Active Management- Attempts to beat the market through security selection and market timing. Typically generates higher fees, transaction costs, and taxes due to increased turnover.
Advisor – One who gives investment advice for a fee.
Alpha- measures the portion of an investment’s return arising from specific (non-market) risk; often referred to as a manager’s “value added”. Measures the difference between actual returns and expected performance resulting from exposure to specific risk factors.
American Depository Receipt (ADR)- a receipt for a share of a foreign-based company held by a US bank and entitles the shareholder to all dividends and capital gains of the underlying stock.
American Stock Exchange (AMEX)- founded in 1842 in New York City. Acquired by the Nasdaq in 1998, but still operates as a separate exchange.
Amortization- the systematic repayment (e.g. monthly, quarterly, or yearly) of a debt or loan, such as a bond or mortgage, over a specific time period.
Annual Effective Yield- the measure of the actual annualized rate of return on an account after interest is compounded.
Annuity – An insurance contract usually guaranteeing lifetime income on whose life the contract is based on in return for either a lump sum or periodic payment to the insurance company: can be fixed, immediate, or variable.
Appreciation- an increase in the price or value of an asset.
Ask Price- the price at which a prospective seller is willing to sell a security.
Asset Class – a concentration of securities with similar risk/return characteristics, i.e. size of companies or growth/value tilt.
Asset Allocation- dividing investment dollars among various asset classes, typically among cash investments, bonds and stocks.
Average Maturity- the average of all maturity dates for securities in a money market or bond fund.
Back-end (Deferred) Load- a sales fee charged by mutual funds when an investor sells fund shares. (Contingent Deferred Sales Charge).
Basis point- one basis point is equal to 1/100 of a percent.
Beta- measures an investment’s relative volatility or impact of a per-unit change in the independent variable (market) on the dependable variable (portfolio) holding all else constant. The market portfolio has a Beta of 1.00.
Bid- the price a prospective buyer is willing to pay for a security.
Bid-ask spread- the difference between what a buyer is willing to pay (bid) for and security and the seller’s asking price (ask).
Bond- an interest bearing security issued by corporations and governments. Bonds are essentially loans by the investor to the issuer in return for interest payments.
Book-to-Market Ratio- the ratio of a firm’s per share book value (liquidation value) to its market value.
Book Value- a company’s assets, minus any liabilities and intangible assets; liquidation value of a company.
Broker- one who sells financial products for a trading commission.
Bull Market – A market in which prices of a certain group of securities are rising or are expected to rise.
Buy-and-Hold- a strategy that employs buying of shares of companies (mutual funds) with the intention of keeping those holdings for an extended period of time.
Bear Market – A market in which prices of a certain group of securities are falling or are expected to fall.
Capital Gain/Loss- the difference between the price at which an asset is sold and its original purchase price (“basis”).
Capital Gains Distributions- payments made to mutual fund shareholders for gains realized through purchases and sales by the mutual fund during the year.
Certificate of Deposit (CD)- an insured, interest-bearing deposit at a bank requiring the depositor to keep the money invested for a specific length of time.
Churning – Excess trading of securities within an account for the purpose of generating commissions and fees for the broker.
Closed-End Fund- a mutual fund that has a fixed number of shares and is typically listed on a major stock exchange. These funds often trade perpetually at a discount to their net asset value (NAV).
Coefficient of Determination (R2)- a correlation of determination, which ranges from 1 to – 1, measures the goodness of fit of a regression line. The correlation coefficient is often used to determine if a manager is properly tracking a specific benchmark/index by examining the relationship between the performance of the fund to the benchmark index. Positive indicates the variables move in the same direction; negative means they are opposite to each other.
Commercial Paper- a promissory note issued by a large company to secure short-term financing.
Commission- a fee charged by a broker for executing a securities transaction.
Consumer Price Index (CPI)- an inflation tracker, which is the measure of the price, change in consumer goods and services.
Current Yield- calculated as the annual interest on a fixed-income security divided by its market price.
Decile- a portion within a whole that has been divided into ten equal parts.
Derivative- a financial contract whose value is “derived” from another security, such as stocks, bonds, commodities, or a market index such as the Standard & Poor’s 500. The most common types of derivatives are options, futures and mortgage-backed securities.
Discount (Bond)- the positive difference between the purchase price of a bond and its par value. Purchasing a bond at a discount suggests that the purchaser paid less than par value for the bond.
Discount Rate- the interest rate that is charged by the Federal Reserve Board to member banks for loans.
Dividend- that portion of a company’s earnings paid to each shareholder.
Dividend Yield- the contribution to annual total return that an investor earns by receiving dividends. Determined by dividing the dividend per share by the current price per share of common stock.
Dollar-Cost Averaging- systematic buying of investments at regular intervals with fixed dollar amounts.
Dow Jones Industrial Average- the oldest index of the US stock market; reflects the movement of 30 stocks that, in the opinion of the editors of the Wall Street Journal, most represent the American economy.
Duration- measures bond price volatility by calculating the weighted average term-to-maturity of a bond’s cash flows.
Earnings per Share (EPS)- a company’s earnings, also known as net income or net profit, divided by the number of shares of common stock outstanding.
Earnings-to-Book Ratio- the ratio of a firm’s current (or predicted) earnings per share to the book value (liquidation value) per share of its common stock.
Efficient Market Theory (EMT)- the theory postulating that market prices reflect the knowledge and expectations of all investors. It asserts that any development is instantaneously priced into a security, thus making it impossible to consistently beat the market.
Employee Stock Ownership Plan (ESOP)- a retirement plan that invests primarily in the employer’s stock for the benefit of employees.
Equities- shares of common or preferred stock in a company.
Expense Ratio (Operating Expense)- the percentage of a mutual fund that is taken out of the fund’s assets to pay expenses (portfolio management fees, advertising expenses, custody fees).
Federal Reserve- the central bank of the United States comprised of a twelve-member policy-making board.
Fee-only Compensation- an arrangement in which a financial advisor charges by an hourly rate, or by an agreed upon percentage of assets under management, rather than on a trading commission on securities purchases or sales.
Fiduciary- an individual, corporation, or association that is charged with managing or investing assets for the benefit of others.
Fixed Income Fund (Bond Fund)- a mutual fund that invests in CDs, preferred stock, or other fixed-income instruments.
Front-end Load- a sales commission charged by a mutual fund to purchase shares of the fund.
Gross Domestic Product (GDP)- the value of all goods and services provided within the borders of a nation.
Gross National Product (GNP)- the dollar value of all goods and services produced in a nation’s economy. It includes the income from goods and services produced abroad.
High-Yield Bond- bond that is rated as below investment grade; higher risk of default of interest and principal payments. Sometimes referred to as “Junk Bonds”.
Junk Bond- see High-Yield Bond.
Index- an unmanaged selection of securities whose collective performance is used as a standard to measure investment results.
Individual Retirement Account (IRA)- a non-forfeitable trust or custodial account established for the exclusive benefit of an individual and the individual's beneficiaries. No Part of the funds may be invested in life insurance contracts.
Investment Grade- a bond whose credit quality is considered to be the most secure by an independent credit-rating agency.
Investment Policy- a formal statement outlining the broad investment objectives of a plan.
Load- a sales commission paid when purchasing shares of a mutual fund (front-end load) or when redeeming shares of a mutual fund (rear-end load) or both (level load).
Long-term Capital Gain- a profit on a sale of shares of stock, mutual fund shares, or other securities that have been held for more than one year.
Management Fee- fees paid to the manager(s) of a mutual fund; also referred to as an “advisory fee”.
Market Capitalization- the value of a company as determined by the market price of its issues and outstanding common stock. Market price X shares outstanding = market capitalization.
Market Timing- an investment strategy based on predicting short-term price changes in securities.
Mean (average)- equals the sum of the observation values divided by the number of observations.
Modern Portfolio Theory- a method of choosing investments that focuses on the importance of the relationship among all of the investments in a portfolio rather than the individual merits of each investment. The method allows investors to quantify and control the amount of risk they accept and return they achieve.
Money Market Fund- a mutual fund that invests in very short-term, highly liquid investments.
Municipal Bond- a debt instrument issued by a state or local government that is exempt from federal taxes.
Mutual Fund – An investment company that continuously offers new shares in a managed portfolio of securities. All shareholders participate in the fund’s gains or losses. Each mutual fund’s portfolio is invested to match the objective stated in its prospectus. See Open and Closed End mutual funds.
National Association of Securities Dealers Automated Quotations (NASDAQ)- a computerized system that stores and displays up-to-the-second price quotations for securities traded over the counter.
National Association of Securities Dealers (NASD)- largest securities-industry self-regulatory organization in the United States. Develops rules and regulations and conducts regulatory reviews of members’ business activities.
Net Asset Value (NAV)- the price of each share of a mutual fund. Calculated by subtracting the fund’s liabilities from its total assets, and dividing that figure by the number of shares outstanding.
New York Stock Exchange (NYSE)- the oldest and largest stock exchange in the United States.
Nikkei Index- an index of more than 200 blue-chip stocks traded on the Tokyo Stock Exchange.
No-load Fund- a mutual fund that does not charge a sales commission; shares are purchased at net asset value (NAV).
Open-end Fund- a mutual fund that has an unlimited number of shares available for purchase.
Par Value (bond)- the stated value of a bond as printed on its certificate or the amount the issuer must repay when the bond reaches maturity.
Passive Management – Accepts asset class returns allowing benchmarks to define strategy.
Portfolio Manager- any individual(s) in charge of the investment decisions of a portfolio.
Preferred Stock- a stock that pays a dividend on a regular schedule and is given preference over common stock in regard to the payment of dividends.
Premium (Bond)- the negative difference between the purchase price of a bond and its par value. Purchasing a bond at a premium suggests the purchaser paid more than par value for the bond.
Price-to-Earnings Ratio- the ratio of the market price of a firm’s common stock to its current (or predicted) earnings per share.
Prime Rate- the interest rate that lenders charge their very best, most-reliable customers.
Prospectus- a legal document usually written in extraordinarily tedious language that provides information about a potential investment, including discussions of its investment objectives, policies, past performance, risks, and cost.
Real Estate Investment Trust (REIT)- specialized form of equity that allows investors to own a portion of a group of real estate properties. REIT’s pay out 95% of their earnings in the form of dividends.
Real Return- inflation-adjusted return of an investment.
Record Date- the date on which a company’s books are closed in order to identify share owners and distribute quarterly dividends, proxies, or other financial documentation.
Registered Investment Advisor (RIA)- an individual or firm, who, for a fee, provides investment management or counsel to the investing public. The advisor is registered with the Securities and Exchange Commission and operates in compliance with the Commission’s regulations and regulatory review.
Retained Earnings- income a company has earned, less the dividends it has paid.
Risk-Free Rate- the current interest rate on a default-free bond in the absence of inflation.
Risk Premium- the additional return an investor requires to compensate for the risk borne.
Russell 2000- a market-capitalization weighted index that serves as a benchmark for US small-cap stocks.
Securities and Exchange Commission (SEC)- the federal agency charged with ensuring that the US stock market is a free and open market. All companies with stock registered in the United States must comply with SEC rules and regulations, which include filing quarterly reports on how the company is doing. Created under the Securities Exchange Act of 1934. Also responsible for the regulation and supervision of Registered Investment Advisors (RIA).
Sharpe Ratio- relative measure of a portfolio’s return-to-risk ratio. It is calculated as the return above the risk-free rate divided by its standard deviation.
Short-term Capital Gain- a profit on the sale of a security that has been held for one year or less and taxed as ordinary income.
Standard & Poor’s 500 Index- a market-capitalization-weighted index of the 500 largest publicly traded stocks in the United States.
Standard Deviation- the statistical measure of the degree to which an individual value in a probability distribution tends to vary from the mean of the distribution. A measure of the volatility of investment returns for a particular investment over a specific time period.
Tax-exempt Bond- a bond typically issued by state, county, or municipal governments whose interest payments are not taxed by the federal government.
Ticker Symbol- an abbreviation for a company or mutual fund’s name that is used as shorthand in stock-quote reporting services and brokerages.
Transaction Fee- a charge assessed by a broker for assisting in the trade of a stock or other security.
Treasury Bill- a short-term discounted security issued by the US government with a maturity of one-year or less. Often referred to as “risk free” investments.
Treasury Bond- a long-term security issued by the US government with a maturity of 10 years or more.
Treasury Note- an intermediate-term security issued by the US government having a maturity of 1-10 years.
Turnover Rate- a measurement of trading activity during the past year.
12b-1 Fee- mutual fund promotional expenses such as advertising and public relations that are paid by the shareholders and generally paid to the broker of record.
Unrealized Capital Gain/Loss- an increase (or decrease) in the value of a stock or other security that is not "realized” because the security has not yet been sold for a gain or loss.
Variable Annuity- an insurance industry investment product that allows an investor to choose from a range of mutual fund investment funds, called sub-accounts.
Volatility- the degree of movement in the price of a stock or other security.
Wilshire 5000 Equity Index- a benchmark index made up of all US stocks regularly traded on the three major US exchanges; currently comprised of over 7,000 stocks actually traded on those exchanges.
Yield (Dividend Yield)- the income relative to the current share price that a company will pay out to the shareholders. Calculated by dividing the dividend per share by the market value per share.
Yield Curve- a line plotted on a graph that depicts the yields on bonds of varying maturities.
Yield-to-Maturity- the annualized rate of return if a long-term, interest bearing security held to its maturity. The calculation takes into account the premium or discount paid on the bond’s initial purchase.
Zero-coupon Bond- bonds so named because the coupon rate (the amount of interest paid) is zero. Rather than paying interest on a periodic basis, these bonds are issued at a fraction of their par value (discount) and increase in value as they approach maturity. | 
