond matures you reinvest it to extend the ladder.


Internalization occurs when a securities trade is executed within a brokerage firm rather than through an exchange. For example, if you give your broker an order to buy, the brokerage firm, acting as dealer, sells you shares it holds in its own account. Similarly, if you give an order to sell, the firm buys your shares. The transaction is reported to the exchange or market where the stock is listed but the trade is settled within the firm. Your broker might choose an internalized trade, sometimes called a principal transaction, because it results in the fastest trade at the best price. The firm keeps the spread, which is the difference between the price the buyer pays and the amount the seller receives. But if the spread is smaller than it would be with a different execution, you, as buyer or seller, benefit. Your broker may also execute your order by going directly to another firm. In that case, the transaction is reported to the appropriate market just as an internalized trade is, but the recordkeeping and financial arrangements are handled between the firms.

International fund

An international mutual fund invests in stocks, bonds, or cash equivalents that are traded in overseas markets, or in indexes that track these markets. Like other funds, international funds have investment objectives and strategies, and pose some level of risk, such as the risk that currency fluctuations may greatly affect the fund's value. Some international funds focus on countries with established economies, some on emerging markets, and some on a mix of the two. US investors may buy funds that invest in other markets to diversify their portfolios, since owning a fund is usually simpler than investing in individual securities abroad. A different group of funds, called global or world funds, also invest in overseas markets but typically keep a substantial portion of their portfolios in US securities.

International Monetary Fund (IMF)

The IMF was set up as a result of the United Nations Bretton Woods Agreement of 1944 to help stabilize world currencies, lower trade barriers, and help developing nations pay off debt. The IMF's activities are funded by developed nations and are sometimes the subject of intense criticism, either by the nations the IMF is designed to help, the nations footing the bill, or both.


A person who dies without a will is said to have died intestate. In this case, the probate court in the person's home state -- sometimes known as surrogate's court or orphan's court -- determines who has the right to inherit the person's assets and who should be named guardian of any minor children. The process, known as administration, can be time consuming and expensive, and the outcome may or may not reflect what the intestate person would have wanted.

Introducing broker (IB)

An introducing broker is a broker-dealer that contracts with a clearing firm to handle the execution and settlement of orders that the introducing firm receives from its clients or its own trading desk to buy and sell securities. The clearing firm, not the introducing broker, receives payments and securities from the clients and handles recordkeeping. The introducing broker, who earns a commission on the transaction, typically pays a fee for each trade and interest on margin loans the clearing firms make to the clients it introduces. In commodities markets, an introducing broker is an intermediary who takes orders for futures contracts but passes on responsibility for executing the orders and handling the financial arrangements to a futures commission merchant (FCM).

Investment bank

An investment bank is a financial institution that helps companies take new bond or stock issues to market, usually acting as the intermediary between the issuer and investors. Investment banks may underwrite the securities by buying all the available shares at a set price and then reselling them to the public. Or the banks may act as agents for the issuer and take a commission on the securities they sell. Investment banks are also responsible for preparing the company prospectus, which presents important data about the company to potential investors. In addition, investment banks handle the sales of large blocks of previously issued securities, including sales to institutional investors, such as mutual fund companies. Unlike a commercial bank or a savings and loan company, an investment bank doesn't usually provide retail banking services to individuals.

Investment club

If you're part of an investment club, you and the other members jointly choose the investments the club makes and decide on the amount each of you will contribute to the club's account. Among the reasons that clubs are popular are that they allow investors to commit only modest amounts, share in a diversified portfolio, and benefit from each other's research. While clubs may establish themselves informally, many groups use the resources of BetterInvesting, an investor education membership organization. Its website,, provides information on how to start an investment club and support services to existing clubs.

Investment company

An investment company is a firm that offers open-end funds, called mutual funds, closed-end funds, sometimes called investment trusts, or exchange traded funds to the public. By describing a company offering the funds as an investment company, it's easier to distinguish the company from the funds that it offers. For example, a single investment company might offer an aggressive-growth fund, a growth and income fund, a US Treasury bond fund, and a money market fund. Or a closed-end investment company might offer an international fund focused on a single country, such as Ireland, or a region, such as Latin America.

Investment Company Act of 1940

Congress passed the Investment Company Act of 1940 to authorize the Securities and Exchange Commission (SEC) to regulate investment companies, though not to supervise or evaluate their investment decisions. The Act requires that all mutual funds and exchange traded funds (ETFs) that invest in securities and sell their own shares to US investors must register with the SEC and meet a set of standards. These standards include regular public disclosure of their financial situation, their investment policies and objectives, and their fund portfolios as well as their pricing and fees. The provisions of the Act are updated from time to time to reflect market developments, changing attitudes toward governance, and other issues.

Investment Company Institute (ICI)

The Investment Company Institute is an association of US mutual fund companies. ICI membership is open to all US open- and closed-end investment companies, as well as their investment advisers and underwriters. Each year, ICI publishes the Fact Book, a comprehensive review of the mutual fund industry. ICI's goals are to maintain ethical standards in the fund industry, advance the interests of funds and their shareholders, and educate the public about mutual funds and other investment companies.

Investment grade

When a bond is rated investment grade, its issuer is considered able to meet its obligations, exposing bondholders to minimal default risk. Most US corporate and municipal bonds are rated by independent services such as Moody's Investors Service and Standard & Poor's (S&P). The ratings are based on a number of criteria, including the likelihood that the bond issuer will be able to make interest payments and repay the principal in full and on time. The four categories of bonds rated BBB and higher by S&P or Baa and higher by Moody's are considered investment grade.

Investment horizon

Your investment horizon is the point in time when you hope to achieve a particular investment goal. That horizon, sometimes called your time frame, may be fixed or flexible, depending on the nature of the goal and the investment decisions you make. For example, paying for college is often a fixed goal because most students enroll the year they graduate from high school. Retirement may be a more flexible goal if you have the choice about when you will stop working. The landscape can be more complicated if you have more than one investment goal, and therefore there's more than one horizon in the picture.

Investment income

Investment income -- sometimes called unearned income -- is the money that you collect from your investments. It may include stock dividends, mutual fund distributions, and interest from CDs, interest-bearing bank accounts, bonds, and other debt instruments. You may also have rental income from real estate or other assets you own for investment purposes. Capital gains you realize from selling investments for more than you paid to acquire them may also be considered investment income. Your net investment income is what you have left over after you subtract your investment expenses, such as fees and commissions.

Investment objective

An investment objective is a financial goal that helps determine the type of investments you make. For example, if you want a source of regular income, you might select a portfolio of high-rated bonds and dividend-paying stocks. Each mutual fund describes its investment objective in its prospectus, along with the strategy the fund manager follows to meet that objective. Mutual fund investors often look for funds whose stated objectives are compatible with their own goals.

Investment style

Investment style refers to the approach that investors, including professional money managers, take in selecting individual investments and assembling portfolios as they seek to achieve their investment goals. For example, a mutual fund that is focused on small-cap stocks might seek long-term capital appreciation by choosing aggressive growth stocks. Another small-cap fund with the same objective might build a portfolio of underpriced value stocks. Evaluating a fund's investment style -- which is typically described as aggressive, moderate, conservative, or contrarian -- is an important consideration in choosing among mutual funds and ETFs. You'll want to be sure that any fund you purchase is compatible with your individual risk tolerance.

Investment Transfer Expense

Fee associated with a participant changing his or her investment allocation, or making transfers among funding accounts under the plan.

IRA rollover

If you move assets from an employer sponsored retirement plan to an IRA, you've completed an IRA rollover. You owe no income tax on the money you move if you deposit the full amount into the new IRA within 60 days or arrange a direct transfer from the existing account to the new account. If you're moving money from an employer's retirement plan to an IRA yourself, the plan administrator is required to withhold 20% of the total. That amount is credited to you when you file your income tax return, provided you've deposited the full amount into the new account on time, including the 20% that's been withheld that you provide from other sources. Any amount you don't deposit within the 60-day period is considered an early withdrawal and you'll have to pay tax on it. You might also have to pay a 10% tax penalty for early withdrawal if you're younger than 59 1/2. However, if you arrange a direct transfer from your plan to the rollover IRA nothing is withheld and the full value is moved to the IRA.

Irrevocable trust

An irrevocable trust is a legal agreement whose terms cannot be changed by the creator, or grantor, who establishes the trust, chooses a trustee, and names the beneficiary or beneficiaries. The trust document names a trustee who is responsible for managing the assets in the best interests of the beneficiary or beneficiaries and carrying out the wishes the creator has expressed. You typically use an irrevocable trust for the tax benefits it can provide by removing assets permanently from your estate. In addition, through the terms of the trust you can exert continuing control over the way your property is distributed to your beneficiaries. Trusts have the additional advantages of being more difficult to contest than a will and more private. If you establish an irrevocable trust while you're still alive, it's called a living or inter vivos trust. If you establish the trust in your will, so that it takes effect at the time of your death, it's called a testamentary trust.


When a corporation offers a stock or bond for sale, or a government offers a bond, the security is known as an issue, and the company or government is the issuer.


An issuer is a corporation, government, agency, or investment trust that offers securities, such as stocks and bonds, for purchase by investors. Issuers may sell the securities through an underwriter as part of a public offering or as a private placement.

January Effect

Each year, the stock market tends to increase slightly in value between December 31 and the end of the first week of January. Known as the January effect, this rise starts when investors sell underperforming stocks at year-end to claim capital losses on their tax returns. After the new tax year begins on January 1, the same investors tend to reinvest the money from those sales, heightening demand temporarily, and making the overall market rise slightly during that week.

Junior security

In the world of bonds, the term junior means having less claim to repayment. If you own a junior security and the issuing company goes out of business, you have less claim on any assets than an investor who owns a senior security issued by the same company. But all bondholders, whether they own junior or senior securities, are senior to, or have a greater claim than, holders of preferred stock, who in turn are senior to holders of common stock.

Junk bond

Junk bonds carry a higher-than-average risk of default, which means that the bond issuer may not be able to meet interest payments or repay the loan when it matures. Except for bonds that are already in default, junk bonds have the lowest ratings, usually Caa or CCC, assigned by rating services such as Moody's Investors Service and Standard & Poor's (S&P). Issuers offset the higher risk of default on junk bonds by offering substantially higher interest rates than are being paid on investment-grade bonds. That's why junk bonds are also known, more positively, as high-yield bonds.

Keogh plan

A group of qualified retirement plans, including profit sharing plans, money purchase defined contribution plans, and defined benefit plans, is available to self-employed people, small-business owners, and partners in companies that file an IRS Schedule K, among others. Together these plans are sometimes described as Keogh plans in honor of Eugene Keogh, a US representative from Brooklyn, NY, who was a force behind their creation in 1963. The employer, not the employee, makes the contributions to Keogh plans, but the employee typically chooses the way the contributions are invested. Like other qualified plans, there are contribution limits, though they are substantially higher than with either 401(k)s or individual retirement plans, and on par with contribution limits for simplified employee pension plans (SEPs). Any earnings in an employee's account accumulate tax deferred, and withdrawals from the account are taxed at regular income tax rates. If you participate in a Keogh plan, a 10% federal tax penalty applies to withdrawals you take before you turn 59 1/2, and required minimum distributions (RMDs) must begin by April 1 of the year following the year that you turn 70 1/2 unless you're still working. In that case, you can postpone RMDs until April 1 of the year following the year you actually retire. The only exception -- and it is more common here than in other retirement plans -- is if you own more than 5% of the company. If you leave your job or retire, you can roll over your account value to an individual retirement account (IRA). If you're eligible to establish a qualified retirement plan, a Keogh may be attractive because there are several ways to structure the plan, you may be able to shelter more money than with other plans by electing the defined benefit alternative, and you have more control in establishing which employees qualify for the plan. But the reporting requirements can be complex, making it wise to have professional help in setting up and administering a plan.


Laddering is an investment strategy that calls for establishing a pattern of rolling maturity dates for a portfolio of fixed-income investments. Your portfolio might include intermediate-term bonds or certificates of deposit (CDs). For example, instead of buying one $15,000 CD with a three-year term, you buy three $5,000 CDs maturing one year apart. As each CD comes due, you can reinvest the principal to extend the pattern. Or you could use the money for a preplanned purchase, have it available to take advantage of a new investment opportunity, or use it to cover unexpected expenses. You can use laddering to pay for college expenses, with a series of zero coupon bonds coming due over four years, in time to pay tuition each year. If you ladder, you can avoid having to liquidate a large bond investment if you need just some of the money. You can also avoid having to reinvest your entire principal at a time when interest rates may be low.

Large-capitalization (large-cap) stock

The stock of companies with market capitalizations of $5 billion or more is known as large-cap stock, though that dollar value isn't fixed and may move up or down to reflect what's happening in the stock market. Market cap is figured by multiplying the number of either the outstanding or floating shares by the current share price. Large-cap stock prices are generally considered less volatile than stock prices of smaller companies, in part because investors believe that the bigger companies' financial reserves will carry them through economic downturns. However, market capitalization is always in flux. Today's large-cap stock can drop out of that category if the share price plunges either in a general market downturn or as a result of internal problems. And the opposite is true as well. Many of the country's largest companies began life as start-ups.

Lead underwriter

When a company wants to raise capital by selling securities to investors, it partners with an investment bank, known as the lead underwriter. That bank has the primary responsibility for organizing and managing an initial public offering (IPO), a secondary stock offering, or a bond offering. In the case of an IPO, the lead underwriter agrees to buy some or all the shares from the company and helps it determine an initial offering price for the security, create a prospectus, and organize a syndicate of other investment banks to help sell the securities to investors. In return for assuming the financial risk of the IPO, the lead underwriter receives a fee, which is usually a percentage of the price of each share of the IPO.


Lenders make loans. Lenders include private-sector providers, such as banks, credit unions, investment companies, and certain organizations. Public-sector lenders include the federal government and its agencies, and sometimes state or local governments and their agencies. You must qualify for a loan, usually by demonstrating creditworthiness. The terms you're offered depend on the lender's assessment of your ability and willingness to repay what you borrow based on your credit history. Because lenders can set their own rates, with a few restrictions, the lender you use has a major effect on how much borrowing costs you. For example, federal student loans are much cheaper than education loans offered by private lenders.

Level load

Some load mutual funds impose a recurring sales charge, called a level load, each year you own the fund rather than a sales charge to buy or sell shares. The level-load rate is generally lower than the sales charge for front- or back-end loads. But the annual asset-based management fee on these funds is higher than for front-load funds. This means the total amount you pay over time with a level load can be substantially more than a one-time sales charge, especially if you own the fund for a number of years. If a fund company offers you a choice of the way you prefer to pay the load, level-load funds are generally identified as Class C shares. Front-end loads are Class A shares and back-end loads are Class B shares.

Level yield curve

A level yield curve results when the yield on short-term US Treasury issues is essentially the same as the yield on long-term Treasury bonds. You create the curve by plotting a graph with yield on the vertical axis and maturity date on the horizontal axis and connecting the dots. In most periods, the yield on long-term bonds is higher and the yield curve is positive because investors demand more for tying up their money for a longer period. There are also times, when short-term T-bills yields are higher, that the pattern is reversed and the yield curve is negative, or inverted.

Leveraged buyout (LBO)

A leveraged buyout (LBO) occurs when a group of investors using primarily borrowed money, often raised with high-yield bonds or other types of debt, takes control of a company by acquiring a majority interest in its outstanding stock. Leveraged buyouts, which are often, but not always, hostile takeovers, may be engineered by an outside corporation, a private equity firm, or an internal management team.


In personal finance, liabilities are the amounts you owe to creditors, or the people and organizations that lend you money. Typical liabilities include your mortgage, car and educational loans, and credit card debt. When you figure your net worth, you subtract your liabilities, or what you owe, from your assets. The result is your net worth, or the cash value of what you own. In business, liabilities refer to money a company owes its creditors and any claims against its assets.


A lien exists when you owe money to a lender on a particular vehicle or other asset, such as real estate, that has been used as collateral on a loan. An asset on which there's a lien can't be sold until the lienholder has been repaid. When you own an asset on which there's a lien, you risk having it repossessed if you default and don't make the required payments in full and on time.


A lienholder is the bank, finance company, credit union, other financial institution, or individual with whom you signed an agreement to borrow money using a particular asset, such as a car, as collateral. As long as there is a balance due on the loan, the lienholder must be repaid before you are free to sell the asset.

Life expectancy

Your life expectancy is the age to which you can expect to live. Actuarial tables establish your official life expectancy, which insurance companies use to evaluate the risk they take in selling you life insurance or an annuity contract. The Internal Revenue Service (IRS) also uses life expectancy to determine the distribution period you must use to calculate required minimum distributions (RMDs) from your retirement savings plans or traditional IRAs. However, your true life expectancy, based on your lifestyle, family history, and other factors, may be longer or shorter than your official life expectancy.

Lifecycle fund

A lifecycle fund, which is a fund of funds, invests in a group of individual mutual funds. Investors may select such a fund to help meet their investment objectives without having to select individual funds. Some companies offer a set of lifecycle funds, each with a different level of risk and potential return, from conservative to aggressive. In that case, you may choose a fund that's structured to help you reach your goals within the time frame you've allowed or at the level of risk you are comfortable taking. The typical pattern is for younger investors to choose a more aggressive lifecycle fund, and those nearing retirement to choose a more conservative fund. With target date funds, which are a type of lifecycle fund, you choose a fund associated with your target retirement year, such as 2025 or 2040. The fund manager reallocates your portfolio periodically. The pattern is to provide a more conservative mix as you near retirement.

Lifetime learning credit

You may qualify to claim a lifetime learning tax credit each year for qualified higher educational expenses for yourself, your spouse, or a dependent if your family's modified adjusted gross income (MAGI) falls within the annual limits that Congress sets. Those amounts tend to increase slightly each year. The education must be coursework-based but doesn't have to be part of a degree- or certificate-granting program. But the tax credit can be used for undergraduate, postgraduate, or professional studies. Even if you are paying for more than one person's education, you can take only one lifetime learning credit per year. If you claim the credit while you're taking withdrawals from tax-free college savings plans such as a 529 college savings plan or an education savings account (ESA), you'll have to plan carefully. Your withdrawals will lose their qualified status and be subject to tax and penalty if you use them to pay for the same expenses for which you claim the tax credit. You can't take the credit, though, if you claim a tuition and fees deduction in calculating your adjusted gross income or deduct the amount as a business expense.

Limit order

A limit order sets the maximum you will pay for a security or the minimum you are willing to accept on a particular transaction. For example, if you place a limit order to buy a certain stock at $25 a share when its current market price is $28, your broker will not buy the stock until its share price reaches $25. Similarly, if you give a limit order to sell at $25 when the stock is trading at $20, the order will be filled only if the price rises to $25. A limit order differs from a market order, which is executed at the current price regardless of what that price is. It also differs from a stop order, which becomes a market order when the stop price is reached and the order is executed at the best available price.

Limit price

A limit price is the specific price at which you tell your stockbroker to execute a buy or sell order on a particular security. If the transaction can be completed at that price, it goes through, but if that price is not available, no purchase or sale takes place. The advantage of a limit order is that you won't pay more or sell for less than you want. Since your broker is monitoring the price, it is more likely that the trade will take place at the limit price than if you waited until the security reached that price to place your order. The potential drawback of setting a limit price, which is also known as giving a limit order, is that the transaction may not take place in a fast market if the price of the security moves up or down quickly, passing the limit price.

Limited liability company (LLC)

Organizing a business enterprise as a limited liability company (LLC) under the laws of the state where it operates protects its owners or shareholders from personal responsibility for company debts that exceed the amount those owners or shareholders have invested. In addition, an LLC's taxable income is divided proportionally among the owners, who pay tax on their share of the income at their individual rates. The LLC itself owes no income tax. The limited liability protection is similar to what limited partners in a partnership or investors in a traditional, or C, corporation enjoy. The tax treatment is similar to that of a partnership or S corporation, another form of organization that's available for businesses with fewer than 75 employees. However, only some states allow businesses to use LLC incorporation.

Limited partner

A limited partner is a member of a partnership whose only financial risk is the amount he or she has invested. In contrast, all the assets of the general partner or partners, including those held outside the partnership, could be vulnerable to claims brought by the partnership's creditors.

Limited partnership

A limited partnership is a financial affiliation that includes at least one general partner and a number of limited partners. The partnership invests in a venture, such as real estate development or oil exploration, for financial gain. The arrangement can be public, which means anyone who meets in income or net worth requirements can buy into the partnership, or private. What makes it a limited partnership is that everyone but the general partners has limited liability. The most the limited partners can lose is the amount they invest.

Line chart

A line chart is one type of price chart that technical analysts use to track price data for a particular security over a set period of time, typically a day. A line chart shows only the closing price, which produces a single line that runs across the x-, or horizontal, axis of a graph when closing prices for several days are connected. Since these charts show relatively little data, in contrast to other charts that may show open, low, high, and close prices, some analysts believe line charts make trends easier to spot.

Line of credit

A line of credit is a revolving credit arrangement you establish with a lender. The lender sets the credit limit, which is the most you can borrow under the arrangement. When you borrow against a line of credit, you pay interest on the amount of money you actually borrow, not on the available balance, or full amount you are able to borrow. For example, if you have a $10,000 line of credit on a credit card, you may borrow as much or as little as you want up to that amount, and you pay interest only on the amount you have borrowed. If you carry a balance of $3,000, you pay interest on only that amount, but there is still $7,000 available for you to borrow. Once you repay the $3,000 you borrowed, you can borrow it again. A line of credit may be secured with collateral, or unsecured. A line of credit on a credit card is usually unsecured, for example. But if you have a home equity line of credit, your home serves as collateral against the amount you borrow.

Lipper, Inc

Lipper provides financial data and performance analysis for more than 30,000 open- and closed-end mutual funds and variable annuities worldwide. The company evaluates funds on the strength of their success in meeting their investment objectives and identifies the strongest funds in specific categories as Lipper Leaders. The research company's mutual fund indexes are considered benchmarks for the various categories of funds.

Liquid asset

Liquid assets are accounts or securities that can be easily converted to cash at little or no loss of value. These include money in bank accounts, money market mutual funds, and US Treasury bills. Actively traded stocks, bonds, and mutual funds are liquid in the sense that they are easy to sell, but the price is not guaranteed and could be less than the amount you paid to buy the asset. In contrast, selling fixed assets, such as real estate, usually requires time and negotiation and may result in either a profit or a loss.


When you liquidate an asset, such as a stock, bond, or real estate, you sell to convert its value to cash. The more easily you can sell with little to no loss in value, the more liquid the investment is. The asset class known as cash equivalent investments, which includes certificates of deposit (CDs), US Treasury bills, and money market mutual funds, among others, is highly liquid. For example, you can generally redeem shares in a money market mutual fund at any time for $1 a share. Exchange-listed stocks are liquid to the extent that there is almost always a buyer. But there is no guarantee against loss in value if you sell when the price has dropped. In contrast, illiquid investments are difficult to sell quickly because of a limited market or because they carry a penalty, sometimes substantial, if you cash out before the term expires. Some alternative investments, including some direct investments, are considered illiquid. Real estate may be illiquid in some markets.


If you can convert an asset to cash easily and quickly, with little or no loss of value, the asset has liquidity. For example, you can typically redeem shares in a money market mutual fund at $1 a share. Similarly, you can cash in a certificate of deposit (CD) for at least the amount you put into it, although you may forfeit some or all of the interest you had expected to earn if you liquidate before the end of the CD's term. The term liquidity is sometimes used to describe investments you can buy or sell easily. For example, you could sell several hundred shares of a blue chip stock by simply calling your broker, something that might not be possible if you wanted to sell real estate or collectibles. The difference between liquidating cash-equivalent investments and securities like stock and bonds, however, is that securities constantly fluctuate in value. So while you may be able to sell them readily, you might sell for less than you paid to buy them if you sold when the price was down.

Listing requirement

Listing requirements are the standards a corporation must meet to have its stock or bonds traded on a particular exchange. Exchanges set their own initial and continuing listing requirements. Among the listing criteria are a corporation's pretax earnings, a minimum market value, and a minimum number of existing shares.

Living trust

Living trusts, also called inter vivos trusts, are set up while you're alive to hold assets that you as grantor transfer to the trust. The trust itself is a legal entity, like a corporation, that can earn income, pay taxes, and distribute earnings. You also name the beneficiaries of the trust and the trustee or trustees who administer it. A living trust may be revocable, which means its terms can be changed, or irrevocable. In either case, when the trust ends, the trust's assets will be distributed directly to your beneficiaries according to the trust's terms. They aren't subject to the probate process, as property transferred by a will is. There are several types of living trusts, each designed to accomplish a specific goal or goals. Well-designed trusts can be valuable estate planning or financial management tools. But poorly drawn trusts may not accomplish the goals for which they were created.

Living will

A living will is a legal document that describes the type of medical treatment you want -- or don't want -- if you are terminally ill or unable to communicate your wishes. Like wills that provide instructions about your assets, living wills must be signed and have two or more witnesses to be valid. You can use a healthcare proxy or durable power of attorney for healthcare to authorize someone to act as your agent to ensure your wishes are followed. Because there are still unresolved questions about the extent of your agent's authority, it may be wise to get legal advice in preparing the documents.


If you buy a mutual fund through a broker or other financial professional, you pay a sales charge or commission, also called a load. If the charge is levied when you purchase the shares, it's called a front-end load. If you pay when you sell shares, it's called a back-end load or contingent deferred sales charge. And with a level load, you pay a percentage of your investment amount each year you own the fund.

Load fund

Some mutual funds charge a load, or sales commission, when you buy or sell shares or, in some cases, each year you own the fund. The charge is generally figured as a percentage of your investment amount. Most load funds are sold by brokers or other investment professionals. The sales charge compensates them for their time. In contrast, no-load funds, which don't have sales charges but may levy other fees, are usually sold directly to the public by the investment company that offers the fund. Some companies offer both load and no-load versions of the same fund.

Loan Maintenance and Repayment Tracking Fee

Fee charged to monitor outstanding loans and repayment schedule.

Loan Origination Fee

Fee charged when a plan loan is originally taken.

Loan Processing Fee

Fee charged to process a plan loan application.

Lock-up period

A lock-up period is the time during which you cannot sell an investment that you own. You are most likely to encounter a lock-up period if you acquire shares in an initial public offering (IPO) because you had a private equity investment in the company before it went public and receive shares in the IPO proportionate to your private equity ownership interest. You may also have a lock-up period if you are an owner or an employee of the company and are granted shares. The lock-up period may last as long as 180 days. In some cases, though, the lock-up period is graduated, meaning that after the initial 180 days you can sell an increasingly larger portion of your shares over the next two years. After the lock-up period ends, you are free to sell all your shares if you wish.

Logarithmic scale

On a logarithmic scale or graph, comparable percentage changes in the value of an investment, index, or average appear to be similar. However, the actual underlying change in value may be significantly different. For example, a stock whose price increases during the year from $25 to $50 a share has the same percentage change as a stock whose price increases from $100 to $200 a share. On a logarithmic scale, it's irrelevant that the dollar value of the second stock is four times the value of the first. Similarly, the percentage change in the Dow Jones Industrial Average (DJIA) as it rose from 1,000 to 2,000 is comparable to the percentage change when it moved from 4,000 to 8,000.

Long bond

Thirty-year bonds issued by the US Treasury are referred to as long bonds. The interest rate on the long bond is typically but not always higher than the rate on the Treasury's shorter term notes and bills. The rate on the most recently issued bond is the basis for pricing other long-term bonds and setting other financial benchmarks.

Long-term capital gain

When you sell a capital asset that you have owned for more than a year at a higher price than you paid to buy it, any profit on the sale is considered a long-term capital gain. Unlike short-term gains, which are taxed as ordinary income, most long-term gains on most securities are taxed at rates lower than the rates on ordinary income. Currently, those rates are 15% if you're in the 25% tax bracket or higher, and 0% if you are in the 10% or 15% bracket. You can subtract any long-term capital losses you realized in the same tax year from your long-term capital gains to reduce the amount on which potential tax may be due. You may also be able to use capital losses that you have carried over from earlier years for this purpose.

Long-term capital loss

When you sell a capital asset that you have owned for more than a year at a lower price than you paid to buy it, any loss on the sale is considered a long-term capital gain. You can deduct your long-term capital losses from your long-term capital gains to reduce the amount on which potential tax may be due. You may also be able to deduct up to $3,000 in accumulated long-term capital losses from your ordinary income and carry forward losses you can't use in one tax year to deduct in the next tax year.

Loose credit

To combat a sluggish economy, the Federal Reserve's Open Market Committee (FOMC) may institute a loose credit policy. In that case, the Federal Reserve Bank of New York buys large quantities of Treasury securities in the open market, which gives banks additional money to lend at lower interest rates. This abundance, or looseness, of credit is intended to stimulate borrowing and invigorate the economy. Tight money is the opposite of loose credit. It's the result of a FOMC decision to sell securities in the open market, which reduces bank reserves and makes borrowing more expensive. A tight money policy is designed to slow down a rapidly accelerating economy.


Stocks whose market prices drop the most during the trading day are described, rather bluntly, as losers. The stocks that lose the most value relative to their opening price are called percentage losers, and the stocks that lose the greatest number of points are called net losers or dollar losers. Each trading day, the number of losers is compared to the number of gainers, or stocks that have risen in value, to gauge the mood of the market. If there are more losers than gainers over a period of days, the market as a whole is in a slump.

Lump sum

A lump sum is an amount of money you pay or receive all at once rather than in increments over a period of time. For example, you buy an immediate annuity with a single lump-sum payment. If you receive the face value of a life insurance policy when the insured person dies, or receive the full value of your retirement account, those payments are also lump sums.

Lump-sum distribution

When you retire, you may have the option of taking the value of your pension, salary deferral, or profit-sharing plan as a lump-sum distribution. If you take the lump sum from a defined benefit pension plan, the employer follows specific regulatory rules to calculate how much you would have received over your estimated lifespan if you'd taken the pension as an annuity adjusted for the amount it estimates it would have earned in its investments on that amount during the payout period. In contrast, when you take a lump-sum distribution from a defined contribution plan, such as a salary deferral or profit-sharing plan, you receive the amount that has accumulated in the plan. You may or may not have the option to take a lump-sum distribution from these plans when you change jobs. You can take a lump-sum distribution as cash, or you can roll over the distribution into an individual retirement arrangement (IRA). If you take the cash, you owe income tax on the full amount of the distribution, and you may owe an additional 10% penalty if you're younger than 59 1/2. If you roll over the lump sum into an IRA, the full amount continues to be tax deferred, and you can postpone paying income tax until you withdraw.

Make a market

A broker-dealer firm that stands ready to buy or sell at least one round lot of a specific security at its publicly quoted price is said to make a market in that security. Electronic markets, such as the Nasdaq Stock Market, tend to have several market makers in a particular security. The overall effect of multiple market makers is greater liquidity in the marketplace and more competitive pricing.

Managed account

A managed account is a portfolio of securities chosen and managed by a professional investment manager who makes the buy and sell decisions. Each managed account has an investment objective, and each manager oversees multiple individual accounts invested in the same basic portfolio to meet the same objective. While managed accounts resemble mutual funds in some ways, with a managed account you own individual securities rather than shares of a common fund. You may also be able to request that the manager avoid certain investments, which you can't do with a mutual fund. And, through your broker, you might ask the manager to sell certain holdings in your account to realize capital gains or losses. There are no phantom gains in managed accounts. Those gains can occur if a mutual fund realizes a profit from selling an investment and credits you with a capital gain even if there has been no actual increase in your account value as a result of holding the security. However, the minimum investment is usually higher for a managed account than for a mutual fund. The annual fees may also be higher than the fees for holding a mutual fund of similar value.

Management fee

A management fee is the percentage of your account value that an investment company or manager charges to handle your account. Fees for passively managed index funds typically cost less than the fees for actively managed funds, though fees differ significantly from one fund company to another.


Margin is the minimum amount of collateral -- in either cash or securities -- you must have in your margin account to buy on margin, sell short, or invest in certain derivatives. The initial margin requirement is set by the Federal Reserve Regulation T and varies from product to product. For example, to buy stock on margin, you must have at least 50% of the purchase price in your account. After the initial transaction, maintenance rules set by the self-regulatory organizations, such as FINRA, and brokerage firms apply. Under these rules, you must have a minimum of 25% of the total market value of the margined investments in your account at all times. Individual firms may set their maintenance requirement higher -- at 30% or 35%, for example. If your equity in the account falls below the maintenance level, you'll receive a margin call for additional collateral to bring the account value back above the minimum level.

Margin account

Margin accounts are brokerage accounts that allow you a much wider range of transactions than cash accounts. In a cash account you must pay for every purchase in full at the time of the transaction. In a margin account, you can buy on margin, sell short, and purchase certain types of derivative products. Before you can open a margin account, however, you must satisfy the firm's requirements for margin transactions. You must also agree in writing to the terms of the account, and make a minimum deposit of at least $2,000 in cash or qualifying securities. If you buy on margin or sell short, you pay interest on the cash or the value of the securities you borrow through your margin account and must eventually repay the loan. Because both types of transactions use leverage, they offer the possibility of making a substantially larger profit than you could realize by using only your own money. But because you must repay the loan plus interest even if you lose money on the investment, using a margin account also exposes you to more risk than a cash account.

Margin call

To protect the margin loans they make, brokers issue a margin call if your equity in your margin account falls below the required maintenance level of at least 25%. If you get a margin call, you must deposit additional cash or securities to meet the call, bringing the balance of the account back up to the required level. If you don't meet the call, securities in your account may be sold, and your broker repaid in full. For example, if you buy 1,000 shares on margin when they are selling at $10 a share, and the price falls to $7 a share, your equity would be $2,000 ($7,000 market value minus $5,000 loan is $2,000). That's 28.6% of the market value. If your brokerage firm has a maintenance requirement of 30%, you would receive a margin call to bring your equity back to the required level -- in this case $2,100, which is 30% of $7,000. You might also get a margin call if you trade futures contracts and the value of your account drops below the required maintenance level. However, margin requirements for futures are different than for stock.

Margin requirement

The margin requirement is the minimum amount the Federal Reserve, in Regulation T, requires you to deposit in a margin account before you can trade through that account. Currently this minimum, or initial margin, is $2,000, or 50% of the purchase price of securities you buy on margin, or 50% of the amount that you receive for selling securities short. In addition, there's a minimum maintenance requirement, a minimum of 25% and often more, of the market value of the securities in the account. The maintenance requirement is set by securities regulators and individual brokerage firms.

Marginal tax rate

Because the US income tax system is progressive, your tax rate rises as your taxable income rises through two or more tax brackets. Your marginal tax rate is the rate you pay on the taxable income that falls into the highest bracket you reach: 10%, 15%, 25%, 28%, 33%, or 35%. For instance, if you have a taxable income that falls into three brackets, you would pay at the 10% rate on the first portion, the 15% rate on the next portion, and the 25% federal tax rate on only the third portion. Your marginal rate would be 25%. However, your marginal tax rate is higher than your effective tax rate, which is the average rate you pay on your combined taxable income. That's because you're paying tax at your marginal, or maximum, rate only on the top portion of your income. Keep in mind that your marginal tax rate applies only to tax on ordinary income and does not take into account other tax liabilities -- such as realized long-term capital gains, which are taxed at your long-term capital gains rate, or tax credits for which you may be eligible, which may reduce the actual tax you pay.

Mark to the market

When an investment is marked to the market, its value is adjusted to reflect the current market price. With mutual funds, for example, marking to the market means that a fund's net asset value (NAV) is recalculated each day based on the closing prices of the fund's underlying investments. With a margin account to buy futures contracts, the value of the contracts in the account is recalculated at least once a day to determine whether it meets the firm's margin requirements. If that value falls below the minimum specified, you get a margin call and must add assets to your account to return it to the required level. Publicly traded financial companies must report the value of some assets by marking them to market on their balance sheets. When the assets are illiquid and similar assets have been sold for much less than their purchase prices, the new marked-to-market values reduce the company's bottom line.


A markdown is the amount a broker-dealer earns on the sale of a fixed-income security and is the difference between the sales price and what the seller realizes on the sale. The markdown may or may not appear in the commission column or be stated separately on a confirmation statement. A markdown is determined, in part, by the demand for the security in the marketplace. A broker-dealer may charge a smaller markdown if the security can be resold at a favorable markup. The term markdown also refers more generally to a reduced price on assets that a seller wants to unload and will sell at less than the original offering price.


Traditionally, a securities market was a place -- such as the New York Stock Exchange (NYSE) -- where members met to buy and sell securities. But in the age of electronic trading, the term market is used to describe the organized activity of buying and selling securities, even if those transactions do not occur at a specific location.

Market capitalization

Market capitalization is a measure of the value of a company, calculated by multiplying the number of either the outstanding shares or the floating shares by the current price per share. For example, a company with 100 million shares of floating stock that has a current market value of $25 a share would have a market capitalization of $2.5 billion. Outstanding shares include all the stock held by shareholders, while floating shares are those outstanding shares that actually are available to trade. Market capitalization, or cap, is one of the criteria investors use to choose a varied portfolio of stocks, which are often categorized as small-, mid-, and large-cap. Generally, large-cap stocks are considered the least volatile, and small caps the most volatile. The term market capitalization is sometimes used interchangeably with market value, in explaining, for example, how a particular index is weighted or where a company stands in relation to other companies.

Market cycle

A market cycle is the movement from a period of increasing prices and strong performance, or bull market, through a period of weak performance and falling prices, or bear market, and back again to new strength. Cycles recur periodically, though not on a predictable schedule. The length of each full cycle, and each phase within it, varies from several months to several years. The top of a cycle is called a peak and the bottom a trough. A market cycle generally runs ahead of the concurrent economic cycle. For example, investors begin to sell stocks because they anticipate a recession, or turn bullish in the early stages of a recovery. However, not all sectors of a market operate on the same schedule. For example, some stocks, such as utilities, have historically prospered in the downward phase of the stock market cycle when most other stocks have underperformed. Similarly, the stock market tends to operate on a different cycle than the bond or commodities markets. These overlapping but distinct cycles are the basis of the investment strategy known as asset allocation.

Market exposure

Market exposure is the extent to which the performance of your investment portfolio or a fund in which you're invested depends on the performance of a particular asset class, market sector, or individual security. For example, if 90% of your portfolio is in equities, that's your market exposure to equities. The term also describes the amount of principal you have invested in the securities markets, which is therefore at risk.

Market index

A market index measures changes in the value of a specific group of stocks, bonds or other investments that it tracks from a specific starting point, which may be as recent as the previous day or some date in the past. An index may be broad, encompassing a large number of stocks or bonds, or quite narrow, including only a limited number.

Market maker

A broker-dealer who is prepared to buy or sell a specific security -- such as a bond or at least one round lot of a stock -- at a publicly quoted price, is called a market maker in that security. Other brokers buy or sell specific securities through market makers, who may maintain inventories of those securities. There is often more than one market maker in a particular security, and they bid against each other, helping to keep the marketplace liquid. The Nasdaq Stock Market and the corporate and municipal bond markets are market maker markets. In contrast, on the floor of the New York Stock Exchange (NYSE) there's a single specialist to handle transactions in each security.

Market order

When you tell your broker to buy or sell a security at the market, or current market price, you are giving a market order. The broker initiates the trade immediately. The amount you pay or receive is determined by the number of shares and the current bid or ask price. Market orders, which account for the majority of trades, differ from limit orders to buy or sell, in which a price is specified.

Market price

A security's market price is the price at which it is currently trading in an organized market. A good indication of the market price of a stock selling on the New York Stock Exchange (NYSE) or the Nasdaq Stock Market is the last reported transaction price. However, if you give a market order to buy securities, then market price means the current ask, or offer. If you give a market order to sell, market price means the current bid.

Market risk

Market risk, also known as systemic risk, is risk that results from the characteristic behavior of an entire market or asset class. One example of this type of risk is that the market prices of existing bonds generally fall as interest rates rise because investors are not willing to pay par value to own a bond that pays less interest than other bonds available in the marketplace. So if you wanted to sell your existing bonds, you would probably have to settle for less than you paid to buy them. Asset allocation is generally considered an antidote for market risk, since if your portfolio includes multiple asset classes it tends to be less vulnerable to a downturn in any one class.

Market timing

Market timing means trying to anticipate the point at which a market has hit, or is about to hit, a high or low turning point, based on historical patterns, technical analysis, or other factors. Market timers try to buy as the market turns up and sell before the market turns down. It's the anticipated change in direction rather than the amount of time that passes between those changes that's significant for these investors. The term is sometimes used in a negative sense to refer to a trading strategy that aims for quick profits by taking advantage of short-term changes in securities' prices. Market timers, sometimes known as day traders, trade electronically. They try to buy low and sell high by taking advantage of second-to-second or minute-to-minute changes in the financial marketplace. They base decisions on information such as a forecast on interest rates or a sell-off in a particular market sector.

Market value

The market value of a stock or bond is the current price at which that security is trading. In a more general sense, if an item has not been priced for sale, its fair market value is the amount a buyer and seller agree upon. That's assuming that both know what the item is worth and neither is being forced to complete the transaction.


When you buy securities from a broker-dealer or market maker, you pay a markup. The markup is either a percentage of the selling price or a flat fee, over and above the amount it cost the broker-dealer to purchase the security. The amount of this markup, or spread, is the broker-dealer's profit and depends in part on the demand for that security or others like it. For example, if investors are buying up certain types of bonds, a broker-dealer may increase the markup for bonds in that category. You might say that the broker-dealer acquires the security at wholesale price and sells it to you at retail price. The difference is the markup. If the markup doesn't appear on the confirmation statement, you can ask the broker-dealer about the markup amount. Or you can compare the prices that different broker-dealers quote for the same security or the price being quoted for the security on the Internet. The differences in price generally reflect the differences in markups.

Matching contribution

A matching contribution is money your employer adds to your retirement savings account, such as a 401(k) or a SIMPLE. It's usually a percentage of the amount you contribute up to a cap that the employer sets, such as 50% of your contribution up to 5% of your salary. The matching amount and any earnings are tax deferred until you withdraw them from your account. In most plans, employers are not required to match contributions, but may do so if they wish. Employers also determine, within federal guidelines, how long you have to work for the company in order to be fully vested in the matching contributions.

Matrix trading

Matrix trading occurs when the yield spread between two categories of bonds with different levels of risk is temporarily inconsistent with what that spread would normally be, prompting traders to try to capitalize on an unusual situation by initiating a bond swap. For example, such a swap might involve long-term corporate bonds with high ratings and those with low ratings or bonds with longer terms and those with shorter terms.

Maturity date

A bond or other loan that must be repaid comes due on its maturity date. On that date, the full face value of the bond (and sometimes the final interest payment) must be paid in full to the bondholder. Certificates of deposit (CDs) also have maturity dates on which you may withdraw the principal and interest without penalty or roll over the money into a new CD. Other debt instruments, such as mortgage-backed securities, pay back their principal over the life of the debt, similar to the way a mortgage is amortized, or paid down. While these instruments also have a maturity date, that date is when the last installment payment of the loan as well as the last interest payment is due.


Mediation is a voluntary method of attempting to resolve disputes, in which the parties in conflict meet with a trained, independent third party to come up with a solution that's satisfactory to everyone involved. For example, if you have a problem with your broker that you can't resolve directly with the firm, you can file a request for mediation with FINRA, which oversees brokerage firms and has over 900 trained mediators to help resolve disputes. Mediation is less expensive, less formal, and less confrontational than arbitration or lawsuits. But both parties must agree to use the process. While you may retain a legal adviser during mediation, any resolution will be crafted with your direct involvement, which is usually not the case with arbitration. Also, unlike arbitration, mediation is nonbinding, which means that if you're not happy with the outcome, you can stop the process, and either drop the issue or move to more formal proceedings.


When two or more companies consolidate by exchanging common stock, and the resulting single company replaces the old companies, the consolidation is described as a merger. The shareholders of the old companies receive prorated shares in the new company. A merger is typically a tax-free transaction, meaning, among other things, that shareholders owe no capital gains taxes on the stock that is being exchanged. A merger is different from an acquisition, in which one company purchases, or takes over, the assets of another. The acquiring company continues to function and the acquired company ceases to exist. Shareholders of the acquired company receive shares in the new company in exchange for their old shares. Despite their differences, mergers and acquisitions are invariably linked, often simply described as M & A.

Micro-cap stock

A micro-cap stock is one with a smaller market capitalization -- sometimes much smaller -- than stocks described as small-caps. Market capitalization is figured by multiplying the current market value by the number of outstanding or floating shares. The cut-off for deciding that a stock belongs in one category or the other is arbitrary and tends to change from time to time to reflect market prices. Micro-caps are not only the smallest of the publicly traded corporations, but they are also the most volatile. That's partly because they often lack the reserves that may allow a larger company to weather a rough economic environment. As there are generally relatively few shares of a micro-cap company, a large transaction can have a dramatic impact on the stock's price. In contrast, a similar transaction might not affect the stock price of a larger company that had many more shares in the market quite as much.

Mid-capitalization (mid-cap) stock

A mid-cap stock is one issued by a corporation whose market capitalization falls in a range between a small company and a large one. The dollar values assigned to those divisions are arbitrary and change to reflect the overall state of the stock market. That is, the numbers are higher is a strong market environment and lower in a weak one. Market capitalization is figured by multiplying the number of either the outstanding or the floating shares by the current share price. Investors tend to buy mid-cap stocks for their growth potential. Their prices are typically lower than those of large-caps. At the same time, these companies tend to be less volatile than small-caps, in part because they have more resources with which to weather an economic downturn.

Minimum required distribution (MRD)

A minimum required distribution is the smallest amount you must take each year from your tax-deferred retirement savings plan once you've reached the mandatory withdrawal age, usually 70 1/2. While the term continues to be used, it has been supplanted by required minimum distribution (RMD). MRDs (or RMDs) are required from 401(k) plans, 403(b) plans, 457 plans, and SIMPLEs as well as traditional IRAs. If you take less than the required minimum in any year, you owe a 50% penalty on the amount you should have taken but didn't. You calculate your MRD by dividing your account balance at the end of your plan's fiscal year -- often December 31 -- by a distribution period based on your life expectancy. You find that number in IRS Publication 590, Table 3. If your spouse is your beneficiary and more than ten years younger than you are, you can use a longer distribution period, found in Table 2.

Minority interest

All shareholders whose combined shares represent less than half of the total outstanding shares issued by a corporation have a minority interest in that corporation. In fact, in many cases, the combined holdings of the minority shareholders are considerably less than half of the total shares. In another example, in a partnership, any partner who has a smaller percentage than another partner is said to have a minority interest. Under normal circumstances, it is difficult for those with a minority interest to have any real influence on corporate policy.

Mirror voting

In mirror voting, a block of new votes is cast proportionally to reflect, or echo, the votes that have already been cast on a particular issue. Using mirror voting, some brokerage firms cast proxy votes on behalf of non-voting beneficial owners to reflect balance of yes and no votes cast by voting beneficial owners. For example, if 100 shareholders cast 60 votes for a proposal and 40 votes against, the brokerage firm would follow the 3:2 proportion in voting the proxies of the non-voting shareholders. Brokerage firms are not required to use mirror voting, also known as shadow voting or echo voting, but may do so voluntarily.

Model Portfolio

A model portfolio consists of a specially selected basket of index funds with varying allocations. Model portfolios are developed and balanced to meet the needs of specific investing profiles, including time horizon and risk tolerance.

Modern portfolio theory

Modern portfolio theory focuses on evaluating potential return in relation to potential risk as the basis of sound investment decision-making. The strategy is to evaluate and select individual securities as part of an overall portfolio rather than solely for their own strengths or weaknesses as an investment. Asset allocation is a primary tactic according to theory practitioners. That's because it allows investors to create portfolios to get the strongest possible return without assuming a greater level of risk than they are comfortable with. Another tenet of modern portfolio theory is that investors must be rewarded, in terms of realizing a greater return, for assuming greater risk. Otherwise, there would be little motivation to make investments that might result in a loss of principal.

Modified adjusted gross income (MAGI)

Your modified adjusted gross income (MAGI) is your adjusted gross income (AGI) plus exclusions or deductions you may have taken for housing expense or income earned outside the United States or income received as a resident of American Samoa or Puerto Rico. If your MAGI is less than the annual ceilings set by Congress for your filing status, you qualify for various tax adjustments, deductions, and credits. Some of these include a deduction for your contributions to a traditional IRA, contributing to a Roth IRA, the Hope and Lifetime Learning credits, the adoption credit, and the right to subtract student loan interest. However, the specific MAGI for each adjustment, deduction, or credit tends to be different from the MAGI for others.


Technical analysts use a momentum indicator to measure the rate of change of a security's closing prices in order to identify a price trend and the strength of that trend. The indicator is a centered oscillator, which means it fluctuates above and below a center, or zero, line. High readings may indicate an uptrend may be occurring, while low readings may indicate a downtrend. Some analysts interpret movement above the zero line from below as a signal to buy because they expect prices to rise. Similarly they see moves below the line from above as a signal to sell because they expect prices to drop. Momentum may also be used to indicate that a security is overbought or oversold.

Momentum investing

A momentum investor focuses on stocks that are rising in value on increasing daily volume, and avoids stocks that are falling in price or that are perceived to be undervalued. The logic is that when a pattern of growth has been established, it will continue to gain momentum and the growth will continue. Momentum investing is essentially the opposite of contrarian investing.

Monetary aggregate

A monetary aggregate is a class of financial assets that's a component of a country's money supply. In the United States, the Federal Reserve identifies four monetary aggregates: M1, M2, M3, and L. M1 is the narrowest. L is the largest and incorporates the other three, as M2 incorporates M1, and M3 incorporates M2.

Monetary policy

A country's central bank is responsible for its monetary policy. In the United States, for example, the Federal Reserve aims to keep the economy growing but not allow it to become overheated. In a sluggish economy, the Fed may lower the short-term interest rate to loosen credit and allow more cash to circulate in an attempt to stimulate expansion. Or, if it fears the economy is growing too quickly, it may tighten credit by raising the short-term interest rate to reduce the money supply, in an attempt to rein in potential inflation. In pursuit of its monetary policy, the Fed can also increase or decrease the money supply by buying or selling government securities. To avoid a potential recession, for example, the Fed might increase its purchases of US Treasury notes and bonds from banks and brokerage firms, providing them with more money to lend.

Monetary reserve

A government's monetary reserve includes the foreign currency and precious metals that its central bank holds. That reserve enables the government to influence foreign exchange rates and to manage its transactions in the international marketplace. For example, a country with a large reserve of US dollars is in a position to make significant investments in US markets.

Money manager

Registered money managers are paid professionals who are responsible for handling the securities portfolios they oversee in the best interest of the institutions or individuals for whom they work. That obligation is known as fiduciary responsibility. The specific decisions an individual money manager makes vary, depending on the portfolio in question. For example, pension funds, mutual funds, and insurance companies have money managers, as do endowments, managed accounts, and hedge funds. The portfolio that the manager constructs and the amount and timing of the trading he or she authorizes are directly linked to the portfolio's investment objective and risk profile.

Money market

The money market isn't a place. It's the continual buying and selling of short-term liquid investments. Those investments include Treasury bills, certificates of deposit (CDs), commercial paper, and other debt issued by corporations and governments. These investments are also known as money market instruments.

Money market account

Bank money market accounts normally pay interest at rates comparable to those offered by money market mutual funds. One appeal of money market accounts is that they have the added safety of Federal Deposit Insurance Corporation (FDIC) protection, currently up to $250,000 per depositor per account type. One drawback may be that some banks reduce the interest they pay or impose fees if your money market account balance falls below a specific amount. Money market accounts may offer check writing and cash transfer privileges, although there are limits on the number of withdrawals or transfers you can make each month.

Money market fund

Money market mutual funds invest in stable, short-term debt securities, such as commercial paper, Treasury bills, and certificates of deposit (CDs), and other short-term instruments. The fund's management tries to maintain the value of each share in the fund at $1. Unlike bank money market accounts, money market mutual funds are not insured by the Federal Deposit Insurance Corporation (FDIC). However, since they're considered securities at most brokerage firms, they may be insured by the Securities Investor Protection Corporation (SIPC) against the bankruptcy of the firm. In addition, some funds offer private insurance comparable to FDIC coverage. Tax-free money market funds invest in short-term municipal bonds and other tax-exempt short-term debt. No federal income tax is due on income distributions from these funds, and in some cases no state income tax. While taxable funds may offer a slightly higher yield than tax-free funds, you pay income tax on all earnings distributions. Many money market funds offer check-writing privileges, which do not trigger capital gains or losses, as writing a check against the value of a stock or bond fund would.

Money order

A money order entitles the person named as payee on the order to receive the specific amount of cash shown on the order. You can use money orders in place of checks if you don't have a checking account or if the payee requires a guaranteed form of payment. You can purchase money orders at banks, post office branches, credit unions, and other financial institutions. You can use money orders to send money internationally as well as within the United States. The United States Postal Service (USPS) has agreements with 30 countries that allow recipients to cash USPS money orders in post offices in those countries. Sellers sometimes impose a limit on the size of the money orders they sell, and they typically charge a fee for each order. However, those fees are less than for guaranteed bank checks. One drawback of a money order is that you have no proof that payment was received.

Money purchase plan

A money purchase plan is a defined contribution retirement plan that requires the employer to contribute a fixed percentage of each employee's salary every year the plan is in effect. The contributions must be made regardless of how well the company does in a given year. In contrast, in profit-sharing plans, the employer's contribution is more flexible because it is based on annual profits. However, some small-company employers or self-employed people create a paired plan that combines money purchase with profit sharing. Paired plans require them to add at least a minimum percentage of each employee's salary to the plan each year.

Money supply

The money supply is the total amount of liquid or near-liquid assets in the economy. The Federal Reserve, or the Fed, manages the money supply, trying to prevent either recession or serious inflation by changing the amount of money in circulation. The Fed increases the money supply by buying government bonds in the open market, and decreases the supply by selling these securities. In addition, the Fed can adjust the reserves that banks must maintain, and increase or decrease the rate at which banks can borrow money. This fluctuation in rates gets passed along to consumers and investors as changes in short-term interest rates. The money supply is grouped into four classes of assets, called money aggregates. The narrowest, called M1, includes currency and checking deposits. M2 includes M1, plus assets in money market accounts and small time deposits. M3, also called broad money, includes M2, plus assets in large time deposits, eurodollars, and institution-only money market funds. The biggest group, L, includes M3, plus assets such as private holdings of US savings bonds, short-term US Treasury bills, and commercial paper.

Monte Carlo simulation

A Monte Carlo simulation can be used to analyze the return that an investment portfolio is capable of producing. It generates thousands of probable investment performance outcomes, called scenarios, that might occur in the future. The simulation incorporates economic data such as a range of potential interest rates, inflation rates, tax rates, and so on. The data is combined in random order to account for the uncertainty and performance variation that's always present in financial markets. Financial analysts may employ Monte Carlo simulations to project the probability of your retirement account investments producing the return you need to meet your long-term goals.

Moody's Investors Service, Inc.

Moody's is a financial services company best known for rating investments. Moody's rates bonds, common stock, commercial paper, municipal short-term bonds, preferred stocks, and annuity contracts. Its bond rating system, which assigns a grade from Aaa through C3 based on the financial condition of the issuer, has become a world standard.

Morgan Stanley Capital International Indexes

Morgan Stanley Capital International Inc. (MSCI)computes and disseminates a number of international indexes. They track securities traded in international financial markets and serve as benchmarks for international investments and mutual fund portfolios. The strong performance of the Europe and Australasia Far East Equity Index (EAFE) between 1982 and 1996 is often credited with generating increased US interest in investing overseas.

Morningstar, Inc.

Morningstar, Inc., offers a broad range of investment information, research, and analysis online, in software products, and in print. For example, the company rates open- and closed-end mutual funds and variable annuities, as well as other investment products, using a system of one to five stars, with five being the highest rating. The Morningstar system is a risk-adjusted rating that brings performance, or return, and risk together into one evaluation. In addition, Morningstar produces analytical reports on the funds and variable annuities it rates, as well as on stocks sold in US and international markets.

Mortality Risk and Administrative Expense (M&E Fee)

Fee charged by an insurance company to cover the cost of the insurance features of an annuity contract, including the guarantee of a lifetime income payment, interest and expense guarantees, and any death benefit provided during the accumulation period.


A mortgage gives temporary right to the real estate that you are buying with a mortgage loan to lender who has given you the loan. The property serves as collateral, or security, that you will repay what you borrowed plus interest. The terms of the mortgage are detailed in a mortgage note. They include the lender's right to assume control of the property if you default on your repayment. The note also gives the lender a lien on the property, which means you can't sell it without paying off the loan. While the mortgage is in force, you have the use of the property, but not the title to it. When the loan is repaid in full, the property is yours. But if you default, or fail to repay the loan, the mortgagee may exercise its lien on the property and take possession of it.

Mortgage loan

A mortgage loan is a long-term loan used to finance the purchase of real estate. As the borrower, or mortgager, you repay the lender, or mortgagee, the loan principal plus interest, gradually building your equity in the property. The interest may be calculated at either a fixed or variable rate, and the term of the loan is typically between 10 and 30 years. While you repay the mortgage loan, you have the use of the property, but not the title to it. When the loan is repaid in full, the property is yours. But if you default, or fail to repay, the mortgagee may exercise its lien on the property and take possession of it.

Mortgage-backed security (MBS)

Mortgage-backed securities are created when the sponsor buys mortgages from lenders, pools them, and packages them for sale to the public, a process known as securitization. The securities are available through government agencies, quasi-public corporations such as Fannie Mae and Freddie Mac, banks, brokerage forms, or other financial institutions. The money raised by selling the bonds may be used to buy additional mortgages, making more money available to lend. The most common mortgage-backed securities, also known as pass-through securities, are self-amortizing, and pay interest and repay principal over the term of the security. You can buy individual mortgage-backed securities, but many individual investors select mutual funds, such as Ginnie Mae funds, that invest in mortgage-backed securities insured by that agency. Mortgage-backed securities known as collateralized debt obligations (CDOs) or real estate mortgage investment conduits (REMICs) are structured differently. While a CDO or REMIC passes through payments on the underlying mortgages, the payments are structured in what are known as tranches that pay different interest rates and mature in sequence. The principal is repaid to bondholders in the order in which the tranches are stacked, so the holders of the shortest-term tranche are repaid first, the next shortest second, and so on. CDOs constructed subprime mortgages but given high ratings from credit rating firms were an important contributing factor to the financial crisis of 2008.

Moving average

A moving average of securities prices is an average that is recomputed regularly by adding the most recent price and dropping the oldest one. For example, if you looked at a 365-day moving average on the morning of June 30, the most recent price would be for June 29, and the oldest one would be for June 30 of the previous year. The next day, the most recent price would be for June 30, and the oldest one for the previous July 1. Investors may use the moving average of an individual security over a shorter period, such as 5, 10, or 30 days, to determine a good time to buy or sell that security. For example, you might decide that a stock that is trading above its 10-day moving average is a good buy or that it's time to sell when a stock is trading below its 10-day moving average. The longer the time span, the less volatile the average will be. This is one of the reasons a moving average is a popular tool for technical analysts. When volatility is smoothed out, it's easier to spot trends.


A stock's multiple is its price-to-earnings ratio (P/E). It's figured by dividing the market price of the stock by the company's earnings. The earnings could be the actual earnings for the past four quarters, called a trailing P/E. Or they might be the actual figures for the past two quarters plus an analyst's projection for the next two, called a forward P/E. Investors use the multiple as a way to assess whether the price they are paying for the stock is justified by its earnings potential. The higher the multiple they are willing to accept, the higher their expectations for the stock. However, some investors reject stocks with higher multiples, since it may be impossible for the stock to meet the market's expectations.

Municipal bond (muni)

Municipal bonds are debt securities issued by state or local governments or their agencies to finance government operations or special projects. For example, a state may float a bond to fund the construction of highways or college dormitories. The interest munis pay is usually exempt from federal income taxes, and is also exempt from state and local income taxes if you live in the state where the bond was issued. Tax-exempt munis generally pay interest at a lower rate than similarly rated corporate bonds of the same term. However, they appeal to investors in the highest tax brackets, who may benefit most from the tax-exempt income. However, interest on certain types of munis is taxable, as are any capital gains you realize from selling a muni for more than you paid to buy it. In addition, some muni interest may be vulnerable to the alternative minimum tax (AMT).

Municipal bond fund

Municipal bond funds invest in municipal bonds. Interest earnings from these funds are free from federal income tax but may be subject to the alternative minimum tax (AMT). In addition, some mutual fund companies offer funds that invest exclusively in municipal bonds offered by a single state. One advantage of muni bond funds is that buyers can invest a much smaller amount than they would need to put together a diversifies portfolio of municipal bonds on their own. However, the interest rate on a bond fund is not fixed as the fund portfolio changes over time. Nor is there the promise of return of principal.

Mutual company

A mutual company is a privately held company owned by its policyholders, depositors, or other customers. A share of the profits is distributed as dividends, allocated in proportion to the amount of business each customer does with the company. Insurance companies, federal savings and loan associations, and savings banks are examples of mutual companies, although each type operates somewhat differently.

Mutual fund

A mutual fund is a professionally managed investment product that sells shares to investors and pools the capital it raises to purchase investments. A fund typically buys a diversified portfolio of stock, bonds, or money market securities, or a combination of stock and bonds, depending on the investment objectives of the fund. Mutual funds may also hold other investments, such as derivatives and cash. A fund that makes a continuous offering of its shares to the public and will buy any shares an investor wishes to redeem, or sell back, is known as an open-end fund. An open-end fund trades at its net asset value (NAV). The NAV is the value of the fund's portfolio plus money waiting to be invested, minus operating expenses, divided by the number of outstanding shares. Open-end funds may be actively managed, which means the fund's manager or managers choose the components of the portfolio, or they may be index funds. The components of an index fund are determined by the index it tracks. Load funds -- those that have upfront or back-end sales charges -- are sold through brokers or financial advisers. No-load funds are sold directly to investors by the investment company offering the fund and don't impose sales charges. Both types of mutual funds may charge 12b-1 fees to pass on the cost of marketing and providing shareholder services. All mutual funds charge management fees, though at different rates, and they may also levy other fees and charges, which are included in the fund's expense ratio. These costs plus the trading costs, which aren't included in the expense ratio, reduce the return you realize from investing in the fund. A fund that sells a predetermined number of shares to the public is known as a closed-end fund. The shares of a closed-end fund trade on a stock exchange the way common stock does.

Nasdaq Composite Index

The Nasdaq Composite Index tracks the prices of all the securities traded on the Nasdaq Stock Market. That makes it a broader measure of market activity than the Dow Jones Industrial Average (DJIA) or Standard & Poor's 500 Index (S&P 500). On the other hand, many computer, biotechnology, and telecommunications companies are listed on the Nasdaq. So the movement of the Index is heavily influenced by what's happening in those sectors. The Index is market capitalization weighted, which means that companies whose market values are higher exert greater influence on the Index. Market capitalization, or value, is computed by multiplying the total number of existing shares by the most recent sales price. So, for example, if a stock with 1 million shares increases $3 in value, it has a greater impact on the changing value of the Index than a stock that also increases $3 but has only 500,000 shares.

National Association of Securities Dealers Automated Quotation System (NASDAQ)

NASDAQ is a computerized stock trading network that allows brokers to access price quotations for stocks being traded electronically or sold on the floor of a stock exchange.

National bank

In the United States, a national bank is a commercial bank with a federal rather than a state charter and is subject to federal rather than state regulation. National banks must be members of the Federal Reserve System and the Federal Deposit Insurance Corporation (FDIC) and own stock in the Federal Reserve Bank for their district. Their charters are approved by the US Controller of the Currency, which shares banking oversight with the Federal Reserve System. In another usage of the term, most countries, including the United States, have a national bank to oversee its monetary policies and perform other economic functions. But, unlike the situation in most countries, the US Federal Reserve System, known informally as the Fed, isn't one bank. It's 12 separate district banks and 25 regional branches spread across the country, so that no one state, region, or business group can exert too much control. Each district bank has a president and board of directors, and the system itself is run by a seven-member board of governors. The Fed's Open Market Committee is responsible for guiding day-to-day monetary decisions.

National Credit Union Administration (NCUA)

The National Credit Union Administration (NCUA) is an independent federal agency that authorizes the establishment and oversees the administration of most federal- and state-chartered credit unions in the United States. The National Credit Union Share Insurance Fund arm of the agency insures credit union deposits, just as the Federal Deposit Insurance Corporation (FDIC) does bank deposits. NCUA is funded by member credit unions and is backed by the full faith and credit of the federal government.

National debt

The total value of all outstanding Treasury bills, notes, and bonds that the federal government owes investors is referred to as the national debt. The government holds some of this debt itself, in accounts such as the Social Security, Medicare, Unemployment Insurance, and Highway, Airport and Airway Trust Funds. The rest is held by individual and institutional investors, both domestic and international, or by overseas governments. There is a debt ceiling imposed by Congress, but it is typically raised when outstanding debt approaches that level. Interest on the national debt is a major item in the federal budget, but the national debt is not the same as the federal budget deficit. The deficit is the amount by which federal spending exceeds federal income in a fiscal year.

National Market System (NMS)

The National Market System (NMS) links all the major stock markets in the United States and was developed to foster competition among them. Federal rules require these trading centers to ensure that transactions are executed at prices at least as good as protected quotations displayed at another center. A protected quotation is one that's immediately and automatically accessible.

Negative divergence

In technical analysis, a negative divergence occurs when a technical indicator -- a tool used to study price trends and predict future price movements in a securities market -- decreases in value while the market price of the same security is simultaneously increasing. Technical analysts generally view a negative divergence as a bearish signal that the security's price will soon begin to fall. A positive divergence, on the other hand, occurs when a technical indicator rises in value while the security's market price is falling. Analysts generally see this as a bullish signal that the security's price will soon begin to rise.

Negative yield curve

A negative, or inverted, yield curve results when the yield on short-term US Treasury issues is higher than the yield on long-term Treasury bonds. You create the curve by plotting a graph with yield on the vertical axis and maturity date on the horizontal axis and connecting the dots. When the curve is negative the highest point is to the left. A positive yield curve -- one that's higher on the right -- results when the yield on long-term bonds is higher than the yield on the short-term bills. A level curve results when the yields are essentially the same. In most periods, the yield curve is positive because investors demand more for tying up their money for a longer period. But there are times, such as when interest rates seem to be on the upswing, that the pattern is reversed and the yield curve is negative.


A negotiable contract is one whose terms can be altered by agreement between the parties to the contract. For example, when you negotiate the sale of your home, you might be willing to reduce the price, or you might be flexible about the closing date, generally in response to some concessions from the buyer. Similarly, the interest rate on your mortgage or the number of points you pay might be negotiable with your lender. A negotiable financial instrument or security is one that can be transferred easily from one party to another by endorsing and delivering the appropriate documentation. Stock certificates are negotiable, for example, requiring the owner simply to sign the back and deliver the document to an agent. A check is also negotiable, transferring money from the writer to the payee on the basis of a signature and an endorsement.

Net asset value (NAV)

The NAV is the dollar value of one share of a fund. It's calculated by totaling the value of all the fund's holdings plus money awaiting investment, subtracting operating expenses, and dividing by the number of outstanding shares. A fund's NAV changes regularly, though day-to-day variations are usually small. The NAV is the price per share an open-end mutual fund pays when you redeem, or sell back, your shares. With no-load mutual funds, the NAV and the offering price, or what you pay to buy a share, are the same. With front-load funds, the offering price is the sum of the NAV and the sales charge per share and is sometimes known as the maximum offering price (MOP). The NAV of an exchange traded fund (ETF) or a closed-end mutual fund may be higher or lower than the market price of a share of the fund. With an ETF, though, the difference is usually quite small because of a unique mechanism that allows institutional investors to buy or redeem large blocks of shares at the NAV with in-kind baskets of the fund's stocks.

Net capital loss

You have a net capital loss if, in any tax year, losses that result from selling capital assets for less than you paid at the time of purchase are larger your gains from selling capital assets for more than you paid to buy them. If you have a net capital loss in any tax year, you may use it to reduce your taxable income, up to the annual cap. If your loss is greater than the annual cap, you can carry over the excess and deduct it in later years.

Net change

The difference between the closing price of a stock, bond, or mutual fund, or the last price of a commodity contract, and the closing price on the previous day is reported as net change. It may also simply be referred to as change. When a stock has gained in value, the positive net change is expressed with a plus sign and a number, such as +0.50, meaning that the price was up 50 cents from the previous trading day. On days that a stock falls, the negative net change is expressed with a minus sign and a number, such as -1, meaning that the price was a dollar lower.

Net earnings

Net earnings, also known as retained earnings, are a corporation's profits after paying all of its expenses. This money is available to pay dividends on common stock, make acquisitions, or expand operations without incurring debt, issuing additional stock, or buying back outstanding shares.

Net income

Net income is the amount of money a corporation has earned after subtracting all of the expenses of producing its goods or services from the income or revenue it has realized from sales of those goods or services.

Net margin

A company's net margin, typically expressed as a percentage, is its net profit divided by its net sales. Net profit and net sales are the amounts the company has left after subtracting relevant expenses from gross profits and gross sales. The higher the percentage, the more profitable the company is. Fundamental analysts use net margin, sometimes called net profit margin, as a way to assess how effective the company is in converting income to profit. In general, a higher net margin is the result of an appropriate pricing structure and effective cost controls.

Net unrealized appreciation (NUA)

Net unrealized appreciation (NUA) is the difference between the average cost basis, or purchase price, of company stock you hold in an employer sponsored retirement plan and its current market value. The effect of your NUA is something to consider if you're retiring or leaving your job and plan to roll over plan assets to an individual retirement account (IRA). That's because it may make more sense, from a tax perspective, to take a distribution of the stock. At distribution, you owe income tax on the cost basis of the stock at your regular rate. But the NUA is taxed at your long-term capital gains rate at the time you sell the shares, either immediately or in the future. Additional capital gains taxes apply on any appreciation in the stock's value that occurs after the distribution and before you sell the shares. That tax is also calculated at your long-term rate if you waited more than a year to sell. In contrast, if you roll the shares into an IRA, you owe income tax at your regular rate on all distributions including the portion that is appreciation. The long-term capital gain tax rate never applies. Taking a distribution of the stock may not be the best choice in all cases. You may incur a 10% tax penalty in addition to the tax on the cost basis if you're younger than 59 1/2. In addition, this strategy may not be the most tax-efficient for estate planning purposes if you still own the shares at your death.

Net worth

A corporation's net worth is the retained earnings, or the amount left after dividends are paid, plus the money in its capital accounts, minus all its short- and long-term debt. Its net worth is reported in the corporation's 10-K filing and annual report. Net worth may also be called shareholder equity, and it's one of the factors you consider in evaluating a company in which you're considering an investment. To figure your own net worth, you add the value of the assets you own, including but not limited to cash, securities, personal property, real estate, and retirement accounts, and subtract your liabilities, or what you owe in loans and other obligations. If your assets are larger than your liabilities, you have a positive net worth. But if your liabilities are more than your assets, you have a negative net worth. When you apply for a loan, potential lenders are likely to ask for a statement of your net worth.


Netting is a process that streamlines the clearance and settlement of securities transactions. It is used initially at the brokerage firm level and then by the National Securities Clearing Corporation (NSCC) to reduce the number of transactions that require the exchange of securities and cash. To net, a firm or group of affiliated firms offsets client buy and sell orders, forwarding to NSCC for clearance and settlement only those that can't be netted. In a simplified example, if the firms' clients entered buy orders for 1,000 shares and sell orders for 800 shares, ownership of the 800 would be transferred internally and just 200 buy orders would be forwarded to NSCC. NSCC compares all buy and sell orders for each individual security and offsets purchases by clients of one brokerage firm with corresponding sales by clients of other firms. The small percentage of trades that aren't netted at this stage require firms with net short positions, whose clients sold more than they purchased, to deliver the required securities, or more precisely have them debited from their Depository Trust Corporation (DTC) custodial account for delivery. The NSCC credits those shares to the firms with a net long position, whose clients purchased more shares than they sold. In the final step, the DTC nets the total costs of buying and selling throughout the trading day to limit the amount of money that must be exchanged among firms. Firms with a net debit wire payment to the DTC, and firms with a net credit receive funds.

New issue

When a stock or bond is offered for sale for the first time, it's considered a new issue. New issues can be the result of an initial public offering (IPO), when a private company goes public, or they can be additional, or secondary, offerings from a company that's already public. For example, a public company may sell bonds from time to time to raise capital. Each time a new bond is offered, it's considered a new issue.

New York Stock Exchange Composite Index

This New York Stock Exchange Composite Index tracks the performance of the common stocks listed on the NYSE, including those issued by domestic and international companies and those sold as American Depository Receipts (ADRs). The Index is market capitalization weighted, so that companies with the most shares and the highest prices have the greatest impact on the changing value of the Index.

Nikkei Stock Average

The Nikkei Stock Average, sometimes call the Nikkei Index or simply the Nikkei, is a price-weighted index of 225 blue chip stocks traded on the Tokyo Stock Exchange. The Nikkei, which was introduced in 1950, is frequently described as the Japanese equivalent of the Dow Jones Industrial Average (DJIA).

No-load mutual fund

You buy a no-load mutual fund directly from the investment company that sponsors the fund. You pay no sales charge, or load, on the fund when you buy or sell shares. No-load funds may charge a redemption fee if you sell before a certain time has elapsed in order to limit short-term turnover. Some fund companies charge an annual asset-based fee, called a 12b-1 fee, to offset their marketing and shareholder costs. Your share of this fee is a percentage of the value of your holdings in the fund. You may also be able to buy no-load funds through a mutual fund network, sometimes known as a mutual fund supermarket, typically sponsored by a discount brokerage firm. If you have an account with the firm, you can choose among no-load funds sponsored by a number of different investment companies. Front-end load funds and no-load funds making similar investments tend to produce almost equivalent total returns over the long term -- say ten years or more. But it can take an investor nearly that long to offset the higher cost of buying the load fund.

Nominal yield

Nominal yield is the annual income that you receive from a bond or other fixed-income security divided by the par value of the security. The result, stated as a percentage, is the same as the rate of interest the security pays, also known as its coupon rate. If you purchase the security in the secondary market, at a price above or below par, your actual yield will be more or less than the coupon rate. So, for example, if you have $55 in annual income on a $1,000 bond, the nominal yield is 5.5%. But if you paid $975 for the bond in the marketplace, your actual yield is 5.64%. Similarly, if you had paid $1,050, your actual yield would be 5.23%.

Nominee name

Nominee name is the name in which securities are registered when they are held in either physical or electronic form by The Depository Trust Company (DTC). That name is Cede & Co., an acronym for Central Depository. Holding stock in nominee name, sometimes known as street name, makes it easier to transfer ownership using an electronic book entry system when the securities are traded. Transactions are credited to or debited from the accounts of brokerage firms that are customers of DTC. The firms then adjust their client account records to reflect the results of the trade. If you own stock held in nominee name, you remain the beneficial owner, entitled to dividends the stock may pay. You also have the right to sell if you wish and to vote on certain issues, such as membership of the company's board of directors.

Nonbank banks

Nonbank banks, also called limited-service banks, offer some but not all the services of a traditional commercial bank. They're typically owned by companies, including insurance companies, brokerage firms, and retail stores to provide financial services without being limited by the regulations that govern traditional banks, such as restrictions on interstate and branch banking. Many nonbank banks are insured by the Federal Deposit Insurance Corporation (FDIC). Those banks are subject to the same reserve requirements and examinations as regular banks. Opponents of nonbank banks believe they drain financial resources away from small towns to big cities in other states and undermine the nation's decentralized banking system.


When a bond is noncallable, the issuer cannot redeem it before the stated maturity date. Some bonds have call protection for their full term, and others for a fixed period -- often ten years. The appeal of a noncallable bond is that the issuer will pay interest at the stated coupon rate for the bond's full term. In contrast, if a bond is called, you receive a lump-sum repayment of principal, which you must reinvest. Frequently, rates are lower at call than they were when the bond was issued, which means your reinvested principal will provide a smaller yield.

Noncompetitive bid

Investors who can't or don't wish to meet the minimum purchase requirements for competitive bidding on Treasury bills, notes, or bonds may enter a noncompetitive bid. You can invest as little as $100 or as much as $5 million in each new issue through TreasuryDirect, a system that allows you to buy government securities without going through a bank or a brokerage firm. The Treasury sells T-bills, for example, to all noncompetitive buyers whose bids arrive by the weekly deadline, for a price equal to what competitive bidders pay for that week's issue. A noncompetitive bid may also be known as a noncompetitive tender.

Nondiscrimination rule

All qualified retirement plans, including 401(k) plans, must follow nondiscrimination rules. Among other things, the rules prevent highly paid employees from receiving more generous benefits than other employees. However, employers may offer nonqualified plans to which antidiscrimination rules don't apply. Unlike contributions to qualified plans, contributions to nonqualified plans are not tax deductible.

Nondiscrimination Testing Expense

Tax qualified retirement plans must be administered in compliance with several regulations requiring numerical measurements. The fee charged for the process of determining whether the plan is in compliance is collectively called nondiscrimination testing expense.


Computations used to report corporate income and earnings that are not defined by generally accepted accounting principles (GAAP) are described as non-GAAP metrics. These measures, including core earnings, free cash flow, pro forma earnings, operating earnings, and earnings before interest, taxes, depreciation, and amortization (EBITDA), provide useful financial information about individual companies. But lack of standardization in these calculations, plus the potential for creative accounting, make it difficult to draw relevant comparisons among companies or draw meaningful conclusions from these statistics.


Charitable, cultural, and educational organizations that exist for reasons other than providing a profit for their owners, directors, or members are nonprofit organizations. However, these organizations can generate income to pay for their activities, salaries, and overhead by charging for services, making investments, and soliciting donations and memberships. A nonprofit arts center, for instance, may charge patrons for tickets and event subscriptions. Nonprofits incorporate in the states where they operate and are exempt from the state income taxes that for-profit corporations must pay. Some but not all qualify for federal tax-exempt status under section 501(c)(3) of the Internal Revenue Code. Contributions to those qualifying organizations are tax deductible, though tax rules govern the percentage of your income you may deduct for gifts to different types of nonprofits. In exchange for these tax benefits, nonprofits must comply with some of the same financial reporting rules that for-profit corporations follow. For instance, nonprofits generally must follow corporate governance rules and make their financial reports available to the public.

Nonqualified annuity

An annuity you buy on your own, rather than through a qualified employer sponsored retirement plan or individual retirement arrangement, is a nonqualified annuity. Nonqualified annuities aren't governed by the federal rules that apply to qualified contracts, such as annual contribution caps and mandatory withdrawals after you turn 70 1/2. While there may be a 10% tax penalty for withdrawals before you turn 59 1/2, you can generally put up to $1 million in an annuity and postpone withdrawals until you're 75 or 80 or older. Those limits are set by the state where you purchase the contract or by the annuity company. In other ways, though, qualified and nonqualified annuities are alike. You can choose between fixed or variable contracts, and the annuity can be either deferred or immediate.

Nonsystemic risk

Nonsystemic risk results from unpredictable factors, such as poor management decisions, successful competitive products, or suddenly obsolete technologies that may affect the securities issued by a particular company or group of similar companies. Portfolio diversification, which means spreading your investment among a number of asset classes and subclasses and individual issuers within those subclasses, can help counter nonsystemic risk though it can't eliminate it.


Certain documents, such as wills, trusts, medical, and other legal documents, need to be notarized, or signed by a notary public -- an individual authorized by the state in which he or she performs the service to certify documents and attest to their authenticity.


A notary, or notary public, is an individual authorized by the state in which he or she lives or works to certify documents and attest to their authenticity. Certain documents, such as wills, trusts, medical, and other legal documents, need to be notarized, or signed by a notary.


A note is a debt security that promises to pay interest during the term that the issuer has use of the money, and to repay the principal on or before the maturity date. For US Treasury securities, a note is an intermediate-term obligation -- as opposed to a short-term bill or a long-term bond. There are Treasury notes that mature in two, three, five, seven, or ten years from their issue date.


A not-for-profit organization pays taxes and may make a profit, but those profits are not distributed to its owners or members. Private clubs, sports organizations, political organizations, and advocacy groups are examples of not-for-profit institutions. Contributions to these not-for-profits are not tax deductible. Until it became a publicly traded company in 2006, the New York Stock Exchange was a not-for-profit membership association.


NYSE Arca, one of the two securities exchanges operated by the NYSE Euronext, is an open, all-electronic stock exchange. Trades are executed quickly -- electronically and anonymously. Among the securities traded on NYSE Arca are individual stocks, exchange-traded funds, and equity options. NYSE Arca was formed by the merger of the traditional NYSE and Archipelago Exchange, an electronic communications network (ECN), creating what is known as a hybrid market.


An obligor is an individual or institution legally bound to do what's required in a specific contract or agreement. For example, if you owe money to your credit card company, you are the obligor. On the other hand, if you buy a bond, the bond issuer is the obligor since it owes you principal and interest payments.

Odd lot

The purchase or sale of securities in quantities of fewer than the standard trading lot -- 100 shares of stock or $1,000 worth of bonds -- is considered an odd lot. At one time, trading an odd lot might have cost you a slightly higher commission, but in the electronic trading environment that's generally no longer the case.


Transactions in New York Stock Exchange (NYSE) listed securities that aren't executed on a national exchange are known as off-board transactions. Those trades may be handled through an electronic market, such as the Nasdaq Stock Market, through an electronic communications network (ECN), or internally at a brokerage firm. The term off-board derives from the fact that the NYSE is colloquially known as the Big Board.


The offer is the price at which someone who owns a security is willing to sell it. It's also known as the ask price, and is typically paired with the bid price, which is what someone who wants to buy the security is willing to pay. Together they constitute a quotation.


An offering occurs when a corporation or government issues securities for sale to the public. In the stock market, an offering is a specific number of shares that a company sells at a set price in an initial public offering (IPO) or in a secondary offering. In a bond offering, the issuer seeks to borrow a specific amount of investment capital at a specific rate. In both cases the issuer generally works with an investment bank or group of banks that underwrite the issue and facilitate the sale. US Treasury offerings occur on a regular schedule and are available directly to investors through a federal program called Treasury Direct or through brokers.

Offering date

The offering date is the first day on which a stock or bond is publicly available for purchase. For example, the first trading day of an initial public offering (IPO) is its offering date.

Offering price

A security's offering price is the price at which it is taken to market at the time of issue. It may also be called the public offering price. For example, when a stock goes public in an initial public offering (IPO), the underwriter sets a price per share known as the offering price. Subsequent share offerings are also introduced at a specific price. When the stock begins to trade, its market price may be higher or lower than the offering price. The same is true of bonds, where the offering price is usually the par, or face, value. In the case of open-end mutual funds, the offering price is the price per share of the fund that you pay when you buy. If it's a no-load fund or you buy shares with a back-end load or a level load, the offering price and the net asset value (NAV) are the same. If the shares have a front-end load, the sales charge is added to the NAV to arrive at the offering price.

Offshore fund

An offshore fund is a mutual fund that's sponsored by a financial institution that's based outside the United States. Unless the fund meets all the regulatory requirements imposed on domestically sponsored funds, it can't be sold in the United States. However, an offshore fund may be sponsored by an overseas branch of a US institution, may invest in US businesses, and may be denominated, or offered for sale, in US dollars. In total, there are approximately four times as many offshore funds as there are US-based funds.

Online brokerage firm

To buy and sell securities online, you set up an account with an online brokerage firm. The firm executes your orders and confirms them electronically. When the markets are open, the turnaround may be very fast, but you can also give buy or sell orders at any time for execution when the markets open. You may mail the firm checks to settle your transactions or transfer money electronically from your bank account. Some online firms are divisions of traditional brokerage firms, while others operate exclusively in cyberspace. Most of them charge much smaller trading commissions than conventional firms. Online firms usually provide extensive investment data and analysis, including regularly updated market news, on their websites.

Online trading

If you trade online, you use a computer and an Internet connection to place your buy and sell orders with an online brokerage firm. While the market orders you give online are executed immediately while the markets are open, you may place stop or limit orders for future execution, or orders for execution at the next market opening at a time outside normal trading hours that's convenient for you.

Open market

In an open market, any investor with the money to pay for securities is able to buy those securities. US markets, for example, are open to all buyers. In contrast, a closed market may restrict investment to citizens of the country where the market is located. Closed markets may also limit the sale of securities to overseas investors, or forbid the sale of securities in specific industries to those investors. In some countries, for example, overseas investors may not own more than 49% of any company. In others, overseas investors may not invest in banks or other financial services companies. The term open market is also used to describe an environment in which interest rates move up and down in response to supply and demand. The Federal Reserve's Open Market Committee assesses the state of the US economy on a regular schedule. It then instructs the Federal Reserve Bank of New York to buy or sell Treasury securities on the open market to help control the money supply.

Open offer

In an open offer, also called an entitlement issue, a corporation gives its existing shareholders the right to buy additional shares at a price typically lower than the market price before the offer expires. The open offer, which occurs in conjunction with a secondary offering, sets the number of shares a shareholder is entitled to, based on the number he or she already owns. The shareholder can buy some or all of those shares. Unlike a rights offering, which is similar to an open offer, shareholders may not sell or trade their entitlements.

Open order

An order that remains on the books until it is either executed or canceled is known as an open order, or a good til canceled order (GTC).

Open outcry

When exchange-based commodities traders shout out their buy and sell orders or use a combination of words and hand signals to negotiate an order, it's known as open outcry. When someone who shouts an offer to buy and someone who shouts an order to sell name the same price, a deal is struck, and the trade is recorded. Open outcry is one type of auction.

Open-end index fund

An open-end index fund operates like other open-end mutual funds, continuously issuing and redeeming shares based on investor demand. The main difference is that, as an index fund, its investment objective is to replicate the performance of its underlying index. Unlike an exchange traded fund (ETF), which also tracks an index but redeems shares only as a block in exchange for corresponding baskets of securities, open-end index funds need cash to buy back shares that investors wish to redeem, or sell. If a fund must sell securities to meet redemption demands, the sale may generate capital gains or losses and cause the fund's return to deviate from the index return. You buy and sell open-end index funds at their net asset value (NAV), which is determined at the end of each trading day. In contrast, ETFs may be traded throughout the day, and market forces beyond the fund's NAV may affect their prices.

Open-end investment company

An open-end investment company issues and redeems, or buys back, shares in the mutual funds it sponsors on a continuous basis in response to investor demand. The company pools money it raises by selling shares in a fund and the fund's manager invests in stock, bonds, money market instruments, or a combination of these asset classes to meet the fund's specific objectives. However, the open-end company may stop selling new shares in a fund if it decides the fund has grown too large to invest additional assets effectively. In contrast, when a closed-end investment company creates a fund, it issues only a limited number of shares, and those shares trade on the secondary market as shares of stock do. If you purchase fund shares directly from the open-end investment company, you pay the current net asset value (NAV) per share. You also redeem shares at the NAV that's current at the time you sell. If you buy shares through a broker or other investment professional, you may pay an up-front sales charge, or load, in addition to the NAV.

Open-end mutual fund

Most mutual funds are open-end funds. This means they issue and redeem shares on a continuous basis, and grow or shrink in response to investor demand for their shares. Open-end mutual funds trade at their net asset value (NAV), and if the fund has a front-end sales charge, that sales charge is added to the NAV to determine the selling price. NAV is the value of the fund's investments, plus money awaiting investment, minus operating expenses, divided by the number of outstanding shares. An open-end fund is the opposite of a closed-end fund, which issues shares only once. After selling its initial shares, a closed-end fund is listed on a securities market and trades like stock. The sponsor of the fund is not involved in those transactions. However, an open-end fund may be closed to new investors at the discretion of the fund management, usually because the fund has grown very large.


The first transaction in each security or commodity when trading begins for the day occurs at what's known as its opening, or opening price. Sometimes the opening price on one day is the same as the closing price the night before. But that's not always the case, especially with stocks or contracts that are traded in after-hours markets or when other factors affect the markets when the stock or commodity is not trading. The opening also refers to the time that the market opens for trading or the time a particular instrument begins trading. For example, New York Stock Exchange (NYSE) opens at 9:30 ET. The first transaction in a single security may be at that time or at a later time.

Open-market operations

Open-market operations allow the Federal Reserve's Open Market Committee (FOMC) to implement its monetary policy and regulate the money supply. The FOMC regularly instructs the securities desk of the Federal Reserve Bank of New York to buy or sell government securities as part of the process of increasing or decreasing the money supply and the cash available for lending.

Opportunity cost

When you make an investment decision, there is often a next best alternative that you decided not to take, such as buying one stock and passing up the opportunity to buy a different one. The difference between the value of the decision you did make and the value of the alternative is the opportunity cost. If you decide to invest in a risky stock hoping to realize a high return, you give up the return you might have earned on a bond or blue chip stock. So if the risky stock fails to perform, when you might have realized a 2% dividend yield on a blue chip, then the opportunity cost of the risky investment is 2%. Of course, if your stock pick pays off, there will have been no opportunity cost, because you have the potential to make more than the 2% available from the safer investment. Businesses must also consider opportunity costs in their decision-making. If a company is considering a capital investment, it must also consider the return it would earn if, instead of going ahead with the capital project, it invested the same amount in some other way. In general, a business will only make a capital investment if the opportunity cost is lower than the projected earnings from the new project.

Order imbalance

An order imbalance occurs when there are substantially more buy orders in a particular security than there are sell orders, or the reverse. The result is a wide spread between bid and ask prices. A specialist on an exchange floor might ease a minor imbalance by purchasing shares if there is not enough demand or selling shares if there is more demand than supply. Major imbalances typically result in a suspension of trading until the situation that caused the imbalance is resolved. Either very good or very bad news about a company may trigger an imbalance.

Order protection rule

The order protection rule, part of Regulation NMS -- for National Market System -- adopted by the Securities and Exchange Commission (SEC) in 2005, requires that every stock trading center establish and enforce a policy that ensures no transaction will be traded-through, or executed at a price that's lower than a protected quotation in that security displayed by another trading center. A protected quotation is one that's immediately and automatically accessible. The order protection rule, also called Rule 611, does allow certain exceptions, which apply to limit orders, immediate-or-cancel (IOC) orders, and intermarket sweep orders (ISOs).

Original issue discount

A bond or other debt security that is issued at less than par but can be redeemed for full par value at maturity is an original issue discount security. The appeal, from an investor's perspective, is being able to invest less up front while anticipating full repayment later on. Issuers like these securities as well because they don't have to pay periodic interest. Instead, the interest accrues during the term of the bond so that the total interest when combined with the principal equals the full par value at maturity. Zero-coupon bonds are a popular type of original issue discount security. The drawback, from the investor's perspective is that the imputed interest that accumulates is taxable each year even though that interest has not been paid. The exceptions are interest on municipal zero-coupons, which are tax exempt, or on zeros held in a tax-deferred or tax-exempt account.


An originator is a bank, lender, or other entity that bundles a pool of financial assets into a securitized debt obligation for sale to investors. The assets may be loans the originator made or those that it purchased from other entities. By securitizing, an originator removes the underlying loans from its balance sheet. Sale of the securitized product frees up cash the originator can use to make additional loans or meet other financial needs. An originator sometimes enlists the help of an arranger -- a financial institution that determines the structure of the security and ensures that it is marketable to investors. In other cases, a firm acts as both originator and arranger.


An oscillator is a type of technical indicator, or tool technical analysts use to study price trends and predict future price movements within a securities market. Oscillators, unlike some other technical indicators with unrestricted movement, fluctuate either above or below a center line or within a zone created by two lines, or bands. Oscillators that fluctuate above and below a center line are known as centered oscillators. Those that move back and forth within a zone are known as banded oscillators.

OTC Bulletin Board (OTCBB)

During the trading day, the electronic OTC bulletin board (OTCBB) provides continuously updated real-time bid and ask prices, volume information, and last-sale prices. The OTCBB lists this information for unlisted US and overseas stocks, warrants, unit investment trusts (UITs), and American Depositary Receipts (ADRs). It also lists Direct Participation Programs (DPPs) that are not listed on an organized market but are being traded over-the-counter (OTC). Approximately 3,600 companies are tracked on the OTCBB. To qualify for inclusion, they must report their financial information to the Securities and Exchange Commission (SEC) or appropriate regulatory agency.

Outstanding shares

The shares of stock that a corporation has issued and not reacquired are described as its outstanding shares. Some of but not all these shares are available for trading in the marketplace. A corporation's market capitalization is figured by multiplying its outstanding shares by the market price of one share. The number of outstanding shares is often used to derive much of the financial information that's provided on a per-share basis, such as earnings per share or sales per share. However, some analysts prefer to use floating shares rather than outstanding shares in calculating market cap and various ratios. Floating shares are the outstanding shares that are available for trading as opposed to those held by founding partners, in pension funds, employee stock ownership plans (ESOP), and similar programs.


When a stock or entire securities market rises so steeply in price that technical analysts think that buyers are unlikely to push the price up further, analysts consider it overbought. For these analysts, an overbought market is a warning sign that a correction -- or rapid price drop -- is likely to occur.


A stock, a market sector, or an entire market may be described as oversold if it suddenly drops sharply in price, despite the fact that the country's economic outlook remains positive. For technical analysts, an oversold market is poised for a price rise, since there would be few sellers left to push the price down further.


An initial public offering (IPO) is oversubscribed when investor demand for the shares is greater than the number of shares being issued. What typically happens is that the share price climbs, sometimes dramatically, as trading begins in the secondary market, though the price may drop back closer to the offering price after a period of active trading. The group of investment banks, known as a syndicate, that underwrites a well-received IPO may have an agreement, known as a green shoe clause, with the issuing company to sell additional shares at the same offering price.


A stock whose price seems unjustifiably high based on standard measures, such as its earnings history, is considered overvalued. One indication of overvaluation is a price-to-earnings ratio (P/E) significantly higher than average for the market as a whole or for the industry of which the corporation is a part. The consequence of overvaluation is usually a drop in the stock's price -- sometimes a rather dramatic one -- when demand for shares falls and current owners sell off their holdings.


When you own more of a security, an asset class, or a subclass than your target asset allocation calls for, you are said to be overweighted in that security, asset class, or subclass. For example, if you have decided to invest 60% of your portfolio in stock and other equity investments, but your equity holdings account for 80% of your portfolio, you are overweighted in equity. In another use of the term, a securities analyst might recommend overweighting a particular security, which you might reasonably interpret as advice to buy.


Short-term, unsecured debt securities that a corporation issues are often referred to as paper -- for short-term commercial paper. The term is sometimes used to refer to any corporate bonds, whether secured or unsecured, short or long term.

Paper loss

If you own an asset that decreases in value, that decrease is a paper loss, or unrealized loss. If you sell the asset for less than you paid to buy it, your paper loss becomes an actual loss, or realized loss. Until you sell, there's always the potential that the asset will rebound, turning your paper loss into a paper profit. On the other hand, you may decide to sell at a loss because you expect the asset's value to decrease further. You use paper losses and paper gains to calculate the current value of your investment portfolio.

Paper profit

If you own an asset that increases in value, that increase is a paper profit, or unrealized gain. If you sell the asset for more than you paid to buy it, your paper profit becomes an actual profit, or realized gain. You owe no capital gains tax on a paper profit, though you use paper value when calculating the current worth of your investment portfolio. The risk with a paper profit is that it may disappear before you realize it. On the other hand, you may postpone selling because you expect the value to increase further.

Par value

Par value is the face value, or named value, of a stock or bond. With stocks, the par value, which is frequently set at $1, is used as an accounting device but has no relationship to the actual market value of the stock. But with bonds, par value, usually $1,000, is the amount you pay to purchase at issue and the amount you receive when the bond is redeemed at maturity. Par is also the basis on which the interest you earn on a bond is figured. For example, if you are earning 6% annual interest on a bond with a par value of $1,000, that means you receive 6% of $1,000, or $60. While the par value of a bond typically remains constant for its term, its market value does not. That is, a bond may trade at a premium, or more than par, or at a discount, which is less than par, in the secondary market. The market price is based on changes in the interest rate, the bond's rating, or other factors.


A partnership is a legal relationship arranged between two or more people who agree to work together, sharing the profit or loss that their enterprise yields in accordance with the terms of the contract. General partners, who are actively involved in managing the enterprise and determine the way it is run, are personally liable for the entity's debts. A partnership may also have limited partners, who invest in the enterprise but are not involved in its management. They have no liability for its financial or legal obligations and are generally entitled to a smaller portion of the profits.

Passive income

You collect passive income from certain businesses in which you aren't an active participant. They may include limited partnerships where you're a limited partner, rental real estate that you own but don't manage, and other operations in which you're an investor but have a hands-off relationship. For example, if you invest as a limited partner, you realize passive income or passive losses because you don't participate in operating the partnership and have no voice in the decisions the general partner makes. In some cases, income from renting real estate is also considered passive income. On the other hand, any money you earn or realize on your investment portfolio of stocks, bonds, and mutual funds is considered active income. That includes dividends, interest, annuity payments, capital gains, and royalties. Any losses you realize from selling investments in your portfolio are similarly active losses. Internal Revenue Service (IRS) regulations differentiate between passive and active income (and losses) and allow you to offset passive income only with passive losses and active income with active losses.

Passive losses

You have passive losses from businesses in which you aren't an active participant. These include limited partnerships, such as real estate limited partnerships, and other types of activities that you don't help manage. You can deduct losses from passive investments against income you earn on similar ventures. For example, you can use your losses from rental real estate to reduce gains from other limited partnerships. Or you can deduct those losses from any profits you realize from selling a passive investment. However, you can't use passive losses to offset earned income, income from your actively managed businesses, or investment income.

Passively managed

An index mutual fund or exchange traded fund is described as passively managed because the securities in its portfolio change only when the make-up of the index it tracks is changed. For example, a mutual fund that tracks the Standard & Poor's 500 Index (S&P 500) buys and sells only when the S&P index committee announces which companies have been added to and dropped from the index. In contrast, when mutual funds are actively managed, their managers select investments with an eye for enabling the fund to achieve its investment objective and outperform its benchmark index. Their portfolios tend to change more frequently as a result. They also tend to have higher fees. The performance of passively managed indexed investments and their risk profiles tend to correspond closely to the asset class or subclass that the index tracks. They tend to be more popular in bull markets when their returns reflect the market strength and less popular in bear markets when active managers may provide stronger returns.

Pass-through security

When a corporation or government agency buys loans from lenders to pool and package as securities for resale to investors, the products may be pass-through securities. That means regular payments of interest and return of principal that borrowers make on the original loans are funneled, or passed through, to the investors. Unlike standard bonds, whose principal is repaid at maturity, the principal of a pass-through security is repaid over the life of the debt. The best known pass-throughs are the mortgage-backed bonds offered by Fannie Mae, Freddie Mac, and Ginnie Mae. However, you can also buy pass-through securities backed by car loans, credit card debt, and other types of borrowing. Those are known as asset-backed securities.


A bank account titled payable-on-death (POD) lets you name one or more beneficiaries to whom the assets are paid when you die. POD accounts can be useful estate planning tools in the states where they are available, since the assets in the account can pass to your beneficiaries directly, outside the probate process. A similar type of registration is available in some states for securities and brokerage accounts, known as transferable-on-death, or TOD, accounts.


A payee is a person or institution who receives payment. For example, when you write a check, you designate the payee in the line that begins 'Pay to the order of.'


A payer is a person who makes a payment to another. For example, when you write a check or authorize an electronic payment, you are the payer.

Paying agent

A paying agent is a financial institution, typically a bank, hired by a corporation to make payments, such as dividends, interest, and return of principal, on its behalf. For example, if you are entitled to a semiannual interest payment on a bond you hold, the issuer or a paying agent acting on the issuer's behalf makes the payment.

Payout ratio

A payout ratio, expressed as a percentage, is the rate at which a company distributes earnings to its shareholders in the form of dividends. For example, a company that earns $5 a share and pays out $2 a share has a payout ratio of 2 to 5, or 40%. A average range for companies that do pay dividends is between 30% and 40% of earnings, though it has historically been closer to 50%. But the percentage may vary, ranging from 10% or less to 70% or more if a company keeps the amount of its dividend consistent with past dividends regardless of a drop in its earnings. A very high ratio may indicate that the corporation may not be a wise investment. In some cases, payout ratios are mandated. Real estate investment trusts (REITs) must pay out 90% of their earnings to their shareholders.

Penny stock

Stocks that trade for less than $1 a share are often described as penny stocks. Penny stocks change hands over-the-counter (OTC) and tend to be extremely volatile. Their prices may spike up one day and drop dramatically the next. The fluctuations reflect the unsettled nature of the companies that issue them and the relatively small number of shares in the marketplace. While some penny stocks may produce big returns over the long term, many turn out to be worthless. Institutional investors tend to avoid penny stocks, and brokerage firms typically warn individual investors of the risks involved before handling transactions in these stocks. However, penny stocks are sometimes marketed aggressively to unsuspecting investors.


A pension is an employer plan that's designed to provide retirement income to employees who have vested -- or worked enough years to qualify for the income. Defined benefit plans promise a fixed income, usually paid for the employee's lifetime or the combined lifetimes of the employee and his or her spouse. The employer contributes to the plan, invests the assets, and pays out the benefit, which is typically based on a formula that includes final salary and years on the job. You pay federal income tax on your pension at your regular rate, so a percentage is withheld from each check. If the state where you live taxes retirement income, those taxes are withheld too. However, you're not subject to Social Security or Medicare withholding on pension income. In contrast, the retirement income you receive from a defined contribution plan depends on the amounts that were added to the plan, the way the assets were invested, and their investment performance. The way a particular plan is structured determines if you, your employer, or both you and your employer contribute and what the ceiling on that contribution is.

Pension Benefit Guaranty Corporation (PBGC)

The PBGC was created to ensure that participants in defined benefit pension plans under its jurisdiction receive at least a basic pension if plans are terminated because they're underfunded and unable to meet their obligations. The maximum benefit is adjusted each year for plans terminated in that year to reflect increases in Social Security. Covered plans, which include those offered by corporations with 25 or more participants, must pay annual premiums to the PBGC to help fund this federal corporation. The PBGC also tries to find people who participated in, and are due benefits from, plans that are no longer operating.

Pension maximization

Pension maximization is a strategy that begins with selecting a single life annuity for income to be paid from your retirement plan, rather than a joint and survivor annuity. The next step involves using some of your annuity income to buy a life insurance policy. At your death, the annuity income ends and the life insurance death benefit is paid to your beneficiary, often your surviving spouse. You do receive more income from a single life annuity than from a joint and survivor annuity, which translates to a larger pension while you're alive. However, pension max, as this approach is sometimes called, has some potentially serious drawbacks. These include the cost of the insurance premiums, including sales charges, and an increased burden on your beneficiary for turning the death benefit into a source of lifetime income.

Per capita

Per capita is the legal term for one of the ways that assets being transferred by your will can be distributed to the beneficiaries of your estate. Under a per capita distribution, each person named as beneficiary receives an equal share. However, the way your will is drawn up and the laws of the state where the will is probated may produce different results if one of those beneficiaries has died. For example, if you specify that your children inherit your estate per capita, in some states only those children who survive you would inherit. In other states your surviving children and the surviving descendants of your deceased children would receive equal shares. That could result in your estate being split among more heirs than if all your children outlive you.

Per stirpes

Per stirpes is the legal term for transferring the assets of your estate to your children and their descendants. With a per stirpes distribution, each of your children who is named as a beneficiary is entitled to an equal share. If one of your children is no longer alive, that person's children or children's children divide his or her share. For example, if you had two children each of whom had two children and one of your children died before you did, under a per stirpes bequest, your surviving child would receive 50% of your estate and the children of your deceased child would each receive 25%.


Performance, expressed as a percentage, measures the total return an investment provides over a specific period. It can be positive, representing a gain in value, or negative, representing a loss. While return is reported on a second-to-second and day-to-day basis, short-term results are less significant an indicator of strength or weakness than performance over longer periods, such as one, five, or ten years. Past performance is one of the factors you can use to evaluate a specific investment, but there's no guarantee that those results will be repeated in the future. What past performance can tell you is the way the investment has previously reacted to fluctuations in the markets, and, in the case of managed funds, something about the skills of the manager. An investment is said to outperform when its return is stronger than the return of its benchmark or peers over the same period. Conversely, it is said to underperform if its results lag behind those of its benchmark or peers.

Performance drag

Performance drag describes a situation in which an investment -- such as an index mutual fund or exchange traded fund (ETF) -- lags behind the index that it is designed to track. Performance drag can occur for a variety of reasons. One example, known as cash drag, occurs when a fund allocates a portion of its portfolio to cash, causing its performance to underperform its underlying index. Cash drag may especially affect open-end index funds, which may need cash to buy back shares that investors want to sell. Performance drag is illustrated by a fund's tracking error -- a calculation of how much an index-tracking investment deviates from its underlying index.

Phantom gains

Phantom gains are capital gains on which you owe tax even if your actual return on the investment is negative. For instance, if a mutual fund sells stock that has increased in price, you, as a fund shareholder, are liable for taxes on the portion of the gain the fund distributes to you. The rule applies even if you bought shares of the fund after the stock price increased, and didn't benefit from the stock's rising value. You also owe the tax if you purchase shares in the fund after the stock has been sold but before the fund has made its distribution. Phantom gains can also occur in a falling market, when a mutual fund may sell investments to raise cash to repurchase shares from shareholders who are leaving the fund. If you're still an owner of the fund at the time any gains from those sales are distributed, you'll owe tax even though the value of your investment has decreased.


Phishing is one way that identity thieves use the Internet to retrieve your personal information, such as passwords and account numbers. The thieves' techniques include sending hoax emails claiming to originate from legitimate businesses and establishing phony websites designed to capture your personal information. For example, you may receive an urgent email claiming to come from your bank and directing you to a website where you're asked to update or verify your account number or password. By responding you give identity thieves an opportunity to steal your confidential information. Phishing is difficult to detect because the fraudulent emails and websites are often indistinguishable from legitimate ones and the perpetrators change identities regularly.


A broker who piggybacks acts illegally by buying or selling a security for his or her own account after -- and presumably because -- a client has authorized that same transaction. One speculation is that a broker in this situation thinks the client is acting on information that the broker doesn't have.

Pink Sheets

Pink Sheets LLC is a centralized financial information network. It provides current prices and other information in both print and electronic formats to the over-the-counter (OTC) securities markets. Its Electronic Quotation Service reports real-time OTC equity and bond quotations to market makers and brokers, and its website provides a broad range of historical and current data. The name pink sheet derives from the pink paper on which the National Quotation Bureau originally printed information about OTC stocks. Comparable information on OTC bonds was printed on yellow paper.

Plan administrator

A plan administrator is the person or company your employer selects to manage its retirement savings plan. The administrator works with the plan provider to ensure that the plan meets government regulations. The administrator is also responsible for ensuring employees have the information needed to enroll, select, and change investments in the plan, apply for a loan if the plan allows loans, and request distributions.

Plan Document/Determination Letter Fee (Filing Fee)

Fee charged for a written plan document. Fee can also include the costs associated with preparing and filing IRS required documentation, including the request for a determination letter (document issued by the IRS stating whether the plan meets the qualifications for tax advantaged treatment).

Plan Establishment Date

This is the day when a 401(k) plan is established. For new plans, this date is the current date. For takeover plans, this date is the day that the plan was first established.

Plan Loan

The law allows participants to borrow from their accounts up to prescribed limits. This is an optional plan feature.

Plan participant

If you're enrolled in an employee retirement plan, such as a 401(k) or pension plan, you're a plan participant with certain rights and protections guaranteed by federal rules. The plan in which you participate may be subject to administration and investment rules set by the Employee Retirement Income Security Act (ERISA). As a participant, you have the right to certain information about your plan, such as a summary plan description, which outlines how it works. You also have the right to see copies of the tax reporting form that your plan must file with the IRS (Form 5500), as well as statements showing your estimated retirement benefits. If you have problems with your plan, you also have the right to bring claims against it.

Plan provider

The plan provider of a retirement savings plan, such as a 401(k), 403(b), or 457 plan, is the mutual fund company, insurance company, brokerage firm, or other financial services company that creates, sells, and manages the plan your employer selects.

Plan sponsor

The plan sponsor of a retirement savings plan is an employer who offers a retirement savings plan to employees. The sponsor is responsible for choosing the plan, the plan provider, and the plan administrator, and for deciding which investments will be offered through the plan.

Plan Year

The 12 calendar months ending with the last day of the month specified by the employer in the Adoption Agreement, or plan document.

Point and figure chart

A point and figure chart is a type of price chart, which technical analysts use to track price data for a security and predict future price movements. While other price charts track prices over a specific time period, point and figure charts use X and O symbols -- where X represents a rising price and O represents a falling price -- to indicate significant movements in price. For example, if the price of a security increases over a five-day period, five X's will be recorded for the period despite any small dips the stock's price may have taken during a trading day. Some analysts believe that point and figure charts make trends easier to spot since they smooth out small price fluctuations.

Ponzi scheme

A Ponzi scheme is a scam in which investors are promised high returns with little or no risk. But, instead of being paid with actual investment returns, investors are paid with the initial investments of the next round of investors drawn into the scheme. In many cases, no legitimate investment activity ever occurs. Since Ponzi schemes rely on new investment money to survive, many fail when the flow of new participants stops or a number of current investors ask for their money back. The Ponzi scheme gets its name from Charles Ponzi, a con artist who infamously cheated thousands of victims out of millions of dollars in 1920 by promising 50% profit In 45 days or 100% profit in 90 days from his fraudulent international postage scheme.

Portable benefits

Benefits or accumulated assets that you can take with you when you leave your employer or switch jobs are described as portable. For instance, if you contribute to a 401(k), 403(b), 457, or other defined contribution plan at your current job, you can roll over your assets to an individual retirement account (IRA) or to a new employer's plan if the plan accepts rollovers. In contrast, credits accumulated toward benefits from a pension -- otherwise known as a defined benefit plan -- usually aren't portable. Insurance benefits under an employer sponsored group health plan may also be portable as the result of The Health Insurance Portability and Accountability Act (HIPAA). If you have had group coverage and move to a new employer who offers health insurance, your new group health plan can't impose exclusions for preexisting conditions. HIPAA may also give you a right to purchase individual coverage if you are not eligible for group health plan coverage or are no longer eligible to extend your previous coverage under the Consolidated Omnibus Budget Reconciliation Act (COBRA) or similar coverage. Other job benefits, such as health savings accounts (HSAs), are also be portable, but flexible spending plans (FSAs) are not.


If you own more than one security, you have an investment portfolio. You build your portfolio by buying additional stock, bonds, annuities, mutual funds, or other investments. Your goal is to increase the portfolio's value by selecting investments that you believe will go up in price. According to modern portfolio theory, you can reduce your investment risk by creating a diversified portfolio that includes different asset classes and individual securities chosen from different segments, or subclasses, of those asset classes. That diversification is designed to take advantage of the potential for strong returns from at least some of the portfolio's investments in any economic climate.

Portfolio manager

A portfolio manager is responsible for overseeing a collection of investments, either for an institution -- such as a mutual fund, brokerage firm, insurance company, or pension fund -- or for an individual. It's the portfolio manager's job to invest the client's assets in a way that's appropriate to meet the client's goals. A portfolio manager develops investment strategies, selects individual investments, evaluates performance, and rebalances the portfolio as necessary. Portfolio managers may also be referred to as fund managers or money managers and may be paid fees based on the value of the assets under management, the performance of the portfolio, or both.

Portfolio turnover

Portfolio turnover is the rate at which a mutual fund manager buys or sells securities in a fund, or an individual investor buys and sells securities in a brokerage account. A rapid turnover rate, which frequently signals a strategy of capitalizing on opportunities to sell at a profit, has the potential downside of generating short-term capital gains. That means the gains are usually taxable as ordinary income rather than at the lower long-term capital gains rate. Rapid turnover may also generate higher trading costs, which can reduce the total return on a fund or brokerage account. As a result, you may want to weigh the potential gains of rapid turnover against the costs, both in your own buy and sell decisions and in your selection of mutual funds. You can find information on a fund's turnover rate in the fund's prospectus.

Positive divergence

In technical analysis, a positive divergence occurs when a technical indicator -- a tool used to study price trends and predict future price movements in a particular security -- rises in value while the market price of the same security is simultaneously falling. Technical analysts generally view a positive divergence as a bullish signal that the security's price will soon begin to rise. A negative divergence, on the other hand, occurs when a technical indicator decreases in value while the security's market price is rising. Analysts generally see this as a bearish signal that the security's price will soon begin to fall.

Positive yield curve

A positive yield curve results when the yield on long-term US Treasury bonds is higher than the yield on on short-term Treasury bills. You create the curve by plotting a graph with yield on the vertical axis and maturity date on the horizontal axis and connecting the dots. When the curve is positive the highest point is to the right. In most periods, the yield curve is positive because investors demand more for tying up their money for a longer period. When the reverse is true, and yields on short-term investments are higher than the yields on long-term investments, the curve is negative, or inverted. That typically occurs if inflation spikes after a period of relatively stable growth or if the economic outlook is uncertain. The yield curve can also be flat, if the rates are essentially the same.

Post-trade processing

Each securities transaction goes through post-trade processing during which the details of the trade are compared, cleared, and settled. This involves matching the details of the buy order with those of the sell order, changing the records of ownership, and finalizing the payment.

Power of attorney

A power of attorney is a written document that gives someone the legal authority to act for you as your agent or on your behalf. To be legal, it must be signed and notarized. You may choose to give someone a limited, or ordinary, power of attorney. This authority is revoked if you are no longer able to make your own decisions. In contrast, if you give an attorney, family member, or friend a durable power of attorney, he or she will be able to continue to make decisions for you if you're unable to make them. Not all states allow a durable power of attorney, however. A springing power of attorney takes effect only at the point that you are unable to act for yourself. It's a good idea have an attorney draft or review a power of attorney to be sure the document you sign will give the person you're designating the necessary authority to act for you but not more authority than you wish to assign. You always have the right to revoke the document as long as you are able to act on your own behalf.

Preferred stock

Preferred stock is an equity investment that's issued by a corporation and trades in the secondary market. It's listed separately from common stock issued by the same corporation and trades at a different price. Preferred stock is sometimes described as a hybrid investment because it shares some characteristics with common stock and some with fixed-income securities. For example, a preferred stock typically pays a fixed dividend on a regular schedule, but its price tends to move with changing interest rates in the same way that bond prices do. Convertible preferred shares can be exchanged for a specific number of common shares of the issuing company at an agreed-upon price. The process is similar to the way that a convertible bond can be exchanged for common stock. Preferred stock generally doesn't carry the right to vote on corporate matters or the opportunity to share in the corporation's potential for increased profits in the form of increased share prices and dividend payments.


Prerefunding may occur when a corporation plans to redeem a callable bond before its maturity date. If that's the case, the bond is identified as a prerefunded bond. To prerefund, the issuer sells a second bond with a longer maturity or a lower coupon rate, or both, and invests the amount it raises from that sale in US Treasury notes or other securities that are essentially free of default risk. The specific securities are typically chosen because their maturity dates correspond to the date on which the company will use the money to redeem the first bond.

Present value

The present value of a future payment, or the time value of money, is what money is worth now in relation to what you think it will be worth in the future based on expected earnings. For example, if you expect a 10% return, $1,000 is the present value of the $1,100 you expect to have a year from now. The concept of present value is useful in calculating how much you need to invest now in order to meet a certain future goal, such as buying a home or paying college tuition. Many financial websites and personal investment handbooks provide calculators and other tools to help you compute these amounts based on different rates of return. Inflation has the opposite effect on the present value of money, accounting for loss of value rather than increase in value. For example, in an economy with 5% annual inflation, $100 is the present value of $95 next year. Present value also refers to the current value of a securities portfolio. If you compare the present value to the acquisition cost of the portfolio, you can determine its profit or loss. Further, you can add the present value of each projected interest payment of a fixed income security with one year or more duration to calculate the security's worth.

Pretax contribution

A pretax contribution is money that you agree to have subtracted from your gross income and put into a retirement savings plan or other employer sponsored benefit plan. Your taxable earnings are reduced by the amount of your contribution, which reduces the income tax you owe in the year you make the contribution. Some pretax contributions, including those you put into your 401(k), 403(b), or 457, are taxed when you withdraw the amount from your plan. Other contributions, such as money you put into a flexible spending plan, are never taxed provided you use it for qualified expenses.

Pretax income

Pretax income, sometimes described as pretax dollars, is your gross income before income taxes are withheld. Any contributions you make to a salary reduction retirement plan, such as a traditional 401(k) or 403(b) plan, or to a flexible spending account comes out of your pretax income. The contribution reduces your current income and the amount you owe in current income taxes.

Price chart

A price chart tracks a series of price data points, usually over an established period of time, which may range from minutes to years. The charts are typically formed with prices plotted on the y-, or vertical, axis and time on the x-, or horizontal, axis. Technical indicators, which are tools that technical analysts use to study price trends and predict future price movements for a particular security, are typically plotted above or on top of price charts. Price charts may track short-term movement over a day or intraday, or over longer periods, such as weeks, months, or years. Short-term price charts show greater detail and capture sudden, though potentially insignificant, price fluctuations. Longer-term price charts are used to show primary, or overall, price trends because they smooth out short-term swings.

Price improvement

Price improvement occurs when you pay less or receive more on a securities transaction than the bid and ask prices being currently quoted. In other words, the price you pay to buy is lower than the ask price or the price you collect for selling is higher than the bid price. Price improvement may occur for a variety of reasons, from a change in market price to the diligence of your broker in seeking out the best price. For example, your broker may fill your order from the firm's inventory or net it against a sell order from another client of the firm. Or the order will be sent to a particular market for execution if a better price is available.

Price/earnings-to-growth ratio (PEG)

To find a stock's PEG ratio, you divide the stock's price-to-earnings ratio (P/E) by its projected annual earnings per share (EPS) growth. The result is a rule-of-thumb assessment of whether the stock is overvalued or undervalued. In brief, if a stock has a PEG ratio of 1, you conclude that investors are paying what the stock is worth based on its P/E and growth potential. If it is higher than 1 -- say 1.55 -- you conclude that investors are paying more than the growth projection justifies. If it is less than 1, you conclude that the stock may be poised to appreciate in value and so is a wise purchase. However, a PEG ratio, by itself, does not provide an adequate basis for an investment decision, any more than a P/E does, because it doesn't take company fundamentals into account. For example, an underpriced stock may be a good buy, but it may also be the sign of a company in poor financial shape or an industry in trouble. The potentially greater problem is that growth projections, even when they are the consensus views of professional analysts, are just estimates. That is especially true of estimates that look out five or more years, since there is no way to anticipate the shifting marketplace with real precision. Yet projections based on a single-year's results are notoriously inaccurate over longer periods. In short, a PEG ratio can be a valuable addition to an investor's toolkit, provided you understand the assumptions on which its components and results are based.

Price-to-book ratio

Some financial analysts use price-to-book ratios to identify stocks they consider to be overvalued or undervalued. You figure this ratio by dividing a stock's market price per share by its book value per share. Other analysts argue that book value reveals very little about a company's financial situation or its prospects for future performance.

Price-to-cash flow ratio

You find a company's price-to-cash flow ratio by dividing the market price of its stock by its cash receipts minus its cash payments over a given period of time, such as a year. Some institutional investors prefer price-to-cash flow over price-to-earnings as a gauge of a company's value. They believe that by focusing on cash flow, they can better assess the risks that may result from the company's use of leverage, or borrowed money.

Price-to-earnings ratio (P/E)

The price-to-earnings ratio (P/E) is the relationship between a company's share price and its earnings. It is calculated by dividing the current price per share by the earnings per share. A stock's P/E, also known as its multiple, gives you a sense of what you are paying for a stock in relation to its earning power. For example, a stock with a P/E of 30 is trading at a price 30 times higher than its earnings, while one with a P/E of 15 is trading at 15 times its earnings. There is no ideal P/E, but the average P/E at any point in time reflects investor confidence -- or lack of it -- in future returns. Higher P/Es are typical of companies that are expected to grow rapidly in value. They're often more volatile than stocks with lower P/Es because it can be more difficult for the company's earnings to satisfy investor expectations. A low P/E may be the sign of an undervalued company whose price hasn't caught up with its earnings potential. Conversely, a low P/E can be a clue that investors considers the company a poor risk. P/E can be calculated two ways. A trailing P/E uses earnings for the last four quarters. A forward P/E generally uses earnings for the past two quarters and analyst projection for the coming two.

Price-to-sales ratio

A price-to-sales ratio, or a stock's market price per share divided by the revenue generated by sales of the company's products and services per share, may sometimes identify companies that are undervalued or overvalued within a particular industry or market sector. For example, a corporation with sales per share of $28 and a share price of $92 would have a price-to-sales ratio of 3.29, while a different stock with the same sales per share but a share price of $45 would have a ratio of 1.61. Some financial analysts and money managers suggest that, since sales figures are less easy to manipulate than either earnings or book value, the price-to-sales ratio is a more reliable indicator of how the company is doing and whether you are likely to profit from buying its shares. Other analysts believe that steady growth in sales over the past several years is a more valuable indicator of a good investment than the current price-to-sales ratio.

Primary dealer

A primary dealer is a bank or securities brokerage that is authorized to trade US government securities directly with the Federal Reserve Bank of New York. Primary dealers are also expected to bid at Treasury auctions for bills, notes, and bonds, as well as participate in open market operations, which the Fed uses to carry out monetary policy and regulate the money supply. Banks apply to the Federal Reserve to become primary dealers and are accepted if they meet specific capital requirements, among other qualifications. The primary dealer system was formally enacted in 1960. The number of primary dealers has fluctuated over time, as some firms have consolidated others have filed for bankruptcy. The number of primary dealers peaked at 46 in 1988, and was 20 in 2011.

Primary market

If you buy stocks or bonds when they are initially offered for sale, and the money you spend goes to the issuer, you are buying in the primary market. In contrast, if you buy a security at some point after issue, and the amount you pay goes to an investor who is selling the security, you're buying in the secondary market. The term primary market also applies the leading or main markets for trading various products. For example, the New York Stock Exchange (NYSE) is a primary market for stocks while the Chicago Mercantile Exchange (CME) is a primary market for certain commodities.

Prime rate

The prime rate is a benchmark for interest rates on business and consumer loans. For example, a bank may charge you the prime rate plus two percentage points on a car loan or home equity loan. The prime rate is determined by the federal funds rate, which is the rate banks charge each other to borrow money overnight. If banks must pay more to borrow, they raise the prime rate. If their cost drops, they drop the prime rate. The difference between the two rates is three percentage points, with the prime rate always the higher number. The federal funds rate itself is determined by supply and demand, prompted by the actions of the Open Market Committee of the Federal Reserve to increase or decrease the money supply.


Principal can refer to an amount of money you invest, the face amount of a bond, or the balance you owe on a debt, distinct from the finance charges you pay to borrow. A principal is also a person for whom a broker carries out a trade, or a person who executes a trade on his or her own behalf.

Private equity

Private equity is an umbrella term for large amounts of money raised directly from accredited individuals and institutions and pooled in a fund that invests in a range of business ventures. The attraction is the potential for substantial long-term gains. The fund is generally set up as a limited partnership, with a private equity firm as the general partner and the investors as limited partners. Private equity firms typically charge substantial fees for participating in the partnership and tend to specialize in a particular type of investment. For example, venture capital firms may purchase private companies, fuel their growth, and either sell them to other private investors or take them public. Corporate buyout firms buy troubled public firms, take them private, restructure them, and either sell them privately or take them public again.

Private letter ruling

A private letter ruling explains a position the Internal Revenue Service (IRS) has taken on a specific issue or action that affects the amount of income tax a taxpayer owes. While these rulings are not the law, and there's no guarantee that they won't be overturned by new IRS opinions, they can provide guidance on how to handle financial decisions that have potential tax consequences. There is a fee when you request such a ruling.

Private placement

If securities are sold directly to an institutional investor, such as a corporation or bank, the transaction is called a private placement. Unlike a public offering, a private placement does not have to be registered with the Securities and Exchange Commission (SEC), provided the securities are bought for investment and not for resale.


Privatization is the conversion of a government-run enterprise to one that is privately owned and operated. The conversion is made by selling shares to individual or institutional investors. The theory behind privatization is that privately run enterprises, such as utility companies, airlines, and telecommunications systems, are more efficient and provide better service than government-run companies. But in many cases, privatization is a way for the government to raise cash and to reduce its role as service provider.


Probate is the process of authenticating, or verifying, your will. After probate, your executor can carry out the wishes you expressed in the document for settling your estate and appointing a guardian for your minor children. While the probate process can run smoothly if everything is in order, it can also take a long time and cost a great deal of money if your will isn't legally acceptable or it's contested by potential beneficiaries who object to its terms. If you die without a will, the same court that handles probate resolves what happens to your assets, based on the laws of the state where you live, through a process known as administration. The larger or more complex your estate is, the greater the potential for delay and expense.

Probate estate

Your probate estate includes all the assets that will pass to your heirs through your will. It doesn't include anything that you have sold, given away, put into trusts, or passed directly to recipients by naming them as beneficiaries of specific accounts. Assets you can pass directly to beneficiaries include money in retirement plans, insurance policies, payable-on-death bank accounts, and transferable-on-death securities accounts. In addition, any property you own jointly with rights of survivorship passes directly to your co-owner outside the probate process. However, all the assets you own at the time of your death, including half the value of property you own jointly, are considered part of your estate for purposes of calculating whether estate taxes are due.

Product Termination Fee

Investment-product charges associated with terminating one or all of a service provider's investment products.


Profit, which is also called net income or earnings, is the money a business has left after it pays its operating expenses, taxes, and other current bills. When you invest, profit is the amount you make when you sell an asset for a higher price than you paid for it. For example, if you buy a stock at $20 a share and sell it at $30 a share, your profit is $10 a share minus sales commission and capital gains tax if any.

Profit margin

A company's profit margin is derived by dividing its net earnings, after taxes, by its gross earnings minus certain expenses. Profit margin is a way of measuring how well a company is doing, regardless of size. For example, a $50 million company with net earnings of $10 million and a $5 billion company with net earnings of $1 billion both have profit margins of 20%. Profit margins can vary greatly from one industry to another, so it can be difficult to make valid comparisons among companies unless they are in the same sector of the economy.

Profit sharing

A profit-sharing plan is a type of defined contribution retirement plan that employers may establish for their workers. The employer may add up to the annual limit to each employee's profit-sharing account in any year the company has a profit to share, though there is no obligation to make a contribution in any year. The annual limit is stated as a dollar amount and as a percentage of salary, and the one which applies to each employee is the lower of the two alternatives. Employers get a tax deduction for their contribution. Employees owe no income tax on the contributions or on any of the earnings in their accounts until they withdraw money. In some cases, employees in the plan may be able to borrow from their accounts to pay for expenses such as buying a home or paying for college. Profit-sharing plans offer employers certain flexibility. For example, in a year without profits, they don't have to contribute at all. And they can vary the amount of each year's contribution to reflect the company's profitability for that year. However, each employee in the plan must be treated equally. This means that if an employer contributes 10% of one employee's salary to the plan, the employer must also contribute 10% of the salaries of all other employees in the plan.

Profit taking

Profit taking is the sale of securities after a rapid price increase to cash in on gains. Profit taking sometimes causes a temporary market downturn after a period of rising prices as investors sell off shares to lock in their gains.

Program trading

Program trading is the purchase or sale of a basket, or group, of 15 or more stocks with the combined value of $1 million or more. In some cases, programmed trades are triggered automatically when prices hit predetermined levels. In other cases, institutional investors, arbitrageurs, and other large investors use program trading to take advantage of the spread between a basket of stocks replicating an index and a futures contract on the same index. Large-scale program trading can cause abrupt price changes in a stock or group of stocks and may even have a dramatic effect on the overall market. The New York Stock Exchange (NYSE) and other exchanges have instituted a series of circuit breakers, which halt trading for a period of time when prices fall by specific percentages in a single day, to help prevent such disruption.

Progressive tax

In a progressive, or graduated, income tax system, taxpayers with higher incomes are taxed at higher rates that those with lower incomes. Those in favor of this approach say that the greatest tax burden falls on those who can afford to carry it. Opponents argue that it imposes an unfair burden on the people whose ingenuity and hard work make the economy strong.

Proprietary fund

Proprietary mutual funds are offered for sale by the financial institution -- such as a bank, investment company, or brokerage firm -- that sponsors the funds. Characteristically, the funds' names include the name of the institution. For example, a hypothetical bank called Last Bank might offer a Last Bank Growth Fund or a Last Bank Capital Appreciation Fund. Some institutions market only their proprietary funds, while others offer both their own funds and funds sponsored by others.


A prospectus is a formal written offer to sell stock to the public. It is created by an investment bank that agrees to underwrite the stock offering. The prospectus sets forth the business strategies, financial background, products, services, and management of the issuing company, and information about how the proceeds from the sale of the securities will be used. The prospectus must be filed with the Securities and Exchange Commission (SEC) and is designed to help investors make informed investment decisions. Each mutual fund provides a prospectus to potential investors, explaining its objectives, management team and policies, investment strategy, and performance. The prospectus also summarizes the fees the fund charges and analyzes the risks you take in investing in the fund.

Prototype Plan

A qualified retirement plan that has been approved and qualified as to its concept by the IRS, that is made available for the use of employers.


If you own common stock in a US corporation, you have the right to vote on certain company policies and elect the board of directors by casting a proxy, or vote. You may vote in person at the annual meeting, by phone, or online.

Proxy statement

The Securities and Exchange Commission (SEC) requires that all publicly traded companies provide a proxy statement to their shareholders prior to the annual meeting. The proxy statement presents the candidates who have been nominated to the board of directors and any proposed changes in corporate management that require shareholder approval. The statement also states the position the board of directors takes on the nominations and proposals. By law, the proxy statement must also present shareholder proposals even if they are at odds with the board's position. SEC rules also require that the proxy statement shows, in chart form, the total compensation of the company's five highest paid executives and compares the stock's performance to the performance of similar companies and the appropriate benchmark.

Prudent man rule

The prudent man rule is the basic standard a fiduciary, who is responsible for other people's money, must meet. It mandates acting as a thoughtful and careful person would, given a particular set of circumstances. A trustee, for example, observes the prudent man rule by preserving a trust's assets for its beneficiaries. The prudent man rule has sometimes been described as a defensive approach to money management, putting greater emphasis on preservation than on growth. The newer prudent investor rule differs by putting greater emphasis on achieving a reasonable rate of return and by delegating decision-making to investment professionals.

Public company

The stock of a public company is owned and traded by individual and institutional investors. In contrast, in a privately held company, the stock is held by company founders, management, employees, and sometimes venture capitalists. Many privately held companies eventually go public to help raise capital to finance growth. Conversely, public companies can be taken private for a variety of reasons.

Pump and dump

In a pump and dump scheme, a scam artist manipulates the stock market by buying shares of a low-cost stock and then artificially inflating the price by spreading rumors, typically using the Internet and phone, that the stock is about to hit new highs. Investors who fall victim to the get-rich-quick scheme begin buying up shares, and the increased demand drives up the price. At the peak of the market, the scammer sells out at a profit, shuts down the rumor mill, and disappears. The price of the stock invariably drops dramatically and the investors who got caught in the scam lose their money.

Qualified Domestic Relations Order (QDRO)

A QDRO is a judgment or order that creates the right for an alternative payee to receive some or all of the retirement benefits that would otherwise be payable to a specific participant of an employer-sponsored plan. Since a large percentage of marital assets are often tied up in a pension or retirement savings plan, a QDRO can be an important tool in ensuring an equitable division of that property in a divorce. When approved, it requires the plan administrator to divide the assets in compliance with the terms of the order. To be binding, a state agency or authority, such as a court, must issue the QDRO before a divorce or property settlement is finalized. In addition, the order must comply with the QDRO requirements of the Internal Revenue Code (IRC), the Employee Retirement Income Security Act (ERISA), and the retirement plan that's involved.

Qualified domestic trust (QDOT)

If your spouse isn't a US citizen and your estate is large enough to risk being vulnerable to estate taxes, you can use a qualified domestic trust (QDOT) to allow your spouse to enjoy the benefit of the marital deduction until his or her own death. In short, the marital deduction means that one spouse can leave the other all his or her assets free of estate tax. The inherited assets become part of the estate of the surviving spouse, and unless the combined value is less than the exempt amount, estate tax could be due at the death of that spouse. The difference, with a QDOT, is that at the death of the surviving, noncitizen spouse, the assets in the trust don't become part of his or her estate, but are taxed as if they were still part of the estate of the first spouse to die. Income distributions from the trust are subject to income tax alone, but distributions of principal may be subject to estate tax.

Qualified retirement plan

A qualified retirement plan is an employer sponsored plan that meets the requirements established by the Internal Revenue Service (IRS) and the US Congress. Pensions, profit-sharing plans, money purchase plans, cash balance plans, SEP-IRAs, SIMPLEs, and 401(k)s are all examples of qualified plans, though each type works a little differently. In some cases, contribution levels and withdrawals requirements are set of law, though they may be modified from time to time. Employers may take a tax deduction for contributions to qualified plans, and in some plans employees may make tax-deferred contributions. Among the other requirements, a qualified plan must provide for all eligible employees equivalently. That means the plan can't treat highly paid employees more generously than it does less-well paid employees, though one group of employees, such as those within five years of the official retirement age, may receive different treatment than another group. In contrast, a nonqualified plan may be available to some employees and not others. In some plans, nonqualified contributions are made with after-tax dollars, either by the employer or the employee, although any earnings in the plan are tax deferred. In other plans, future benefits are promised but contributions are not actually deposited in an account established for the employee. Mandatory federal withdrawal rules that apply to qualified plans do not apply in the same way to nonqualified plans, though nonqualified plans are subject to stringent regulation as well.

Qualitative analysis

When a securities analyst evaluates intangible factors, such as the integrity and experience of a company's management, the positioning of its products and services, or the appeal of its marketing campaign, that seem likely to influence future performance, the approach is described as qualitative analysis. While this type of evaluation is more subjective than quantitative analysis -- which looks at statistical data -- advocates of this approach believe that success or failure in the corporate world is often driven as much by qualitative factors as by financial data.

Quant fund

A quant fund is a mutual fund whose managers assemble its portfolio based on quantitative research, also called technical analysis. The goal is to beat the return on the index fund on which the quant fund is based by using statistical analysis to identify the securities that will outperform the others in the index and the overall benchmark. For example, instead of buying all the stocks in the S&P 500, a quant fund manager would buy selected stocks identified by the research as strong performers in the current economic environment. The portfolio of a quant fund is likely to change more often than the portfolio of a traditional index fund that seeks to mirror the performance of the index it tracks.

Quantitative analysis

When a securities analyst focuses on a corporation's financial data in order to project potential future performance, the process is called quantitative analysis. This methodology involves looking at profit-and-loss statements, sales and earnings histories, and the statistical state of the economy rather than at more subjective factors such as management experience, employee attitudes, and brand recognition. While some people feel that quantitative analysis by itself gives an incomplete picture of a company's prospects, advocates tend to believe that numbers tell the whole story.


The financial world splits its calendar into four quarters, each three months long. If January to March is the first quarter, April to June is the second quarter, and so on, though a company's first quarter does not have to begin in January. The Securities and Exchange Commission (SEC) requires all publicly held US companies to publish a quarterly report, officially known as Form 10-Q, describing their financial results for the quarter. These reports and the predictions that market analysts make about what they will reveal often have an impact on a company's stock price. For example, if analysts predict that a certain company will have earnings of 55 cents a share in a quarter, and the results beat those expectations, the price of the company's stock may increase. But if the earnings are less than expected, even by a penny or two, the stock price may drop, at least for a time. However, this pattern doesn't always hold true, and other forces may influence investor sentiment about the stock.

Quasi-public corporation

In the United States, quasi-public corporations have links to the federal government although they are technically in the private sector. They are also known as government-sponsored enterprises (GSEs). Their managers and executives work for the corporation, not the government. And, in some cases, you can buy stock in a quasi-public corporation, expecting to share in its profits. Some quasi-public corporations were originally federal agencies that have been privatized. The US Postal Service is a quasi-public corporation, as is the Tennessee Valley Authority (TVA). Two of the best-known GSEs, Fannie Mae and Freddie Mac, are currently in government conservatorship to stabilize their financial situation and reduce the threat of collapse. Their stocks have been delisted and have little if any value.


The Nasdaq Stock Market sells shares in a unit investment trust (UIT) that tracks the Nasdaq 100 Stock Index. This market capitalization weighted index includes the 100 largest nonfinancial companies trading on the Nasdaq and is adjusted quarterly to keep it focused on the strongest performers. The name Qubes comes from the UIT's trading symbol: QQQQ. Qubes resemble Standard & Poor's Depositary Receipts (SPDR), which reflect the performance of the Standard & Poor's 500 Index (S&P 500) and the DIAMOND (DIA), which tracks the Dow Jones Industrial Average (DJIA). These investment products are also described as exchange traded funds (ETFs).

Quotation (Quote)

On a stock market, a quotation combines the highest bid to buy and the lowest ask to sell a stock. For example, if the quotation on DaveCo stock is "20 to 20.07," it means that the highest price that any buyer wants to pay is $20, and the lowest price that any seller wants to take is $20.07. How that spread is resolved depends on whether the stock is traded on an auction market, such as the New York Stock Exchange (NYSE), or on a dealer market, such as the Nasdaq Stock Market, where the price is negotiated by market makers.


A rally is a significant short-term recovery in the price of a stock or commodity, or of a market in general, after a period of decline or sluggishness. Stocks that make a particularly strong recovery in a particular sector or in the market as a whole are often said to be leading the rally, a reference to the term's origins in combat, where an officer would lead his rallying troops back into battle. While a rally may signal the beginning of a bull market, it doesn't necessarily do so.

Random walk theory

The random walk theory holds that it is futile to try to predict changes in stock prices. Advocates of the theory base their assertion on the belief that stock prices react to information as it becomes known, and that, because of the randomness of this information, prices themselves change as randomly as the path of a wandering person's walk. This theory stands in opposition to technical analysis, whose practitioners believe you can predict future stock behavior based on statistical patterns of prior performance.


Ranking is a method of assigning a value to an investment in relation to comparable investments by using a scale. The scale might be a straightforward numerical (1 to 5) or alphabetical (A to E) system, or one that also uses stars, checks, or some other icon to convey the evaluation. Research firms and individual analysts typically establish and publish their criteria -- though not their methodology -- for establishing their rankings. These criteria, which also differ by investment type, may include quantitative information such as past earnings, price trends, and the issuing company's financial fundamentals, or more qualitative assessments, such as the state of the marketplace. Ranking can be a useful tool in evaluating potential investments or in reviewing your current portfolio. Before depending on a ranking, though, you'll want to understand how it has been derived and how accurate the system for assigning the values has been over time.

Rate of return

Rate of return refers to different things. It is income you collect on an investment expressed as a percentage of the investment's purchase price. With a common stock, the rate of return is dividend yield, or your annual dividend divided by the price you paid for the stock. With a bond, rate of return is the current yield, or your annual interest income divided by the price you paid for the bond. For example, if you paid $900 for a bond with a par value of $1,000 that pays 6% interest, your rate of return is $60 divided by $900, or 6.67%. In contrast, rate of return may be used interchangeably with percentage return, which is calculated by dividing total return -- investment income plus change in value -- by the amount invested.


Rating means evaluating a company, security, or investment product to determine how well it meets a specific set of objective criteria. For example, a bond issue may be rated along a spectrum from highest quality investment grade to speculative, or from AAA to D. Rating typically affects the interest rate a fixed-income security must pay to attract investors, forcing lower-rated bond issuers to pay higher rates. Some investors buy low-rated bonds for their higher yield. Other investors may shun low-rated investments entirely, unwilling to take the risk that the issuer might default. Ratings are not infallible, and should never be the only criterion you use to choose an investment or select an insurer. In fact, ratings can be downgraded at any time in response to new information about the issuer or the issue. Rating differs from ranking, which assigns the relative standing of two or more similar items in relation to each other.

Rating service

A rating service, such as Moody's Investors Service or Standard & Poor's, evaluates bond issuers to determine the level of risk they pose to would-be investors. Though each rating service focuses on somewhat different criteria in making its evaluation, the assessments tend to agree on which investments pose the least default risk and which pose the most. These rating services also evaluate insurance companies, including those offering fixed annuities and life insurance, in terms of how likely a provider is to meet its financial obligations to policyholders.

Real estate investment trust (REIT)

A real estate investment trust (REIT) pools investors' capital to invest in a variety of real estate ventures.There are three types: Equity REITs buy properties that produce income. Mortgage REITs invest in real estate loans. Hybrid REITs usually make both types of investments. REITs may be publicly traded corporations. In that case, after the REIT has raised its investment capital, it trades on a stock market just as a closed-end mutual fund does. Other REITs are private, nontraded investments available to qualified investors. All REITs are income-producing investments, and by law 90% of a REIT's taxable income must be distributed to investors. That means the yields on REITs may be higher than on other equity investments. However, the dividends are taxed as ordinary income.

Real interest rate

Your real interest rate is the interest rate you earn on an investment minus the rate of inflation. For example, if you're earning 6.25% on a bond, and the inflation rate is 2%, your real rate is 4.25%. That's enough higher than inflation to maintain your buying power and have some in reserve, which you could use to build your investment base. But if the inflation rate were 5%, your real rate would be only 1.25%.

Real property

Real property is what's more commonly known as real estate, or realty. A piece of real property includes the actual land as well as any buildings or other structures built on the land, the plant life, and anything that's permanently in the ground below it or the air above it. In that sense, real property is different from personal property, which you can move from place to place with you.

Real rate of return

You find the real rate of return on an investment by subtracting the rate of inflation from the nominal, or named, rate of return. For example, if you have a return of 6% on a bond in a period when inflation is averaging 2%, your real rate of return is 4%. But if inflation were 4%, your real rate of return would be only 2%. Finding real rate of return is generally a calculation you have to do on your own. It isn't provided in annual reports, prospectuses, or other publications that report investment performance.

Real time

When an event is reported as it happens -- such as a quick jump in a stock's price or the constantly changing numbers on a market index -- you are getting real-time information. Traditionally, this type of information was available to the public with a 15- or 20-minute time delay or was reported only periodically by news services. Because of the Internet and cable TV, however, more and more individual investors have access to real-time financial news. Real time, when used in computer technology, means that there is an interactive program that collects data and reports results immediately. The alternative, called batch processing, occurs when data is collected, stored, and then reported later in the evening or the next day.

Realized gain

When you sell an investment for more than you paid, you have a realized gain. For example, if you buy a stock for $20 a share and sell it for $35 a share, you have a realized gain of $15 a share. In contrast, if the price of the stock increases, and you don't sell, your gain is unrealized, or a paper profit. Realizing your gains means you lock in any increase in value, which could potentially disappear if you continued to hold the investment. But it also means you may owe tax on that profit when you sell unless the investment is tax exempt or you hold it in a tax-deferred or tax-free account. In a tax-deferred account, you can postpone paying the tax until you begin withdrawing from the account. However, if taxes are due and you have owned the investment for more than a year when you sell, you pay tax at the long-term capital gains rate, which, for most types of investments, is lower than the rate at which you pay federal income tax on ordinary income.

Realized loss

When you sell an investment for less than you paid for it, you have a realized loss. For example, if you buy a stock for $20 a share and sell it for $15 a share, you have a realized loss of $5 a share. In contrast, if the price of the stock drops, but you don't sell, you have an unrealized, or paper, loss. Realizing a loss means you lock in the drop in value, which could potentially reverse if you continued to hold the investment. But it also means you have avoided potentially greater losses if the investment is on a downward spiral. Selling an investment when the price is down also means you may be able to use the realized loss to offset realized gains on other taxable investments when you file your income tax return for the year. You may also be able to use some realized losses to offset ordinary income.


When you recapture assets, you regain them, usually because of the provisions of a contract or legal precedent. When a contract is involved, you may be entitled to recapture a percentage of the revenues from something you produce in addition to being paid the cost of producing it. For example, a hotel developer might be entitled to recapture a portion of the hotel's profits. Most of the time, recapture works in your favor, but depending on the situation, it can also mean a financial loss. A negative form of recapture occurs when the government makes you repay tax benefits that you've profited from in the past. For example, say that your divorce settlement calls for you to pay $150,000 to your ex-spouse over three years. If you pay all the money in the first two years in order to qualify for a tax deduction, and pay nothing in the third year, the IRS may force you to recapture part of your deduction in the third year and pay taxes on it.


Broadly defined, a recession is a downturn in a nation's economic activity. The consequences typically include increased unemployment, decreased consumer and business spending, and declining stock prices. Recessions are typically shorter than the periods of economic expansion they follow, but they can be quite severe even if brief. Recovery is slower from some recessions than from others. The National Bureau of Economic Research (NBER), which tracks recessions, describes the low point of a recession as a trough between two peaks. The points at which a recession begins and ends can be identified only in retrospect. The Conference Board, a business research group, considers three consecutive monthly drops in its Index of Leading Economic Indicators a sign of decline and potential recession up to 18 months in the future. The Board's record in predicting recessions is uneven, having correctly anticipated some but expected others that never materialized.


When you have converted one type of individual retirement account (IRA) to another type -- such as a traditional IRA to a Roth IRA -- and then convert it back to the original type, you are recharacterizing the IRA. Similarly, you can recharacterize a contribution you've made to one type of IRA as a contribution to another type of IRA. In either case, when the recharacterization is handled correctly, the original conversion or contribution is erased, as if it never happened. To be valid, a recharacterization must be handled as a transfer between IRA providers or internally by a single provider. Further, it must be completed before the date your tax return is due, including extensions. You must also report the action to the IRS, and in some cases, you must file an additional form.

Record date

Record date, also known as the date of record, is the day by which you must own a stock to be entitled to the dividend that the issuer's board of directors intends to pay. For example, if a company declares a dividend of 50 cents a share payable on September 1 to shareholders of record as of August 10, you must own the shares on August 10 to be entitled to the dividend. To be the legal owner on the record date you must buy the stock at least three business days before the record date. That is the last day on which trades will settle on the record date. If you buy the stock after that day, you are buying the stock ex-dividend, which means you are not entitled to the dividend. The first day the buyer is not entitled to receive the dividend is called the ex-dividend date and is currently two days before the record date in most cases.


Recovery, in the context of debt investments, is the percentage of their principal that investors are likely to recoup through bankruptcy or other proceedings if an issuer defaults. In evaluating credit risk, a credit rating agency may consider recovery as part of its general evaluation of credit quality or may issue specific recovery ratings.

Red herring

The preliminary prospectus the underwriter prepares when a security is offered to the public for the first time is called a red herring. While the name refers to the parts of the document printed in red ink, it's also the case that the document has been written to present the company in the best possible light. The implicit reference is to the rather distinctive odor of the fish of the same name, which, the story goes, fleeing fugitives sometimes used to throw bloodhounds off their scent. Although the preliminary prospectus contains important information about the company, its offerings, financial projections, and investment risk, it is customarily revised before the final version is issued.


When a fixed-income investment matures, and you get your investment amount back, the repayment is known as redemption. Bonds are usually redeemed at par, or face value, traditionally $1,000 per bond. However, if a bond issuer calls the bond, or pays it off before maturity, you may be paid a premium, or a certain dollar amount over par, to compensate you for lost interest. You can redeem, or liquidate, open-end mutual fund shares at any time. The fund buys them back at their net asset value (NAV), which is the dollar value of one share in the fund.

Redemption fee

Some open-end mutual funds impose a redemption fee when you sell shares in the fund, often during a specific, and sometimes brief, period of time after you purchase those shares. The fee is usually a percentage of the value of the shares you sell, but it may also be a flat fee, or fixed amount. The purpose of the fee is to prevent large-scale withdrawals from the fund in response to changes in the financial markets, which might require the fund manager to sell holdings at a loss in order to meet the fund's obligation to buy back your shares.

Regional exchange

Stock exchanges in cities other than New York are called regional exchanges. They list both regional stocks, which may or may not be listed on the New York exchanges, as well as stocks that are listed in New York. Because of the National Market System, securities listed on one exchange can be traded on any other exchange if the price there is better than the price on the exchange where the stock is listed. The number of regional exchanges is shrinking, however, as the result of mergers and acquisitions by larger exchanges.

Registered bond

When a bond is registered, the name of the owner and the particulars of the bond are recorded by the issuer or the issuer's agent. When registered bonds are issued in certificate form, a bond can be sold only if the owner endorses the certificate, or signs it over to someone else. In contrast, bearer bonds are considered the property of the holder, since there is no record of ownership. Currently, however, most bonds are registered electronically, so there are no certificates to endorse. Instead, you authorize a sale over the phone or by computer.

Registered investment adviser (RIA)

Investment advisory firms that register with the Securities and Exchange Commission (SEC) and agree to be regulated by SEC rules are known as registered investment advisers (RIAs). Only a small percentage of investment firms, and an even smaller number of individuals, register as RIAs, though being registered is often equated with greater expertise and a higher standard of service.

Registered owner

A security's registered owner is the person or institution in whose name the security is held on the books of the issuer or the issuer's agent. The registered owner is not always the beneficial, or actual, owner. When you buy stock through your brokerage firm, your name is recorded on the firm's books as the owner, but the stock is usually held in street name rather than issued to you in certificate form. The shares are registered electronically in the name Cede & Co., the nominee name of The Depository Trust Company (DTC). Holding securities in nominee name makes it easier to sell, since the transfer is handled electronically. You don't have to deliver the certificates within the required timeframe. It also eliminates the problem of lost or stolen certificates. However, you may own stock through an electronic direct registration system (DRS). In that case you are both the registered and beneficial owner.

Registered representative

Registered representatives are licensed to act on investors' orders to buy and sell securities and to provide advice relevant to portfolio transactions. They may be paid a salary, a commission, usually a percentage of the market price of the investments their clients buy and sell, or by annual fee figured as a percentage of the value of a client's account. Registered reps, more commonly known as stockbrokers, work for a broker-dealer that belongs to the exchange or operates in the market where the trades are handled. The reps must pass a series of exams administered by FINRA to qualify for their licenses and are subject to FINRA oversight.

Regressive tax

A regressive or flat income tax system taxes everyone at the same rate, as sales tax does. Advocates say it's simpler and does away with the kinds of tax breaks that tend to favor the wealthy. Opponents say that middle-income taxpayers carry too large a proportion of the total tax bill.

Regulation D

Both the Securities and Exchange Commission (SEC) and the Federal Reserve have regulations known as Regulation D. The SEC's Regulation D specifies which securities can be sold within the United States without having to be registered with the Commission. Among the other restrictions, these securities can be made available only to accredited investors -- individuals with a net worth of at least $1 million or an annual income of $200,000 or more, and institutions with assets of $5 million or more. The Federal Reserve's Regulation D sets the requirements for depositary institutions, including the amount of cash the bank must hold in reserve and the number of transfers or withdrawals permitted for a savings account -- which is six transfers every four week cycle with no more than three by check or electronic payment.

Regulation T

Regulation T is the Federal Reserve Board rule that governs how much you can borrow through your margin account to cover the purchase price of a security. This initial margin is 50% of the total cost. The New York Stock Exchange (NYSE) and FINRA additionally require your account to have a minimum margin of $2,000 or the full cost of the purchase, whichever is less, at the time you trade, plus a maintenance margin of at least 25% of the total market value of the securities in your account at all times. Individual broker-dealers may and often do require higher minimum and maintenance margins.

Regulation Z

Under Regulation Z, a Federal Reserve Board rule covering provisions of the Consumer Credit Protection Act of 1968, lenders have to tell you certain terms of the credit they're offering, in writing, before you borrow. Also known as the Truth in Lending Act, the regulation stipulates that lenders must disclose the true cost of loans. For example, they must make the interest rate, annual percentage rate (APR), and other terms of the loan simple to understand. Regulation Z establishes uniform methods for calculating the cost of credit, disclosing credit terms, and resolving errors on certain types of credit accounts.


Rehypothecation occurs when your broker, to whom you have hypothecated -- or pledged -- securities as collateral for a margin loan, pledges those same securities to a bank or other lender to secure a loan to cover the firm's exposure to potential margin account losses. When you open a margin account, you typically sign a general account agreement with your broker, in which you authorize your broker to rehypothecate.


When you own certain stocks and most mutual funds, you can reinvest the dividends or distributions to buy more shares instead of receiving a cash payout. In a corporate Dividend Reinvestment Plan (DRIP), for example, a company offers you the right to reinvest any cash dividends automatically to buy more stock. When you open a mutual fund account, you're generally offered an automatic reinvestment option as well. One benefit of reinvestment programs is that in most cases you can make the new investments without incurring the usual sales charges, so it can be a lower cost way to build your investment portfolio. One potential drawback, if you're reinvesting in a taxable account, is that you acquire shares at different prices, so figuring the cost basis for capital gains or losses when you sell can be more complicated than if you made fewer, larger purchases. You owe income or capital gains tax in the year the money is reinvested, even though you do not receive the cash directly. However, no tax is due on reinvestment in a tax-deferred or tax-free account, which occurs automatically. You will also want to consider the impact of reinvestment on the diversification of your portfolio, since buying additional shares increases the percentage of your portfolio that is allocated to a particular stock or mutual fund.

Reinvestment risk

Reinvestment risk occurs when you have money from a maturing fixed-income investment, such as a certificate of deposit (CD) or a bond, and want to make a new investment of the same type. The risk is that you will not be able to find the same rate of return on your new investment as you were realizing on the old one. In fact, the return could be significantly lower, based on what's happening in the economy at large, though it could also be higher. For example, if a bond paying 6% interest matures when the current rate is 4%, you must settle for a lower return if you buy a new bond unless you're willing to buy one of lower quality. One way to limit reinvestment risk is by using an investment technique known as laddering, which means splitting your investment among a number of bonds or CDs that mature gradually over a series of years. That way only part of your total investment will mature and have to be reinvested at any one time.


In a reorganization, a company changes its legal or operating structure or its ownership. It always occurs in the case of bankruptcy and may occur in other circumstances. A reorganization may be mandatory or voluntary. In a mandatory reorganization, such as a stock split or a name change voted by the board of directors, shareholder participation is required. But in a voluntary reorganization, shareholders have a voice in the outcome. For example, they can choose to participate in a tender offer and vote to approve or reject spinning off part of the company as a new entity. When a corporate reorganization occurs, the CUSIPs, or unique nine-digit character sequences that identify the company's securities, are often reissued.

Required beginning date (RBD)

Your required beginning date (RBD) is the date by which you must take your first required minimum distribution (RMD) from retirement savings plans that require distributions. For an individual retirement account (IRA), it's April 1 of the year following the year you turn 70 1/2. For a 401(k), it's either the April 1 of the year following the year you turn 70 1/2 or the April 1 following the year you retire, unless you own 5% or more of the company sponsoring the plan. If that's the case, your deadline is April 1 of the year after the year you turn 70 1/2. Some older 403(b) plans have RBDs of 75.

Required minimum distribution (RMD)

A required minimum distribution (RMD) is the smallest amount you must take each year from your tax-deferred retirement savings plan once you've reached the mandatory withdrawal age, usually 70 1/2. RMDs are required from 401(k) plans, 403(b) plans, 457 plans, and SIMPLEs as well as traditional IRAs. If you take less than the required minimum in any year, you owe a 50% penalty on the amount you should have taken but did not. You calculate your RMD by dividing your account balance at the end of your plan's fiscal year -- often December 31 -- by a distribution period based on your age. You find that number in IRS Publication 590, Table 3. If your spouse is your beneficiary and more than ten years younger than you are, you can use a longer distribution period, found in Table 2.

Reserve requirement

The Federal Reserve requires its member banks to keep a certain percentage of their customer deposits in cash and other liquid assets in reserve at all times. The required percentage may be revised at the Fed's discretion. When a bank finds itself with excess reserves, it can lend them to other banks that may need them. These very short-term loans are known as federal funds and the interest rate the lenders charge is called the federal funds rate. That's also the benchmark rate for many corporate and international government loans.


Resistance, or resistance level, is the top of a stock's current trading range. Investors seem unwilling to buy when the stock reaches that price and begin to sell. As stockholders sell at resistance level, the stock price goes down because supply exceeds demand. For example, if, on a repeated basis, as stock A's price reaches $60, stockholders begin to sell, then $60 is considered its resistance level. But a trading range isn't fixed and investor attitudes change, so the resistance level tends to move higher or lower over time. If stock A rises to $63 without a surge of selling, the current resistance line has been breached. This may be the result of a rising market or a bullish assessment of the stock's value. On the other hand, if selling increases at $57, that may become the new resistance level. Conversely, the level at which demand exceeds supply and investors typically buy a certain stock is called support. It's the point that's considered the bottom of a stock's current trading range. Technical analysts use the concepts of resistance and support in anticipating future stock price movements.

Restricted security

Restricted securities are stocks or warrants that you acquire privately, through stock options or a corporate merger, rather than by buying them in the open market. For example, you may receive restricted stock if you put money into a startup company. If the company has not yet registered with the Securities and Exchange Commission (SEC) for an initial public offering (IPO), its securities cannot be transferred or resold until the issuing company meets the SEC registration requirements for publicly traded securities. If you exercise stock options and buy stock at a reduced price, you may be required to hold those stocks for a period of time before liquidating them.

Retail investor

Retail investor refers to an individual who buys and sells securities for his or her own account through a traditional or online brokerage firm. While some retail investors hold portfolios worth millions of dollars and others own just a few securities, they are different from institutional investors, such as pension funds, money managers, or financial services companies, who have discretionary control over at least $100 million in securities.

Retained earnings

Retained earnings, also known as retained surplus, are the portion of a company's profits that it keeps to reinvest in the business or pay off debt, rather than paying them out as dividends to its investors. Retained earnings are one component of the corporation's net worth and increase the supply of cash that's available for acquisitions, repurchase of outstanding shares, or other expenditures the board of directors authorizes. Smaller and faster-growing companies tend to have a high ratio of retained earnings to fuel research and development plus new product expansion. Mature firms, on the other hand, tend to pay out a higher percentage of their profits as dividends.


Your return is the profit or loss you have on your investments, including income and change in value. Return can be expressed as a percentage and is calculated by adding the income and the change in value and then dividing by the initial principal or investment amount. You can find the annualized return by dividing the percentage return by the number of years you have held the investment. For example, if you bought a stock that paid no dividends at $25 a share and sold it for $30 a share, your return would be $5. If you bought on January 3, and sold it the following January 4, that would be a 20% annual percentage return, or the $5 return divided by your $25 investment. But if you held the stock for five years before selling for $30 a share, your annualized return would be 4%, because the 20% gain is divided by five years rather than one year. Percentage return and annual percentage return allow you to compare the return provided by different investments or investments you have held for different periods of time.

Return on equity (ROE)

Return on equity (ROE) measures how much a company earns within a specific period in relation to the amount that's invested in its common stock. It is calculated by dividing the company's net income before common stock dividends are paid by the company's net worth, which is the stockholders' equity. If the ROE is higher than the company's return on assets, it may be a sign that management is using leverage to increase profits and profit margins. In general, it's considered a sign of good management when a company's performance over time is at least as good as the average return on equity for other companies in the same industry.

Return on investment (ROI)

Your return on investment (ROI) is the profit you make on the sale of a security or other asset divided by the amount of your investment, expressed as an annual percentage rate. For example, if you invested $5,000 and the investment was worth $7,500 after two years, your annual return on investment would be 25%. To get that result, you divide the $2,500 gain by your $5,000 investment, and then divide the 50% gain by 2. Return on investment includes all the income you earn on the investment as well as any profit that results from selling the investment. It can be negative as well as positive if the sale price plus any income is lower than the purchase price.


Revenue is the money you collect for providing a product or service. Revenue is different from earnings, which is what's left of your revenue after subtracting the costs of producing or delivering the product or service and any taxes you paid on the amount you took in. When corporations release their financial statements, those that provide services, such as power or telecommunications companies, describe their income as revenues, while those that manufacture products, such as lightbulbs or books, describe their income as sales. The money a government collects in taxes is also called revenue. The US body that collects those taxes is called the Internal Revenue Service (IRS). In the United Kingdom, it's Inland Revenue.

Revenue bond

Revenue bonds are municipal bonds issued to finance public projects, such as airports and roadways. The bonds are backed by revenue to be generated by the project. For example, if the construction of a tunnel is financed with municipal revenue bonds, the tolls paid by motorists are used to pay back the bondholders. However, bondholders usually have no claims on the bond issuer's other assets or resources.

Reverse merger

In a reverse merger, a privately held company purchases a publicly held company and, as part of the new entity, becomes public without an initial public offering (IPO). It's described as reverse because in the more typical merger pattern a public company purchases a private company to expand its business.

Reverse stock split

If a company's stock is trading at a low price, the company may decide to reduce the number of existing shares and increase their price by consolidating the shares. For example, a 1-for-2 reverse stock split halves the number of existing shares and doubles the price. In that case, if you hold 100 shares of a stock selling at $5 a share, for a combined value of $500, in a 1-for-2 reverse stock split, you would own 50 shares valued at $10 a share, which would still give you a combined value of $500. Stocks may be reverse split 1-for-5, or 5-for-10, or in any ratio the company chooses. Reverse splits are generally used to ensure that a stock will continue to meet listing requirements on the market where it is traded or to encourage purchases by institutional investors, who may not buy stocks priced below a specific point.

Revocable trust

A revocable trust is a living trust that can be modified or revoked by the grantor, or person who establishes the trust and transfers property to it. The trust can be a useful estate-planning tool because, when you die, the assets in the trust pass directly to the beneficiaries you've named in the trust rather than through your will. But because you haven't relinquished control over the assets, as you do when you transfer them to an irrevocable trust, they are still included in your estate. If its total value, including the trust assets, is greater than the exempt amount, federal or state estate taxes may be due. For the same reason, during your lifetime, you continue to collect the income that the assets in the revocable trust produce, and you owe income or capital gains taxes on those earnings at your regular rates. That's not the case with an irrevocable trust, which has its own tax identity.

Rights of survivorship

If two or more people own property jointly with rights of survivorship and one of the owners should die, the deceased owner's share of the property automatically passes to the surviving owners. This arrangement for joint ownership is in contrast to the arrangement known as tenants-in-common, in which a deceased owner's share becomes part of his or her estate and can be sold or distributed to heirs according to the terms of his or her will. Couples who own their own home jointly often opt for right of survivorship to allow the surviving partner to enjoy full ownership rights to their home.

Rights offering

In a rights offering, also known as a subscription right, a company offers existing shareholders the opportunity to buy additional shares of company stock in proportion to the number they already own before any new shares are offered to the public. Such an offering is usually mandated by the corporate charter. To act on the offering, you turn over the rights you receive, typically one for each share of stock you own, and the money needed to make the purchase within the required period, often two to four weeks. The amount of money that's required is known as the subscription price. You don't have to buy the additional shares, and you can transfer your rights to someone else if you prefer. But buying helps you maintain the same percentage of ownership you had in the company before the new shares were issued rather than having that percentage diluted.


For an investor, risk is the possibility you'll lose money if an investment you make provides a disappointing return. All investments carry a certain level of risk, since investment return is not guaranteed. In general, the greater the risk you take in making an investment, the greater your return has the potential to be if the investment succeeds. For example, investing in a start-up company carries substantial risk, since there is no guarantee that it will be profitable. But if it is, you're in a position to realize a greater gain than if you had invested a similar amount in an already established company. As a rule of thumb, if you are unwilling to take at least some investment risk, you are likely to limit your return to what's provided by insured products such as bank certificates of deposit (CDs).

Risk management

Risk management is a set of strategies for analyzing potential risks and instituting policies and procedures to avoid losses and realize gains. The work of assessing the possibilities, setting priorities, and finding cost-effective solutions is also described as business continuity planning. In a business environment, some risks, such as economic pressures or technology meltdowns, are universal while others are unique to a particular venture or physical location. Large companies may use a combination of strategies to manage risk, including buying insurance, creating redundant systems, diversifying physical locations or core businesses, and establishing other hedges. For an individual investor, risk can be managed in several ways: insuring at least a portion of your portfolio, allocating your assets across classes, diversifying your holdings, and hedging with derivative products.

Risk premium

A risk premium is one way to measure the risk you'd take in buying a specific investment. Some analysts define risk premium as the difference between the current risk-free return -- defined as the yield on a 13-week US Treasury bill -- and the potential total return on the investment you're considering. Other measures of risk premium, which are applied specifically to stocks, are a stock's beta, or the volatility of that stock in relation to the stock market as a whole, and a stock's alpha, which is based on an evaluation of the stock's intrinsic value. Similarly, the higher interest rates that bond issuers typically offer on bonds below investment grade may be considered a risk premium, since the higher rate, and potentially greater return, is a way to compensate for the greater risk.

Risk ratio

Some investors and financial analysts try to estimate the risk an investment poses by speculating on how much the investment is likely to increase in value as opposed to how much it could decline. For example, a stock priced at $50 that analysts think could increase to $90 or decrease to $30 has a 4:2 risk ratio, because they estimate the stock could go up $40 but down $20. Critics point out that it is impossible to provide an accurate estimate of future prices, rendering risk ratios meaningless.

Risk tolerance

Risk tolerance is the extent to which you as an investor are comfortable with the risk of losing money on an investment. If you're unwilling to take the chance that an investment that might drop in price, you have little or no risk tolerance. On the other hand, if you're willing to take some risk by making investments that fluctuate in value, you have greater risk tolerance. The probable consequence of limiting investment risk is that you are vulnerable to inflation risk, or loss of buying power.

Risk-adjusted performance

When you evaluate an investment's risk-adjusted performance, you aren't looking simply at its straight performance figures but at those figures in relation to the amount of risk you took (or would have taken) to get the return the investment produced. One method is to investigate the investment's price volatility over various periods of time, including different market environments. For example, you might consider how far the price fell in the most recent bear market against its price in a bull market, or how it performed in a recent market correction. In general, the greater the volatility, the greater the risk. However, many analysts believe that looking exclusively at past performance can be deceptive in evaluating the risk you are taking in making a certain investment, since it can't predict what will happen in the future.

Risk-free return

When you buy a US Treasury bill that matures in 13 weeks, you're making a risk-free investment in the sense that there's virtually no chance of losing your principal (since the bill is backed by the US government) and no threat from inflation (since the term is so short). Your yield, or the amount you earn on that investment, is described as risk-free return. By subtracting the risk-free return from the return on an investment that has the potential to lose value, you can figure out the risk premium, which is one measure of the risk of choosing an investment other than the 13-week bill.


If you move your assets from one investment to another, it's called a rollover. For example, if you move money from one IRA to another IRA, that transaction is a rollover. In the same vein, if you move money from a qualified retirement plan, such as a 401(k), into an IRA, you create a rollover IRA. Similarly, when a bond or certificate of deposit (CD) matures, you can roll over the assets into another bond or time deposit.

Rollover IRA

A rollover IRA is an individual retirement account or annuity you create with tax-deferred assets you move from an employer sponsored retirement plan to an individual investment account. If you arrange for a direct rollover, the trustee of your employer's plan transfers the assets to the trustee you select for your IRA. In that case the total value of the account moves from one to the other. If you handle the rollover yourself, by getting a check from your employer's plan and depositing it in your IRA, your employer must withhold 20% of the total to prepay taxes that will be due if you fail to redeposit the full amount of the money you're moving into a tax-deferred account within 60 days. The required withholding forces you to supply the missing 20% from another source to meet the deposit deadline if you want to maintain the tax-deferred status of the full amount and avoid taxes and a potential early withdrawal tax penalty on the amount you don't deposit in the IRA.

Roth 401(k)

A Roth 401(k) allows you to make after-tax contributions to an account in your employer's retirement savings plan. Your earnings may be withdrawn tax free, provided that you have left your job, are at least 59 1/2, and your account has been open five years or more. The Roth 401(k), which is available only if the employer offers a traditional tax-deferred 401(k), has the same annual contribution limits and distribution requirements as a traditional 401(k). You can add no more than the annual federal limit each year, plus the catch-up contribution if you are 50 or older, and you must begin taking required minimum distributions (RMD) by April 1 of the year following the year you turn 70 1/2. You are eligible to postpone RMDs if you are still working unless you own 5% or more of the company sponsoring the plan. You may not move assets between traditional and Roth 401(k) accounts, though you may be able to split your annual contribution between the two. If you leave your job or retire, you can roll Roth 401(k) assets into a Roth IRA, just as you can rollover traditional 401(k) assets. Most 401(k) plans, including Roth 401(k)s, require you to choose specific investments from among those offered through the plan. Employers who offer traditional 403(b) plans may also ofter Roth 403(b)s.

Roth IRA

A Roth IRA is an individual retirement arrangement (IRA) to which you make after-tax contributions and withdraw earnings tax free any time after you turn 59 1/2, provided your account has been open at least five years. You may withdraw contributions without penalty at any time and may be able to withdraw earnings if you qualify for certain exceptions, such as using up to $10,000 toward the purchase of a first home. Since Roth IRAs have no required withdrawals during your lifetime, you can continue to accumulate tax-free earnings as long as you like. You can make a nondeductible annual contribution, up to the annual federal limit, any year you have earned income, even after age 70 1/2, though you can never contribute more than you earn. If you are 50 or older, you may also make annual catch-up contributions. To make a full contribution to a Roth IRA, your modified adjusted gross income (MAGI) must be less than the annual limit set by Congress. You may make partial contributions on a sliding scale if your MAGI is between the amounts that Congress sets for your filing status. These annual limits are lower if you file as a single than if you're married and file a joint return. You may also convert a traditional IRA or 401(k) to a Roth IRA. In the case of the 401(k), you must either retire or leave your job before the conversion. You owe income tax at the same rate you pay on ordinary income on the earnings and on any tax-deferred or deductible contributions you convert. The amount you're converting is not included in that total.

Round lot

A round lot is the normal trading unit for stocks and bonds on an organized securities exchange or market, also called a trading platform. For example, shares of stock traded in multiples of 100 are typically considered round lots, as are bonds with par values of $1,000 and $5,000.


R-squared is a statistical measurement that determines the proportion of a security's return, or the return on a specific portfolio of securities, that can be explained by variations in the stock market, as measured by a benchmark index. For example, an r-squared of 0.08 shows that 80% of a security's return is the result of changes in the market -- specifically that 80% of its gains are due to market gains and 80% of its losses are due to market losses. The other 20% are the result of factors particular to the security itself.

Rule 144A

Rule 144A of the Securities Act of 1933 makes it easier for private companies to raise money in US capital markets and for institutional investors to trade restricted securities not registered with the Securities and Exchange Commission (SEC). Specifically, the rule allows private companies, both domestic and international, to sell unregistered securities, also known as Rule 144 securities, to qualified institutional buyers (QIBs) through a broker-dealer. The rule also permits QIBs to buy and sell these securities among themselves. To be a QIB, the institution must control a securities portfolio of $100 million or more. The NASDAQ Portal Market is an electronic trading platform for Rule 144A securities. Only NASDAQ members and QIBs have access to this platform. Companies issuing unregistered securities may raise enough capital in the 144A market to remain private. They may also use a 144A offering as an intermediary step toward an initial public offering (IPO).

Russell 1000 Index

This capitalization-weighted index, published by the Frank Russell Company, tracks the 1,000 largest stocks that are included in the Russell 3000 Index and represents approximately 92% of the market value of US stocks, as represented by the Russell 3000. The Index is rebalanced at the end of June every year, to include the stocks that qualify based on its statistical criteria. It is widely used as a benchmark of large-cap US stock performance.

Russell 2000 Index

The Russell 2000 Index, published by the Frank Russell Company, tracks the stocks of the 2,000 smallest companies in the Russell 3000 index. The index includes many of the initial public offerings (IPOs) of recent years and is considered the benchmark index for small-cap investments.

Russell 3000 Index

The Russell 3000 Index, a market capitalization weighted index published by the Frank Russell Company, tracks the 3,000 largest companies in the United States. Its subsets, the Russell 1000 and the Russell 2000, are widely used benchmarks of the US large-cap and small-cap markets.

Safe harbor

A safe harbor protects an organization from liability or penalty for specific actions that occur in particular circumstances or when the organization has followed defined rules. A safe harbor 401(k) allows small businesses to avoid nondiscrimination testing by either matching employee contributions to the plan under a prescribed formula or making a 3% across-the-board contribution to retirement accounts established for each eligible employee. By avoiding nondiscrimination testing, the owners or principals may make maximum annual contributions regardless of the percentage of pay that other employees contribute. A different type of safe harbor allows a corporation, in good faith, to make Securities and Exchange Commission (SEC) filings or discuss its expectations for the future with analysts and others without being liable to investors who may use that information but end up losing money on the company's securities.


Safekeeping occurs when a broker-dealer holds securities that are registered in a client's name for the client. The advantage from the client's perspective is that the securities are safe and the broker-dealer has them available to sell at the client's instruction. The disadvantage from the broker-dealer's perspective is that securities held in a client's name are not fully negotiable or fungible, so they can't be used to settle trades, for example. Thus, it's a service for which many firms charge a fee. Alternatively, instead of being registered in their own names, clients' securities may be registered in the name of the name of the central depository, Cede & Co. That's known as being registered in street name or nominee name. With this type of registration, the client's ownership rights are fully protected but the stock is fungible.

Salary reduction plan

A salary reduction plan is a type of employer-sponsored retirement savings plan. Typical examples are traditional 401(k)s, 403(b)s, 457s, and SIMPLE IRAs. A salary reduction plan allows you, as an employee, to contribute some of your current income to a retirement account in your name and to accumulate tax-deferred earnings on those contributions. In most plans, you contribute pretax income, which reduces your current income tax, and you pay tax at withdrawal at your regular rate. Your employer may match some of or all your contribution according to a formula that applies on an equal basis to all participating employees. All salary reduction plans have an annual contribution cap that's set by Congress and allow annual catch-up contributions for participants 50 and older. With Roth 401(k)s and similar plans, you contribute after-tax income but qualify for tax-free withdrawals if you are older than 59 1/2 and your account has been open at least five years.

Sales charge

A sales charge is the fee you pay to buy mutual fund shares or other investments through a financial professional. In some cases, it may be called a commission. The charge is typically figured as a percentage of the amount you invest. As the size of your investment increases, the rate at which you pay the sales charge may decrease. In the case of mutual funds available from some investment companies, there are set dollar amounts at which there is a corresponding reduction in the sales charge. This is known as a breakpoint. For example, the rate may drop from 4.5% to 4.25% with an investment of $25,000. The sales charge on a mutual fund may be imposed as a front-end load when you buy (also known as Class A shares), as a back-end load when you sell (also known as Class B shares), or as a level load each year you own the fund (also known as Class C shares). Other classes of shares may also be offered.

Sallie Mae

This corporation makes student loans and purchases loans from other lenders, such as banks. It then packages the loans as debt securities of different maturities. After issue, these debt securities trade on the secondary market. Sallie Mae guarantees repayment of these issues, and uses the money it raises through the sale of the securities to provide additional loan money for post-secondary school borrowers. Sallie Mae also arranges financing for state student loan agencies. Its shares trade on the New York Stock Exchange (NYSE).

Sarbanes-Oxley Act of 2002

Named after its main Congressional sponsors, Senator Paul Sarbanes and Representative Michael Oxley, the Sarbanes-Oxley Act of 2002 introduced new financial practices and reporting requirements, including executive certification of financial reports, plus more stringent corporate governance procedures for publicly traded US companies. It also added protections for whistleblowers. Officially the Corporate and Auditing Accountability, Responsibility, and Transparency Act, the law is known more colloquially as SarbOx or SOX. It was passed in response to several high-profile corporate scandals involving accounting fraud and corruption in major US corporations. The law also created the Public Company Accounting Oversight Board (PCAOB), a private-sector, nonprofit corporation that regulates and oversees public accounting firms. The law has seen its share of controversy, with opponents arguing that the expense and effort involved in complying with the law reduce shareholder value, and proponents arguing that increased corporate responsibility and transparency far outweigh the costs of compliance.

Savings bonds

The US government issues two types of savings bonds: Series EE and Series I. You buy electronic Series EE bonds through a Treasury Direct account for face value and paper Series EE for half their face value. You earn a fixed rate of interest for the 30-year term of these bonds, and they are guaranteed to double in value in 20 years. Series EE bonds issued before May 2005 earn interest at variable rates set twice a year. Series I bonds are sold at face value and earn a real rate of return that's guaranteed to exceed the rate of inflation during the term of the bond. Existing Series HH bonds earn interest to maturity, but no new Series HH bonds are being issued. The biggest difference between savings bonds and US Treasury issues is that there's no secondary market for savings bonds since they cannot be traded among investors. You buy them in your own name or as a gift for someone else and redeem them by turning them back to the government, usually through a bank or other financial intermediary. The interest on US savings bonds is exempt from state and local taxes and is federally tax deferred until the bonds are cashed in. At that point, the interest may be tax exempt if you use the bond proceeds to pay qualified higher education expenses, provided that your adjusted gross income (AGI) falls in the range set by federal guidelines and you meet the other conditions to qualify.


A screen is a set of criteria against which you measure stocks or other investments to find those that meet your standards. For example, you might screen for stocks that meet a certain environmentally or socially responsible standard, or for those with current price-to-earnings ratios (P/E) less than the current market average. A socially responsible mutual fund describes the screens it uses to select investments in its prospectus.


Scrip is a certificate or receipt that represents something of value but has no intrinsic value. What's essential is that the issuer and the recipient must agree on the value that the scrip represents. For example, in the past, after a corporate stock split or spin-off, a company might issue scrip representing a fractional share of stock for each share you owned. On or before a specific date, you could combine the certificates and convert the value they represented into full shares. But most companies today make a cash payment for fractional shares based on the closing price of the stock on a specific date.

SEC yield

SEC yield is the yield that a bond mutual fund must disclose in its advertising and other documents according to Securities and Exchange Commission (SEC) rules. The rather complex calculation reports the annualized current net market yield, or the actual interest earned per share after fund expenses and any sales charges are subtracted, divided by the cost per share. The formula excludes any capital gains the fund may have realized. SEC yield creates a level playing field for comparing bond fund investments because the amount you would have received in income distributions from each of the funds over a specific period is figured in the same way. This formula can't accurately predict future yields, though, in part because a bond fund portfolio typically changes all the time. Money market funds must also report SEC yield, though the formula for that calculation is much simpler. In this case, it's what a fund would yield if it paid at the same rate over a full year as it paid in the previous month.

Secondary market

When investors buy and sell securities through a brokerage account, the transactions occur on what's known as the secondary market. While the secondary market isn't a place, it includes all of the exchanges, trading rooms, and electronic networks where these transactions take place. The issuer -- company or government -- that sold the security initially receives no proceeds from these trades, as it does when the securities are sold for the first time.

Secondary offering

The most common form of secondary offering occurs when an investor, usually a corporation, but sometimes an individual, sells a large block of stock or other securities it has been holding in its portfolio to the public. In a sale of this kind, all the profits go to the seller rather than the company that issued the securities in the first place. The seller usually pays all the commissions. Secondary offerings can also originate with the issuing companies themselves. In these cases, a company issues additional shares of its stock, over and above those sold in its initial public offering (IPO), or it reissues shares that were issued and have been bought up by the company over time. Reissued shares are known as Treasury stock.


A sector is a segment of the economy that includes companies providing the same types of products or services. For example, the utility sector provides electric power, natural gas, water, or a combination of these services. According to some definitions, this sector may also include companies who produce power and those that trade it. Similar companies within a sector tend to resemble each other in average earnings per share, price/earnings ratios (P/Es), and other fundamentals. But fundamentals may differ substantially from one sector to another. For example, some sectors are cyclical, rising and falling with changes in the economy while others are defensive, maintaining their strength despite economic ups and downs. Since there's no official list of sectors, there can be confusion about how many sectors there are, what they're called, and which companies are included. For example, transportation is sometimes considered a standalone sector and sometimes included as part of the industrial sector. Sector indexes, some of which are broad while others are very narrow, track many of the major sectors of the economy.

Sector fund

Sector mutual funds, also called specialty or specialized funds, concentrate their investments in a single segment of an industry, such as biotechnology, natural resources, utilities, or regional banks, for example. Sector funds tend to be more volatile and erratic than more broadly diversified funds, and often dominate both the top and bottom of annual mutual fund performance charts. A sector that thrives in one economic climate may wither in another one.

Sector rotation

Sector rotation refers to the practice of shifting of investment assets among different sectors of the economy in response to actual or anticipated changes in the investment markets and the overall economy. Since, any given time, certain sectors be in transition, investment managers use sector rotation strategies to capitalize on changing performance patterns to maximize profits.

Secular market

A secular market is one that moves in the same direction -- up or down -- for an extended period. Benchmark indexes continue to rise to new, higher levels during a secular bull market despite some short-term corrections. Similarly, during a secular bear market, index levels decline or remain flat despite short-term rallies. In addition, the average price-to-earnings ratio increases substantially during a secular bull market before reaching a top and falls during secular bear markets before hitting a bottom. Secular markets tend to move in cycles, or predictable though not regular patterns, so that a secular bull market is followed by a secular bear market, which is followed by a secular bull market, and so on. For example, the bull market of 1982 through 1999 followed the bear market of 1966-1981. The length of secular markets varies, from as few as 4 or 5 years to more than 20 years, though when one begins and ends becomes clear only in retrospect.

Secured bond

The issuer of a bond or other debt security may guarantee, or secure, the bond by pledging, or assigning, collateral to investors. If the issuer defaults, the investors may take possession of the collateral. A mortgage-backed bond is an example of a secured issue, since the underlying mortgages can be foreclosed and the properties sold to recover some of or all the amount of the bond. Holders of secured bonds are at the top of the pecking order if an issuer misses an interest payment or defaults on repayment of principal.

Secured credit card

A secured credit card is linked to a savings account you open with the bank or other financial institution offering the card. You deposit a sum of money in the account, and you can borrow up to that amount using your card. If you don't repay what you borrowed, the creditor can access your account to cover your debt. The creditor may also change substantial fees for a secured card, which has the effect of limiting actual access to credit. Secured credit cards look the same as other credit cards, so no merchant can identify a card as secured. But if you have trouble qualifying for credit, perhaps because you've just started working, you can use a secured card as a first step toward establishing a record of using credit responsibly. This works, however, only if you use the card responsibly and the issuer reports your use of the card to the national credit reporting agencies.

Securities Act of 1933

The Securities Act of 1933 requires public companies to register a security with the Securities and Exchange Commission (SEC) and issue a prospectus that discloses all relevant financial information to potential investors before offering the security for sale. It also forbids false or misleading claims about the security, deceit, or other fraud. Some small offerings, securities sold only in a single state, government securities, and private offerings to a limited number of investors are exempt from registration. This act, sometimes described as the truth in securities law, was the first in a series of financial reforms that followed the stock market crash of 1929.

Securities and Exchange Commission (SEC)

The Securities and Exchange Commission (SEC) is an independent federal agency that oversees and regulates the securities industry in the United States and enforces securities laws. The SEC requires registration of all securities that meet the criteria it sets, and of all individuals and firms who sell those securities. It's also a rule making body, with a mandate to turn the law into rules that the investment industry can follow. Established by Congress in 1934, the SEC sets standards for disclosure by publicly traded corporations, and works to protect investors from misleading or fraudulent practices, including insider trading. It has four divisions: Corporate Finance, Market Regulation, Investment Management, and Enforcement.

Securities Exchange Act of 1934

The Securities Exchange Act of 1934 created the Securities and Exchange Commission (SEC) and gave it authority over all areas of the securities industry. The act requires public companies with assets of $10 million or more and 500 or more shareholders to file quarterly and annual 10-K reports. They must also file the proxy materials they must provide to shareholders about issues that will be raised and voted on at annual or special meetings. SEC regulations also govern tender offers, insider trading, and the registration of securities exchanges, broker-dealers, transfer agents, and clearing firms. The SEC also oversees the self-regulatory organizations, such as the Financial Industry Regulatory Authority (FINRA), by reviewing their proposed rules before approving them. This act was expanded by the Securities Act Amendments of 1975.

Securities Investor Protection Corporation (SIPC)

The Securities Investor Protection Corporation (SIPC) is a nonprofit corporation created by Congress to insure investors against losses caused by the failure of a brokerage firm. Through SIPC, assets in your brokerage account are insured up to $500,000, including up to $100,000 in cash, but only against losses that result from the brokerage firm going bankrupt, not against market losses caused by trading decisions or other causes. All brokers and dealers must register with the Securities and Exchange Commission (SEC) and are required to be SIPC members though they can lose their affiliation under certain circumstances. Clients of nonmember firms are not insured.


Securitization is the process of pooling various types of debt -- mortgages, car loans, or credit card debt, for example -- and packaging that debt as pass-through securities or collateralized debt obligations (CDOs), which are sold to investors. The principal and interest on the debt underlying a security is paid to the investors on a regular basis, though the method varies based on the type of security. Debts backed by mortgages are known as mortgage-backed securities (MBS), while those backed by other types of loans are known generically as asset-backed securities. The loans underlying an MBS may be either retail or commercial.


Traditionally, a security was a physical document, such as stock or bond certificate, that represented your investment in that stock or bond. But with the advent of electronic recordkeeping, paper certificates have increasingly been replaced by electronic documentation. In current general usage, the term security refers to the stock, bond, or other investment product itself rather than to evidence of ownership.

Self-directed retirement plan

If you participate in an employer's retirement savings plan, such as a 401(k) or a 403(b), you usually must select the investments into which your contribution goes from a menu of choices your plan offers. When that's the case, your plan is self-directed, and the income you receive when you retire is determined in part by the investment choices you make. Individual retirement accounts are also self-directed, as you choose the way that the assets in the account are invested. Individual retirement annuities may or may not be self-directed, depending on the contract you chose. In contrast, if you're part of a defined benefit pension plan, your employer is responsible for making the investment decisions. If you own a fixed annuity, the insurance company makes the investment decisions.

Self-regulatory organization (SRO)

A self-regulatory organization (SRO) establishes the standards under which its members conduct business, monitors the way those businesses are conducted, and enforces their own rules. In some cases, those rules are subject to government approval. For example, rules made by Financial Industry Regulatory Authority (FINRA), which is the SRO for brokerage firms and brokers, must be approved by the Securities and Exchange Commission (SEC). Exchanges may also be SROs, with oversight for trading and trading firms. For example, the New York Stock Exchange (NYSE) requires that client orders delivered to the floor of the exchange be filled before orders that originate with traders on the floor, who buy and sell for their own accounts.

Sell short

Selling short is a trading strategy that's designed to take advantage of an anticipated drop in a stock's market price. To sell short, you borrow shares through your broker, sell them, and use the money you receive from the sale as collateral on the loan until the stock price drops. If it does, you then buy back the shares at a lower price using the proceeds of your sale, and return the borrowed shares to your broker plus interest and commission. If you realize a profit, it's yours to keep. Suppose, for example, you sell short 100 shares of stock priced at $10 a share. When the price drops to $7.50, you buy 100 shares, return them to your broker, and keep the $2.50-per-share profit minus commission, interest, and fees. The risk is that if the share price rises instead of falls, you may have to buy back the shares at a higher price and suffer the loss. During the period of the short sale, the stock that has been lent, typically from another margin account, is no longer the property of the actual owner because the stock has been sold. If any dividends are paid during the period before the borrowed stock is returned, or any other corporate actions occur, the short seller must make the lender whole by paying the amount that's due. That income is taxed at the lender's regular rate, not the lower rate that applies to qualifying dividend income.

Sell side

Brokerage firms and other financial services companies that buy and sell investments as agents for retail investors as well as for their own accounts are described as the sell side of Wall Street. Sell-side institutions employ analysts to research potential investments and make buy, hold, or sell recommendations that the firm's brokers may make available to their clients to help guide their investment decisions.


A sell-off is a period of intense selling of securities and commodities triggered by declining prices. Sell-offs -- sometimes called dumping -- usually cause prices to plummet even more sharply.

Senior bond

Senior bonds offer slightly lower interest rates than subordinated or junior bonds because they are considered less risky. A senior bond has priority in interest payments, and if a bond issuer defaults, or runs into difficulty paying off debt, holders of senior bonds have a prior claim in receiving whatever monies are available.

Separate account

An insurance company's separate account is established to hold the premiums you use to purchase funds included in variable annuity contracts the company offers. The separate account is distinct from the company's general account, which holds the company's assets as well as premiums for fixed annuities and fixed-income separate account funds. Assets in a company's separate account are not vulnerable to the claims of creditors, as assets in the general account are. But they can be affected by the ups and downs of the marketplace. Any gain or loss in the annuity's value results from the investment performance of the investments in the separate account funds you select.

Separate account fund

Each variable annuity contract offers a number of separate account funds. Each of those funds owns a collection of individual investments chosen by a professional manager who is striving to achieve a particular objective, such as long-term growth or regular income. You allocate your variable annuity premiums among different separate account funds offered in your contract to create a diversified portfolio of funds. Separate account funds are sometimes called investment portfolios or subaccounts. If you're comparing different contracts to decide which to purchase, among the factors to consider are the variety of funds each contract offers, the experience of the professional manager, the fees, the risk profile, and the past performance of those funds. Remember, however, that past performance does not predict or guarantee future performance. In evaluating the funds a contract offers, or the specific funds you are using in the contract you selected, you can use the prospectus the annuity company provides for each separate account fund. You may be able to find independent research on the funds from firms such as Morningstar, Inc., Standard & Poor's, and Lipper.

Series 6

The Series 6 is a licensing examination that you must pass to be entitled to sell mutual funds and variable annuities to investors. The examination, which is administered by FINRA, is a 100-question multiple choice test that puts primary emphasis on knowledge of the products plus the securities and tax regulations that apply. Anyone taking the exam must be sponsored by either a FINRA member firm or an industry self-regulatory organization (SRO).

Series 63

The Series 63 is a licensing examination that most states require for anyone who wants to sell securities within the state. Developed by the North American Securities Administrators Association (NASAA), the test covers state securities laws, known informally as blue sky laws, as reflected in the Uniform Securities Act as amended by NASAA. To sell securities anywhere in the United States, applicants must also pass the Series 6 (for a license to sell mutual funds and annuities) or Series 7 (for a license to sell all securities) administered by FINRA.

Service Provider Termination Charge

Plan administrative costs associated with terminating a relationship with a service provider, with the permanent termination of a plan, or with the termination of specific plan services. These may be termed "surrender" or "transfer" charges.

Set Up

The one-time price charged by a provider to establish the 401(k) plan design in line with a company's objective, and ready the websites and employee support to launch a retirement plan.

Settlement date

The settlement date is the date by which a securities transaction must be finalized. By that date, the buyer must pay for the securities purchased in the transaction, and the seller must deliver those securities. For stocks, the settlement date is three business days after the trade date, or what's referred to as T+3. For options and government securities, the settlement date is one day, or T+1, after the trade date. In figuring long- and short-term capital gains on your tax return, you use the trade date -- the date you buy or sell a security -- rather than the settlement date as the date of record.


A share is a unit of ownership in a corporation or mutual fund, or an interest in a general or limited partnership. Though the word is sometimes used interchangeably with the word stock, you actually own shares of stock.

Share class

Some stocks and certain mutual funds subdivide their shares into classes or groups to designate their special characteristics. For example, the differences between Class A shares and Class B shares of stock may focus on voting rights, resale rights, or other provisions that enhance the power of certain shareholders. In fact, in the United States, most dual class shares involve one class that is publicly traded and another class that is privately held. In some overseas countries, Class A shares can be purchased by citizens only, while Class B shares can be purchased by noncitizens only. In the case of mutual funds, class designations indicate the way that sales charges, or loads, are levied. Class A shares have front-end loads, Class B shares have back-end loads, also called contingent deferred sales charges, and Class C shares have level loads.


If you own stock in a corporation, you are a shareholder of that corporation. You're considered a majority shareholder if you alone or in combination with other shareholders own more than half the company's outstanding shares, which allows you to control the outcome of a corporate vote. Otherwise, you are considered a minority shareholder. In practice, however, it is possible to gain control by owning less than 51% of the shares, especially if there are a large number of shareholders or you own shares that carry extra voting power.

Shareholder of record

A stock's shareholder of record is the registered owner of the stock. If you own stock through the direct registration system (DRS) or in certificate form, you are the shareholder of record. When you buy shares that are registered in street name, your name is recorded on your brokerage firm's books as the beneficial, or actual, owner. However, the shareholder of record is generally Cede & Co., the nominee name of The Depository Trust Company (DTC). Holding securities in this way eases the process of changing ownership since the transfer is handled electronically. You don't need to sign and deliver certificates to complete a sale. Dividends and other payments are distributed first to the shareholder of record and then disbursed to the beneficial owners of the security through the brokerage firms where their ownership is registered.

Shareholder proposal

A shareholder proposal is a resolution that's put forward for consideration at a corporation's annual meeting by an individual shareholder or a group of shareholders rather than by the corporation's board of directors. A shareholder who has owned at least $2,000 worth of stock or 1% of a company's outstanding shares for at least a year is entitled to offer a proposal. In most cases, management opposes these proposals and urges shareholders to vote against them. However, management may negotiate with activist investors to make changes in corporate policy to avoid the threat of a shareholder proposal. A shareholder proposal must be included in proxy materials unless the corporation receives authorization from the Securities and Exchange Commission (SEC) to omit it.

Sharpe ratio

The Sharpe ratio is one way to compare the relationship of risk and return in different investment strategies, such as emphasizing growth or value investments, or holding various investment mixes in a portfolio. To figure the ratio, the risk-free return is subtracted from the average return of an investment portfolio in question over a period of time, and the result is divided by the standard deviation of the return. A strategy with a higher ratio is less risky than one with a lower ratio. This type of analysis, which is done using sophisticated computer programs, is named for William P. Sharpe, who won the Nobel Prize in economics in 1990.

Short interest

Short interest is the total number of shares of a particular stock that investors have sold short in anticipation of a decline in the share price and have not yet repurchased. Short interest is often considered an indicator of pessimism in the market and a sign that prices will decline. However, some analysts see short interest as a positive sign, pointing out that short sales have to be covered, and that the need to repurchase can trigger increased demand and therefore higher prices.

Signature Ready Form 5500

Fee to prepare Form 5500, a form which all qualified retirement plans (excluding SEPs and SIMPLE IRAs) must file annually with the IRS.


SIMPLE is short for Savings Incentive Match Plans for Employees, an employer sponsored retirement savings plan that may be offered by companies with fewer than 100 employees. Employers must contribute to eligible employees' accounts each year in one of two ways. They can make a contribution equal to 2% of salary for every employee, or match dollar-for-dollar each employee's contribution to the plan, up to 3% of that employee's annual salary. A SIMPLE may be set up by establishing an IRA in each employee's name or as a 401(k). Congress sets an annual dollar limit on the tax-deferred amount an employee may contribute, based on the type of SIMPLE it is. Contribution ceilings for SIMPLE-IRAs are lower than for other employer sponsored plans. You may withdraw assets from a SIMPLE without penalty if you are 59 1/2 or older and retired. Taxes are due on distributions at your regular tax rate. And you must begin taking minimum required distributions by April 1 of the year following the year you turn 70 1/2 unless you're still working. If you leave your job for any reason or retire, you may roll your assets over into an IRA or another employer plan, if the plan accepts rollovers. Two key differences between SIMPLEs and other employer plans are that your account must be open at least two years before you can withdraw or move the money, and the federal tax penalty for early withdrawal is 25% of the amount you take, rather than the 10% that applies to other plans.

Simple interest

If you earn simple interest on money you deposit in a bank or use to purchase a certificate of deposit (CD), the interest is figured on the amount of your principal alone. For example, if you had $1,000 in an account that paid 5% simple interest for five years, you'd earn $50 a year ($1,000 x .05 = $50) and have $1,250 at the end of five years. In contrast, if you had been earning compound interest, you'd have $1,276.29 at the end of five years, since the interest you earned each year, as well as your principal, would have earned interest.

Simplified employee pension plan (SEP)

A SEP is a qualified retirement plan set up as an individual retirement arrangement (IRA) in an employee's name. You can establish a SEP for yourself if you own a small business, or you may participate as an employee if you work for a company that sponsors such a plan. The federal government sets the requirements for participation, the maximum annual contribution limits, and the rules governing withdrawals.

Sinking fund

To ensure there's money on hand to redeem a bond or preferred stock issue, a corporation may establish a separate custodial account, called a sinking fund, to which it adds money on a regular basis. Or the corporation may be required to establish such a fund to fulfill the terms of its issue. The existence of the fund allows the corporation to present its investments as safer than those issued by a corporation without comparable assets. However, sinking fund assets may be used to call bonds before they mature, reducing the interest the bondholders expected to receive.

Slow market

A slow market is one with sluggish trading and static prices. In this environment, it may be difficult to find buyers willing to pay the price at which you'd like to sell your securities or other assets. So to reduce the risk of losing principal or limiting gains, you may decide not to sell in a slow market unless you have a pressing need for the money that your asset might produce. On the other hand, you might choose to buy in a slow market because lackluster trading volume might depress the prices of attractive investments. The term slow market is also used to describe an exchange or market where transactions take relatively longer to execute than they do in other trading environments.


In an investment slump, prices fall. The slump may affect an individual investment as the result of company-specific problems or it may affect an entire investment market. Often a slump is short-term, but it may also signal a long-term decline.

Small-capitalization stock

Shares of relatively small publicly traded corporations with a total market capitalization of less than $1.5 billion are typically considered small-capitalization, or small-cap, stocks. That number is not used uniformly, however, and you may find small-cap defined as having assets worth more or less during an extended bull or bear market. Market capitalization is calculated by multiplying the market price per share by the number of outstanding shares. Small-cap stocks, which are tracked by the Russell 2000 Index, tend to be issued by young, potentially fast-growing companies. Over the long term -- though not in every period -- small-cap stocks as a group have produced stronger returns than any other investment category. Mutual funds that invest in this type of stock are known as small-cap funds.

Social Security

Social Security is a federal government program designed to provide income for qualifying retired people, their dependents, and disabled people who meet the Social Security test for disability. You qualify for retirement benefits if you have had at least the minimum required payroll tax withheld from your wages for 40 quarters, the equivalent of 10 years. The minimum for each quarter is set by Congress and increases slightly each year. You earn credits toward disability coverage in the same way. The amount you receive in Social Security retirement benefits, up to the annual cap, is determined by the payroll taxes you paid during your working life, which were matched by an equal tax paid by your employers. Some of your benefit may be subject to income tax if your income plus half your benefit is higher than the ceiling Congress sets.

Socially responsible fund

When socially responsible mutual funds, also known as green funds or conscience funds, select securities to meet their investment goals, the securities must also satisfy the fund's commitment to certain principles spelled out in the fund's prospectus. For example, a socially responsible fund might not buy shares of a manufacturing company that operates factories that fund managers consider sweatshops. Or the fund might not buy shares of a food company that sells out-of-date products in emerging markets. Since the priorities of these funds vary, you may need to do some investigating to find one that matches your values.

Soft dollars

Soft dollars are amounts that money managers, including mutual fund managers, pay out of their clients' accounts to a brokerage firm to cover the cost of research the firm provides. Soft dollars also cover transaction fees for executing trades. The alternative would be for the managers to purchase the research with their own money, or hard dollars, and pay for the transaction fees with their clients' money. Using soft dollars isn't a violation of the manager's fiduciary duty, provided that the money pays for research that is consistent with SEC requirements and for actual transaction costs. In fact, it may make valuable research information available to both the managers and their clients. The practice is controversial, however, for a number of reasons, including whether soft dollar relationships conflict with the managers' obligation to seek best execution of the trades they place.

Soft market

A soft market, also known as a buyer's market, is one in which there is inactive trading in an individual stock or the market as a whole at current prices. As a result, a large sell order can easily push the price of the stock or the market down. If investors move in to buy at this lower level, the market is sometimes said to be firming up. Another way to describe a soft market is as one with more supply than demand.

Sole proprietor

A sole proprietor is the owner and operator of a business that isn't registered as either a corporation or a limited liability company. As a sole proprietor, you are personally liable for all your business's debts and report any business profits or losses on your individual tax return.

Sovereign wealth fund (SWF)

A sovereign wealth fund (SWF) is a government-owned enterprise that invests a portion of its country's foreign-exchange reserves in global financial markets. These reserves consist of a balance of payments surplus, also called a current account surplus, that are created because the payments received in overseas currencies for the country's exports, such as natural resources or manufactured goods, exceed what its residents are paying for imports. Unlike the traditional overseas investments that governments make to ensure liquidity, such as the purchase of US Treasury securities, SWF assets are separate from official reserves and are typically invested in the private sector to produce higher returns. SWFs are controversial, in part because their investment strategies, portfolio holdings, and returns are generally secret and in part because of the concern that the sponsoring countries could exert substantial economic pressure on the companies and countries where they invest.

Special purpose acquisition company (SPAC)

A special purpose acquisition company (SPAC), sometimes called a blank check company or an empty shell company, uses an initial public offering (IPO) to raise money it will use to purchase or merge with an existing company. The target company is not named at the time of the IPO, and typically has not been selected by the SPAC management. In some cases, however, the relevant sector or industry is identified in the registration documents filed with the Securities and Exchange Commission (SEC). The terms of each deal vary, but in general, at least 80% of the capital is held in a trust account to be returned to investors if a deal is not finalized within a specific period, usually 18 to 24 months. Investors must approve any deal and acquire 80% of the new publicly held company. SPACs are controversial, even though they account for a substantial percentage of new IPOs. Advocates point to the lower fees and greater liquidity than is typical of private equity deals. Critics warn of limited investor protections, including third-party claims against assets held in trust, as well as outsized financial benefits for management and underwriters.

Special purpose entity (SPE)

A special purpose entity (SPE) is formed by a parent corporation, such as a financial services company, for a specific business reason that it wishes to keep separate from its general operations. For example, the arranger of a securitization generally creates an SPE to finance the purchase of the pool of underlying assets by selling the security to investors. In this case, the SPE also distributes the cash flows generated by the assets, such as mortgage or credit card payments, to the owners of the securities. An SPE, also known as a special purpose vehicle (SPV), is legally distinct from the parent company and operates independently. Its assets and liabilities are not included in the parent company's balance sheet.

Special situation

An undervalued stock that one or more analysts expects to increase in price in the very near future because of an anticipated -- and welcome -- change within the company is known as a special situation. That change could be the introduction of a major new product, a corporate restructuring, or anything else that has the potential to increase earnings. In some cases, the fact that a stock is identified as a special situation creates a flurry of investor interest and actually helps drive the price up even before the change has had time to take effect. A stock that is extremely volatile over the short term because of important recent news about the company, such as a takeover or spin-off, is also described as a special situation.


A specialist or specialist unit at a securities exchange is responsible for maintaining a fair and orderly market in a specific security or securities on the exchange floor. Specialists execute market orders given to them by other members of the exchange known as floor brokers or sent to their post through an electronic routing system. Typically, a specialist acts both as agent and principal. As agent, the specialist handles limit orders for floor brokers in exchange for a portion of their commission. Those orders are maintained in an electronic record known as the limit order book, or specialist's book, until the stock is trading at the acceptable price. As principal, the specialist buys or sells for his or her own account to help maintain a stable market in a security. For example, if the spread, or difference, between the bid and ask, or the highest price offered by a buyer and the lowest price asked by a seller, gets too wide, and trading in the security hits a lull, the specialist might buy, sell, or sell short shares to narrow the spread and stimulate trading. But because of restrictions the exchange puts on trading, a specialist is not permitted to buy a security when there is an unexecuted order for the same security at the same price in the limit order book.

Specialist's display book

A display book was traditionally a written chronological record of all limit, stop, and short sale orders that had been placed with a specialist for an individual security on behalf of specific clients plus an inventory of the specialist's own holdings in the security. The New York Stock Exchange (NYSE) Display Book is an electronic extension of that recordkeeping. It's part of an integrated telecommunications system that not only displays orders but executes and reports transactions, handles trade comparison, and links to a number of other functions.

Speculative grade

Speculative grade, or noninvestment grade, describes bonds or other debt securities that have a greater relative potential to default than investment grade securities. Generally speaking, speculative grade means that an issuer currently has the financial resources to meet its obligations to investors but a change in the business environment or other adverse conditions could cause default.


In a spin-off, a company sets up one of its existing subsidiaries or divisions as a separate company. Shareholders of the parent company receive stock in the new company based on an evaluation established for the new entity. In addition, they continue to hold stock in the parent company. The motives for spin-offs vary. A company may want to refocus its core businesses, shedding those that it sees as unrelated. Or it may want to set up a company to capitalize on investor interest. In other cases, a corporation may face regulatory hurdles in expanding its business and spin off a unit to be in compliance. Sometimes, a group of employees will assume control of the new entity through a buyout, an employee stock ownership plan (ESOP), or as the result of negotiation.

Split-funded annuity

A split-funded annuity lets you begin receiving income from a portion of your principal immediately, while the rest of the money goes into a deferred annuity. The advantage of split-funding is that you have the benefit of some income right away for immediate needs or wants, while the balance compounds tax deferred, allowing you to build your retirement assets. One goal of a split-funded annuity is providing a larger future income when you begin to draw on the deferred portion than you would receive if you annuitized the entire principal now.


Some market analysts maintain that periods of increased volatility in stock markets may be the result of an illegal practice known as spoofing, or placing phantom bids. To spoof, traders who own shares of a certain stock place an anonymous buy order for a large number of shares of the stock through an electronic communications network (ECN). Then they cancel, or withdraw, the order seconds later. As soon as the order is placed, however, the price of the stock jumps. That's because investors following the market closely enter their own orders to buy what seems to be a hot stock and drive up the price. When the price rises, the spoofer sells shares at the higher price, and gets out of the market in that stock. Investors who bought what they thought was a hot stock may be left with a substantial loss if the price quickly drops back to its prespoof price. Spoofing is a variant of the scam known as pump and dump.

Spot market

Commodities and currencies are traded for immediate delivery and payment on the spot market, also known as a cash market. The term refers to the fact that the current market price is paid in cash at the time of the transaction -- on the spot -- or within a short period of time. A cash sale, whether arranged in person, over the telephone, or electronically, is the opposite of a forward contract, where delivery and settlement are set for a date in the future.

Spot price

The spot, or cash, price is the price of commodities and currencies that are being sold for immediate delivery with payment in cash.


In the most general sense, a spread is the difference between two similar measures. In the stock market, for example, the spread is the difference between the highest price bid and the lowest price asked. With fixed-income securities, such as bonds, the spread is the difference between the yields on securities having the same investment grade but different maturity dates. For example, if the yield on a long-term Treasury bond is 6%, and the yield on a Treasury bill is 4%, the spread is 2 points. The spread may also be the difference in yields on securities that have the same maturity date but are of different investment quality. For example, there is a 4 point spread between a high-yield bond paying 9% and a Treasury bond paying 5% that both come due on the same date. The term also refers to the price difference between two different derivatives of the same class. For instance, there is typically a spread between the price of the October wheat futures contract and the January wheat futures contract. Part of that spread is known as the cost of carry. However, the spread widens and narrows, caused by changes in the market -- in this case the wheat market.


Stagflation results when inflation increases significantly despite a slowdown in the economy and shrinking demand for products and services that results from rising unemployment and low consumer confidence. This combination of stagnation and inflation has a crippling effect on economic and political stability. As the central bank strives to stimulate the economy by increasing liquidity and cutting interest rates, it risks fueling inflation, which acts as a drag against growth. At the same time, focusing on controlling inflation rather than easing credit may increase the risk of sending the economy into an extended recession. A vivid example in recent US history began during the OPEC crisis of 1973 and 1974 when oil and food prices soared, and unemployment grew, while the economy contracted and the stock market lost value. In 1980, the inflation rate was 13.9% rather than the long-term average of 3%, and the prime rate reached 21.5%.


Stagnation is a period during which the economy grows slowly, doesn't grow at all, or actually contracts after adjusting for inflation. Typically, there is a corresponding contraction in the stock market. As a result of a slowing economy, unemployment increases and consumer spending slows. Policymakers may fear a recession, and, in response, the central bank may try to stimulate growth by increasing liquidity and lowering interest rates. While stagnation is hard on the economy, it's more common and potentially less disruptive than stagflation, which combines slowing growth with rising inflation.

Standard & Poor's (S&P)

Standard & Poor's is a private, independent source of financial market information for investors and other market participants. Its products include indexes, risk evaluation, investment research and data, and credit ratings on public companies, financial institutions, insurance firms, sovereign nations, municipal and state governments, and many nonprofit organizations such as hospitals and universities.

Standard & Poor's 500 Index (S&P 500)

The benchmark Standard & Poor's 500 Index, widely referred to as the S&P 500, tracks the performance of 500 widely held large-cap US stocks in the industrial, transportation, utility, and financial sectors. In calculating the changing value of this capitalization-weighted index, also called a market value index, stocks with the greatest number of floating shares trading at the highest share prices exert more weight than stocks with lower market value. This can mean that a relatively few stocks have a major impact on the movement of the index at any point in time. The stocks included in the index, their relative weightings, and the number of stocks from each of the sectors vary from time to time, at S&P's discretion.

Standard & Poor's Depositary Receipts (SPDR)

When you buy SPDRs -- pronounced spiders -- you're buying shares in a unit investment trust (UIT) that owns a portfolio of stocks included in market index. There are dozens of SPDRs, tracking indexes in both equity and fixed-income markets. The earliest and perhaps the best known tracks the Standard & Poor's 500 Index (S&P 500). Like a mutual fund that tracks the S&P 500, the SPDR S&P provides a way to diversify your investment portfolio without the time or expense of having to purchase a weighted portfolio of shares in all the S&P 500 companies yourself. A SPDR share is priced at about 1/10 the value of the S&P 500. However, while the net asset value (NAV) of an index fund is set only once a day, at the end of trading, the NAV and the market price of a SPDR change throughout the day, reflecting the constant changes in the value of the index to which it is linked and the forces of supply and demand for shares. SPDRs, which are part of a category of investments known as exchange traded funds (ETFs), can be sold short or bought on margin as stocks can. Each quarter you receive a distribution based on the dividends paid on the stocks in the underlying portfolio, after trust expenses are deducted. If you choose, you can reinvest those distributions to buy additional shares.

Standard & Poor's/Citigroup Growth and Value Indexes

To provide benchmarks for specific investment styles, Standard & Poor's offers complementary sets of style indexes for the US market that subdivide the S&P 500, the S&P MidCap 400, the S&P SmallCap 600, the Composite 1500, the S&P 1000, and the S&P 900 into to growth and value segments. One set, called the style index series, divides each of the indexes into approximately equal halves, with one half comprising growth stocks and the other value stocks. Stocks that don't fit clearly into either category are distributed between growth and value. The other set, called the pure style index series, tracks only those stocks that fit clearly into the growth category or the value category. Stocks in these indexes are weighted by their style scores rather than their market cap to eliminate the impact of size on the index return.

Standard deviation

Standard deviation is a statistical measurement of how far a variable quantity, such as the price of a stock, moves above or below its average value. The wider the price range, which means the greater the standard deviation, the riskier an investment is considered to be. Some analysts use standard deviation to predict the future value of a particular investment or portfolio of investments. They calculate a range of possible outcomes based on a history of past performance, and then estimate the probability of meeting each performance level within that range.


While any new company could be considered a start-up, the description is usually applied to aggressive young companies that are actively courting private financing from venture capitalists, including wealthy individuals and private equity partnerships. In many cases, the start-ups plan to use the cash infusion to prepare for an initial public offering (IPO).

Statutory voting

When shareholders vote for candidates nominated to serve on a company's board of directors, they usually cast their ballots using statutory voting. Under this system, each shareholder gets one vote for each share of stock he or she owns, and may cast that number of votes for or against each candidate. For example, if you owned 100 shares, and there were three candidates, you could cast 100 votes for each of them. That means the shareholders owning greater numbers of shares have greater influence on the outcome of the election. In cumulative voting, on the other hand, a shareholder may cast the total number of his or her votes -- one vote for every share of stock multiplied by the number of candidates for the board -- for or against a single nominee, divide them between two nominees, cast an equal number of shares for each candidate, or any other combination. For example, if you owned 100 shares, and there were three candidates, you could cast 300 votes for one of them and ignore the others. With this system, people owning a smaller number of shares can concentrate on one or two candidates. That means they may have a better chance of influencing the makeup of the board.

Step-up in basis

When you inherit assets, such as securities or property, they are stepped-up in basis. That means the assets are valued at the amount they are worth when your benefactor dies, or as of the date on which his or her estate is valued, and not on the date the assets were purchased. That new valuation becomes your cost basis. For example, if your father bought 200 shares of stock for $40 a share in 1965, and you inherited them in 2000 when they were selling for $95 a share, they would have been valued at $95 a share. If you had sold them for $95 a share, your cost basis would have been $95, not the $40 your father paid for them originally. You would not have had a capital gain and would have owed no tax on the amount you received in the sale. In contrast, if your father had given you the same stocks as a gift where there is no step-up, your basis would have been $40 a share. So if you sold at $95 a share, you would have had a taxable capital gain of $55 a share (minus commissions).

Stochastic modeling

Stochastic modeling is a statistical process that uses probability and random variables to predict a range of probable investment performances. The mathematical principles behind stochastic modeling are complex, so it's not something you can do on your own. But based on information you provide about your age, investments, and risk tolerance, financial analysts may use stochastic modeling to help you evaluate the probability that your current investment portfolio will allow you to meet your financial goals. Appropriately enough, the term stochastic comes from the Greek word meaning "skillful in aiming."


Stock is an equity investment that represents part ownership in a corporation and entitles you to part of that corporation's earnings and assets. Common stock gives shareholders voting rights but no guarantee of dividend payments. Preferred stock provides no voting rights but usually guarantees a dividend payment. In the past, shareholders received a paper stock certificate -- called a security -- verifying the number of shares they owned. Today, share ownership is usually recorded electronically, and the shares are held in street name by your brokerage firm.

Stock certificate

A stock certificate is a paper document that represents ownership shares in a corporation. In the past, when you bought stock, you got a certificate that listed your name as owner, and showed the number of shares and other relevant information. When you sold the stock, you endorsed the certificate and sent it to your broker. Stock certificates have been phased out, however, and replaced by electronic records. That means you don't have to safeguard the certificates, and can sell shares by giving an order over the phone or online. The chief objection that's been raised to the new system is largely nostalgic and aesthetic, since the certificates, with their finely engraved borders and images, are distinctive and often beautiful.

Stock market

A stock market may be a physical place, sometimes known as a stock exchange, where brokers gather to buy and sell stocks and other securities. The term is also used more broadly to include electronic trading that takes place over computer and telephone lines. In fact, in many markets around the world, all stock trading is handled electronically.

Stock split

When a company wants to make its shares more attractive and affordable to a greater number of investors, it may authorize a stock split to create more shares selling at a lower price. A 2-for-1 stock split, for example, doubles the number of outstanding shares and halves the price. If you own 100 shares of a stock selling at $50 a share, for a total value of $5,000, and the company's directors authorize a 2-for-1 split, you would own 200 shares priced at $25, with the same total value of $5,000. Announcements of stock splits, or anticipated stock splits, often generate a great deal of interest. Buyers may simply want to take advantage of the lower share price, or they may believe that the split stock will increase in value, moving back toward its presplit price. While 2-for-1 splits are the most common, stocks can be also be split 3-for-1, 10-for-1, or any other combination. In addition, a company can reverse the process and consolidate shares to reduce their number by authorizing a reverse stock split.

Stop order

You can issue a stop order, which instructs your broker to buy or sell a security once it trades at a certain price, called the stop price. Stop orders are entered below the current price if you are selling and above the current price if you are buying. Once the stop price is reached, your order becomes a market order and is executed. For example, if you owned a stock currently trading at $35 a share that you feared might drop in price, you could issue a stop order to sell if the price dropped to $30 a share to protect yourself against a larger loss. The risk is that if the price drops very quickly, and other orders have been placed before yours, the stock could actually end up selling for less than $30. You can give a stop order as a day order or as a good 'til canceled (GTC) order. You might use a buy stop order if you have sold stock short anticipating a downward movement of the market price of the security. If, instead, the price rises to the stop price, the order will be executed, limiting your loss. However, there is a risk with this type of order if the market price of the stock rises very rapidly. Other orders entered ahead of yours will be executed first, and you might buy at a price considerably higher than the stop limit, increasing your loss.

Stop price

When you give an order to buy or sell a stock or other security once it has reached a certain price, the price you name is known as the stop price. When you ask your broker to buy, your stop price is higher than the current market price. When you're selling, the stop price is lower than the current price. In either case, once the stop price has been reached, your broker will execute the order even if a flurry of trading drives the stock's price up or down quickly. That might mean you end up paying more than the stop price if you're buying or get less than the stop price if you're selling.

Stop-limit order

A stop-limit is a combination order that instructs your broker to buy or sell a stock once its price hits a certain target, known as the stop price, but not to pay more for the stock, or sell it for less, than a specific amount, known as the limit price. For example, if you give an order to buy at "40 stop 43 limit," you might end up spending anywhere from $40 to $43 a share to buy a stock, but not more than $43. A stop-limit order can protect you from a rapid run-up in price -- such as those that may occur with an initial public offering (IPO) -- but you also run the risk that your order won't be executed because the stock's price leapfrogs your limit.

Street name

Stock held by The Depository Trust Company (DTC) and registered in its nominee name, Cede & Co., rather than in the name of the actual, or beneficial, owner is said to be held in street name. The advantage of having your stocks registered in street name is that the shares are secure and at the same time can be traded easily though DTC's electronic book-entry system. You don't have to sign and deliver the stock certificates before a sale can be completed or have stock that's registered in your name on the books of the issuer or the issuer's agent transferred to a broker for sale. There's an advantage from your broker-dealer's perspective as well, since stocks held in street name can be used to complete a trade or in other transactions, subject to regulatory limits.


STRIPS, an acronym for Separate Trading of Registered Interest and Principal of Securities, are special issues of US Treasury zero-coupon bonds. They're created and sold by brokerage firms, not by the government. The bonds are prestripped, which means that the issue is separated into the principal and a series of individual interest payments, and each of those parts is offered separately as a zero-coupon security.

Structured product

Financial institutions create investment products, known generically as structured products, that trade on a stock exchange and link the return on an investor's principal to the performance of an underlying security, such as a stock or basket of stocks, or to a derivative, such as a stock index. For example, the return on debt securities known as structured notes is determined by the performance of a stock index such as the Standard & Poor's 500 (S&P 500) rather than the market interest rate. The objective is to provide the potential for higher returns than are available through a conventional investment. Each product has a distinctive name, often expressed as an acronym, and its terms and conditions vary somewhat from those offered by its competitors. For example, in some cases the principal is protected and in others it isn't. But some features are characteristic of these complex investments -- their value always involves an underlying financial instrument and they require investors to commit a minimum investment amount for a specific term, such as three years.

Stub stock

When a company has a negative net worth as a result of being bought out or going bankrupt, it may convert some of the bonds it has issued into shares of common stock. Perhaps because each share is worth only a portion of the original bond's value, this new stock is known as stub stock. The issuing company's financial instability makes stub stock a volatile investment. But if the company regains its strength, stub stock can increase dramatically in value.

Style drift

Style drift occurs if an investment manager moves away from the investment mix that's appropriate to a mutual fund or managed account portfolio based on the portfolio's objectives and style. Such a drift typically occurs if the core portfolio is providing disappointing returns while other investments in the marketplace are performing better. In this case, a manager may feel pressure to increase the bottom line. The drift may also occur inadvertently if some of a portfolio's underlying investments take on different characteristics. For example, a small company may become a mid-sized company or a value investment may increase substantially in price. The danger of style drift from your perspective is that you might end up owning investments that are more or less risky than you intended or that expose you unexpectedly to portfolio overlap. Advocates of index investing cite style drift as a key disadvantage of actively managed funds, pointing out that index investments stay true to their style no matter what's happening in the economy.


The separate account funds to which you allocate your variable annuity premiums are sometimes called subaccounts. Each subaccount is managed by an investment specialist, or team of specialists, who make buy and sell decisions based on the subaccount's objective and their analysts' research. If you're comparing different contracts to decide which to purchase, among the factors to consider are the variety of subaccounts each contract offers, the past performance of those subaccounts, the experience of the professional manager, and the fees. In evaluating the past performance and other details of the subaccounts a contract offers, or those you select in the contract you choose, you can use the prospectus the annuity company provides for each subaccount. You may also be able to find independent research from firms such as Morningstar, Inc., Standard & Poor's, and Lipper. However, past performance is not a guarantee of future results.


Each asset class -- stock, bonds, and cash equivalents, for example -- is made up of a number of different groups of investments called subclasses. Each member of a subclass shares distinctive qualities with other members of the subclass. For example, some of the subclasses of the asset class bonds are US Treasury bonds, mortgage-backed agency bonds, corporate bonds, and high-yield bonds. Similarly, some of the subclasses of stock are large-, medium-, and small-company stock, blue chip stock, growth stock, value stock, and income stock. Because different subclasses of an asset class perform differently, carry different risks, and may go up and down in value at different times, you may be able to increase your return and offset certain risks by diversifying your portfolio, which means holding individual securities within a variety of subclasses within each asset class.

Subordinated debt

Subordinated debt generally refers to debt securities that have a secondary or lesser claim to the issuer's assets than more senior debt, should the issuer default on its obligations. In fact, there are also levels of subordinated debt, with senior subordinated debt having a higher claim to repayment than junior subordinated debt.

Subprime loan

Lenders may make subprime loans to borrowers who would not ordinarily qualify for credit if customary underwriting standards were applied. To offset the increased risk that these borrowers might default, lenders charge higher interest rates than they offer to creditworthy borrowers and assess additional fees. While subprime rates vary from lender to lender, the Federal Reserve defines a subprime loan as one that carries an interest rate at least three percentage points higher than the rate on a US Treasury bond that has the same term as the loan. Subprime loans may provide credit to responsible people who may not have a strong credit history. However, subprime lending practices can be abusive or predatory, trapping unsophisticated borrowers in a cycle of debt while providing initially large profits for the lender. Lenders with large portfolios of these loans are vulnerable to major losses in market downturns. Subprime loans can be securitized and sold to investors as pass-through securities or in more complex packages such as collateralized debt obligations (CDOs). Individual and institutional buyers purchase these products for the promise of higher than average returns despite the greater risk of default.

Subscription price

The subscription price is the discounted price at which a current shareholder can buy additional shares of company stock before these newly available shares are offered for sale to the general public. In some cases the shareholder can buy the new shares without incurring a brokerage fee.

Subscription right

If a corporation's charter has a preemptive rights clause, before the company offers a new issue of securities to the public, it must offer existing shareholders the opportunity to buy new shares of stock in proportion to the number they already own. That obligation is known as a subscription right, or a rights offering, and allows you to maintain the same percentage of ownership you had before the new issue. Usually you receive one right for every share you already own, although the number of rights you need to buy a share depends on the number of outstanding shares in relation to the number in the proposed new issue. Rights are transferable, and may be traded on the secondary market. For example, if you don't wish to purchase additional shares, you may choose to sell your rights. If you need additional rights to make a purchase, you may buy them. Rights have expiration dates, so you typically must act promptly to take advantage of the offer.

Subsidized Stafford loan

Subsidized Stafford loans are available to undergraduate and graduate students who demonstrate financial need by completing the Free Application for Federal Student Aid (FAFSA). The loans may be made directly by the federal government through the Direct Loan program or through private lenders. The federal government pays the interest that accumulates on these loans while you are enrolled in an accredited program at least half-time, when repayment has been deferred, and during the six-month grace period after graduation. You are responsible for the interest if you are no longer enrolled at least half-time and after the repayment period begins.

Suitability rules

Self-regulatory organizations (SROs), such as FINRA, securities exchanges, and individual brokerage firms require that stockbrokers ensure that the investments they buy for you are suitable for you. This means, for example, that the investments are appropriate for your age, financial situation, investment objectives, and tolerance for risk. Brokerage firms require investors opening accounts to provide enough information about their financial picture to enable the broker to know what investments would be suitable.

Summary Plan Description

The document that summarizes a company or government agency's 401(k), 403(b) or 457 plan. By law, this document must be provided to all plan participants and beneficiaries. This summary outlines all the features of the plan, including eligibility, benefits, rules, investment options, etc.; and is generally an abridged version of the plan document.


Support, or support level, is the bottom of a stock's current trading range. It's the level at which the price is low enough to stimulate demand among investors. Strong buying at the support level moves the stock's price up. For example, if every time stock A's price drops to $40, investors begin to buy, then $40 is considered its support. But a trading range isn't fixed, so the support level tends to move higher or lower over time in response to changing market conditions and investor attitudes. If stock A falls to $38 without a surge of buying, the current support line has been breached. This may be the result of a falling market or a bearish assessment of the stock's value. On the other hand, if demand increases at $43, that may become the new support level. Conversely, the top of a stock's current trading range is the level at which supply exceeds demand and investors typically begin to sell. It's called resistance or resistance level. Technical analysts use the concepts of support and resistance in anticipating future stock prices.

Suspended trading

Suspended trading means that an exchange has temporarily stopped trading in a particular stock or other security. Trading is typically halted either because an important piece of information about the issuing company is about to be released or because there's a serious imbalance between buy and sell orders, often triggered by speculation. In the case of an expected announcement, the affected company generally notifies the exchange that the news is imminent. The suspension, or trading halt, provides time for the marketplace to absorb the announcement, good or bad, and helps reduce volatility in the stock price. Examples of news that could cause a suspension are a poorer than expected earnings report, a major innovation or discovery, a merger, or significant legal problems. The Securities and Exchange Commission (SEC) can also suspend trading in the stock of a company it suspects of misleading or illegal activity.


When you swap or exchange securities, you sell one security and buy a comparable one almost simultaneously. Swapping enables you to change the maturity or the quality of the holdings in your portfolio. You can also use swaps to realize a capital loss for tax purposes by selling securities that have gone down in value since you purchased them. Corporations use more complex swaps, including interest rate swaps and currency swaps, to protect themselves against sudden, dramatic shifts in currency exchange rates or interest rates.

Sweep account

A brokerage firm or bank may automatically transfer -- or sweep -- a client's uninvested or surplus funds into a designated account. For instance, at the end of each business day, a bank might sweep a business client's surplus cash from a checking account into a high-yield money market or savings account, where the money earns interest overnight. The next morning, the bank would make these funds again available to the customer. Individuals are more likely to have sweep arrangements with their brokerage firm to handle investment earnings.


When a group of investment banks works together to underwrite and distribute a new security issue, they are acting as a syndicate. Syndicates are temporary, forming to purchase the securities from the issuer and dissolving once the issue is distributed. However, new syndicates, involving some of or all the same banks, form on a regular basis to underwrite each new issue. You may also hear these underwriting syndicates called purchase groups, underwriting groups, or distributing syndicates. In other financial contexts, syndicate may refer to any group of financial institutions that works together on a particular project. Syndicate also describes a group of investors who make a joint investment in a company.

Systematic withdrawal

Systematic withdrawal is a method of receiving income in regular installments from your mutual fund accounts, retirement plans, or annuity contracts. Generally, you decide how much you want to receive in each payment or the schedule on which you want to receive the income. The payments continue until you stop them or you run out of money. Unlike the alternatives, such as a pension annuity, systematic withdrawal gives you the flexibility to stop payments at any time, adjust the amount you receive, or choose a different way to access your money. By withdrawing the same amount on a regular schedule, you limit the risk of taking a large lump sum at a time when your account value has dropped because of a market decline. The chief drawback of this withdrawal method is that there's no guarantee of lifetime income, and it's possible to deplete your account more quickly than the rate at which it's growing. That could mean running out of money. After you reach 70 1/2, you can use systematic withdrawals as a way to ensure you take out the required minimum distribution (RMD) from qualified retirement accounts and IRAs to avoid the risk of incurring IRS penalties.

Systemic risk

Systemic risk, also called market risk, is risk that's characteristic of an entire market, a specific asset class, or a portfolio invested in that asset class. It's the opposite of the risk posed by individual securities in a class or portfolio, also known as nonsystemic risk. The predictable impact that rising interest rates have on the prices of previously issued bonds is one example of systemic risk. Systemic risk also describes a situation in which the failure of one or more major institutions threatens the stability of the system as a whole. Actions the federal government took in response to the credit crisis of 2008 were described as efforts to avert a collapse of the financial system.


When a broker places your order for a security, and then immediately places an order for his or her own account for the same security, the broker is tailgating. Although this practice, which is also known as piggybacking, isn't illegal, it is considered unethical, because the assumption is that the broker is trying to profit from information he or she believes you have about the stock. A broker will typically tailgate only when you buy stock in a sufficient quantity to potentially affect the price of the security.

Target company

A target company is the object of a third-party take-over bid. The bid may be friendly or hostile, and is usually made by another corporation, a wealthy individual or group of individuals, or a fund. When the potential acquirer has accumulated 5% of the outstanding shares of the target company, it must report its holdings to the Securities and Exchange Commission (SEC), the exchange where the target is listed, and the target itself. The acquirer may accumulate shares by buying them in the market or through a tender offer to shareholders to buy their shares. In a tender offer, the price that's offered is generally higher than the current market price.

Target date fund

A target date fund is a fund of funds that allows you to link your investment portfolio to a particular time horizon, typically your expected retirement date. In fact, a target date fund characteristically has a date in its name, such as a 2015 Fund or a 2030 Fund. A target fund aiming at a date in the somewhat distant future tends to have a fairly aggressive asset allocation, with a focus on growth. As the target date approaches, the fund is designed to become more conservative to preserve the assets that have accumulated and eventually to provide income. Each fund company formulates its own approach to risk, so that the allocation of one 2025 Fund may be noticeably different from the allocation of a 2025 Fund from a different company. You can find model portfolios and statements of investment strategy in the fund's prospectus. Each mutual fund company that offers target date funds tends to offer a series, with dates five or ten years apart. Most companies populate their funds of funds with individual funds from their fund family, though some companies add mutual funds or exchange traded funds from other investment companies. Like other funds of funds, the fees you pay for a target date fund may be higher than you would pay to own each of the individual funds separately. However, these fees pay for an additional level of professional oversight.

Target risk fund

A target risk fund is a fund of funds that maintains a specific asset allocation in order to provide an essentially level exposure to investment risk. You may find a target risk fund attractive if you want a professional manager to keep your portfolio aligned with your risk tolerance as you pursue specific investment goals. Target risk funds are generally available with conservative, moderate, and aggressive portfolios, and some mutual fund companies offer even more finely tuned approaches. Like other funds of funds, the fees you pay for a target risk fund may be higher than you would pay to own each of the individual funds separately. However, these fees pay for an additional level of professional oversight.

Tax avoidance

Tax avoidance is the strategy whose goal is to allow you to pay the least amount of tax you are legally required to pay. It's perfectly legal and totally legitimate. You avoid taxes by taking advantage of all of the tax-saving aspects of the Internal Revenue Code (IRC) and comparable state codes. These include, but aren't limited to, claiming all the adjustments to income, deductions, and credits to which you are entitled, making tax-deferred or tax-exempt investments or investments whose earnings are taxed at a lower rate, making nontaxable gifts, including those to individuals and charities, creating trusts, and planning your estate.

Tax basis

Your tax basis in a security is the amount you paid for the asset plus any commission. You use the basis to calculate capital gain or loss when you sell. Your tax basis in a real estate investment is the purchase price plus commission, plus the cost of improvements -- though not routine maintenance -- over the period you own the home. In this case, too, the basis is used to calculate capital gain or loss.

Tax bracket

A tax bracket is a range of income that is taxed at a specific rate. In the United States there are six brackets, and the income that falls into each bracket is taxed at an increasingly higher rate. For example, if your taxable income was high enough to cross three brackets, you'd pay tax at the 10% rate on income in the lowest bracket, at the 15% rate on income in the next bracket, and at the 25% rate on the rest. The rates remain fixed until they are changed by Congress, but the dollar amounts in each bracket change slightly each year to reflect the impact of inflation. In addition, the income that falls into each bracket varies by filing status, so that if you file as a single taxpayer you may owe more tax on the same taxable income as a married couple filing a joint return.

Tax credit

A tax credit is an amount you can subtract from the tax you would otherwise owe. Unlike a deduction or exemption, a credit is a dollar-for-dollar reduction of your tax bill. For example, if you pay someone to care for your young children or for elderly or disabled relatives, you may be able to subtract that money, up to a set limit. Among the other tax credits for which you may qualify are the Hope scholarship and lifetime learning education credits, a credit for purchasing a hybrid car, or a credit for adopting a child. The list changes from time to time. Some but not all credits are available to people whose income is less than the ceilings Congress sets. Other credits are available to anyone who has spent the money.

Tax deferred

A tax-deferred account allows you to postpone income tax that would otherwise be due on employment or investment earnings you hold in the account until some point the future, often when you retire. For example, you can contribute pretax income to employer retirement plans, such as a traditional 401(k) or 403(b). You owe no tax on any earnings in these plans, or in traditional individual retirement accounts (IRAs), fixed and variable annuities, and some insurance policies until you withdraw the money. Then tax is due on the amounts you take out, at the same rate you pay on your regular income. A big advantage of tax deferral is that earnings may compound more quickly, since no money is being taken out of the account to pay taxes. But in return for postponing taxes, you agree to limited access to your money before you reach 59 1/2.

Tax evasion

Tax evasion is the deliberate and illegal act of not paying the taxes you owe. The term is used most often in conjunction with federal or state income taxes, though other taxes may be involved. If income tax evasion is discovered, you face both criminal and civil charges in addition to the back taxes plus penalties that you owe. Conviction can mean serving prison time. There are a number of ways to evade taxes, from very sophisticated tax shelters to simply understating what you earned or overstating your deductions.

Tax exempt

Some investments are tax exempt, which means you don't have to pay income tax on the earnings they produce. For example, the interest you receive on a municipal bond is generally exempt from federal income tax, and also exempt from state and local income tax if you live in the state where the bond was issued. However, if you sell the bond before maturity, any capital gain is taxable. Similarly, distributions from bond mutual funds that invest in municipal bonds are exempt from federal income tax. And for residents of the issuing state for single-state funds, the distributions are also exempt from state and local taxes. Capital gains distributions on these funds are taxable. Earnings in a Roth IRA are tax exempt when you withdraw them, provided your account has been open for five years or more and you're at least 59 1/2. And earnings in 529 college savings plans and Coverdell education savings accounts (ESAs) are also tax exempt if the money is used to pay qualified education expenses. When an organization such as a religious, educational, or charitable institution, or other not-for-profit group, is tax exempt, it does not owe tax of any kind to federal, state, and local governments. In addition, you can take an income tax deduction for gifts you make to such organizations.

Tax loss harvesting

Tax loss harvesting describes the process of selling certain securities at a loss to offset the taxable gains from other investments. Many investors use this technique to reduce their tax bill. The difference between short- and long-term capital gains plays a key role in developing a loss harvesting strategy, since you must use short-term losses to offset short-term gains and long-term losses to offset long-term gains. At the end of the tax year, when many investors are selling off securities for tax purposes, tax loss harvesting may affect the price of certain securities and may even noticeably impact the market as a whole.

Tax refund

A tax refund is the amount you are repaid if more income tax has been withheld than the amount you actually owe after calculating all the deductions and credits to which you are entitled. Tax refunds may occur inadvertently, but are sometimes planned for, by deliberately increasing withholding to ensure a refund. This strategy can be self-defeating because you earn no interest on the amounts that are refunded. You would come out ahead by limiting withholding to the amount required to meet your tax obligation and depositing the difference in an interest-paying account. To be successful, this strategy requires that you actually save the money.

Tax return

Tax return is a document you file with the Internal Revenue Service (IRS) to report your federal income taxes. You also file a tax return with your state if the state imposes income taxes. The IRS provides standard forms which you can send by mail or you can file your return electronically, which the IRS prefers. Federal individual tax returns are due April 15 or the first business day after that date if it falls on a Saturday or Sunday. You can arrange an automatic six-month extension if you are unable to complete your return on time. But any tax you owe is due on April 15.

Tax-efficient funds

When a mutual fund minimizes the income earnings and capital gains it distributes to its shareholders, it may be described as a tax-efficient fund. In general, the smaller a fund's turnover, or the less buying and selling it does, the more tax-efficient it has the potential to be. That's one reason why index funds, which buy and sell investments only when the composition of the index they track changes, are generally tax-efficient. In addition to reducing turnover, actively managed funds may increase tax efficiency by emphasizing investments expected to grow in value over those that produce current taxable income, or yield. And they may postpone the sale of certain investments until they qualify as long-term capital gains, making them subject to a lower tax rate. Funds that emphasize tax efficiency generally include that goal in their statement of investment objectives.

Technical indicator

Technical indicators are tools that technical analysts use to study price trends and predict future price movements in the securities markets. Technical indicators are composed of a series of data points, based on price or volume information, plotted above or on top of price charts, which track a series of price data points over a set period of time. Some are simple and others are derived from complex formulas. Often indicators are used in conjunction with each other, as just one may not present the clearest or fullest picture of security's potential future price movements. However, while indicators can be useful tools, prices do not necessarily move as anticipated because of the unpredictable nature of the markets. Indicators may be applied to stock, indexes, futures contracts, and any other tradable instrument whose price moves in response to changes in supply and demand.

Tenancy-in-common (TIC)

When two or more people own property as tenants-in-common (TIC), they share in the property's tax benefits, any income it generates, and its growth in value, as well as expenses of ownership. If one owner dies, that owner's share of the property becomes part of his or her estate, to be sold or distributed among heirs as the owner instructs. TIC arrangements are a popular way to structure the ownership of real estate investments, in which two or more parties buy commercial property to generate income. However, siblings might also own family property in this way, as might business partners.

Tender offer

When a corporation or other investor offers to buy a large portion of outstanding shares of another company, called the target company, at a price higher than the market price, it is called a tender offer. The tender is usually part of a bid to take over the target company. Current stockholders, individually or as a group, can accept or reject the offer. If the tender offer is successful and the corporation accumulates 5% or more of another company, it has to report its holdings to the Securities and Exchange Commission (SEC), the target company, and the exchange or market on which the target company's shares are traded.


A term is the length of time between when a fixed-income security, such as a bond or note, is offered for sale and its maturity date. When the term ends, the issuer repays the par value of the security, often along with the final interest payment. In general, the longer the term, the higher the rate of interest the investment pays, to offset the increased risk of tying up your money for a longer period of time. Term is also the lifespan of a certificate of deposit (CD), called a time deposit. If you hold a bank CD for its entire term, which may run from six months to five years, you collect the full amount of interest the CD has paid during the term and are free to roll the principal into a new CD or use the money for something else.

Thin market

A thin market is one where securities trade infrequently. The term can refer to an entire securities market, such as one in a developing nation, a specific class of securities, such as micro-cap stocks, or an individual security.

Thinly traded

A particular stock, sector, or market is said to be thinly traded if transactions occur only infrequently, and there are a limited number of interested buyers and sellers. Prices of thinly traded securities tend to be more volatile than those traded more actively because just a few trades can affect the market price substantially. It can also be difficult to sell shares of thinly traded securities, especially in a downturn, if there is no ready buyer. Shares of small- and micro-cap companies are more likely to be thinly traded than those of mid- or large-cap stocks.

Third market

Exchange-listed securities, such as those that are traded on the New York Stock Exchange (NYSE), may also be bought and sold off the exchange, or over-the-counter (OTC), in what is known as the third market. Typically, third-market transactions are large block trades involving securities firms and institutional investors, such as investment companies and pension funds. With the growth of electronic communications networks (ECNs), more institutional investors are buying and selling in this way. Among the appeals of the third market are speed, reduced trading costs, and anonymity.

Thrift savings plan (TSP)

The thrift savings plan (TSP) is a tax-deferred retirement savings plan for federal government employees. Employees choose whether or not to participate and how much to contribute, up to the annual limit. That amount is the same as the limit for 401(k)s and similar plans. If you're 50 or older, you can also make annual catch-up contributions. The retirement income an account provides depends on how much was contributed and how those contributions were invested. The TSP offers six investment choices. There are actually three components of the plan, two for civilians and one for members of the military. The differences among them are primarily the role the TSP plays in the employee's total retirement package and the matching contributions that are made.

Ticker (tape)

While the stock markets are in session, there is a running record of trading activity in each individual stock. Today's computerized system, still referred to as the ticker, actually replaces the scrolling paper tape of the past.

Ticker symbol

A ticker symbol, also known as a stock symbol, is a unique string of letters that identifies a particular stock on one of two electronic tapes that report market transactions. The consolidated tape includes companies that trade on the New York Stock Exchange (NYSE), NYSE Amex, regional exchanges and other markets. A second tape includes companies that trade on the Nasdaq Stock Market. Most corporations have a say in what their symbol will be, and many choose one that's clearly linked to their name, such as IBM or AMZN for Various letters may be added to a ticker symbol to indicate where the trade took place or that there was something atypical about the transaction. For example, IBM.Pr would indicate that the trade involved preferred stock.

Time deposit

When you put money into a bank or credit union account with a fixed term, such as a certificate of deposit (CD), you are making a time deposit. Time deposits may pay interest at a higher rate than demand deposit accounts, such as checking or money market accounts, from which you can withdraw at any time. If you withdraw from a time deposit account before the term ends, you may lose interest as a penalty -- sometimes as much as all the interest that has been credited to your account.

Time value of money

The time value of money is money's potential to grow in value over time. Because of this potential, money that's available in the present is considered more valuable than the same amount in the future. For example, if you invested $100 at an annual rate of just 1%, it could be worth $101 at the end of one year, which is more than you'd have if you received $100 at that point. Becasue of money's potential to increase in value over time, you can calculate how much you need to invest now to meet a certain future goal. Many financial websites and personal investment handbooks help you identify the required amounts, assuming different average annual rates of return. Inflation has the reverse effect on the value of money. Because inflation reduces purchasing power, an uninvested dollar is worth more in the present than that dollar will be worth in the future.

Toehold purchase

A toehold purchase is one in which an individual investor or investment firm caps holdings in a potential target company at less than 5% of the company's outstanding stock. Presumably that's because once an investor has acquired 5% or more of the stock, the investor must notify the company, the market where the company is listed, and the Securities and Exchange Commission (SEC). That notification must explain the next steps the investor intends to take, such as a possible takeover bid.

Total return

Total return is your annual gain or loss on an equity or debt investment. It includes dividends or interest, plus any change in the market value of the investment. When total return is expressed as a percentage, it's figured by dividing the increase or decrease in value, plus dividends or interest, by the original purchase price. On bonds you hold to maturity, however, your total return is the same as your yield to maturity (YTM). Calculating total return is more complex if your earnings have been reinvested, as they often are in a mutual fund, to buy more shares. But fund companies do that calculation on a regular basis.

Total return index

A total return index is an equity market index that's calculated using the assumption that all the dividends that the stocks in the index pay are reinvested in the index as a whole. Since an index is not an investment, but a statistical computation, the re-investment occurs only on paper, or, more precisely, in a software program.

Tracking stock

Some corporations issue tracking stock, a type of common stock whose value is linked to the performance of a particular division or business within a larger corporation rather than to the corporation as a whole. Tracking stock separates the finances of the division from those of the parent company, so that if the division falters or takes time to become profitable, the value of the traditional common stock won't be affected. If you own tracking stock, you actually are invested in the parent company, since it continues to own the division that's being tracked, though typically you have no shareholder's voting rights in the corporation.


In investing, a trade is a transaction in which you buy or sell a security or other investment product. You may pay a commission for each trade, an asset-based fee that includes the cost of your trades, or some other sales charge based on the way the trade is handled. The trade is finalized, or settled, if the information on price and size provided by each side of the trade match, or agree. The settlement schedule is determined by the type of security being traded.

Trade date

The trade date is the day on which you buy or sell a security, option, or futures contract. The settlement date, on which cash and securities are delivered, occurs one or more days after the trade date, depending on the type of security that you're trading. Options, futures contracts, and US government securities settle on T+1, or one business day after the trade date. Stocks and corporate and municipal bonds settle on T+3, or three business days after the trade.


Traders who are dealers or market makers select the securities in which they will specialize and provide quotes on those securities in the marketplace. They commit their firm's capital by taking positions in those securities and are ready to buy and sell at the prices they quote. Traders known as competitive or floor traders buy and sell securities for their own accounts. They don't pay commissions, so they can profit on small differences in price, but they must abide by the rules established by the exchange or market on which they trade. The term trader also describes people who execute transactions at brokerage firms, asset management firms, and mutual fund companies.

Trading floor

The trading floor is the active trading area of a stock exchange, such as the New York Stock Exchange (NYSE). Securities are traded double auction style on an exchange trading floor. That means the prices are set by competitive bidding between brokers representing buyers and brokers representing sellers, following a series of clearly established exchange rules. Many market maker firms refer to the space in their offices that they have allocated for trading as their trading floor. The same term is used to describe the trading areas in banks and brokerage firms.

Trading market

A trading market is one in which securities prices oscillate up and down or sideways rather than moving steadily up or down over a particular period. For example, if over several weeks or months the Dow Jones Industrial Average fluctuates within 500 points, up some days and down others, technical analysts would describe the market as trading. In a trending market, on the other hand, there would be a gradual movement up or down over a prolonged period, despite occasional short-term changes in direction.

Trading range

A trading range means different things on different types of markets. On a stock exchange or over-the-counter market, it's the spread between the highest and lowest prices at which a particular stock or market as a whole has been trading over a period of time. In contrast, some commodities exchanges set a trading range for each commodity because of the minimum margin required to maintain a position. If the market price moves above or below the trading range, trading is halted to give the member firms the opportunity to issue margin calls and collect the required money from customers whose account values are below the margin requirements.

Trading symbol

All companies listed on the New York Stock Exchange (NYSE), NYSE Amex, or the NASDAQ Stock Market are represented by a unique combination of one to five letters of the alphabet. Some, but not all, trading symbols are easily associated with their companies, such as GE for General Electric or YHOO for Yahoo!. Sometimes, the exchange trading symbol varies slightly from the way the company is designated on the ticker.


Certain securities, such as collateralized debt obligations (CDOs), are made up of a number of segments, called tranches, that differ from each other because they pay different interest rates, mature on different dates, carry different levels of risk, or differ in some other way. When the security is offered for sale, each of these tranches is sold separately. Similarly, a large certificate of deposit (CD) may be subdivided into smaller certificates for sale to individual investors. Each smaller certificate, or tranche, matures on the same date and pays the same rate of interest, but is worth a fraction of the total amount.


In a transfer, a 401(k) or IRA custodian or trustee moves the assets in your existing account directly to the custodian or trustee of your new account. With a transfer, you don't risk failing to deposit the full amount you are moving within the 60-day deadline for rollovers. And, in the case of a transfer from a 401(k) or similar retirement savings plan, nothing is withheld for income taxes. In contrast, if you handle the rollover yourself, your employer must withhold 20% of the account value. You receive a credit for that amount when you file your tax return for the year, provided you have rolled over the full amount including the 20%, within 60 days. When securities are sold, the change of the ownership is also known as a transfer.

Transfer agent

A transfer agent is responsible to a corporation for keeping track of who owns the corporation's stock and bonds and whether those securities are registered in the name of an individual investor or in the nominee name of The Depository Trust company (DTC), Cede & Co, which is known as street name registration. In some cases, stocks can be registered directly on the books of an issuer or its transfer agent using the direct registration system (DRS). Increasingly, ownership records are electronic, though a transfer agent may issue stock and bond certificates to new owners if they request them. The transfer agent also receives certificates that represent securities that have been sold or returned by beneficial owners to be reregistered.

Transferable-on-death (TOD)

A securities or brokerage account titled transferable-on-death (TOD) lets you name one or more beneficiaries, to whom the account assets are transferred when you die. TOD accounts are available only in some states, and laws may vary. Nonetheless, TOD accounts can be useful estate planning tools where they are available, since the assets in the account can pass to your beneficiaries directly, outside the probate process. A similar type of registration is available in some states for bank accounts. They're known as payable-on-death, or POD, accounts.


Transparency is a measure of how much information you have about the markets where you invest, the corporations whose stocks or bonds you buy, or the mutual funds or other investments you select. For example, in order to achieve maximum transparency in US markets, the Securities and Exchange Commission (SEC) requires corporations to disclose all information that might have an impact on their financial status so that investors can make informed decisions. However, there is evidence that certain now-bankrupt corporations did not fully comply with that mandate. Real-time trading information, increasingly available to individuals as well as institutional investors, and linked pricing systems are other steps toward complete transparency.

Treasury Direct

Treasury Direct is a direct investment system, offered through the US Department of the Treasury, that lets you make competitive or noncompetitive bids for new US Treasury issues. Once you open a Treasury Direct account, you can buy, sell, or roll over your investments by mail, telephone, or online. Interest paid on your investments, and the value of any securities you redeem at maturity or by sale, are deposited directly into the bank account you designate.

Treasury inflation-protected securities (TIPS)

TIPS, or Treasury inflation-protected securities, are inflation-indexed Treasury bonds and notes. TIPS pay a fixed rate of interest like traditional Treasurys, but their principal, to which the interest rate is applied, is adjusted twice a year to reflect changes in inflation as measured by the Consumer Price Index (CPI). However, those increases are not paid until the end of the term. Twice a year the interest rate is multiplied by the new principal, so the interest you receive will increase or decrease as well. Interest is federally taxable, as are any increases in the value of your principal. The interest is exempt from state and local income taxes. At maturity, you're repaid the inflation-adjusted principal or par value, whichever is more.

Treasury stock

Treasury stock is stock that an issuing company repurchases from its shareholders. The company may choose to repurchase if it has cash available, as an alternative to investing it in expanding the business. Or it may issue bonds to raise the money it needs to repurchase, which changes the company's debt-to-equity ratio. In most cases, the company offers to pay a premium, or more than the market price, to build its cache of Treasury stock. Reducing the number of outstanding shares boosts the per-share value of the remaining shares and tends to increase the market price of the stock. That results, in part, because no dividends are paid on Treasury stock and it's not included in earnings-per-share calculations, boosting that ratio. A company may buy back its stock for a number of other reasons, ranging from preventing a hostile takeover to having shares available if employees exercise their stock options. It may also choose to resell the shares or use them to meet the demand for shares from holders of convertible securities.

Trending market

In a trending market, securities prices move up or down for an extended period despite occasional short-term changes in direction. When prices are trending upward, it's known as a bull market. When prices are trending downward, it's known as a bear market. In contrast, in a trading market prices oscillate up and down or sideways.

Troubled Asset Relief Program (TARP)

The Troubled Asset Relief Program (TARP) was created by the Emergency Economic Stabilization Act of 2008 in response to the credit crisis created in part by illiquid mortgage-backed securities (MBS) full of defaulting mortgages. The original plan was to use up to $700 billion to buy up these toxic securities to unfreeze the money markets. But that approach was dropped, and the US Treasury purchased preferred shares in eight banks, three automobile companies, community banks, and American International Group, Inc (AIG), an insurance corporation. Much but not all of that money has been repaid to the Treasury, which has also sold some of the shares it purchased at a profit. These factors have combined to reduce the cost of the bailout to much less than projected.


A trust is a legal entity through which a trustee holds title to assets on behalf of a beneficiary or beneficiaries. The trustee has a fiduciary obligation to manage the assets in the best interests of the beneficiary and distribute those assets according to the instructions provided in the trust document, or agreement, that established the trust. When you establish a trust, you are the grantor or donor, and you name the people or institutions who are its beneficiaries. You also designate the trustee or trustees. In some cases the grantor may also be a trustee. There are many types of trusts. You must choose one that's appropriate for achieving your specific financial goal or goals. Those goals may include protecting assets from estate taxes, simplifying the transfer of property, or making provision for a minor or other dependents. Trusts you establish while you are still alive are called living or inter vivos trusts, and those that are established in your will are called testamentary trusts. Trusts that can be modified by the grantor are revocable trusts, while those that can't be modified are irrevocable trusts.


A trustee is a person or institution appointed to hold and manage assets for someone else's benefit. For example, a trustee may be responsible for money you have transferred to a trust, or money in certain retirement accounts. Trustees are entitled to collect a fee for their work, often a percentage of the value of the amount in trust. In turn, they are responsible for managing the assets in the best interests of the beneficiary of the trust. That's known as fiduciary responsibility.

Trustee Services

Fees charged by the individual, bank or trust company with fiduciary responsibility for holding plan assets.

Turnover ratio

A mutual fund's turnover ratio measures the percentage of holdings that the fund sells, or turns over, in a year. For example, if a stock fund manager has a portfolio of 100 stocks at the beginning of the year, sells 75 of them and buys 75 different stocks, the turnover rate of the fund is 75%. Some investors look for funds with lower turnover ratios, since limited trading may help to minimize capital gains taxes and trading costs. However, a high turnover ratio can also produce strong returns, which can offset the added costs and produce a net gain.


Any stock that trades at a lower price than the issuing company's reputation, earnings outlook, or financial situation would seem to merit is considered undervalued. Undervaluation may occur when investors lose interest in a company, perhaps because it hasn't kept pace with its competitors, or if there are management problems. Some investors concentrate on identifying and investing in undervalued stocks, sometimes called simply value stocks, drawn by their bargain prices and the expectation of recovery.


When you own less of a security, an asset class, or a subclass than your target asset allocation calls for, you are said to be underweighted in that security, asset class, or subclass. For example, if you have decided to invest 30% of your portfolio in fixed-income investments, but the actual holdings account for only 10% of your portfolio, you are underweighted in fixed income. In another use of the term, a securities analyst might recommend underweighting a particular security, which you might reasonably interpret as advice to sell.


An underwriter, typically an investment bank, may buy part or all of a new securities issue from the issuing company or government and resell the individual stocks or bonds to investors. Or, in a best-efforts arrangement on a stock IPO, the underwriter may commit to selling as many shares as possible without actually buying the securities. Typically, a number of banks join forces as a purchase group, or syndicate, to spread the risk and reach the widest possible market. Insurance policies also need an underwriter. In this case, the term refers to a company that is willing to take the risk of insuring your life, property, income, or health in return for a premium, or payment.


Underwriting means insuring. An insurance company underwrites your policy when it agrees to take the risk of insuring your life or covering your medical expenses in exchange for the premium you pay. An investment bank underwrites an initial public offering (IPO) or a bond issue when it buys the shares or bonds from the issuer and takes the risk of having to sell them to individual or institutional investors to make a profit.

Uniform Gifts to Minors Act (UGMA)

Under the UGMA, you as an adult can set up a custodial account for a minor and put assets such as cash, securities, and mutual funds into it. You pay no fees or charges to set up the account, and there is no limit on the amount you can put into it. To avoid owing potential gift tax, however, you may want to limit what you add each year to an amount that qualifies for the annual gift tax exclusion. One advantage of an UGMA custodial account is that you can transfer to it assets that you expect to increase in value. That way, any capital gains occur in the account, and you avoid potential estate taxes that might have been due had you owned the asset at your death. Investment earnings, including capital gains, above an annual amount that Congress sets, are calculated at the parents' rate if the child is younger than 19, or 24 if he or she is a full-time student. One potential disadvantage of a custodial account is that any gift to the account is irrevocable. The assets become the property of the beneficiary from the moment they go into the account, even though as a minor he or she cannot legally control activity in the account or take money out. At majority, which typically occurs at 18 or 21 depending on the state, the beneficiary may use the assets as he or she wishes. In addition, if you are both the donor and the custodian, and die while the beneficiary is still a minor, the assets are considered part of your estate. That could make your estate's value large enough to be vulnerable to estate taxes.

Uniform Transfers to Minors Act (UTMA)

The UTMA allows you as an adult to set up a custodial account for a minor, who owns any assets placed in the account. You may act as custodian of the account or name another adult to serve in that role. The UTMA is similar to the Uniform Gifts to Minors Act (UGMA) in many respects, but you can use an UTMA to gift assets in addition to cash and securities, including real estate, fine art, antiques, patents, and royalties. You may choose to transfer assets that you expect to increase in value into the UTMA account. That way, any capital gains occur in the account, and you avoid potential estate taxes that might have been due had you owned the asset at your death. Investment earnings, including capital gains, above an annual limit that Congress sets are calculated at the parents' rate if the child is younger than 19, or 24 if he or she is a full-time student. One potential disadvantage of a custodial account is that any gift to the account is irrevocable. The assets become the property of the beneficiary from the moment they go into the account, even though as a minor he or she cannot legally control activity in the account or take money out. At majority, which occurs typically at 18, 21, or 25 depending on the state, the beneficiary may use the assets as he or she wishes. To avoid owing potential gift tax, you may want to limit what you add each year to an amount that qualifies for the annual gift tax exclusion. In addition, if you are both the donor and the custodian, and die while the beneficiary is still a minor, the assets are considered part of your estate. That could make your estate's value large enough to be vulnerable to estate taxes.

Unit investment trust (UIT)

A unit investment trust (UIT) may be a fixed portfolio of bonds with specific maturity dates, a portfolio of income-producing stocks, or a portfolio of all the securities included in a particular index. Examples of the latter include the DIAMONDs Trust (DIA), which mirrors the composition of the Dow Jones Industrial Average (DJIA), and Standard & Poor's Depositary Receipts (SPDR), which mirrors the Standard & Poor's 500 Index (S&P 500). Index UITs are also described as exchange traded funds (ETFs). UITs resemble mutual funds in the sense that they offer the opportunity to diversify your portfolio without having to purchase a number of separate securities. You buy units, rather than shares, of the trust, usually through a broker. However, UITs trade more like stocks than mutual funds in the sense that you sell in the secondary market rather than redeeming your holding by selling your units back to the issuing fund. Further, the price of a UIT fluctuates constantly throughout the trading day, just as the price of an individual stock does, rather than being repriced only once a day, after the close of trading. As a result, some UITs, though typically not index-based UITs such as DIAMONDS or SPDRs, trade at prices higher or lower than their net asset value (NAV). One additional difference is that many UITs have maturity dates, when the trust expires, while mutual funds do not. A fund may be closed for other reasons, but not because of a predetermined expiration date.

Unit trust

The category of investment known as a mutual fund in the United States is called a unit trust in other parts of the world.


In the world of investments, the word universe refers to a specific group or category of investments that share certain characteristics. A universe might be the stocks that are included in a particular index, the stocks evaluated by a particular analytical service, or all the stocks in a particular industry.

Unlisted security

A security, such as a stock, is unlisted when it does not meet the listing requirements or pay the listing fee of any of the organized exchanges or markets. Unlisted stock may be traded over-the-counter (OTC), however, and its price and volume may be tracked in the Pink Sheets or on the OTC Bulletin Board (OTCBB). In most cases, unlisted stocks are thinly traded because they do not get much attention from the media or financial analysts, and so may be too risky for many investors.

Unrealized gain

If you own an investment that has increased in value, your gain is unrealized until you sell and take your profit. In most cases, the value continues to change as long as you own the investment, either increasing your unrealized gain or creating an unrealized loss. You owe no income or capital gains tax on unrealized gains, sometimes known as paper profits, though you typically compute the value of your investment portfolio based on current -- and unrealized -- values.

Unrealized loss

If the market price of a security you own drops below the amount you paid for it, you have an unrealized loss. The loss remains unrealized as long as you don't sell the security while the price is down. In a volatile market, of course, an unrealized loss can become an unrealized gain, and vice versa, at any time. One reason you might choose to sell at a loss, other than needing cash at that moment, is to prevent further losses in a security that seems headed for a still-lower price. You might also sell to create a capital loss, which you could use to offset capital gains.

Unsecured bond

When a bond isn't backed by collateral or security of some kind, such as real estate or revenue from operations, that can be used to repay the bondholders if the bond issuer defaults, the bond is described as unsecured. However, most unsecured bonds pose limited risk of default, since the companies that issue them are usually financially sound. Unsecured bonds are also known as debentures.


An uptick is the smallest possible incremental increase in a security's price, which, for stocks, is one cent. So when there's an uptick in a stock selling at $20.25 cents, the new price is $20.26 cents.

US savings bond

The US government issues two types of savings bonds: Series EE and Series I. You buy electronic Series EE bonds through a Treasury Direct account for face value and paper Series EE for half their face value. You earn a fixed rate of interest for the 30-year term of these bonds, and they are guaranteed to double in value in 20 years. Series EE bonds issued before May 2005 earn interest at variable rates set twice a year. Series I bonds are sold at face value and earn a real rate of return that's guaranteed to exceed the rate of inflation during the term of the bond. Existing Series HH bonds earn interest to maturity, but no new Series HH bonds are being issued. The biggest difference between savings bonds and US Treasury issues is that there's no secondary market for savings bonds since they cannot be traded among investors. You buy them in your own name or as a gift for someone else and redeem them by turning them back to the government, usually through a bank or other financial intermediary. The interest on US savings bonds is exempt from state and local taxes and is federally tax deferred until the bonds are cashed in. At that point, the interest may be tax exempt if you use the bond proceeds to pay qualified higher education expenses, provided that your adjusted gross income (AGI) falls in the range set by federal guidelines and you meet the other conditions to qualify.

US Treasury bill (T-bill)

US Treasury bills are the shortest-term government debt securities. They are issued with a maturity date of 4, 13, 26, or 52 weeks. The par value is $100, which is also the minimum purchase. The interest a T-bill pays is the difference between the purchase price and par value, which is repaid at maturity. The bills are sold weekly by competitive auction to institutional investors, and to noncompetitive bidders through TreasuryDirect for the same price paid by the competitive bidders. Noncompetitive bidders can purchase up to $5 million in bills in a single auction. T-bills are described as risk-free investments. Because they are backed by the full faith and credit of the US government, they pose virtually no credit risk. And, because their terms are so short, they pose little or no inflation risk. However, if you sell before a T-bill's term expires you might realize less than you paid to purchase the bill. You would also pay fees on the transaction. T-bill interest is federally taxable but exempt from state and local taxes.

US Treasury bond

US Treasury bonds are long-term government debt securities with 30-year terms. These bonds are considered among the world's the most secure investments since they are backed by the full faith and credit of the US government New bonds, with a par value of $100, are sold periodically at auction. Institutional investors make competitive bids and individual buyers may invest up to $5 million per issue. They pay the price determined by the auction. Existing bonds trade in the secondary market at prices that fluctuate to reflect changing demand. These bonds, sometimes referred to as long bonds, are considered a benchmark for market interest rates. While interest on US Treasury bonds is federally taxable, it is exempt from state and local taxes.

US Treasury note

US Treasury notes are intermediate-term debt securities issued at par value of $100 with terms of two, three, five, seven, or ten years. The notes are available at issue by competitive auction for institutional investors and through TreasuryDirect for individuals, who pay the same price as competitive bidders. Individuals can purchase up to $5 million in notes at a single auction. After issue, the notes trade in the secondary market, where their market value fluctuates to reflect demand. Vulnerability to inflation risk is somewhat greater than with US Treasury bills, but not as great as with long-term bonds. Like other US Treasury issues, the notes are backed by the full faith and credit of the US government. The interest is exempt from state and local, but not federal, taxes.


Valuation is the process of estimating the value, or worth, of an asset or investment. Sometimes it means determining a fixed amount, such as establishing the value of your estate after your death. Other times, valuation means estimating future worth. For example, fundamental stock analysts estimate the outlook for a company's stock by looking at data such as the stock's price-to-earnings (P/E), price-to-sales, and price-to-book (net asset value) ratios. A company with a high P/E may be considered overvalued, and a company with a low P/E may be considered undervalued.

Value fund

When a mutual fund manager buys primarily undervalued stocks for the fund's portfolio with the expectation that these stocks will increase in price, that fund is described as a value fund. A value fund may be limited to stocks of a certain size, such as those included in a small-cap value fund, or it may include undervalued stocks with different levels of capitalization.

Value Line Composite Index

Value Line, an independent investment research service, tracks the performance of approximately 1,700 common stocks in its composite index. The index, which is equally weighted, is considered a reliable indicator of overall market trends.

Value Line, Inc.

Value Line is an investment research company that provides detailed analysis on a range of stocks, mutual funds, and convertible investments. Their publications include The Value Line Investment Survey and The Value Line Mutual Fund Survey, which contain regularly updated rankings of specific investments that the company covers. The company uses a dual ranking system in its evaluations. For example, Value Line ranks stocks for their safety and timeliness, and mutual funds both for their overall performance and for their risk-adjusted performance.

Value stock

Value stocks, also known as undervalued stocks, trade at a lower price than the company's reputation, earnings outlook, or financial situation would seem to merit. Investors who seek them out expect the company's fortunes to turn around, and the price of the stock to increase accordingly.

Variable annuity

A variable annuity is an insurance company product designed to allow you to accumulate retirement savings. When you purchase a variable annuity, either with a lump sum or over time, you allocate the premiums you pay among the various separate account funds offered in your annuity contract. The tax-deferred return on your variable annuity fluctuates with the performance of the underlying investments in your separate account funds, sometimes called investment portfolios or subaccounts. You may purchase qualified variable annuities, which are offered as options within an employer sponsored retirement savings plan, or nonqualified variable annuities. Nonqualified annuities are those you purchase on your own, often to supplement other retirement savings. You can also choose an individual retirement annuity, which resembles an individual retirement account except that the underlying investments are separate account funds. Among the appeals of both qualified and nonqualified variable annuities are the promise of a stream of income for life if you annuitize the assets in your account and the right to make tax-exempt transfers among separate account funds. If you purchase a nonqualified annuity, there are no federal limits on the annual amounts you can invest, no requirement that you purchase the annuity with earned income, and no minimum required withdrawals beginning at age 70 1/2. However, with both types of variable annuities, withdrawals before you reach age 59 1/2 may be subject to a 10% early withdrawal tax penalty.

Venture capital (VC)

Venture capital is financing provided by wealthy independent investors, banks, and partnerships to help new businesses get started, reach the next level of growth, or go public. In return for the money they put up, also called risk capital, the investors may play a role in the company's management as well as receive some combination of equity, profits, or royalties. Some venture capital also goes into bankrupt companies to help them turn around, or to companies that the management wants to take private by buying up all the outstanding shares.


Vesting gives you the right to contributions your employer made on your behalf to an employer pension plan or an employer sponsored retirement plan, such as a 401(k). You become fully vested -- or entitled to the contributions your employer has made to the plan, including matching and discretionary contributions -- after a certain period of service with the employer. Qualified plans must use one of the standards set by the federal government to determine that period, a maximum of seven years in a defined benefit plan and six years in a defined contribution plan. If you become entitled to full benefits gradually over several years, the process is called graded vesting. But if you have are entitled only when the full waiting period is up, the process is called cliff vesting. If you leave your job before becoming fully vested, you forfeit all or part of your employer-paid benefits. However, you are always entitled to all the contributions you make to a retirement plan yourself through salary reduction or after-tax payments.

Vesting Schedule

Under the Tax Reform Act of 1986, there are two minimum schedules: 100% vesting after 5 years of service and graduated vesting beginning after 3 years, with 100% vesting after 7 years. If a plan has 100% immediate vesting, the eligibility period may be 2 years of service.

Virtual bank

A virtual bank offers of some or all the same types of accounts and services that traditional bricks-and-mortar banks do, but virtual banks exist only online. They typically charge lower fees and pay higher interest because of low overhead. Virtual bank transactions can be checked in real time, as they happen, rather than at the end of the banking day or the end of the month -- though those services may also be available through the online branches of traditional banks. Virtual banks don't have branches or own ATM machines, so you make deposits electronically or by mail. Your virtual bank may reimburse your ATM fees for using other banks' machines. However, there may be a limit to the number of transactions a virtual bank will cover each month.


The term volatility indicates how much and how quickly the value of an investment, market, or market sector changes. For example, because the stock prices of small, newer companies tend to rise and fall more sharply over short periods of time than stock of established, blue-chip companies, small caps are described as more volatile. The volatility of a stock relative to the overall market is known as its beta, and the volatility triggered by internal factors, regardless of the market, is known as a stock's alpha.


Volume is the number of shares traded in a company's stock or in an entire market over a specified period, typically a day. Unusual market activity, either higher or lower than average, is typically the result of some external event. But unusual activity in an individual stock reflects new information about that stock or the stock's sector. In technical analysis, volume charts are used in conjunction with price charts to show the number of trades that took place over the same time period. Technical analysts tend to attribute greater significance to changes in price that correlate with higher volume.

Voting right

Investors who own shares of a common stock or shares in a mutual fund typically have voting rights, which allow them to participate in the election of boards of directors. These shareholders can also vote for or against certain propositions put forward by management or by other stockholders. In contrast, investors who own preferred shares or corporate bonds have no voting rights.


Voice Response Unit for telephone services.

Vulture fund

Like the scavenging bird of prey that lends its name to the fund, a vulture fund seeks out depressed or endangered investments. Many vulture funds focus on real estate, but others invest in bonds that have been downgraded or are in default and other high-risk securities. The strategy behind vulture investing is that such troubled securities have the potential to provide a large return eventually, in spite of their current vulnerable position. Most vulture funds are limited partnerships, but some are retail mutual funds that are open to individual investors.


Corporations may issue warrants that allow you to buy a company's stock at a fixed price during a specific period of time, often 10 or 15 years, though sometimes there is no expiration date. Warrants are generally issued as an incentive to investors to accept bonds or preferred stocks that will be paying a lower rate of interest or dividends than would otherwise be paid. How attractive the warrants are -- and so how effective they are as an incentive to purchase -- generally depends on the growth potential of the issuing company. The brighter the outlook, the more attractive the warrant becomes. When a warrant is issued, the exercise price is above the current market price. For example, a warrant on a stock currently trading at $15 a share might guarantee you the right to buy the stock at $30 a share within the next 10 years. If the price goes above $30, you can exercise, or use, your warrant to purchase the stock, and either hold it in your portfolio or resell at a profit. If the price of the stock falls over the life of the warrant, however, the warrant becomes worthless. Warrants are listed with a "wt" following the stock symbol and traded independently of the underlying stock. If you own warrants to purchase a stock at $30 a share that is currently trading for $40 a share, your warrants are theoretically worth a minimum of $10 a share, or their intrinsic value.

Wash sale

When you purchase and then sell or sell and then repurchase the same security or a substantially similar security within 30 days, the double transaction is called a wash sale. As an individual investor, you can't use any capital losses that the sale produces to offset capital gains from selling other securities in your portfolio. For example, if you sold 200 shares of an underperforming stock on December 15 intending to use the loss on that sale to offset gains on other sales, your offset would be invalid if you repurchased the stock before the following January 15. But if you repurchased on January 16, the offset would be valid. In fact, avoiding wash sales is an important part of tax planning. In a broader use of the term, purchasing and then quickly reselling a security may be described as a wash sale, whether the transaction is part of an innocent trading strategy or a pump-and-dump scheme.

Weighted stock index

In weighted stock indexes, price changes in some stocks have a much greater impact than price changes in others in computing the direction of the overall index. For example, in a market capitalization weighted index, such as the benchmark Standard & Poor's 500 Index (S&P 500), price changes in securities with the highest market valuations have a greater impact on the Index than price changes in stocks with a lower valuation. Market capitalization of S&P indexes is calculated by multiplying the current price per share times the number of floating shares. Other market cap weighted indexes multiply the price by the number of outstanding shares. Market cap indexes may also be called market value indexes. In contrast, in an unweighted index, such as the Dow Jones Industrial Average (DJIA), a similar price change in any of the stocks in the index has an equal impact on the changing value of the index. The theory behind weighting is that price changes in the most widely held securities have a greater impact on the overall economy than price changes in less widely held stocks. However, some critics argue that strong market performance by the biggest stocks can drive an index up, masking stagnant or even declining prices in large segments of the market, and providing a skewed view of the economy.

Whisper number

A whisper number is an unofficial earnings estimate for a particular company that a stock analyst shares with clients to supplement the official published estimate. If the company reports earnings in line with the official estimate when the whisper number has been higher, the stock price may fall anyway since investors were expecting something better. The same is true in reverse. If earnings fall short of official expectations but meet a lower whisper number, the stock price may go up.

White knight

A corporation that is the target of a hostile takeover sometimes seeks out a white knight that comes to the rescue by making an offer to acquire the target company in a friendly takeover that suits the needs and goals of the target's management and board. The hostile acquirer is called a black knight, and if the white knight is outbid by a third potential acquirer, who is both less friendly than the white knight and more friendly than the black knight, the third bidder is called a gray knight.


A will is a legal document you use to transfer assets you have accumulated during your lifetime to the people and institutions you want to have them after your death. The will also names an executor -- the person or people who will carry out your wishes. You can leave your assets directly to your heirs, or you can use your will to establish one or more trusts to receive the assets and distribute them at some point in the future. The danger of dying without a will is that a court in the state where you live will decide what happens to your assets. Its decision may not be what you would have chosen, and its deliberations can be costly and delay settling your estate.

Wire house

National brokerage firms with multiple branches were, in the past, linked by private telephone or other telecommunications networks that enabled them to transmit important news about the financial markets almost instantaneously. Because of these lines, or wires, the firms became known as wire houses. Although the Internet now makes it possible for all firms -- and even individual investors -- to have access to high-speed electronic data, the largest brokerage firms are still referred to as wire houses because of the technological edge they once enjoyed.

Wire room

When brokerage firm orders to buy and sell were handled manually, the firm's back office was called the wire room. People who worked there received the buy or sell orders that came in from brokers and transmitted them to the firm's trading department or floor traders for execution. The wire room also received notifications when the transactions were completed and sent those notifications back to the brokers who took the orders. However, as electronic systems increasingly handle these communications, wire rooms have essentially disappeared.


A withdrawal is money you take out of your banking, brokerage firm, or other accounts. If you withdraw from tax-deferred retirement accounts before you turn 59 1/2, you may owe a 10% early withdrawal penalty plus any income tax that's due on the amount you've taken out. In everyday usage, the term withdrawal is used interchangeably with distribution to describe money you take from your tax-deferred accounts, though distribution is actually the correct term.


Withholding is the amount that employers subtract from their employees' gross pay for a variety of taxes and benefits, including Social Security and Medicare taxes, federal and state income taxes, health insurance premiums, retirement savings, education savings, or flexible spending plan contributions, union dues, or prepaid transportation. Contributions to tax-deferred savings plans are withheld from your pretax income, as are amounts you put into tax-free flexible spending and prepaid transportation accounts. Those amounts reduce the taxable salary that your employer reports to the IRS.

Working capital

Working capital is the money that allows a corporation to function by providing cash to pay the bills and keep operations humming. One way to evaluate working capital is the extent to which current assets, which can be readily turned into cash, exceed current liabilities, which must be paid within one year. Some working capital is provided by earnings, but corporations can also get infusions of working capital by borrowing money, issuing bonds, and selling stock.

World Bank

Formally known as the International Bank for Reconstruction and Development (IBRD), the World Bank was established in 1944 to aid Europe and Asia after the devastation of World War II. To fulfill its current roles of providing financing for developing countries and making interest-free and low-interest long-term loans to developing nations and those with financial difficulties, the World Bank raises money by issuing bonds to individuals, institutions, and governments in more than 100 countries.

World funds

US-based mutual funds that invest in securities from a number of countries, including the United States, are known as world funds or global funds. Unlike international funds that buy only in overseas markets, world funds may keep as much as 75% of their investment portfolio in US stocks or bonds. Because world fund managers can choose from many markets, they are often able to invest in those companies providing the strongest performance in any given period.

World Trade Organization (WTO)

The WTO was formed in 1995 to enforce the regulations established by the General Agreement on Tariffs and Trade (GATT) and several other international trade agreements. Composed of representatives from 150 nations and observers from additional nations, it regulates international trade with the goal of helping it to flow as smoothly and freely as possible. Advocates praise the WTO for helping create an increasingly global economy and bringing prosperity to developing nations through increased trade. Critics, however, assert that industrialized nations such the United States, Canada, and the countries of the European Union have used the WTO to open trade with developing nations while disregarding these nations' environmental and labor-related practices.

Wrap account

A wrap account is a professionally managed investment plan in which all expenses, including brokerage commissions, management fees, and administrative costs, are wrapped into a single annual charge, usually amounting to 2% to 3% of the value of the assets in the account. Wrap accounts combine the services of a professional money manager, who chooses a personalized portfolio of stocks, bonds, mutual funds, and other investments, and a brokerage firm, which takes care of the trading and recordkeeping on the account.

Wrap Fee

An inclusive fee generally based on the percentage of assets in an investment program, which typically provides asset allocation, execution of transactions and other administrative services.

Write down

A write down occurs when a bank or investment firm reduces the value of an asset it holds in order to bring the assigned value in line with current market value. Some write downs are customary, following a practice known as marking to the market. In this case, the fluctuating values of marketable securities in trading accounts are adjusted daily, writing them up if they have increased in value or writing them down if they have lost value. Write downs may also be required to acknowledge that the prices at which securities are recorded on a firm's books exceed the amount they could be sold for, assuming they could be sold at all. The difference between book value and market value is recorded as a loss. Extensive write downs of a firm's assets can threaten the viability of the firm itself. For example, in the wake of the subprime meltdown and the resulting tightening of credit starting in 2007, some investment banks were forced to write down billions of dollars of once highly rated collateralized debt obligations and other complex loan products that were structured with mortgages that defaulted.


Xenocurrency is currency that trades outside its own borders.

Yankee bond

Yankee bonds are bonds issued in dollars in the United States by overseas companies and governments. The purpose is to raise more money than the issuers may be able to borrow in their home markets, either because there is more money available for investment in the United States, or because the interest rate the issuers must pay to attract investors is lower. US investors buy these bonds as a way to diversify into overseas markets without the potential drawbacks of currency fluctuation, foreign tax, or different standards of disclosure that may be characteristic of other markets.

Year-to-date (YTD)

Year-to-date (YTD) describes the period beginning January 1 of the current year and ending with the current date. YTD figures are used to evaluate the returns an investment has generated during the current year.


Yield is the rate of return on an investment expressed as a percent. Yield is usually calculated by dividing the amount you receive annually in dividends or interest by the amount you spent to buy the investment. In the case of stocks, yield is the dividend you receive per share divided by the stock's price per share. With bonds, it is the interest divided by the price you paid. Current yield, in contrast, is the interest or dividends divided by the current market price. In the case of bonds, the yield on your investment and the interest rate your investment pays are sometimes, but by no means always, the same. If the price you pay for a bond is higher or lower than par, the yield will be different from the interest rate. For example, if you pay $950 for a bond with a par value of $1,000 that pays 6% interest, or $60 a year, your yield is 6.3% ($60 ' $950 = 0.0631). But if you paid $1,100 for the same bond, your yield would be only 5.5% ($60 ' $1,100 = 0.0545).

Yield curve

A yield curve shows the relationship between the yields on short-term and long-term bonds of the same investment quality. Since long-term yields are characteristically higher than short-term yields, a yield curve that confirms that expectation is described as positive. In contrast, a negative yield curve occurs when short-term yields are higher. A flat or level yield curve occurs when the yields are substantially the same on bonds with varying terms. A negative yield curve has generally been considered a warning sign that the economy is slowing and that a recession is likely.

Yield spread

Yield spread describes the difference between the yields on two different debt instruments. For example, you can calculate the yield spread on two bonds by subtracting the yield on one bond from the yield on the other. Yield spread is helpful in comparing bonds with different maturities, credit ratings, and tax status. In general, securities with longer maturities tend to have higher yields than those with shorter maturities. And securities with higher credit ratings have lower yields than those with lower ratings.

Yield to maturity (YTM)

Yield to maturity is the most precise measure of a bond's anticipated return and determines its current market price. YTM takes into account the coupon rate and the current interest rate in relation to the price, the purchase or discount price in relation to the par value, and the years remaining until the bond matures.

Zacks Investment Research

This Chicago-based company tracks changes in earnings estimates, as well as buy, sell, and hold recommendations for approximately 5,000 stocks. The information is provided by more than 3,500 financial analysts at more than 210 brokerage firms. Based on its research, Zacks compiles consensus earnings estimates, industry group reports, and company reports that are widely followed by both individual and institutional investors. The service is available to all investors by subscription.

Zero-coupon bond

Zero-coupon bonds, sometimes known as zeros, are issued at a deep discount to par value and make no interest payments during their term. At maturity, the bondholder receives par value, which includes the interest that has accrued since issue. For example, you may purchase a zero-coupon bond with a six-year term for $13,500, and collect $20,000 at maturity. One advantage of zeros is that you can invest relatively smaller amounts and choose maturity dates to coincide with times you know you'll need the money -- for example, when you expect college tuition bills to come due. One drawback of zeros, however, is that income taxes are due annually on the interest that accrues, even though you don't receive the actual payment until the bond matures. The exception occurs if you buy tax-exempt municipal zeros, on which no tax is due either during the term or at maturity. Another drawback is that zero coupon bonds are volatile in the secondary market, so if you have to sell before maturity, you might have a loss. These bonds get their name -- zero coupon -- from the fact that coupon means interest in bond terminology, and there's no periodic interest.

Zero-coupon convertible bond

A zero-coupon convertible bond, like other convertible bonds, can be converted into stock in the issuing corporation if the stock reaches the trigger price. Municipalities may issue tax-exempt zero-coupon convertible bonds you can exchange before maturity for conventional taxable bonds. The advantage of both taxable and tax-exempt zero-coupon convertibles is that they give you access to a potentially substantial gain for a small initial investment since you purchase the zero-coupon for less than the face value. But like all zero-coupons, these convertibles tend to be more volatile in the secondary market than nonconvertible bonds.