Investing Basics

What is a stock?
Common stock represents part ownership in a company. It is also called equity, or simply, stock. Stock values may go up or down, depending on market conditions. Generally, you invest in stocks when you are looking for long-term growth. Historically, stocks have been most successful at outpacing inflation

What is a bond?
A bond is a loan made to a corporation or government, which then issues an IOU, called a certificate. A bond pays a stated or fixed rate of interest and returns the face value on the maturity date. Bond prices are generally more stable than stock prices, but bond values may also go up or down, usually in the opposite direction of interest rates. Bonds have the advantage of providing a consistent stream of income but lack the growth potential of stocks.

What is a money market instrument?
A money market instrument is a high-quality short-term security that pays interest. Money market instruments include U.S. Treasury bills, commercial paper, and short-term certificates of deposit. Money market funds are generally comprised of a variety of money market investments.

Are there different levels and types of risk associated with different securities?
Yes. Every choice you make concerning the way you save and invest your money involves some degree of risk. As a result, your financial health depends on understanding what the risks are and knowing how to balance them against the potential rewards.


Should I always try to avoid investments with the most risk?
Not necessarily. It is possible to invest too conservatively, which can mean running the risk of not earning enough to meet your retirement or other financial goals. Investing solely for safety of principal, therefore, may not be as prudent as you think. Investments that have very low risk and more stability tend to have lower returns and can often lose purchasing power over time because of the effects of inflation. Keep in mind that mutual funds are not insured and that investment returns will vary over time.


Why should I have a diversified portfolio?
Diversification means spreading your assets among a variety of investments to help control the risk of poor performance by any single security. When your investments in your portfolio are properly diversified, you improve your chances for achieving long-term growth.



MUTUAL FUND BASICS

What is a mutual fund?
A mutual fund is an investment that pools your money with the money of many other people who have similar investment goals. Professional money managers use the pool of money to buy securities that, in the team's judgment, will help achieve specified financial objectives. Mutual funds may be an appropriate retirement investment choice because they offer professional management and diversification. Mutual funds are not FDIC insured and the value of your mutual fund may fluctuate with market conditions.

Why should I consider investing in mutual funds?
Mutual funds represent a quick, efficient, and cost-effective means of managing money. They provide professional management, ongoing supervision of your holdings, and automatic diversification, all-important elements of a well-rounded investment program. Because shares can be redeemed on any business day, mutual funds provide liquidity, and because shares of a mutual fund are priced daily, you always know what your investment is worth. Investment return and principal value will vary with market conditions and an investor's shares, when redeemed, may be worth more or less than their original purchase price.

When is a good time to start investing in mutual funds?
If you have not already started your investment program, the sooner you start, the better. Let time be your ally; the longer your money can work for you, the better your prospects for wealth building. The secret is to invest regularly. (Regular investing does not ensure a profit or protect against loss in declining markets).

In which fund - or funds - should I invest?
This is surely among the most frequently asked question about mutual funds, especially by novice investors. With over 7,000 mutual funds currently on the market, the question becomes more compelling than ever. However, the task is not as forbidding as it may seem. By determining the goal or goals you wish to accomplish, you will immediately exclude all the funds that cannot meet those goals. Next, stake out your most comfortable position along the risk/reward spectrum, eliminating funds that are too aggressive or too conservative. By now you have narrowed the field to a definable category of funds; let's say that category is moderately aggressive long-term growth funds. Only at that point should the fund's performance record come into play.

How can I judge a mutual fund's performance?
The financial press frequently carries articles about mutual funds, often comparing and rating the performance of similar funds. When reading such articles, it is wise to look at the funds' long-term records, rather than focusing on strong, yet sometimes transitory, current performance. When evaluating a fund's performance on your own, the most important thing to remember is to compare apples with apples. For example, don't measure a bond fund's results against the rise and fall of the stock market. Even when comparing funds in the same category, you should use the appropriate market index or other benchmark. A broad-based stock fund, for example, can be compared against the Standard & Poor's 500 Index, while a small-company stock fund is better judged against the NASDAQ Index of over-the-counter stocks. Remember that past performance is no guarantee of future results.

How can I tell whether my fund is performing well?
The most important criterion for judging a fund's performance is how well its results mesh with your needs and objectives. Beyond that, the most relevant gauge of a fund's performance is it's ranking within its peer group - comparing it against funds with similar objectives. Companies that provide such comparative ratings include Morningstar, Lipper Analytical Services, and CDA/Wiesenberger. Your local library may maintain subscriptions to all or some of these services.

What can I do if I'm not satisfied with my fund's performance?
If yours is one of several funds within a mutual fund organization, chances are good that you can exchange into another fund within the same fund family at little or no cost. We can help you select the appropriate fund and accomplish the shift.

TRACKING YOUR FUND'S PERFORMANCE

How can I learn about fund performance?
You can check mutual fund information in the mutual fund listing of The Wall Street Journal, The New York Times, or the local paper. Fund information is typically alphabetized under the name of the mutual fund company.

What is a fund share?
A fund share represents a fraction of all the securities (stocks and bonds) owned by the fund. The prices of these securities may change daily; therefore, the value of your fund share may change, too.

What does NAV mean?
NAV, or net asset value of a stock, is the price at which one share was sold to the public as of the previous business day's market closing. The NAV of a mutual fund is determined by adding the value of all the securities in the fund's portfolio, subtracting debts and expenses, and dividing the result by the total number of shares outstanding.

What does NAV change or net change mean?
The NAV change, if any, is the change in net asset value over the previous day's closing price.

What does total return mean?
Total return is a measure of a fund's performance including reinvested dividends and capital appreciation. Listings may be calculated for different time periods and many newspaper listings will only provide this information weekly. Check for the time period being used.

Top of Page

Web Terms

DEFINITIONS OF THE WORDS COMMON TO FINANCIAL PLANNING

ANNUITY: A contract between an insurance company and an individual. It generally guarantees lifetime income to the person on whose life the contract is based in return for either a lump sum or a periodic payment to the insurance company. A fixed annuity guarantees a specific amount of payment each month. In a variable annuity, the amount of the monthly check would fluctuate according to the value of the securities in the separate account. A tax deferred savings account with an insurance company.(Joe Sgroi *1993)
ANNUITY: n. pl. -ties. Abbr. ann. 1) The annual payment of an allowance or income. 2) The right to receive this payment or the obligation to make this payment....(American Heritage *1973) 1) A tax deferred savings account with an insurance company.(Joe Sgroi *1993)
ASKED PRICE: In the case of mutual fund shares, the price at which the buyer may purchase stock from the investment company; that is, the net asset value per share plus the sales charge, if any. In the case of common shares, the lowest price at which the stock is then offered for sale in the public market.
BALANCED FUND: An investment company that at all times holds bonds or preferred stocks, in varying ratios to its holdings of common stocks, in order to maintain relatively greater stability of both capital and income.
BASIS: The Internal Revenue Code's value given to property at a certain date.
BEARER BOND: A bond that is presumed to be owned by the person who holds it; the owner's name is not on record with the issuer. Such a bond carries detachable interest coupons. Interest is collected by presentation of a coupon to the issuer's agent or the bondholder's bank.
BEARER BOND: A bond which does not have the owner's name registered on the books of the issuer. Interest is paid by means of attached coupons. Interest and principal, when due, are payable to the holder. (vs. Registered) Old bearer bonds are still legal but since have been outlawed for obvious reasons (no name, therefore no taxes on interest). Danger to our clients in that they are like cash and, if our client loses bond, he's lost his money. (Joe Sgroi *1993)
BENEFICIARY: A person who gets benefits without ownership.
BID PRICE: In the case of open-end shares, the price at which the holder may redeem shares; in most cases it is the current net asset value per share. In the case of common stock, the highest price then offered for stock in the public market.
BLIND POOL: A limited partnership that does not specify the assets or properties to be acquired.
BLUE LIST: The trade offering sheets of bond dealers, listing dealers' offerings of municipal bonds for sale all over the country.
BOND: Basically an IOU or promissory note of a corporation, municipality, or the U.S. Government. They are usually issued in multiples of $1,000.00 or $5,000.00. A bond is evidence of a debt on which the issuer usually promises to pay the bondholder a specified amount of interest for a specified length of time and to repay the loan on the expiration date. In every case, a bond represents debt. Its holder is a creditor of the issuer.
BOND: n. Abbr. bd. A Certificate of debt issued by a government or corporation, guaranteeing payment of the original investment plus interest by a specified future date....bondable adj. -bonder n.(American Heritage *1973)
BUDGET: n. 1) An itemized summary of probable expenditures and income for a given period, usually embodying a systematic plan for meeting expenses. 2) The total sum of money allocated for a particular purpose or time period. 3) A stock or collection with definitive limits. -tr. v. budgeted, -eting, -ets. 1) To plan in advance the expenditure of (money or time, for example) 2) To enter or plan for in a budget. -budgetary adj. (American Heritage *1973)
BUDGETING: tr-v 1) To plan in advance the expenditure of (money or time, for example) 2) To enter or plan for in a budget.(American Heritage *1973)
BUSINESS: n. Abbr. bus. 1) The occupation, work, or trade in which a person is engaged. 2) Commercial, industrial, or professional dealings; the buying and selling of commodities or services. 3) Any commercial establishment, such as a store or factory. 4) Volume or amount of commercial trade. 5) Commercial policy or practice. 6) One's rightful or proper concern or interest; responsibility: "The business of America is business". (Calvin Coolidge) 7) Serious work or endeavor that pertains to one's job: went to Tokyo on business. 8) An affair or matter: A peculiar business.(American Heritage *1973)
CALL: 1) Exercise by an issuer of its rights to retire outstanding securities. 2) An option contract that gives the holder the right to purchase a particular security from another person at a specified price during the term of the option, which may be any period of time but is rarely longer than six months and 10 days. May be used for either speculative or hedging purposes.
CAPITAL GAINS DISTRIBUTION: A distribution to investment company shareholders from net long-term capital gains realized by a regulated investment company on the sale of portfolio securities.
CERTIFICATE OF DEPOSIT (CD): Time deposit savings accounts issued by banks. The time CD is characterized by it's set date of maturity and interest rate and it's wide acceptance among investors, companies, and institutions. Interest rate penalties vary from bank to bank for withdrawal off normal CD maturity.
CHARTERED FINANCIAL CONSULTANT: Abbr. ChFC. Is a special college degree in financial consulting from The American College. Comparable to 13 to 16 Masters degree level courses in finance, business & taxation, etc..(Joe Sgroi *1993)
CHARTERED LIFE UNDERWRITER: Abbr. CLU. A special college degree earned as a Chartered Life Underwriter from The American College. Comparable to 10 post-graduate courses in economics, insurance, taxation, estate planning, etc..(Joe Sgroi *1993)
CLOSED-END MUTUAL FUND: A mutual fund with a relatively fixed amount of capital, whose securities are traded on a securities exchange or in the over-the-counter market, as are the securities of operating business corporations.
COMMERCIAL PAPER: Short-term, unsecured promissory notes issued by corporations to finance short-term credit needs. Commercial paper is usually sold on a discount basis and has a maturity at the time of issuance not exceeding nine months.
COMPENSATE: v. -sated, -sating, -sates. -tr. 1) To make up for or offset; counterbalance. 2) To make equivalent or satisfactory reparation to; recompense reimburse. 3) To stabilize the purchasing power of (a monetary unit) by changing the gold content in order to counterbalance price variations.(American Heritage *1973)
COMPENSATION: n. 1) a. The act of compensating or making amends. b. The state of being compensated. 2) Something given or received as an equivalent or as reparation for a loss, service, or debt; a recompense; an indemnity. -compensational adj.(American Heritage *1973)
COMPLEX TRUST: Used for tax purposes, any trust not classified as a simple trust. Generally, a trust allowing the trustee control over distribution of trust income or at least one of whose beneficiaries is a qualified charitable organization.
CONSERVATION: n. 1) The act of conserving; preservation from loss, waste, or harm. 2) The official preservation of natural resources, such as topsoil, forests, and waterways. (American Heritage *1973)
CONSOLIDATE: v. -dated, -dating, -dates. -tr. 1) To make firm or coherent; form into a compact mass; solidify. 2) To make internally strong or stable; strengthen: consolidate the empire.(American Heritage *1973)
CONSOLIDATION: n. 1) a. The act or process of consolidating. b. The state of being consolidated. 2) The merger of two or more commercial interests or corporations. (American Heritage *1973)
CONVERTIBLE SECURITIES: Securities carrying the right (either unqualified or under stated conditions) to exchange the security for other securities of the issuer. Most frequently, this term applies to preferred stocks or bonds carrying the right to exchange for given amounts of common stock.
COUPON RATE: The annual rate of interest that the borrower promises to pay the bondholder.
CREATOR/SETTLOR/GRANTOR: A person who gives away assets to a trust.
CURRENT YIELD: The percent relation of the annual interest or dividend received to the price of the bond or stock.
DEALER: A person or firm that, as part of a regular business, buys from and sells securities to others.
DEALER: An individual or firm in the securities business who buys and sells securities for it's own account rather than as an agent. The dealers profit or loss is the difference between the price he pays and the price he receives for the same security. The dealer's confirmation must disclose to his customer that he has acted as principal. An individual or firm may function, at different times, either as broker or dealer.
DEBENTURE: A bond secured only by the general credit of the corporation.
DEBT: n. 1) Something owed such as money, goods, or services. 2) An obligation or liability to pay or render something to someone else. 3) The condition of having such an obligation. Usually used with in.(American Heritage *1973)
DECEDENT: A person who dies.
DEFER: v. -ferred, -ferring, -fers. tr- 1) To put off until a future time; postpone: "against my wishes I deferred writing to you until now" (Emily Dickinson). 2) To postpone the induction of (one eligible for the military draft). int. To procrastinate; delay -deferer n. (American Heritage *1973)
DIRECT (DIRECTED) ROLLOVER: A direct, tax free transfer from a qualified corporate pension/profit sharing plan on a tax-sheltered basis. 1/1/93 Tax Law requires 20% federal tax withholding unless properly direct rolled from one qualified plan to another company plan or IRA.(Joe Sgroi *1993)
DISABILITY: n. pl. -ties. 1) A disabled state or condition; incapacity. 2) Something that disables; a handicap. 3) A legal incapacity or disqualification.(American Heritage *1973)
DISABLE: tr. v. -bled, -bling, -bles. 1) To weaken or destroy the normal physical or mental abilities of; to cripple incapacitate. 2) To render legally disqualified: disabled from inheriting the estate.(American Heritage *1973)
DISTRIBUTIONS: Dividends paid from net investment income and payments made from realized capital gains. (See Capital Gains Distribution.)
DIVERSIFICATION: Investment in a number of different security issues for the purpose of spreading and reducing the risks inherent in all investing.
DOLLAR COST AVERAGING: An automatic capital accumulation method that provides for regular purchases of equal dollar amounts of securities, designed to result in an average cost per share lower than the average price at which purchases are made. Regular investing does not ensure a profit and does not protect against loss in declining markets. Investors should consider their ability to invest continuously during periods of fluctuating price levels.
EQUITY: The residue of value for the owner of an asset remaining after deducting prior claims. The equity of a corporation may be divided into common shares alone or may include preferred shares as well. In calculating the equity of a common stock, preferred stock as well as debt must be deducted from total assets.
ESTATE: n. 1) A sizable piece of rural land, usually with a large house. 2) The whole of one's possessions; especially, all of the property and debts left by a deceased or bankrupt person. 3) Abbr. est. Law. The nature and extent of an owner's rights with respect to his property and it's use. 4) A state in one's development: A child's estate gives way to man's estate. 5) a. A condition of life, wealth, or status; a rank. b. High rank or status: gentlemen of estate.(American Heritage *1973)
EURODOLLAR: US currency held in banks outside the United States, generally in Europe, and commonly used for settling international transactions. Some securities are issued in Eurodollars--that is, with a promise to pay interest in dollars deposited in foreign bank accounts.
EXCHANGE PRIVILEGE: The right to exchange the shares of one open-end fund, or class of fund, for those of another under the same sponsorship at nominal cost or at a reduced sales charge. For tax purposes, such an exchange is considered a sale and new purchase.
EXPENSE RATIO: The proportion that annual expenses bear to average net assets for the year.
FIDUCIARY: A person who is vested with legal rights and powers to be exercised for the benefit of another person.
FIXED INCOME SECURITY: A preferred stock or debt security with a stated percentage of dollar income return.
FLEXIBLE PREMIUM ANNUITIES: An annuity that allows the contract owner the option of whether or not to pay the annuity premiums following the establishment of the annuity. Commonly used in conjunction with Individual Retirement Accounts.(Pictorial *1991) Also used heavily by Joe Sgroi & Associates for 100% safe TSA's & ­ Non-qualified tax deferred savings.(Joe Sgroi *1993)
FUNDED: Assets immediately put into the trust.
GENERAL OBLIGATION: A municipal bond backed by the general taxing power of its issuer.
GENERAL PARTNER: The partner in a limited partnership responsible for all management decisions of the partnership. The general partner has a fiduciary responsibility to act for the benefit of the limited partners. The general partner is fully liable for it's actions.
GINNIE MAE: A real estate-oriented security, guaranteed by the US government. The securities represent a pool of government-guaranteed FHA and VA mortgages. Ginnie Maes pay principal and interest payments each month to their holders.
GROUP INSURANCE: A contract of insurance made with an employer or other entity that covers a group of people identified as individuals by reference to their relationship with the entity. A group contract may be life insurance, health insurance, or an annuity.(Pictorial *1991)
GROWTH STOCK: A stock that has shown better-than-average growth in earnings and is expected to continue to do so through discoveries of additional resources, development of new products, or expanding markets.
HEDGE FUND: A mutual fund or investment company as a regular policy hedges its market commitments. It does this by holding securities it believes are likely to increase in value and at the same time is short other securities it believes are likely to decrease in value. The sole objective is capital appreciation.
INCOME FUND: An investment company whose primary objective is current income.
INSURANCE: n. Abbr. ins. insur. 1) a. The act, business, or system of insuring persons or property. b. The state of being insured. c. The means of being insured. 2) A contract binding a company to indemnify an insured party against specified loss in return for premium paid. 3) The sum or coverage so insured. 4) The periodical premium paid for this indemnification. 5) A protective measure or device.(American Heritage *1973)
INSURE: v. -sured, -suring, -sures. -tr. 1) To cover with insurance. 2) To make sure or certain; to guarantee. 3) To make safe or secure. Used with from or against. -intr. To buy or sell insurance. -insurability n. -insurable adj.(American Heritage *1973)
INVERTED YIELD CURVE: A condition in which short-term interest rates are higher than long-term rates.
INVEST: v. -vested, -vesting, -vests. -tr. 1) To commit (money or capital) in order to gain profit or interest, as by purchasing property, securities, or bonds. 2) To spend or utilize (time, money or effort) for future advantage or benefit. Often used with in. 3) To endow with rank, authority, or power. -intr. To invest money; make an investment. -investor n. (American Heritage *1973)
INVESTMENT COMPANY: A corporation or trust through which investors pool their money to obtain supervision and diversification of their investments.
INVESTMENT GRADE: An investment situation in which the firm shows a very strong balance sheet, is well capitalized, has a record of continuing dividends, and is recognized as a leader in the industry; a bond rating of Baa/BBB or higher. Bonds recognized as investment-grade quality are suitable purchases for fiduciaries.
INVESTMENT: n. 1) The act of investing or the state of being invested. 2) An amount invested. 3) Property or another possession acquired for future income or benefit. (American Heritage *1973)
IPOs: Initial public offerings of a common stock.
IRA ROLLOVER: The reinvestment of assets received as a lump-sum distribution from a qualified tax-deferred retirement plan. Reinvestment may be the entire lump sum or a portion of that sum. If the reinvestment is done within 60 days, there are no tax consequences.
IRA: Individual Retirement Account. A pension plan with major tax advantages. Any worker with earned income can begin an IRA and contribute up to $2,000.00 annually. This may or may not be deductible. An IRA permits investment through intermediaries like mutual funds, insurance companies, and banks or directly in stocks and bonds through stock brokers.(Securities Training Corp *1988) Be careful to never put a client in a non-deductible IRA.(Joe Sgroi *1993) (See non-deductible IRA)
IRREVOCABLE: Cannot be changed or canceled.
ISSUER: With reference to investment company securities, the company itself.
JOINT TENANCY WITH RIGHT OF SURVIVORSHIP: Property (bank account, safe deposit box) held in two or more names, to which any single owner has access without notifying the others. Right of survivorship indicates that in the event of the death of one owner, the remaining tenants immediately become owners of the property.
JOINT TENANCY: Two or more people holding equal ownership of property. Upon the death of one of the parties, the decedent's interest automatically passes on to the surviving owners.
KEOGH PLAN (HR 10 PLAN): Tax advantage personal retirement program that can be established by a self-employed individual. Currently, annual contributions to a plan can be up to $30,000.00. Such contributions and reinvestments are not taxed as they accumulate but will be when withdrawn (presumably at retirement when taxable income may be less).(Securities Training Corp *1991)
KEOGH PLAN: A tax-saving retirement program for self-employed persons and their employees.
LEVERAGE: The effect of the use of borrowed money or other senior capital, magnifying changes in the assets and earnings available for junior issues.
LIFE ANNUITY: Monthly payments made for the life of the annuitant regardless of how long he or she lives.
LIFE INSURANCE: Insurance that guarantees a specific sum of money to a designated beneficiary upon the death of the insured or to the insured should he live beyond a certain age.(American Heritage *1973)
LIMITED PARTNERSHIP: A non-taxable business entity. Each investor is responsible for the taxes on their portion of the business' income or loss.(Securities Training Corp *1991) Generally illiquid for a 7-14 year period of time. Suitability of prospects for Limited Partnerships should be watched carefully and strictly adhered to.(Joe Sgroi *1993)
LIVING TRUST: A trust instrument made effective during the lifetime of the creator; in contrast to a testamentary trust, which is created under a will.
LONG TERM DISABILITY: 1) Usually, a disability having a duration longer than 90 days, but the exact duration being variable. 2) When used in relation to a disability income policy, generally refers to a policy providing benefits for two years or longer.(Pictorial *1991)
MARGIN: The amount paid by the customer when he or she used a broker's credit to buy a security. Under Federal Reserve regulations, the initial margin required in past decades has ranged from 50% to 100% of the purchase price.
MARKET PRICE: Usually the last reported price at which the security actually changed hands.
MATURITY: The date on which the bond principal or stated value becomes due and payable in full to the bondholder.
MONEY MARKET FUND: A mutual fund whose investments are primarily, or exclusively, in short-term debt securities, designed to maximize current income with liquidity and capital preservation.
MONEY MARKET FUNDS: A mutual fund investing in money market instruments.
MONEY MARKET: The market for short term debt instruments maturing in one year or less. Money market instruments include T-bills, Commercial Paper, Bankers Acceptance, CD's, Repo's, and Fed Funds.
MUNICIPAL BOND: A bond issued by a state or a political subdivision, such as county, city, town or village. The term also designates bonds issued by state agencies and authorities. In general, interest paid on municipal bonds is exempt from federal income taxes and state and local taxes within the state of issue.
MUNICIPAL BOND: The bonds of government units such as states, cities, local taxing authorities, and other agencies. Unlike corporate bonds, municipals pay interest that is exempt for US, and sometimes state and local, income tax.
MUNICIPAL NOTES: The shortest-term municipal obligations, generally maturing in two years or less.
MUTUAL FUND: A company without fixed capitalization, freely buying and selling it's own shares and using its capital to invest in other companies. Also called "open-end investment companies".(American Heritage *1973) Open-end mutual funds can be added to at any time.(Joe Sgroi *1993)
MUTUAL FUNDS: A type of investment company that offers for sale or has outstanding securities which it has issued and which are redeemable on demand by the fund at current net asset value. All owners in the fund share in the gains or losses of the fund.
NO LOAD FUND: A mutual fund which charges no sales charge on the purchase of shares.
NON-DEDUCTIBLE IRA: 1) A planned scheme by the IRS to double-tax your money. Never, Never do a non-deductible IRA. 2) Have same dollar limits as deductible IRA's only not eligible for tax deduction if either spouse is covered by any form of a pension plan and their gross income is above certain limits. Only interest is tax-deferred. 3) Always use non-qualified annuities (safe or variable) rather than non-deductible IRA's. This way the client will avoid the non-deductible tax-trap and never pay taxes on his principal contributions...only on the gains from those contributions.(Joe Sgroi *1993)
ODD LOT: Less than a round lot, which is usually 100 shares. On security exchanges, buying and selling costs may be somewhat higher on odd lots than on round lots. Not applicable to open-end investment companies.
OPEN-END INVESTMENT COMPANY: An investment company whose shares are redeemable at any time at approximate asset value. In most cases, new shares are offered for sale continuously.
OPTION: A right to buy (call) or sell (put) a fixed amount of a given stock at a specified price within a limited period of time. The purchaser hopes that the stocks price will go up (if he bought the call) or down (if he bought a put) by an amount sufficient to provide a profit when he sells the option. If the stock price holds steady or moves in the opposite direction, the price paid for the option is lost entirely. Individuals may write (sell) as well as purchase options.
OVER-THE-COUNTER SECURITIES: Unlisted securities not traded on a major exchange.
OVER-THE-COUNTER: A market for securities made up of securities dealers who may or may not be members of a securities exchange. The over-the-counter market is conducted over the telephone and is a negotiated market rather than an auction market such as the NYSE. Over-the-counter dealers may act either as principals or as brokers for customers. The over-the-counter market is the main market for bonds of all types.
PAR: 1) Face value or principal value of a bond, typically $1,000.00 per bond. 2) A bond trading in the market at it's face value. 3) Face value of a preferred stock on which book value, liquidating value and dividend payments are based; typically $100.00 per share. 4) The stated value of common stock used primarily for bookkeeping purposes. It has no relationship to market value.
PENSION ROLLOVER: The opportunity to take distributions from a qualified pension or profit-sharing plan, and within 60 days of the distribution, reinvest them in an Individual Retirement Account, or the further privilege of an employee at a later date to transfer the funds in the account to an employer who rehires him or her.
POINT: In bond prices, a point is worth $10 because bond prices are quoted as percentages of $1,000 maturity value.
POSITIVE YIELD CURVE: A condition where interest rates are higher on long-term debt securities than on short-term debt securities of the same quality.
POWERS OF APPOINTMENT: Powers to control or dispose of trust property. This power is given to someone in a will or in a trust. General powers have no restrictions. Special powers have limits.
PREFERRED STOCK: An equity security (generally carrying a fixed dividend) whose claim to earnings and assets must be paid before common stock is entitled to share.
PREMIUM: n. Abbr. pm., prem. 1) A prize awarded for a particular act. 2) Something offered free or at a reduced price as an inducement to buy. 3) A sum of money or bonus paid in addition to a regular price, salary, or other amount. 4) The amount paid, often in addition to the interest, to obtain a loan. 5) The amount paid or payable, often in installments, for an insurance policy....(American Heritage *1973)
PRIVATE ANNUITY: As used in estate planning, an annuity generally provided to an individual who exchanges income-producing property to another person (typically a family member) in return for an annuity. The primary purpose of using a private annuity is to pass income property to beneficiaries while simultaneously reducing the annuitant's gross estate.
PROFIT SHARING: A system by which employees receive a share of the profits of a business enterprise. -profit-sharing adj.(American Heritage *1973)
PROFIT-SHARING RETIREMENT PLAN: A retirement program to which a percentage of the gross profits of a corporation (or of the earnings of a self-employed person under a Keogh plan) is contributed each year; the eventual benefits are not predetermined.
PROSPECTUS: The official document that describes the shares of a new security issue and must be supplied to each purchaser under the Securities Act of 1933. A prospectus applies to mutual funds and to close-end companies only when new capital is raised.
PROXY STATEMENT: A written power of attorney that stockholders give to another person to vote their stock if they are not present at a stockholders' meeting.
QUALIFIED PENSION PLAN: A plan that meets the requirements of the Internal Revenue Code (generally Section 401(a)). The advantage of qualification is that the plan is eligible for special tax considerations. For example, employers are permitted to deduct contributions to the plan even though the benefits provided under the plan are deferred to a later date.
RATING: A formal opinion by an outside professional service on the credit reputation of an issuer and the investment quality of its securities. This opinion is expressed in letter values (e.g., AAA, Baa-1).
REAL ESTATE INVESTMENT TRUST (REIT): An organization similar to an investment company in some respects but concentrating it's holdings in real estate investments. The yield is generally liberal since REIT's are required to distribute as much as 95% of their income.
RES: The assets or property to be put into the trust.
REVENUE BOND: A municipal bond backed by revenues produced from a particular project, such as a turnpike.
REVOCABLE: Can be changed or canceled.
ROUND LOT: A fixed unit of trading (usually 100 shares) to which prevailing commission rates on a securities exchange will apply.
SENIOR SECURITIES: Notes, bonds, debentures, or preferred stocks. These issues have a prior claim ahead of common stock to assets and earnings.
SEPARATE ACCOUNT: This account is completely separated from the general account of the insurance company, because its assets are generally invested in common stocks.
SHORT INTEREST: The total number of shares of a particular stock which have been sold short and remain uncovered (not repurchased). Followers of the short interest theory believe an increase in short interest is a bullish signal since the short sellers will eventually need to purchase stock to cover their shorts. This cushion of potential buyers will tend to support a declining market or accelerate a rising market.
SHORT POSITION: The amount of stock an individual has sold short and has not covered, as of a particular date.
SHORT SALE: The sale of a security that is not owned, in the hope that the price will go down so that it can be repurchased at a profit. The person making a short sale borrows stock in order to make delivery to the buyer and must eventually purchase the stock for return to the lender.
SHORT SALE: When selling short, a customer is selling securities which he does not own. He anticipates that the market price of the stock will decline and he can then purchase the stock (cover his short position) at a lower price and thus make a profit. Since the customer has sold stock which he does not own, the brokerage firm must lend him the stock.
SIMPLE TRUST: A trust that distributes all income and does not have the authority to make charitable distributions.
SINGLE PREMIUM ANNUITIES- An annuity purchased with one lump-sum payment. (Pictorial *1991)
SPECIALIST: A member of the New York Stock Exchange who has two primary functions, first, to maintain an orderly market, insofar as reasonable practicable in the stock in which he is registered as a specialist. In order to maintain an orderly market, the exchange expects the specialist to buy or sell for his own account to a reasonable degree when there is a temporary disparity between supply and demand. Second, the specialist acts as a broker's broker. When a commission broker on the Exchange floor receives a limit order, say, to buy at $50.00 a stock then selling at $60.00, he cannot wait at the post where the stock is traded to see if the price reaches the specified level. So he leaves the order with the specialist, who will try to execute it in the market if and when the stock declines to the specified price. At all times the specialist must put his customer's interest above his own.
TAX CREDIT: A direct dollar for dollar offset of tax liability (vs. a deduction which offsets taxable income).
TAX EXEMPT COMMERCIAL PAPER: A short term (less than 270 days) note of tax exempt issuer for the purpose of working capital.
TAX SHELTER: A medium or process intended to reduce or eliminate the tax burden of an individual. They range from such conventional ones as tax exempt municipal securities to sophisticated D.P.P.'s in real estate, cattle raising, equipment leasing, oil drilling, research & development activities, and motion picture production.
TENDER OFFER: A public offer to buy shares from existing stockholders of one public corporation by another company or other organization under specified terms good for a certain time period. Stockholders are asked to "tender" (surrender) their holdings for stated value, usually at a premium above current market price, subject to the tendering of a minimum and maximum number of shares.
TENDER: 1) Act of surrendering securities in response to an offer to buy them at a set price as in a sinking fund call or tender offer. 2) To submit a bid to buy a security, as in a U.S. Treasury bill auction.
TESTAMENTARY TRUST: A trust in a will. A trust that goes into effect upon your death.
TOTAL RETURN: A statistical measure of performance reflecting the result of acceptance of capital gains in shares, plus the result of reinvestment of income dividends.
TREASURY SECURITIES:Treasury Securities are debt obligations issued by the U.S. Department of the Treasury. Treasury Securities are considered one of the safest investments because they are backed by the full faith and credit of the U.S. government. The income from Treasury Securities is exempt from state and local taxes, but not from federal taxes. They are issued with various maturities and are categorized based on length of maturity as follows: (a)T-Bills (Treasury Bills) - Mature in less than 2 years (Generally 3 month, 6 month, or 1 year maturities); (b) T-Notes (Treasury Notes) - 2 years to 10 years in maturity; (c) T-Bonds (Treasury Bonds) - More than 10 years in maturity.
TREASURY STOCK: Stock issued by a company but later reacquired. It may be held in the company's treasury indefinitely, reissued to the public, or retired. Treasury stock receives no dividends and has no vote while held by the company.
TRIPLE TAX EXEMPT: Municipal bonds in which the bondholder pays no federal, state, or local taxes on the interest. In general bonds issued by possessions and territories of the U.S. (e.g., Puerto Rico) are triple tax exempt.
TRUST(S): A trust is an arrangement that can be revocable or irrevocable whereby a person gives away assets to a trust for the benefit of beneficiaries s/he has selected. The trust is the legal owner of the assets.
TRUSTEE: A person or institution that is responsible for managing the trust.
TRUSTEE: One to whom property is legally committed in trust.
UNFUNDED: Assets at a later date go into the trust.
UNIFORM GIFT TO MINORS ACT (UGMA): The act which establishes rules governing the purchase of securities for a minor. Each state has adopted the UGMA with few changes. A gift to a minor is irrevocable and securities must be registered in the name of an adult as custodian for the minor.
UNREALIZED APPRECIATION OR DEPRECIATION: The amount by which the market value of portfolio holdings on a given date exceeds or falls short of their cost.
US GOVERNMENT SECURITIES: Various types of marketable securities issued by the US Treasury, including bills, notes, and bonds. Such securities are direct obligations of the US government and differ mainly in the length of their maturity. Treasury bills, the most frequently issued marketable government security, have a maturity of up to one year and are issued on a discount basis.
VARIABLE ANNUITY: 1) A life insurance annuity contract where the annuity premium (a set amount of dollars) is immediately turned into units of a portfolio of stocks. Upon retirement, the policyholder is paid according to his accumulated units whose dollar value varies according to the performance of the stock portfolio. It's objective is to preserve, through stock investment, the purchasing value of the annuity which otherwise is subject to erosion through inflation. 2) Tax-deferred mutual funds administered by an insurance company. A great vehicle to have risk type assets (stock and bond funds) build tax sheltered rather than pay taxes now on dividends and capital gains. Recommended only for high tax bracket individuals on a non-qualified annuity basis only. Qualified money (IRA, TSA, Pensions, etc.) are better off going directly to mutual funds with much lower expenses or 100% safe into flexi. or SPDA's.(Joe Sgroi *1993)
VARIABLE LIFE INSURANCE: A contract or plan under which the death benefit and cash fluctuate in tandem with the investment performance of separate accounts.
VOLATILITY: The relative rate at which a security or fund share tends to move up or down in price. Is usually measured by comparing percentage changes in the price of a stock with those in a market average, such as the New York Stock Exchange Common Stock Index, between the same dates. For example, if the asset value of a fund advanced 15% while the NYSE Index rose 10%, the volatility of the fund would be 15 divided by 10 or 1.50.
YIELD TO CALL: Measures the return on a bond investment an individual would receive stated as an average yearly return from purchase date to call date.
YIELD TO MATURITY: Rate of return on a debt security held to maturity; both interest payments and capital gain or loss are taken into account.
YIELD: Income received from investments, usually expressed as a percentage of market price; also referred to as return.
ZERO-COUPON SECURITY: A security that makes no periodic interest payments but instead is sold at a deep discount from its face value. Because zero-coupon bondholders do not receive interest payments, these bonds are the most volatile of all fixed-income securities.

Top of Page