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10% Withdrawal tax penalty: 401Ks, IRAs and Roth IRAs impose penalties for early withdrawal. This 10% is in addition to your regular tax rate. There are a few exceptions such as home down payment, education expenses and medical expenses, but each requires that you meet a set of qualifying criteria. For a detailed breakdown of withdrawal penalties, see our 2008 401k & IRA Detail Table.
12b-1 Fees: 12b-1 Fees are described as marketing fees but they are most often a commission paid to a telemarketer for selling a fund. These fees are currently under fire, most people question the ethical justification for using a 12b-1 since there is a lot of evidence that this does absolutely nothing to enhance a fund’s performance. The thought process when this fee was invented was that marketing a mutual fund more aggressively would dramatically increase its assets (more people buy = more cash in the fund = more assets). They argued that bigger funds don’t necessarily cost more to manage, so as long as the assets are increasing and the management fees stay flat, the fund will experience economies of scale. This certainly hasn’t proven true, when you spend more to market a fund the expenses will usually increase as fast if not faster than the assets so 12b-1 fees are complete rubbish in our opinion. Avoid 12b-1 fees and don’t buy from cold callers. If you want to learn more on this topic, read our Mutual Fund Checklist.
1940 Investment Company Act: Federal law created to regulate investment companies. This act also regulates how mutual funds and other investment vehicles operate. This Act popularized funds because it required a lot more disclosure and helped to minimize conflicts of interest that were common prior to the 1929 market crash. Investors were finally able to tell what a fund was trying to do and how they were doing it. To learn more on this topic, read our Introduction to Mutual Funds guide.
401k: In the late 70’s, congress added a section to the Internal Revenue Code, Section 401(k), in which employees could avoid taxes on dollars contributed to deferred compensation plans. The two greatest benefits of a 401K for the employee are that they reduce the taxable income you have to report to the IRS and once money is in a deferred account, you can invest tax free until you withdraw the money at retirement. This program was intended for executives but companies were quick to interpret the legislation for their own benefit. The major reason for the explosion of 401K plans is that they allow employers to spend so much less on employee retirement planning. For more information on 401k’s and other Tax Deferred investment vehicles, read our 401k, IRA and Roth IRA Guide.
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Accumulation Phase: This is the market cycle phase in which investors buy up bargains. Stocks are undervalued at the beginning of this phase because of the selloff and market bottoming at the end of the last phase. At the beginning of the accumulation phase, only value investor types that are seeking stocks trading below their intrinsic value are buying but by the end of this phase, sentiment is turning bullish and the market is going up as a result of the flood of investors moving their money back into stocks, funds and other securities.
Active Management: Active Management is an investment approach that seeks to exceed the average returns of a specified benchmark such as the S&P 500. Active managers rely on research, market forecasts, and their own judgment and experience in selecting securities to buy and sell. Read our introduction to investing strategies for more on this topic.
Administrative Fees: Whenever we refer to Administrative Fees on this site we are either referring to the administrative expenses required to manage a mutual fund or the administrative fees to run a company. Mutual Fund investors often try to minimize this expense by selecting funds with low Expense Ratios. To learn more about mutual fund expenses, read our Introduction to Mutual Funds.
Aggressive Investor: Aggressive Investors feel bullish about the market and are usually a long way from retirement. They have a high tolerance for risk, don’t mind market volatility and are looking for capital growth rather than capital appreciation. They know they can weather any short-term market corrections or even recessions because they have a very long investing timeline (usually 15 or more years until retirement). For examples of an aggressive investing strategy, read our Growth Investing Strategy Review or our Momentum Investing Strategy Review.
Alpha: Alpha compares an investment’s expected performance, based on its beta, to its actual performance. If an investment has a negative alpha that means it underperformed expectations. Investors interpret this to mean that either the investment is poorly managed or that momentum is shifting somewhere else. If an investment has a positive alpha, that means it outperformed expectations. Investors interpret this to mean the investment is likely well managed, expense efficient and tax efficient.
Analyst Estimate (or Projection): Wall Street Analysts predict the quarterly and annual earnings of publicly traded companies around the world. They use all tools at their disposal, such as forecasting models, fundamental analysis, statistical analysis, and political/economic/business knowledge, to come up with earnings estimates. To learn more about these tools, read our Morningstar.com: The Power of Institutional Investors at your Fingertips guide.
Allocation Mix: This is the breakdown of the percentage of your portfolio allocated to each asset type. The most common asset types are stocks, bonds and commodities. Investors want a blend of assets because each type of investment behaves very differently from the others. Stocks, for example, have the highest potential return of any type of investment but they also have the highest risk of losses. Bonds, on the other hand, can’t provide the types of returns a stock can but they offer stability since their returns are often guaranteed. A blend of different asset classes is just another way to diversify and you can choose from a wide variety of allocations. To learn more about allocation mix and other important investing concepts, read the 10 Basic Principles of Investing.
Asset: The generic definition of an asset is anything owned by a business or person that has commercial value. When we talk about assets at Money-and-Investing.com, we are usually referring to the various forms of investment vehicles such as stocks, bonds and commodities. Each is a different type of asset and diversifying across asset types is one of the 10 Basic Principles of Investing.
Asset Allocation: This is the breakdown of the percentage of your portfolio allocated to each asset type. The most common asset types are stocks, bonds and commodities. Investors want a blend of assets because each type of investment behaves very differently from the others. Stocks, for example, have the highest potential return of any type of investment but they also have the highest risk of losses. Bonds, on the other hand, can’t provide the types of returns a stock can but they offer stability since their returns are often guaranteed. A blend of different asset classes is just another way to diversify and you can choose from a wide variety of allocations. To learn more about asset allocation, read our 10 Basic Principles of Investing.
Asset Allocation and Diversification Mix: This term incorporates three components; number of securities, diversification mix, and asset allocation. Number of securities refers to the total number of investments held in your portfolio and the recommended range is between 25 and 30. The mix refers to investing in a wide variety of industries, categories and geographies to ensure that when one specific area goes south, it doesn’t significantly hurt your whole portfolio. Finally, the asset allocation refers to the breakdown of the percentage of your portfolio allocated to each asset type. To learn more about the asset allocation and diversification mix, read our 10 Basic Principles of Investing.
Asset Class: Asset Class refers to the different investment categories. The most common types are Stocks, Bonds and Commodities. Investors typically want a blend of assets because each type of investment behaves very differently from the others. Stocks, for example, have the highest potential return of any type of investment but they also have the highest risk of losses. Bonds, on the other hand, can’t provide the types of returns a stock can but they offer stability since their returns are often guaranteed.
Automatic Contributions: When we refer to automatic contributions at Money-and-Investing.com we are talking about any automatic deduction of cash from your paycheck or checking account that goes into some form of savings account. A few examples are automatic payroll deductions for 401k, automatic IRA deductions from your checking, or automatic transfer of funds to your savings account each month. For more information on this topic, read our 401k, IRA and Roth IRA Guide.
Average Cost Per Share: See Cost Basis
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Balance Sheet: This piece of a company's financial statement lists the total assets and liabilities. You can determine what the company owns, what it owes and the ownership equity of shareholders. If you'd like to to learn more on this topic or read about other pieces of the financial statement and other valuation metrics, read our Value Investing Strategy Review.
Balanced Investor: Balanced Index Investors usually feel optimistic about the market but want to avoid extreme volatility. The typical balanced investor is 10 to 15 years from retirement and looking for capital appreciation, but would also like to have a large chunk of their portfolio in the biggest and safest stocks to dampen portfolio volatility and pay generous dividends. In addition to stocks, balanced investors tend to have money in bonds for safe but modest returns and for the loss protection that they provide against stocks. To learn more about different levels of risk tolerance, read the asset allocation and diversification section of our Index Investing guide.
Banking and Finance Industry: This industry category is comprised of banks, investment banks, insurance companies, brokerage houses and any other financial service and investment firms.
Barriers to Entry: Barriers to entry refers to obstacles that make it difficult for a new company to enter a new market or compete against established companies. Examples are prohibitive startup costs, patents, copyrights, strong brand names, or a small group of companies that hold most of the market share and stifle competition.
Baxter, Jay: Founder of Money-and-Investing.com and Editor of Fund Street© and ETF World Investor©.
Bear Market: A period when the majority of stocks on the market are currently decreasing in value because stock prices are dropping. Sentiment, headlines, and earnings estimates are generally negative.
Bearish: A Bearish market means that the majority of stocks on the market are currently decreasing in value because stock prices are dropping.
Benchmark: A standard against which the performance of a security, index, or investor can be measured. Common examples of benchmarks are the S&P 500 Index for US Large and Mid Cap stocks, MSCI EAFE Index for a composite of foreign large-caps, and the MSCI Emerging Market Index for a composite of foreign emerging markets. There are dozens of major indexes covering many different categories, geographies and strategies. Visit our Major Index Reference Chart for more information on this subject.
Beta: Beta is useful because it measures an investment’s volatility against a benchmark. For example, if you are comparing Bonds to Small Caps and the Bond beta is 0.8 this tells us that Bonds will grow less than Small Caps, 20% less to be exact. If the Small Cap index goes up by 20%, this means the Bond index with a beta of 0.8 will only increase by 16%. To learn more about Beta and other statistical measures, read our Momentum Strategy Investing Review.
Blue Chip: The term Blue Chip refers to a prestigious group of companies viewed as the leaders in their respective fields. Thirty of these Blue Chips combine to make up the most widely tracked index in the world, the Dow Jones Industrial Average. Blue Chips are generally very large companies that pay dividends, are in excellent financial shape, have a long history of success and are seen as low-risk compared to most other types of stock. Examples of Blue Chip stock are Wal-Mart, Microsoft, Disney, and Coca-Cola.
Bombay Stock Exchange: The Bombay Stock Exchange is located in Mumbai, India. It is the oldest stock exchange in Asia and one of the largest in the world with nearly 5,000 companies listed. Visit our Major Index Reference Chart for more information on this subject.
Bond: A bond is an interest bearing debt certificate issued by a government or company. They are simply an innovative way for a company or even for governments to borrow money at reasonable interest rates. The reason a Bond system is needed is because there isn’t a bank in the world that could or would lend the vast sums needed by the US Government to cover US debt or needed by some of the world’s largest companies to fund expansion. When you buy a bond, you are one of many creditors who have provided a loan. In return, the issuer will distribute fixed interest income payments once or twice per year (depending on the bond) called Coupon Payments. These payments won’t change regardless of the Bond’s price fluctuation. When the bond reaches maturity (ends), you will receive your price-adjusted principle back.
Bond Coupon Payment: These are the fixed income payments paid by the bond issuer (a government or company) to the bond holder (you, the investor). Bond issuers usually distribute coupon payments twice per year until maturity and the coupons are fixed dollar amounts, they will not fluctuate. Each coupon represents a predetermined payment promised to the bond-holder in return for his or her loan of money to the bond-issuer. The bond-holder is typically not the original lender, but receives this payment for effectively lending the money.
Bond Credit Rating: These ratings assess how likely a corporation or government will default on its debt. These credit ratings act as a risk measurement for investor considering debt vehicles such as bonds. For bonds, these ratings fall into two major categories, Junk and Investment Grade, with Junk bonds being the higher yielding and higher risk of the two. To learn more about bonds and other income producing assets, read our Income Investing Strategy Review.
Bond Maturity: The Bond's term, which is the length of time that must pass in order for the bond to expire or "Mature". Typically, one to three year maturities are referred to as short-term bonds, four to ten year maturities are referred to as intermediate-term bonds and 11+ year maturities are referred to as long-term bonds. To learn more about bonds and other income producing assets, read our Income Investing Strategy Review.
Book Value: The book value of a company is a measure of what it would be worth if the company liquidated all of its assets. It's basically the difference between assets and liabilities expressed in per-share terms. Investors use this and other fundamental analysis methods to calculate a company's value. To learn more about fundamental analysis or value investing, read our Value Investing Strategy Review.
Brand Strength: Brand strength refers to the power of a company's name, logos, slogans or anything else that consumers associate with a company's products and services.
Broad Index: Broad Indexes are those Indexes that follow a large category of stocks or a representative sample from a large category of stocks. They are popular for performance and portfolio comparison. There are many broad indexes, such as the S&P 500 and the MSCI EAFE, and investors typically choose one that is relevant to their portfolio and their strategy. Most are easy to look up on investing websites and there are plenty of free tools available that will allow you to compare your performance to a broad index with just a couple of mouse clicks. If you'd like to learn more about indexes, index investing, ETFs and Index Funds, read our Index Investing: The safe, easy and sure way to wealth or our Index Investing Strategy Review.
Broker: An agent who handles an investor’s stock, bond, option, future and commodity orders. A commission is charged for their service. Most also provide portfolio management and financial/investing guidance. To learn more about brokers, financial planners, and online brokerage firms, read our Online Investing Vs Traditional Financial Planners article.
Brown, Janet: While we consider her a Momentum Investor, Janet calls her investing style Upgrading. Regardless of what you want to call the strategy, Janet has had spectacular results. She crushes the average market return not to mention the returns of all but a handful of her growth and momentum investing peers. Most astonishing is that Janet’s entire portfolio is comprised of Mutual Funds rather than stocks. She uses a momentum scoring model to rank fund performance and “upgrading” refers to the practice of constantly moving your money into the highest ranking funds. Janet’s No Load Fund X provides strategy analysis and explanations, clear and easy to follow buy/sell instructions, and model portfolios. Please see our Can you Afford Outstanding Investing Advice article for more information on this topic.
Buckingham, John: John is Al Frank’s protégé and successor and the current editor of the Prudent Speculator monthly newsletter. His newsletter has beaten the market returns for over 25 years and counting, only a handful of investment advisors around the world can make that type of claim. John’s newsletter provides strategy analysis and explanations, clear and easy to follow buy/sell instructions, and model portfolios. Please see our Can you Afford Outstanding Investing Advice article for more information on this topic.
Buffet, Warren: Buffet is widely regarded as the best value investor of all time, his investing prowess earned him the nickname “the Oracle of Omaha”. He is also famous for his frugality. While he is the world’s richest man with an estimated net worth of $62Billion, he still lives in the same house he bought in 1958 for $31,500. Buffet has proven to be a generous billionaire, announcing in 2006 that he plans to give away his entire fortune to charity. To learn more about fundamental analysis or value investing, read our Value Investing Strategy Review.
Bull Market: A period when the majority of stocks on the market are currently increasing in value because stock prices are rising. Sentiment, headlines, and earnings estimates are generally positive.
Bullish: A Bullish market means that the majority of stocks on the market are currently increasing in value because stock prices are rising. Consumer sentiment is usually strong during a Bullish phase.
Business Cycle: This is the repeating economic cycle that investors experience over long periods of time. Business cycles in the US economy average four to six years but they can vary widely and have become increasingly irregular now that the global economy is much stronger and can have a greater impact on the US and other developed country's economies than ever before.
Business Model: This term is very broad, it encompasses a company's objectives, organizational structure, inventory system, and sales strategy to name a few. Basically, every aspect of a company that is an important part of how it operates and how it meets its goals and objectives is an important component of the business model.
Buy/Sell Recommendations: These are the trade recommendations you receive from your financial advisor, broker, or newsletter. Recommendations can be for stocks, bonds, funds, options, commodities or any other type of security. We talk about advisor Buy/Sell Recommendations a lot because they have a major impact on your returns. Regardless of the source of your buy/sell recommendations, they should be clear and timely. In other words, your advisor should be telling exactly what to buy and sell and when the transaction should occur. Please see our Can you Afford Outstanding Investing Advice or Online Investing Vs Traditional Financial Planners articles for more information on this topic.
Buy-and-Hold Strategy: This refers to any investing strategy that advocates holding your investments for long periods of time and ignoring short-term market volatility. Examples of Buy-and-Hold strategies are Index Investing, Value Investing, and Income Investing. Please see our Investing Strategy Review Guide article for more information on this topic.
Buy Criteria: These are the criteria you adhere to in order to identify attractive investments that are in line with your strategy. Every strategy has it’s own unique set of Buy Criteria, and most investors tailor their strategy’s criteria to match their own investing goals and risk tolerance. Please see our Investing Strategy Review Guide article for more information on this topic.
Buy Limit: Refers to setting an order for some type of security at or below a specified price. Buy Limits allow investors to ensure that they only buy a security when it reaches a price that they feel is attractive rather than simply buying at the current market price.
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Capital Appreciation: This is just a fancy way to say the value of your investment increased. If you own a stock, and the price moves from $45 to $50, you have experienced capital appreciation. Please see our Stock basics guide for a comprehensive introduction to this and many other topics.
Capital Gains: A capital gain is the amount your investment increased in value from the time you bought it to the time you sold it. For example, if you own 100 shares of EEM and the price increased from $110 to $150 from the time you bought until the time you sold, you experienced a capital gain. In this example, your capital gain is $40 per share or $4,000. Please see our Stock basics guide for a comprehensive introduction to this and many other topics.
Capital Gains Distribution: When mutual fund managers buy and sell (realize gains and losses) or receive dividends and other income from investments held in the fund's portfolio, they create capital gains and these are passed on to investors in the form of capital gains distributions. These gains are typically distributed quarterly or annually and, unlike long-term gains, they will be taxed at your individual tax rate. Read our Introduction to Mutual Funds guide to learn more about this topic.
Capital Growth: Refers to increase in the value of an investor's investments. If all of an investor's capital sits in cash rather than being invested in some type of security, this capital will lose value every year. Capital Growth through investment is essential in keeping ahead of inflation. Capital Growth also refers to an increase in value of a mutual fund’s holdings which will increase the NAV, or price, of the fund. To learn more about mutual funds, read our Introduction to Mutual Funds guide.
Capital Loss: A capital loss is the amount your investment decreased in value from the time you bought it to the time you sold it. For example, if you own 100 shares of EEM and the price decreased from $150 to $110 from the time you bought until the time you sold, you experienced a capital loss. In this example, your capital loss is $40 per share or $4,000. Please see our Stock basics guide for a comprehensive introduction to this and many other topics.
Capital Preservation: This refers to protecting your portfolio from losses. A good example of a capital preservation strategy is Income Investing in which investors buy conservative investments such as bonds and blue chips to generate current income and protect against losses.
Capitalization: See Market Capitalization
Cash Flow Statement: This piece of the financial report tracks a companies inflow and outflow of cash for a set period of time. The flow of capital back and forth between a company and other entities is a result of operating, investing and other financial activities.
Casual Investor: A casual investor is one that understands why people invest and how important it is to plan for the future but would prefer to learn as little as possible about investing. They do very little of their own research because they prefer to take the advice of others. Casual Investors are very likely to choose a managed account or trust the advice of a financial planner or broker. If you are trying to decide if you'd prefer a self-directed portfolio or would rather receive advice from a broker or financial planner, be sure to read our Online Investing Vs Traditional Financial Planners.
CD: See Certificate of Deposit
Certificate of Deposit: These are short-term debt securities. The issuer pays you, the CD holder, a low rate of interest income for lending the issuer your money for a stated period of time, usually several weeks to a few years. These are very safe investment vehicles and are attractive if you want to generate a small amount of income for a short period of time without risking your principal.
Charting: The use of graphs and charts in technical analysis to predict price movements and track volume and other technical indicators. To learn more about charting and other technical analysis topics, read our Day Trading & Technical Analysis Strategy Review.
Chase Returns: Many Investors wait until they see an investment performing well before they invest their money. This approach to investing places a lot of emphasis on current and historical returns while ignoring the fundamental and technical aspects of investing. Investors that chase returns often buy high and sell low, a recipe for guaranteed losses. If you’d like to learn more about how to avoid chasing returns, read our 10 Principles of Investing article.
Clason, George S.: Clason is famous for writing The Richest Man in Babylon, which has been a best seller for almost 80 years. The personal finance and investing information contained in this gem of a book is as true and valuable today as the first day it was published. If you’d like more information on this book or Clason, read our review of The Richest Man in Babylon.
Cold Caller: The ethically questionable practice by full-service brokers of making unsolicited phone calls to people they don't know in order to attract new business. To learn how to avoid this and other mutual fund expenses and questionable practices associated with mutual fund investing, read our Mutual Fund Checklist.
Commodity: The generic definition of commodity refers to any good that can be bought or sold. However, when we refer to commodities during investing discussions, we are usually referring to raw materials such as basic agricultural products (i.e. soy beans, coffee), precious metals (i.e. gold, silver), or raw materials (i.e. oil, lumber). All of these products trade on authorized commodities exchanges.
Common Stock: Stock traded in the secondary market is called Common Stock and is appropriately named since it will make up most, if not all, of your trades. This is the “every day” stock available to any investor. To learn more, read our Beginner’s Guide to Stocks.
Company Match Program: This is the amount that your company will contribute to your 401k plan based on your own contribution. If, for example, your company has a $3,000 company match, they will match 100% of your first $3,000 contribution to 401k. The company match is not counted as part of the legal annual maximum amount you are allowed to contribute. To learn more about 401k’s and other Tax Deferred accounts, read our 401k, IRA and Roth IRA Basics guide.
Competitive Advantage: The skills, patents, knowledge, leadership, resources or other characteristics that make a company stronger than it’s competitors.
Competitive Disadvantage: The lack of skills, patents, knowledge, leadership, resources or other characteristics that make a company weaker than it’s competitors.
Compound Interest: In this method of interest calculation, you calculate interest earned on all principal and interest previously accrued. Compound interest is the greatest wealth building tool the world has ever seen. Albert Einstein once declared that compound interest is “the most powerful force in the universe” and we agree because it certainly has made a lot of people rich. It’s a simple concept and is best demonstrated through examples.
In our Compound Interest example below, the investor has $10,000 in savings, he is going to add $10,000 in savings per year, and he will receive the S&P 500 annual return of 10% (compound interest at 10% + $10,000 savings per year).
- After 5 years he will have $77,156
- After 10 years he will have $185,312
- After 15 years he will have $359,497
- After 20 years he will have $640,024
- After 25 years he will have $1,091,818
- After 30 years (the length of the typical career) he will have $1,819,434
Not too shabby.
This is an important investing principle... to learn ten more, read our Basic Principles of Investing guide.
Conservative Investor: Conservative Index Investors are retired, near retirement or feel very bearish towards stocks. They have very low risk tolerance and want to avoid volatility and losses. They are often focused on dividends and bond coupon payments since both provide current income during retirement. Many are withdrawing more than they contribute to their portfolios. Since this is a big part of their income they want a lot of protection against market volatility and losses because the portfolio needs to last for the rest of their retirement. To learn more about the most popular conservative investing strategy, read our Income Investing Strategy Guide.
Contrarian Investor: Warren Buffet is a very successful contrarian and he sums the strategy up best with his philosophical statement, “simply attempt to be fearful when others are greedy and to be greedy when others are fearful”. Contrarian’s seek opportunities to buy or sell when the majority of investors are doing the exact opposite. They believe that excessive fear in the market creates undervalued bargains while excessive greed creates overvalued and dangerous stocks. Value Investing is a great example of a popular contrarian investing strategy, please read our Value Investing Strategy Review for more information on this topic.
Cost Basis: The original purchase price of an investment. The cost basis is used to determine capital gains so it has major tax implications.
Coupon Payment: See Bond Coupon Payment
Covered Call: A call option sold by someone who owns the underlying asset. The covered call writer gives up any potential profit beyond the strike of the calls in exchange for the premium income. Selling covered calls is on our very short list of option strategies that offers an acceptable risk/reward ratio and is relatively easy to master. This strategy is covered in our blog article A low-risk high-reward option income strategy.
Cost Efficient: Economical in terms of the goods or services received for the money spent. Producing optimum results for dollars spent.
Cramer, Jim: Jim is widely respected as one of today’s top investors. He developed a “strict set of investing disciplines” during his ten years as a hedge fund manager that have helped him and his clients profit in up and down markets. Jim stays very busy; he is the host of the popular CNBC Mad Money show, the editor of Action Alerts Plus investment advisory service, author of several top selling investment books, and co-founder of TheStreet.com. To learn more about Jim and many other of today's best investment advisors, read our Can I afford outstanding investing advice article.
Criteria Based Strategy: This method of choosing investments requires a constantly refined set of criteria designed to determine the quality of an investment and estimate its future performance. Please read our Growth Investing Strategy Review or Mutual Fund Investing Strategy Review for two examples of criteria based strategies.
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Daily Rebalancing: See Rebalancing
DAX: Germany’s version of the Dow. This is a Blue Chip stock index consisting of 30 major German companies. This is a good measure of the health of the German economy and a good benchmark for any large cap German based stocks. Visit our Major Index Reference Chart for a complete list and description of all of the world's major indexes.
Day Trader: Speculators are very active traders that get in and out of one or several investments during a single day. They will usually close all positions prior to the close of the current trading session, they will not hold positions overnight. Day Traders typically prefer options over other securities.
Debt: Something owed, such as money, goods, or services. When we refer to debt at Money-and-Investing.com we are usually referring to debt on a company’s financial statements. Debt and other valuation metrics are particularly important to Value Investors. Feel free to browse our Value Investing Strategy Guide for more on this topic.
Debt-to-Equity Ratio: Calculated by dividing a company’s total liabilities by the total the shareholder equity. This tells analysts how aggressively a company is financing expansion with debt. High debt-to-equity ratios can mean a lot of earnings volatility as a result of additional interest expense. To learn more about the Debt-to-Equity Ratio and other important valuation ratios, read our Value Investing Strategy Review.
Default: Default occurs when a debtor is unable to meet the legal obligation of debt repayment. Borrowers may default when they are unable to make the required payment or are unwilling to honor the debt. Investors are often talking about Bonds when they talk about default risk, particularly Junk Bonds which are higher risk.
Deferred Compensation Plan: A compensation plan in which benefits are paid at a later time, such as after retirement. To learn more about deferred compensation plans and other tax-deferred investment vehicles, read our 401k, IRA and Roth IRA Guide.
Derivative: Refers to any investment that derives its value from an underlying security. Options are the most common and popular form of derivative.
Developed Country: a country with a relatively high per capita income, where most people have a higher standard of living with access to more goods and services than most people in developing countries. An area of the world that is technologically advanced, highly urbanized and wealthy.
Developing Country: A country whose per capita income is low by world standards. A country that is in the process of becoming industrialized. Average national income must be below $9,265 for a country to be classified as a developing country. A developing country typically lacks industrialization, infrastructure, high literacy rate and advanced living standards.
Diminishing Returns: A theory that states that as extra units are produced, the output generated by each additional unit produced will eventually fall. For example, the first unit produced may cost a manufacturer $1.00, the 100,000th unit may cost $0.10, and the millionth unit may cost $0.08. There is significant economy of scale benefit from the first unit to the 100,000th, but very little additional improvement at the millionth because the return on productivity diminished after a certain number of units.
Disclosure Laws: (Source = Investopedia)
Investment Act of 1933 - A federal piece of legislation enacted as a result of the market crash of 1929. The legislation had two main goals: (1) to ensure more transparency in financial statements so investors can make informed decisions about investments, and (2) to establish laws against misrepresentation and fraudulent activities in the securities markets.
Securities Exchange Act of 1934 - A federal piece of legislation enacted as a result of the market crash of 1929. The legislation had two main goals: (1) to ensure more transparency in financial statements so investors can make informed decisions about investments, and (2) to establish laws against misrepresentation and fraudulent activities in the securities markets. All companies listed on stock exchanges must follow the requirements set forth in the Securities Exchange Act of 1934. Primary requirements include registration of any securities listed on stock exchanges, disclosure, proxy solicitations and margin and audit requirements. From this act the Securities Exchange Commission (SEC) was created. The SEC's responsibility is to enforce securities laws.
Investment Advisory Act of 1940 - law that was created to regulate the actions of investment advisers as defined by the law. Relates to their advice, counsel, publications, writings, analyses, and reports.
Disposable Income: Money left over after all expenses and taxes have been paid. These are your discretionary dollars that can be spent on anything from consumer goods to savings.
Distribution: This refers to the capital gains distributed from mutual funds to their investors. Distributions are made up of any income and realized gains experienced during the fund's most recent reporting period. To learn more about this topic, read our Introduction to Mutual Funds article. This can also refer to social security, 401k, IRA or Roth IRA retirement distributions. At the qualified retirement age (59 1/2), individuals can begin receiving retirement distributions without paying tax penalties for early withdrawal.
Distribution Date: Date that a mutual fund pays out any income and realized gains experienced during the current reporting period. To learn more about this topic, read our Introduction to Mutual Funds article.
Distribution Phase: It is unclear at the beginning of this phase whether the bull market is ending or if this is just a minor correction before more strong price action. This is a period of high volatility since buyers and sellers are trading on fear and greed. Prices may trade back and forth for a while but eventually sellers will begin to outnumber buyers and market sentiment turns negative.
Diversification: An investment strategy designed to reduce exposure to risk by combining a variety of investments, such as US stocks, international stocks, bonds and cash, which are unlikely to all move in the same direction at the same time since they aren't all strongly correlated. Diversification is one of the 10 Basic Investing Principles.
Diversification and Allocation Mix: This term incorporates three components; number of securities, diversification mix, and asset allocation. Number of securities refers to the total number of investments held in your portfolio and the recommended range is between 25 and 30. The mix refers to investing in a wide variety of industries, categories and geographies to ensure that when one specific area goes south, it doesn’t significantly hurt your whole portfolio. Finally, the asset allocation refers to the breakdown of the percentage of your portfolio allocated to each asset type. To learn more about the asset allocation and diversification mix, read our 10 Basic Principles of Investing.
Diversified Fund: In order to qualify as a “diversified” fund as defined by the Investment Company Act, 75% of a fund’s total asset value is limited to positions of no more than 5% of any one company. For example, if a fund only owns a couple stocks, why wouldn’t you just go buy them so you don’t have to worry about holding periods, management fees and the like? Not to mention the fact that a non-diversified fund is going to be more risky since the assets are concentrated into a few investments. For more on this subject, read our Introduction to Mutual Funds article.
Dividend: A distribution of the earnings of a corporation. A dividend is a portion of a company's profit paid to common and preferred shareholders.
Dividend Reinvestment: The process of automatically purchasing additional shares of a company’s stock or a mutual fund with any dividends distributed by that company or mutual fund. This is a form of dollar cost averaging, one of the 10 Basic Principles of Investing.
Dividend Yield: The annual percentage return that the dividend provides to the investor on either common or preferred stock.
Dollar Cost Averaging: Dollar Cost Averaging means investing a fixed amount of money on a regular basis. For example, if you invest $300 every month regardless of market conditions, you are dollar-cost averaging. The benefit is that you are always buying more stock at lower prices. The reason this is so important for you to learn is because most investors do the exact opposite. Don’t you feel the urge to buy when the market is bullish and rising and feel the urge to wait or sell when the market is bearish and dropping? Most people do, and as a result they buy when prices are high and do nothing or sell when prices are low or falling. This kind of behavior greatly increases your cost basis and decreases your returns, so avoid it, be a dollar-cost averager. This is the 3rd Investing Principle, read our 10 Basic Principles of Investing article for more on this subject.
Don't Throw Good Money After Bad: This means don’t hold on to your losers or sell your winners and it is the 9th Investing Principle. The result of throwing good money after bad is buying high and selling low, a behavior guaranteed to create losses.
- holding on to losers: Almost everyone has done this so it’s an easier concept to absorb. We often put a lot of hard work into selecting investments. By the time we finally hit the “Buy” button we are confident that we’ve made a wise and profitable choice. However, investing is a numbers game, we can’t be right every time and we will inevitably pick losers now and then. When this happens, rather than realizing that we either missed something when we did our research or that something has fundamentally changed about the company or the market, many of us still stubbornly believe that we made a good investment. Because we worked so hard to identify a good stock, we find it hard to believe that we were wrong. Even if the price is dropping while our other investments are going up we hold onto it because we’re sure the loss is only a temporary correction and that the stock will head back up very soon. This behavior is frequently referred to as “falling in love” with a stock. We can’t bear to part with a “good” stock and taking losses is psychologically painful so we wind up riding our losers down. This rarely ends well. Eventually we realize that no recovery is in sight and we sell the stock back into the market at a much larger loss than we should have taken.
- Selling Winners: On the other side of the equation, when we review our portfolio and see that an investment has done particularly well, we are often tempted to take a profit because we don’t think that any company can sustain such exceptional performance for long. This means we wind up selling our winners. Read our 10 Basic Principles of Investing article to learn about several other critical investing principles.
DOW: See Dow Jones Industrial Average
Dow Jones Industrial Average: Commonly referred to as the "Dow". Tracks the performance of 30 of the largest and most widely held US Blue Chip companies. Best-known and most widely followed market indicator in the world and a good measure of US economic health. Perfect benchmark for Blue Chip, large cap and Income Investors.
Dutch East India Company: The first publicly traded company and the Netherland’s version of a weapon of mass destruction. The company was incorporated in 1602 and was granted a monopoly that extended from the Cape of Good Hope to the Strait of Magellan with sovereign rights over whatever territory it could conquer. For over 100 years, the Dutch East India Company monopolized trade, erected fortifications, appointed governors, maintained a standing army, and formed treaties in the name of the Dutch government. At the peak of its power in 1669, the Dutch East India Company commanded 40 warships, 150 merchant ships, and 10,000 soldiers. The Dutch East India Company was an outstanding investment, between 1602 and 1696 the annual dividend paid to investors was never less than 12% and sometimes as high as 63%. For more about the stock history and stock basics, read our Stock Market Basics article.
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Earnings: Profit available to ordinary shareholders after all operating expenses have been deducted. The amount of profit a company realizes after subtracting all expenses and taxes from gross revenue.
Earnings Estimate: Analysts from the major brokerages and other investing institutions are constantly estimating how much a company will earn in the coming quarter, year, or longer period of time. Investors watch these estimates closely and a miss above or below the average analyst estimate can cause a great deal of price fluctuation.
Earnings Per Share (EPS): The formula is net earnings of a corporation divided by the average number of shares outstanding (shares of common stock). This is a popular and common method of expressing a corporation's profitability. To learn more about EPS and other valuation methods, read our Value Investing Strategy Guide.
Economic Trends: Production, employment, import, export and other trends that effect the national and global economy. Analysts and investors watch these trends closely for clues about future market activity.
Economics: Economics is the social science that studies the production, distribution, and consumption of goods and services. The study of how people use their limited resources in an attempt to satisfy unlimited wants.
Economies of Scale: A decrease in cost as supply increases. In many cases, the bigger a company gets, the cheaper it is able to produce or distribute each additional unit. Generally, this is because some costs of production do not increase with each unit.
Einstein, Albert: A German physicist best known for his theory of relativity, especially for the mass energy equivalence theory, E = MC2. Einstein is revered by the physics community, and in 1999 Time magazine named him the "Person of the Century". In wider culture the name "Einstein" has become synonymous with genius. (source = Wikipedia)
Emergency Fund: An emergency fund is for those unexpected events that are not regularly planned for in life.
Employee Match Program: This is the amount that your company will contribute to your 401k plan based on your own contribution. If, for example, your company has a $3,000 company match, they will match 100% of your first $3,000 contribution to 401k. Any company match is not counted against you so technically the maximum contribution is $15,500 + your company’s match amount. To learn more about company match and other tax-free investing options, read our introduction to 401k's, IRAs and Roth IRAs.
Enron: Famous for the largest, most spectacular, and corrupt melt-down in corporate history. Way to go guys… Before its bankruptcy in late 2001, Enron employed around 22,000 people and was one of the world's leading electricity, natural gas, pulp and paper, and communications companies, with claimed revenues of $111 billion in 2000. Fortune named Enron "America's Most Innovative Company" for six consecutive years. At the end of 2001 it was revealed that its reported financial condition was sustained mostly by institutionalized, systematic, and creatively planned accounting fraud. Enron has since become a popular symbol of willfull corporate fraud and corruption. (Source = Wikipedia)
Equity: Equity is the remaining interest in all assets after all liabilities are paid. It belongs to the owners of the company. When you buy stock, you receive shareholder equity in return, which means you own a small piece of the company.
Estate Planning: A plan to ensure your assets pass to designated heirs after your death and to avoid unnecessary taxes. Tools of estate planning include trusts, wills, gifts and power of attorney.
ETF: See Exchange Traded Fund
Exchange: A marketplace for buying and selling stocks such as the New York Stock Exchange and the NASDAQ.
Exchange Traded Fund (ETF): security that tracks an index and represents a basket of stocks like an index fund, but trades like a stock on an exchange. Similar to stock, each ETF has a ticker and can be bought and sold any time during trading hours rather than once a day like mutual funds. To learn all about ETFs, read our Index Investing: The safe, easy and sure way to wealth.
Expense Efficiency: Producing optimal results for money spent. Expense management is a critical component of portfolio management, see our 10 Principles of Investing or Can I afford Outstanding Investing Advice for more on minimizing expenses and maximizing returns.
Expense Management: Producing optimal results for money spent. Expense management is a critical component of portfolio management, see our 10 Principles of Investing or Can I afford Outstanding Investing Advice for more on minimizing expenses and maximizing returns.
Expense Ratio: The salary and administrative expenses required to manage the fund expressed as a percentage of total assets. Expense management is a critical component of portfolio management, see our 10 Principles of Investing or Can I afford Outstanding Investing Advice for more on minimizing expenses and maximizing returns.
Expenses: At Money-and-Investing.com we are generally referring to expenses on financial statements or in mutual funds so the accounting definition is most appropriate. In accounting, an expense represents an event in which an asset is used up or a liability is incurred.
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Fair Market Value: The price agreed upon when both buyer and seller are fully aware of market conditions and have complete knowledge of the situation.
False Indicator: Day traders, market timers, and momentum investors are constantly watching technical indicators for signals of what an index or stock is going to do. When the security they are tracking gives signals that lead these investors to false conclusions, this is called a false indicator. For example, if a stock's price goes above it's resistance level, analysts may assume that the stock is experiencing a breakout when it may only be experiencing unusual price fluctuation.
FDA Approval: Any new food and drug must pass FDA approval before it can be sold to consumers. When we talk about FDA approval at Money-and-Investing.com, we are most often talking about pharmaceuticals. Each drug must pass all FDA criteria and standards before it can be approved and prescribed by doctors or sold over-the-counter. The FDA acts as the watchdog of the food and drug industry to make sure that companies are behaving responsibly and only selling products that have passed rigorous safety tests.
Federal Reserve Bank (commonly referred to as the "Fed"): The central bank of the US. The Fed performs several major functions, but the major ones that have a direct impact on the market and the economy are managing the discount rate and lending money to member banks. By managing the discount rate (rate cuts or increases), the fed can promote economic growth to avoid recessions or cool the economy down to temper inflation. The Fed also lends money to member banks to ensure that there is sufficient liquidity in the banking system.
Fee-Based Financial Planner: Financial planners that charge a percentage of assets, wrap fee or some other portfolio or performance based fee to their clients. Charging these traditional fees creates many conflicts of interest in the client and planner relationship. We recommend choosing an hourly fee planner, this eliminates all conflicts of interest. Want to learn more about traditional financial planners and how their services compare to online brokerages? Read our Online Investing Vs Traditional Financial Planners article.
Fee-Laden Fund: We talk about mutual funds a lot at Money-and-Investing.com so we want people to understand the difference between no-loads no-fee funds and any other types. Fee-Laden Fund is our description for a fund laden with a variety of unnecessary expenses that you can avoid when you choose instead to invest in no-load no-fee funds. Examples of optional fees charged by mutual funds are 12b-1 Fees, Front Loads, and Back Loads. Want to learn more about mutual fund fees and no-load no-fee funds? Read our Mutual Fund Guide.
Fee Structure: When we talk about Fee Structure at Money-and-Investing we are usually referring to the fees charged by a Mutual Fund. See Mutual Fund Fees.
Fees: See Mutual Fund Fees
Financial Metrics: A Financial Metric is a calculation that presents the relationship between various items on a financial statement numerically. Financial metrics are usually expressed in percentages or ratios. Examples are P/E Ratio, Price-to-Book Ratio, and profit margin. Financial metrics are of particular interest to Value Investors.
Financial Planner: A planner's goal is to help investors with all aspects of investing, budgeting, tax, insurance, retirement and estate planning. Quality financial planners will spend a lot of time educating investors, finding capital growth opportunities in line with a client's risk tolerance and preserving capital. The ultimate goal is wealth preservation and net worth maximization. Want to learn more about traditional financial planners and how their services compare to online brokerages? Read our Online Investing Vs Traditional Financial Planners article.
Financial Planning: A process of money management that may include any or all of several strategies, including budgeting, tax planning, insurance, retirement and estate planning, and investment strategies. In effective financial planning, all elements are coordinated with the aim of building, protecting, and maximizing net worth. (Source = joann-low.com)
Financial Statement: A report that summarizes the financial status and health of an institution for a given period of time. The major pieces of a financial statement are the income statement (revenues and expenses), balance sheet (assets and liabilities) and cash flows statement (inflow and outflow of cash).
First Mover: The first firm to enter a market or launch a new product. This creates a first mover advantage.
First Mover Advantage: The advantage that a firm or country may derive from being the first to enter a market, or from being the first to use a new technology. The competitive advantage that the first company to launch a new type of product should have over those that start later.
Fitch's Credit Rating Service: Fitch Ratings is a leading global rating agency committed to providing the world's credit markets with independent, timely and prospective credit opinions across the fixed income global marketplace.
Foreign Funds: Foreign Funds invest at least 80% of their assets into international stocks and other foreign investments. These can be risky investments, they are more volatile on average than growth and value funds. Read our Introduction to Mutual Funds guide or our Complete Index Investing Guide for more information on Foreign Funds.
Frank, Al: The former editor of the Prudent Speculator monthly newsletter. His newsletter has beaten the market returns for over 25 years and counting, only a handful of investment advisors around the world can make that type of claim. Frank’s newsletter is now managed by his protege, John Buckingham. The Prudent Speculator provides strategy analysis and explanations, clear and easy to follow buy/sell instructions, and model portfolios. Please see our Can you Afford Outstanding Investing Advice article for more information on this topic.
Fried, David: David is an investment adviser that focuses on companies that are buying back their own stock. The theory is that this disrupts the natural balance between supply and demand because companies are eliminating some of the supply when they remove part of their stock from the open market. We don’t know much about buyback theory but based on David’s results, this is a winner. The Buyback Income Index’s performance is very strong on a risk-adjusted basis. While the intent is to produce income and preserve capital, the portfolio has also produced very nice growth, which is an important factor for conservative investors that want to stay ahead of inflation. The Buyback Letter provides strategy analysis and explanations, clear and easy to follow buy/sell instructions, and model portfolios. Read our Can you Afford Outstanding Investing Advice for more information on Fried, investing expense management, or monthly investing newsletters.
FTSE 100: Index of the 100 largest companies listed on the London Stock Exchange. Popular London Stock Exchange index and a good measure of the UK’s economic health. Good benchmark for any large cap UK based stocks.
Fund Manager: The person responsible for investing a mutual fund's assets, implementing its investment strategy, and managing the day-to-day portfolio trading. This individual or team of individuals manages a mutual fund's portfolio of stocks, bonds and other securities.
Fund Manager Tenure: The length of time the current fund manager has been responsible for all of the day-to-day management and trading of the fund’s portfolio.
Fund Family: a group of mutual funds controlled by a single investment company, bank, or other financial institution. The various funds within the family can all have different investment objectives, such as growth, income or international.
Fundamental Analysis: Interpreting a company’s financial statements, financial metrics and statistical measures to determine whether a company is trading above or below its fair value and to estimate future performance. This form of analysis is most popular with Value Investors. Several other strategies require at least rudimentary fundamental analysis to make sure that there is nothing glaringly bad about an investment, but Value Investors take their analysis several steps further. They dig deep into the balance sheet, financial statements, and cash flow statements because they want to have a clear picture of the assets, liabilities, revenues and expenses. Once they are comfortable that a company is on firm financial footing, they delve into the business model, products, and debt structure to see how well a company is run, what competitive advantages they can maintain, and what kind of pricing power they have. Finally, they will try to value intangible assets into the equation such as brand strength or intellectual capital. Some common fundamental analysis metrics include price-to-book ratio, intrinsic value, shareholder’s equity, Return on Equity, debt-to-equity ratio, and dividend yield. You can bet that when you hear one person use several of these terms during a conversation, he or she is a value investor that does a lot of fundamental analysis. To learn more on this topic, read our Value Investing Strategy Guide.
Futures Trading: Futures traders trade futures contracts, which are agreements to buy or sell a specific amount of a commodity or financial instrument at a set price on a specific future date. Futures are traded on an exchange like a stock but they are derivatives, which means they derive their value from an underlying asset such as a stock.
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GDP: See Gross Domestic Product
Greeks: Refers to a set of statistical sensitivity metrics; delta, gamma, lambda, rho, theta, and vega. These metrics are used by technical analysts to evaluate derivatives such as options. They are useful in helping to predict price movements.
Gross Domestic Product (GDP): The value of all goods and services produced within a nation in a given year. Because income arising from investments and possessions owned abroad is not included, only the value of the flow of goods and services produced in the country is estimated. Hence the word 'domestic' to distinguish it from the Gross National Product.
Growth Cycle: One of the 5 stages of the business Cycle. Growth cycle peaks (end of expansion) occur when activity is furthest above its trend level. Growth cycle troughs (end of contraction/recession) occur when activity is furthest below its trend level.
Growth Fund: A mutual fund that seeks long-term capital appreciation by selecting investments that should grow more quickly than the general economy. Growth investments are often associated with high P/E Ratios. Growth funds are more volatile than conservative funds such as income funds or money markets. To learn more about mutual funds, read our Mutual Fund Guide.
Growth Investor: An investor that seeks long-term capital appreciation by selecting investments that should grow more quickly than the general economy. Growth stocks are often associated with high P/E Ratios. Growth stocks are more volatile than conservative investments such as bonds or money markets. To learn more on this topic, read our Growth Investor Strategy Review.
Growth Stocks: A stock whose sales and earnings are growing faster then the general economy. These stocks are often associated with high P/E Ratios, which means investors have priced in their expectation that earnings will continue to grow for the foreseeable future. To learn more on this topic, read our Growth Investor Strategy Review.
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Hang Seng Composite: 200 of the largest and most widely held companies on the Hong Kong Stock Exchange.
Hardship Qualification: It is possible to withdraw money from your IRA and 401K and even to borrow against your 401K if you meet a hardship qualification. However, this is a bad idea, every penny you take out or borrow delays your retirement. Common hardship qualifications are medical expenses, purchase of a first home, and education expenses but each has several hardship criteria. See our 401k, IRA & Roth IRA Guide for more on Hardship Qualifications, IRAs, Roth IRAs or 401Ks and contribution limits.
Hardship Withdrawal Exceptions: See Hardship Qualification
Hedge Fund: Funds that use hedging techniques. An investment fund that attempts to generate returns by employing aggressive trading strategies and leverage not commonly used by traditional funds. Hedge funds may employ short and long positions, leverage, swaps, arbitrage and derivatives trading.
Hedge Fund Investor: Generally, high net worth individuals that are looking for returns that exceed the market. They are interested in aggressive hedging techniques such as short-selling, leverage, program trading, swaps, arbitrage and derivatives in order to achieve exceptional returns.
High Dividend Yield: Stocks that pay dividends yielding at least six percent annually and that are likely to increase their dividend payouts each year. Dividend yield is found by dividing the latest known dividend payout from a company by its current share price. This is an important component of Income Investing. For more on this topic, read our Income Investing Strategy Review.
Highly Compensated Employees (HCEs): For benefit plan purposes, a highly compensated employee receives compensation in the top 20% of all employees, is a 5% owner of the business, and exceeds certain annual compensation levels. This category is used in performing nondiscrimination tests.
Historical Performance: Past performance of an investment, often measured in terms of stock price, earnings, or revenue. You’ve probably seen the following statement a thousand times (at least)… historical performance is no guarantee of future results. While it has become cliché, there’s a lot of wisdom in that statement. Don't chase returns, take Jay Baxter's advice and "choose one strategy that is in line with your personality, risk tolerance, and investing goals and then work hard to master it. Do that, and everything else will fall into place if." To learn more on this topic, read our introduction to the 8 most popular investing strategies.
Hong Kong Stock Exchange: This is the stock exchange of Hong Kong, more commonly known as the Hang Seng index.
Hourly Financial Planner: Financial planners that charge a flat hourly fee rather than the more traditional percentage of assets or wrap fees. By working on an hourly basis rather than on a commission basis, hourly planners eliminate many conflicts of interest inherent in the traditional client and planner relationship. Want to learn more about financial planners and how their services compare to online brokerages? Read our Online Investing Vs Traditional Financial Planners article.
Hulbert Financial Digest: Independent rating service that tracks the performance of various investing analysts and newsletters. Today, HFD computers track the performance of over 180 stock and mutual fund letters with more than 500 recommended portfolios.
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Income Fund: An investment fund whose primary objective is current income. Such funds generally invest their assets in government, corporate, or other bonds and high dividend yield stocks. The primary objective is to produce income and preserve capital, they are seeking current income rather than capital growth.
Income Investor: An investor whose primary objective is current income. These investors buy government, corporate, or other bonds and high dividend yield stocks. The primary objective is to produce income and preserve capital, they are seeking current income rather than capital growth. Read our income investing strategy guide article for more on this subject.
Income Stock: A stock with a high current yield and whose company has historically paid out a large portion of its earnings in dividends. Income stocks appeal to investors seeking attractive dividend yields. Income stocks have a long and sustained record of paying higher than average dividends regularly (i.e. utilities & blue chips).
Index: an Index combines together a group of stocks that have something in common and tracks their combined performance. A collection of stocks whose value is a benchmark for the overall movement of a particular type of stock. To learn more about indexes, read our complete index investing guide.
Index Fund: An index mutual fund is designed to mirror the performance of a stock or bond index, such as the S&P 500 Index. These funds aim to achieve the same return as whatever index they track, they do not attempt to outperform, performance should mirror their index. To learn more about index fund and ETF Investing, read our complete index investing guide.
Index Investing: Index Investors buy index funds and ETFs that mirror the performance of a group of investments. The goal is to achieve the same return as the indexes chosen. Through proper asset allocation and diversification across several indexes, many index investors are able to outperform the major indexes such as the S&P 500 or Wilshire 5000. To learn more about Index Investing, read our intro to index investing or our complete guide to index investing.
Index Investor: See Index Investing
Individual Retirement Accounts (IRA): See IRA
Industry: The category describing a company's primary business activity. This usually is determined by the largest portion of revenue.
Industry Group: US Companies are divided into similar product and service groups and these groups are further broken into smaller microeconomic industry groups. For example, technology stocks contain Symantec (SYMC) and Applied Micro Circuits Corp (AMCC). However, when you go down to the next industry subgroup, they are in different categories. Symantec is in Systems & Security and Applied Micro Circuits Corp is in Semiconductors.
Inflation: A rise in the prices of goods and services, as happens when spending increases relative to the supply of goods on the market. A sustained rise in the general price level, generally measured by the Consumer Price Index (CPI).
Inflation Rate: Rate of price changes usually calculated on a monthly or annual basis. The Consumer Price Index and the Producer Price Index are two principle US indicators of inflation rates. At the consumer level, it is the Consumer Price Index (CPI) and at the wholesale level it is the Producer Price Index (PPI).
Initial Public Offering (IPO): A company's first sale of stock to the public. Securities offered in an IPO are often, but not always, those of young, small companies seeking capital for expansion.
Insurance Planning: A plan to ensure your assets pass to designated heirs after your death and to ensure that your loved ones have enough income to support themselves after your death. Due to the complexity of insurance and the myriad options available, financial planners are typically used for insurance planning (as well as estate and tax planning).
Intangible Assets: An asset whose value can only be estimated or is indeterminate. Examples are goodwill, intellectual property, patents, copyrights, and trademarks.
Intellectual Capital: Representation of the financial value that human innovations, inventions, and intelligence bring to a business enterprise. The value of a company's collective experience and knowledge at performing certain tasks or innovating for the future.
Interest Rate Risk:The possibility that a bond's or bond mutual fund's value will decrease due to rising interest rates. Investors in bonds and bond funds must be acutely aware of the risk associated with interest rate changes. When interest rates rise, the values of outstanding bonds fall, and when interest rates drop, the values of outstanding bonds rise.
Interest Rates: The rate of interest charged for the use of money, usually expressed as an annual rate. When we talk about interest rates at Money-and-Investing.com we are usually referring to the discount rate. The Fed adjusts the discount rate to dampen inflation or encourage growth and spending.
Internal Revenue Service (IRS): The division of the US Treasury Department responsible for collecting taxes and administering and enforcing most federal tax laws. The majority of the IRS's resources are focused on collecting federal taxes such as personal income tax, corporate income tax, social security tax, excise tax and gift tax.
International Fund: See Foreign Fund
International Investor: Investor that seeks to diversify their portfolio globally by buying into companies in developed and emerging foreign markets. They will generally have a higher risk tolerance and longer timeline until retirement. The focus is usually capital appreciation, and there are additional risks for international investors that others won’t face. International investing is more volatile than most strategies because you are dealing with additional risks such as foreign political and economic conditions and foreign currency fluctuation.
Intrinsic Value: There are two very different definitions for intrinsic value, one for technical analysts and day traders and one for value investors. A value investor thinks of intrinsic value as a valuation of an investment that takes intangibles such as brand strength and patents into account. Technical analysts think of intrinsic value as the difference between the strike price and the underlying futures price for an option that is in-the-money. For example, if the strike price of a call option is $80 and the stock is trading at $100, the option's intrinsic value is $20.
Inversely Correlated: Two investments that are inversely correlated will usually move in opposite directions. For example, when interest rates are rising, bonds are losing value and the local currency is usually strengthening. When interest rates are dropping, bonds are increasing in value and currency is generally weakening. Because they move in opposite directions, the two are inversely correlated.
Investing Clubs: A group of investors that pool their money together and meet regularly to discuss investing and manage their combined portfolio. Most online investing brokerages offer special investment club accounts.
Investing Discussion Boards: Many major investment research, analysis and news sites have discussion boards for members to post comments or discuss various investing and personal finance topics. They may be called forums or discussion boards but both are essentially the same.
Investing Education Classes: Typical investment workshops, seminars and courses cost anywhere from $1,000 to $5,000 and we’ve yet to see any material that you couldn’t have gotten online for free or through a local bookstore for $20. While we don’t think you’ll find a better resource than Money-and-Investing.com, there are many other similar sites that offer high quality free information on related topics. Why pay thousands when there’s so much great free (internet) and inexpensive (bookstore) investing information available?
Investing Forums: Many major investment research, analysis and news sites have forums for members to post comments or discuss various investing and personal finance topics. They may be called forums or discussion boards but both are essentially the same.
Investing in a Vacuum: This is Investing Principle #6 in our 10 Principles of Investing. A mistake that you will inevitably make (we all do) is investing in a vacuum. What we mean is that, at some point, many investors quit learning, stop adjusting their investment strategy, and lose touch with the current market and economic conditions. This is a painful lesson to learn and unfortunately most people have to learn from it (or fail to learn from it) over and over again.
Investing Information Expenses: Investing information expense refers to the total amount you spend on research, analysis, subscriptions, and other investing information resources. If you want more info on managing these expenses, please read our can I afford outstanding investing advice? article.
Investing Newsletter: Paid investing advisory services that provide strategy analysis and explanations, clear and easy to follow buy/sell instructions, and model portfolios. This is an inexpensive source of high quality investing information for self-directed investors. For example, the Prudent Speculator's recommendations are tracked by the Hulbert Financial Digest (an independent investing advisor rating agency) and they've beaten the market returns for 25 years and counting. The editor, John Buckingham, and other newsletter advisors like him, have proven track records and are some of the best investors in the world. To learn more about Investing Newsletters, read our can I afford outstanding investing advice? article.
Investing Research Tools: Generic description of the many research and analysis tools available at research and investing sites and online brokerages. Common examples are stock and fund screeners and portfolio analysis tools. If you want to learn more about this subject, read our Morningstar.com: the Power of institutional investors at your fingertips guide.
Investing Research & Analysis Site: Refers to sites that specialize in investing research and analysis such as Morningstar.com. Note that many online investing brokerages also specialize in investing research and analysis so check what is available to you for free before you sign up for any paid subscriptions. If you want to learn more about this subject, read our Morningstar.com: the Power of institutional investors at your fingertips guide or read our Fidelity Online Brokerage Review, both have several cutting edge tools found nowhere else.
Investing Strategy: This is the research and analysis criteria you follow to choose investments. Review our introduction to investing strategies article for the major goals, investment selection methods, strengths, weaknesses, risks, long-term outlook, and investor profile for the 8 most popular investing strategies.
Investing Sweet Spot: When we talk about the investing sweet spot at Money-and-Investing.com we are referring to the practice of properly allocating across different asset types and diversifying over a broad range of investments. The purpose is to find the asset allocation and diversification mix that is the best fit with an investor�s goals, investing strategy and risk tolerance. Finding the investing sweet spot is the process of optimizing Risk Vs Return. Done properly, this will lower risk AND improve returns at the same time. This is one of our 10 Basic Investing Principles.
Investment Advisory Service: Paid investing services that provide strategy analysis and explanations, clear and easy to follow buy/sell instructions, and model portfolios. This is an inexpensive source of high quality investing information for self-directed investors. For example, the Prudent Speculator's recommendations are tracked by the Hulbert Financial Digest (an independent investing advisor rating agency) and they've beaten the market returns for 25 years and counting. The editor, John Buckingham, and other newsletter advisors like him, have proven track records and are some of the best investors in the world. To learn more about Investing Newsletters, read our can I afford outstanding investing advice? article.
Investment Company Act: See 1940 Investment Company Act
Investment Goals: Your investing objectives. Examples are capital appreciation, income, or capital preservation. Review our introduction to investing strategies article for the major goals, investment selection methods, strengths, weaknesses, risks, long-term outlook, and investor profile for the 8 most popular investing strategies.
Investment Grade Bonds: Bonds with high credit ratings that pay a relatively low rate of interest due to lower risk than their higher yielding junk bond counterparts. investment grade bonds carry a rating of BBB or better while Junk Bonds carry a rating of BB or worse.
Investment Research & Analysis Site: A site that provides portfolio research and analysis tools such as stock and fund screeners, portfolio analysis and trading simulators. For detailed information on this topic, read our Morningstar.com: The Power of Institutional Investors at your Fingertips article.
Investment Retirement Account: Commonly called an IRA. See IRA.
Investment Selection Criteria: This is the research and analysis criteria you devise and follow to choose investments.Review our introduction to investing strategies article for the major goals, investment selection methods, strengths, weaknesses, risks, long-term outlook, and investor profile for the 8 most popular investing strategies.
Investor Profile: An investor profile or style defines an individual's preferences in investment decisions. Examples of various investor profiles are short-term traders (active managers), long-term traders (passive strategies and buy-and-holders), Risk averse traders and risk tolerant traders.
Investor Psychology: the herd mentality that is so obvious when you watch short-term stock market behavior. It seems that most investors are willing to follow each other up mountains and off cliffs simply because that’s what everyone else is doing. Investor Psychology is the subject of Investing Principle #7, feel free to review our 10 Basic Principles of Investing article for more information on this topic.
IPO: See Initial Public Offering
IPO Prospectus: These documents are required by the SEC whenever a company is about to be offered to the public in an IPO. Like the mutual fund prospectus, the purpose of the IPO prospectus is to disclose all relevant information about the company and the stock offering so that investors can make an informed decision.
IPO Shares: Shares offered to investors in the primary market during the first public sale of a company's stock. Securities offered in an IPO are often, but not always, those of young, small companies seeking capital for expansion. After the initial sale, all future trading is considered to be in the secondary market, shares are no longer IPO shares, they are instead referred to as common shares.
IRA: A tax-deferred savings account. You can deduct IRA contributions from your taxable income as long as you meet the requirements. Once funds are in an IRA they will never be taxed until you withdraw them at retirement. At age 59 ½ you can begin withdrawing funds from your IRA without penalty. To learn more about tax-deferred accounts, read our 401k, IRA & Roth IRA Guide.
IRA Contribution Limits: Because an IRA and other similar tax deferred accounts such as Roth IRAs and 401Ks offer huge tax-breaks and tax-advantages, legislators limit the amount that can be contributed per year. Requirements are based on income and age and they change every year. For a complete list of IRA limits, requirements, and other summary information, check out our 2008 401k, IRA & Roth IRA Limits chart.
IRS: See Internal Revenue Service
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Jobs, Steve: Jobs is considered a leading figure in both the computer and entertainment industries. Jobs' history in business has contributed greatly to the myths of the quirky, individualistic Silicon Valley entrepreneur, emphasizing the importance of design while understanding the crucial role aesthetics play in public appeal. His work driving forward the development of products that are both functional and elegant has earned him a devoted following. Steve Jobs was listed as Fortune Magazine's Most Powerful Businessman of 2007. (Source = oppapers.com)
Junk Bonds: Below investment-grade bonds that provide higher yields with higher risk than their investment grade counterparts. These debt securities are typically issued by companies with higher than normal credit risk and carry a credit rating of BB or worse.
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Keep it Simple: One of our 10 Basic Principles of Investing. Don’t needlessly add complexity to your strategy because you feel being a more sophisticated investor will make you more successful. More sophisticated strategies definitely don’t guarantee better returns, especially if they take you longer to master. Choose a strategy that is in line with your personality, risk tolerance, and investing goals and then work hard to master it.
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Large Cap: Companies that have a market capitalization (Shares Outstanding X Share Price) of greater than $5 Billion are considered to be Large Cap. To learn more about different types of stocks or the stock market, check out our Beginner�s Guide to Stocks and Beginner�s Guide to the Stock Market articles.
Large Cap Growth: This strategy seeks long-term growth through capital appreciation and current income with an emphasis on capital appreciation. Stocks that meet this criteria have a strong earnings growth (high P/E Ratio), a market capitalization of at least $5 billion and usually pay dividends.
Large Cap Value: This strategy seeks long-term growth through a combination of capital appreciation and current income with an emphasis on current income. Stocks that meet this criteria have a strong valuation Vs the current stock price (see our Introduction to Value Investing for more information on this topic), a market capitalization of at least $5 billion and usually pay dividends.
Learning Curve: In layman’s terms, this is an expression suggesting that performance should improve with knowledge and experience. The mathematical explanation is that a learning curve reflects the rate of improvement in performance through repetition of a task or skill set.
Lewis, Vivian: Vivian has been working in the international investing arena since 1966. She graduated magnum cum laude from Harvard and speaks 6 languages. We don’t usually care about pedigree since 4 out of 5 Harvard MBA Fund Managers fail to beat the market each year, but Vivian has always taken a common sense approach to investing. She travels the world to meet the management of potential investments and she follows that up with exhaustive fundamental analysis before buying. Not only have the returns of her international Buy and Hold portfolio beaten the major indices for over a decade, Vivian has the best risk adjusted returns of any Value Investor in the business. To learn more about Value Investing, read our Value Investing Strategy Review. To learn more about Vivian's newsletter and others like it, read our Can you afford outstanding investing advice? article.
Liabilities: Debts and obligations created during the regular course of business and owed to a third party. On our site we are generally referring to liabilities on the balance sheet of a company’s financial statements. Liabilities are an important part of a company’s operations because they may pay for expansions or finance very large purchases.
Load Fees (Mutual Fund Loads): This is a sales charge or commission charged to the investor by the mutual fund. They can be a one time expense at purchase (front-end load), when the investment is sold (back-end load) or an annual charge such as a 12b-1 fee. All loads are optional, and quality mutual funds don’t charge them. To learn more on this topic, read our Mutual Fund Guide.
Loaded Fund: A mutual fund that charges front-end, back-end, 12b-1 or other optional fees. All of these loads are basically sales charge and commission expenses. All loads are optional, and quality mutual funds don’t charge them. To learn more on this topic, read our Mutual Fund Guide.
London Stock Exchange: This is the oldest stock exchange in the world and is still the largest in Europe and third largest in the world. To learn more about the London Stock Exchange or the history of the stock market, read our Introduction to the Stock Market our Stock Basics guides.
Long-Term Capital Gain: Capital gain distributions are considered long-term whenever you hold a security for at least one year before you sell. When you hold a security for a year or more, you will be taxed at the lower long-term capital gains rate of 15% rather than your regular tax rate.
Long-Term Capital Gains Tax: When you hold a security for a year or more, you will be taxed at the lower long-term capital gains rate of 15% rather than your regular tax rate. We encourage buy-and-hold strategies at Money-and-Investing.com, taxes can eat up your gains very quickly if you are a short-term trader, you’ll be taxed at your regular tax rate. For more information on our favorite long-term strategy, read our Index Investing: The Safe, Easy and Sure way to Wealth guide.
Long-Term Investor: Investors that don’t trade frequently, hold their investments for at least a year, and are thinking in terms of long-term portfolio growth, capital preservation and wealth building. For examples of long term strategies, read our Introduction to Index Investing, Introduction to Value Investing, or Introduction to Mutual Fund Investing.
Long-Term Strategy: See Long-Term Investor
Low Maintenance Strategy: See Passive Strategy
Lynch, Peter: By the 1980s, fund managers were emerging from obscurity into the financial spotlight and becoming household names as investors poured billions into the largest and most popular funds. Peter Lynch was the most notable of this new breed of investor as a result of taking the $18 million dollar Magellan Fund in 1977 to more than $14 billion in assets by the time he retired only thirteen years later in 1990. Peter advises beginners to “invest in what you know”, and his message still resonates with working people who don’t have the time to learn complicated technical stock measures or read financial reports as thick as a phone book. For more information on Mutual Funds or Peter Lynch, read our Introduction to Mutual Fund Investing article.
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Magellan Fund: The Magellan Fund (FMAGX) is one of the world’s largest and most well known funds due to it’s meteoric growth from $18 Million to more than $14 Billion over a 13 year period (1977 to 1990) during Peter Lynch’s management. Performance has flattened out since Lynch’s days but the fund is still true to a growth strategy with some foreign exposure (25% foreign Large-Cap stocks). As of January of this year, the fund is open to new investors for the first time in over a decade.
Maintenance Fees: See Management and Administrative Fees
Major Online Brokerages: Several of the online brokerages have as many clients, as many dollars under their care, and as much investing research and analysis assistance as traditional brokerages. We consider this small group the major online brokerages. They are Ameritade, E*Trade, Fidelity and Schwab.com. Click on any of the links for a detailed review.
Management and Administrative Fees: The administrative and salary expenses charged for managing a mutual fund's portfolio. These expenses are expressed as a ratio called an expense ratio. The management and administrative fees aren’t like loads or other optional expenses, these are an unavoidable mutual fund expenses. However, you should still try to find funds with low expense ratios since this expense comes right out of your returns. To learn more about mutual funds and all related expenses, read our Introduction to Mutual Funds article or our Mutual Fund Investing Strategy guide.
Management Fees: The salary expenses charged for managing a mutual fund's portfolio. These expenses are expressed as part of the expense ratio. The management fees aren’t like loads or other optional expenses, these are an unavoidable mutual fund expenses. However, you should still try to find funds with low expense ratios since this expense comes right out of your returns. To learn more about mutual funds and all related expenses, read our Introduction to Mutual Funds article or our Mutual Fund Investing Strategy guide.
Mark-Down Phase: The fourth and final phase in the market cycle is the most painful for those who still hold positions. Many hang on because their investments have fallen below what they paid for them, behaving like the pirate who falls overboard clutching a bar of gold, refusing to let go in the vain hope of being rescued. It is only when the market has plunged 50 per cent or more that the laggards, many of whom bought during the distribution or early mark-down phase, give up or capitulate. Unfortunately, this is a buy signal for early innovators and a sign that a bottom is imminent. But mostly, it is new investors who will buy the depreciated investment during the next accumulation phase and enjoy the next mark-up. (Source = Investopedia)
Mark-Up Phase: At this stage, the market has been stable for a while and is beginning to move higher. The early majority are getting on the bandwagon. This group includes technicians who, seeing that the market is putting in higher lows and higher highs, recognize that market direction and sentiment have changed. As this phase matures, more investors jump on the bandwagon as fear of being in the market is supplanted by greed and the fear of being left out. As this phase begins to come to an end, the late majority jump in and market volumes begin to increase substantially. Valuations climb well beyond historic norms, and logic and reason take a back seat to greed. While the late majority are getting in, the smart money and insiders are unloading. But as prices begin to level off, or as the rise slows down, those laggards who have been sitting on the sidelines see this as a buying opportunity and jump in en masse. Prices make one last parabolic move, known in technical analysis as a selling climax, when the largest gains in the shortest periods often occur. But the cycle is nearing the top of the bubble. Sentiment moves from neutral to bullish to downright euphoric during this phase. (source = Investopedia)
Market Beater: When we use this term at Money-and-Investing.com we are usually referring to analysts, fund managers or investment advisors that have beaten the market for long periods of time. Generally, a proven market beater must have beaten the major indices for at least a 5 year period, preferably longer. This information must also be verifiable through an independent rating agency such as the Hulbert Financial Digest or through an investment research site such as Morningstar.com. To learn about a few of today�s most popular proven market beaters, read our Can you afford outstanding investing advice? article.
Market Capitalization: This is the market value of a company's stock. Market capitalization is calculated by multiplying the price of shares by the number of shares outstanding. This is a popular way to express a company's value.
Market Correction: This is a small reversal in prices (stock or market prices) following a significant upward trending period. This is a technical analysis concept.
Market Cycle: There are four phases in every market cycle. All markets have similar characteristics and go through the same phases. The four phases of the market cycle are Accumulation Phase, Mark-Up Phase, Distribution Phase, and Mark-Down Phase.
Market Share: A firm's market share is the proportion of the market that a company serves and is usually expressed as a percentage. For example, if a company rolls out a new type of energy saving light bulb and 20% of all households use their bulbs, they have a 20% market share.
Market Timing: Determining when to buy or sell securities through fundamental or technical indicators. Market timers try to trade based on market trends, price action, interest rate activity or economic conditions. To learn more about this strategy, read our Market Timing Strategy Review.
Market Timing Model: Market Timers use fundamental analysis, technical analysis and historical data to build predictive mathematical models. These market timing models are designed to predict what the market is going to do and time when it will react to changing conditions. They don’t try to time the performance of an individual investment, they try to predict the broad market indexes such as the S&P 500 and then base individual investment decisions on the overall market direction. A Market Timer’s goal is to be in the right investments at the right time. To learn more about market timing, read our Market Timing Strategy Review.
Market Trend: The general direction in which prices have been moving. Market Timers and Day Traders use market trends to predict price action.
Maximum 401k Contributions: Because 401Ks and other similar tax deferred accounts such as Roth IRAs and IRAs offer huge tax-breaks and tax-advantages, legislators limit the amounts that can be contributed per year. Requirements are based on income and age and they change every year. For a complete list of 401k limits, requirements, and other summary information, check out our 2008 401k, IRA & Roth IRA Limits chart.
Mid Cap: Companies that have a market capitalization (Shares Outstanding X Share Price) between $1 Billion and $5 Billion are considered to be Mid Cap. To learn more about different types of stocks or the stock market, check out our Beginner�s Guide to Stocks and Beginner�s Guide to the Stock Market articles.
Minimum Initial Investment: When we use this term at Money-and-Investing.com, we are generally referring to the minimum amount you are required to invest to open a position at a mutual fund. To learn all about mutual funds and mutual fund investing, read our Introduction to Mutual Funds (including our popular Mutual Fund Checklist) article and Mutual Fund Investing Strategy review.
Model Portfolio: This refers to creating a portfolio based on a trading strategy or based on a list of investment recommendations. This is a popular method of testing new strategies or tracking multiple portfolios. This is also the most common way for newsletters and other advisory services to communicate to clients what investments you should hold in your portfolio at any given time. To learn more about various advisory services, including price, specialty and the performance of today�s leaders, read our Can you afford outstanding investing advice? guide.
Momentum Investor: Momentum Investors try to keep all of their money invested in the current top performers all of the time. Great investments to a Momentum Investor are those that have outperformed the market and their peers during the last 12 months, with more emphasis on the most recent months. They don�t worry about asset allocation or diversification because their strategy doesn�t allow them to, the goal is to always be in the most popular and fastest growing investments. Rather than using diversification and allocation to balance risk vs return, they try to manage risk by moving quickly out of industries and assets that start showing signs of deteriorating performance. Most of the research will be statistical analysis and technical analysis since these are the two types of analysis best suited to measuring short-term trends and short-term performance. However, Momentum Investing is also one of the most flexible and dynamic investing strategies for those that master it. Momentum Investors will buy stocks, REITs, precious metals, currency, bonds, mutual funds, and anything else that is currently hot. To learn more on this topic, read our Complete Momentum Investing Strategy Review.
Money Market Fund: A low-risk low-return mutual fund seeking to generate income through short-term securities. The fund invests in investing vehicles such as certificates of deposit and treasury bills and the NAV is usually $1 per share. Money Market Funds are most commonly used as a holding place for cash when it isn�t invested. For example, if you have $10,000 for a down payment on a new home, a money market will let you earn interest on that money without risking the principal while you search for the house you want to buy.
Moody's: When we talk about Moody�s at Money-and-Investing.com we are generally referring to Moody�s Investor services, which specializes on ranking the credit-worthiness of various debt instruments such as bonds. Their ratings fall into two major categories, Investment Grade and Junk, and investors use these ratings to estimate risk and income (yield) potential.
Moving Averages: This is the average measure of a stock or other security�s price over a period of time. Some popular moving averages are 30 day, 90 day, and 200 day. Moving averages are used frequently by momentum investors and technical analysts/day traders because they can help you anticipate price movements and momentum shifts. To learn more on this topic, read our Momentum Investing Strategy Review or our Day Trading/Technical Analysis Strategy Review.
MSCI EAFE: Index of foreign stocks. Focuses only on developed countries in Europe, Asia and the far east. Good benchmark for anyone that has a portion of their portfolio allocated to developed foreign countries.
MSCI Emerging Markets: Index of foreign stocks. Focuses on 28 developing countries around the world. Good benchmark for anyone that has a portion of their portfolio allocated to developing foreign countries.
Municipal Bond (commonly called Muni's): Tax exempt bonds issued by local governments (towns, cities, etc) to pay for special projects such as new schools or highways. The interest income investors earn on these bonds is completely tax free as long as they buy municipal bonds within their own state. Municipal Bonds may be subject to a state tax if investors buy municipal bonds outside of their own state.
Mutual Fund: A Mutual Fund is a pool of money from several investors that is managed by a professional money manager or �Fund Manager� for a fee. To learn all about Mutual Funds or mutual fund investing strategies, read our Introduction to Mutual Funds (including our popular Mutual Fund Checklist) article and Mutual Fund Investing Strategy review.
Mutual Fund Fees: Mutual fund fees and expenses are the charges a fund passes on to investors. Every fee except for management and administrative expense is optional! That�s right, the funds decide what fees they�re going to try to get away with charging, so can you guess which ones you should pay? None. There are several types of fees that you need to be aware of and they are Loads, Redemption Fees, Transaction Fees, and 12b-1 Fees. The majority of funds, especially good ones that you�d actually want to own, have dropped most if not all of their fees. It doesn�t make sense to charge them when all of your competitors are offering no-fee and no-load funds. Read our Mutual Fund Checklist for more information on fees and how to avoid them.
Mutual Fund Investing: The Mutual Fund Investing Strategy is to get very good at finding great funds run by talented fund managers whose investing goals are in line with their own. Many people will tell you that Mutual Fund Investing isn�t actually a strategy, but we disagree. When you invest in mutual funds, you and many other investors are pooling money together and trusting a professional fund manager to achieve your investment goals. That makes this a unique approach. There is no other self-directed strategy that is based on the investing talent of someone other than the investor. While Mutual Fund Investors don�t have to learn how to implement a traditional investing strategy, there is still a lot involved in identifying top funds and fund managers that are strong enough to beat the market. Mutual Fund Investors must learn enough fundamental analysis and technical analysis to be able to minimize fees and expenses, minimize tax liability and compare a fund�s performance to its peer group and to a relevant index. Creating your selection criteria sounds like it could be complex but Mutual Fund Investors have an advantage. They have easy access to vast amounts of information because every Mutual Fund is required to provide a prospectus. To learn more about Mutual Fund Investing, read our Mutual Fund Investing Strategy review.
Mutual Fund Investor: See Mutual Fund Investing
Mutual Fund Prospectus: All mutual funds are required to make a prospectus available to potential and current investors. The document will divulge the fund�s history, performance, manager background, strategy, financial statements, and expenses. The goal is to provide an investor all the information needed to make an informed decision. Everything must be disclosed, it is illegal for a mutual fund to hide any relevant information that could impact an investor�s decision. To learn more about mutual fund investing, read our Mutual Fund Basics guide.
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NASDAQ Composite: An Index of all securities listed on the NASDAQ. Widely followed by growth and technology investors.
NASDAQ 100: 100 of the largest hardware and software, telecommunications, retail/wholesale trade and biotechnology stocks on the NASDAQ. Good benchmark for growth and technology stocks.
NAV: See Net Asset Value
Negative Alpha: Alpha compares an investment’s expected performance, based on its beta, to its actual performance. If an investment has a negative alpha that means it underperformed expectations. Momentum Investors interpret this to mean that either the investment is poorly managed or that momentum is shifting somewhere else. To learn more about other technical and statistical measure, read our Momentum Investing Strategy Guide.
Net Asset Value: Also referred to as NAV
The formula used to calculate the share price for a Mutual Fund. Mutual fund managers wanted to make sure that their price reflected the performance of their investments, not the flow of money from investors. The formula that they came up with is called the NAV and it is (total market value–daily expenses) / total of shares outstanding. To make this formula work, mutual funds must issue and cancel shares every time an investor buys or sells.
NAV Calculation example:
Here is an easy example of how the mutual fund share price or NAV is calculated.
Suppose that the Wisdom Fund has a total market value of $998,000, daily expenses of $1,000, and a 99,700 total shares outstanding. The NAV calculation is ($998,000 - $1,000) / 99,700 = $10.00 per share. Now suppose you like the Wisdom Fund and want to buy $3,000 worth. They add your investment to their total market value minus daily expenses which means $998,000 - $1,000 + $3,000 = $1,000,000 NEW total market value. In order to keep the price from changing, they must also issue a number of shares that will keep the price at $10.00, and to figure that out we divide the new market value by the original price or $1,000,000 by $10.00 = 100,000 shares. They had 99,700 shares outstanding and they need 100,000 so they have to issue 300 shares to you when you purchase your $3,000 worth of Wisdom Fund.
New York Stock Exchange (NYSE): This is the largest securities exchange in the world and it contains the largest companies in the United States. Investors buy and sell on this exchange but the NYSE does not own or set the prices of any of their securities. To learn more on this topic, read our Introduction to the Stock Market article.
Nikkei 225: 225 Asian stocks on the Tokyo Stock Exchange. This index is designed to reflect the overall market, there is no specific weighting of industries. Most watched index of Asian stocks and a good measure of Asia’s economic health. This is a good index for Asian stocks.
No-Load Fund: Mutual funds that don�t charge front-end, back-end or any other kind of load to customers are considered No-Load Funds. To be considered a No-Load a fund must also keep 12b-1 fees at or lower than 0.25%. Note that even though a fund is no-load, you may still pay a transaction fee charged by your broker when you purchase so be sure to check all loads and transaction fees before you buy. To learn more about mutual funds, mutual fund investing and minimizing fund expenses, read our Introduction to Mutual Funds (including our popular Mutual Fund Checklist) article and Mutual Fund Investing Strategy review.
No-Load No-Fee Fund: Mutual funds that don�t charge loads and also trade for free at your brokerage (no transaction fees) are called No-Load No-Fee Funds. We talk about these funds a lot at Money-and-Investing.com because they truly do trade for free, you pay nothing up front or when you sell. You will still need to check management and administrative fees but this is a great deal, be sure to ask your broker for a list of all of their no-load no-fee funds. To learn which brokerages have the most no-load no-fee funds, check out our 2008 Brokerage Rankings. To learn more about mutual funds, mutual fund investing and minimizing fund expenses, read our Introduction to Mutual Funds (including our popular Mutual Fund Checklist) article and Mutual Fund Investing Strategy review.
NYSE: See New York Stock Exchange
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Online Brokerage: Brokerages that allow self-directed investors to manage their own portfolio via an online website. Even internet and investing novices can sign up, log on and start trading in less than an hour. This is very appealing to investors who would like to manage their own portfolio rather than going through a broker or planner every time they want to make a trade. Investing research sites have also made huge strides over the last ten years. Beginning investors that are internet savvy can quickly learn to use investing research and analysis tools that are just as powerful as any used by investing professionals. For more information on this topic or to compare online investing vs local brokers and financial planners, read our Online Investing Vs Traditional Brokers & Financial Planners article.
Online Trading: Trading via an online brokerage house. Online brokerages such as Ameritrade and Schwab allow online investors to make trades and manage their portfolio via a web site. For more information on this topic or to learn more about online investing brokerages, check out our 2008 Online Brokerage Rankings or our Online Investing Vs Traditional Brokers & Financial Planners article.
Online Investor: Investors that have chosen self-directed online portfolios. Online brokerages such as Ameritrade and Schwab allow online investors to make trades and manage their portfolio via a web site. For more information on this topic or to learn more about online investing brokerages, check out our 2008 Online Brokerage Rankings or our Online Investing Vs Traditional Brokers & Financial Planners article.
Optimization: When we talk about optimization at Money-and-Investing.com we are referring to the practice of properly allocating across different asset types and diversifying over a broad range of investments. The purpose is to find the asset allocation and diversification mix that is the best fit with an investor�s goals, investing strategy and risk tolerance. Optimization is the process of finding the investing sweet spot where you optimize Risk Vs Return. Done properly, this will lower risk AND improve returns at the same time. This is one of our 10 Basic Investing Principles .
Optimizing Risk Vs Returns: See Optimization or read our 10 Basic Investing Principles article.
Options: Also referred to as derivatives since their value is based on an underlying security. A stock option is a contract (usually representing 100 shares) which gives the buyer the right, but not the obligation, to buy or sell shares (exercise the contract) of the underlying security or index at a specific price during a set period of time or on a specific date. If an options contract is �out of the money� or isn�t exercised at expiration, it will expire worthless. To learn more about options, daytrading and technical analysis, read our Day Trading/Technical Analysis Strategy Review.
Outperform: This means that a stock or other security is performing better than whatever index (such as the S&P; 500), industry or group of competitors it is being compared to. This is a common analyst designation. If an analyst designates an investment as �Outperform�, that means they expect it to beat the market and are often recommending it to their clients.
Overvalued: An overvalued stock is one that investors believe has an inflated share price and that will eventually experience a drop to reflect the true valuation. Value Investors spend a great deal of time trying to figure out the intrinsic value of a stock and whether or not they reflect an accurate valuation. If you�d like to learn more about valuation and the Value Investing Strategy, read our Value Investing Strategy Review.
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P/E Ratio: See Price-to-Earnings Ratio
Passive Management: Long-term buy and hold approach in which portfolio managers buy investments that they don�t plan on selling for long periods of time. This is an extremely low cost approach to investing because you have fewer transaction fees and less tax liability since you are only taxed on realized gains. A good example of a passive strategy is Index Investing (ETFs & Index Funds). To learn more about this topic, read our Complete guide to Index Investing (ETFs & Index Funds) or our Index Investing Strategy Review.
Passive Strategy: Long-term buy and hold strategy in which investors buy investments that they don�t plan on selling for long periods of time. This is an extremely low cost approach to investing because you have fewer transaction fees and less tax liability since you are only taxed on realized gains. A good example of a passive strategy is Index Investing (ETFs & Index Funds). To learn more about this topic, read our Complete guide to Index Investing (ETFs & Index Funds) or our Index Investing Strategy Review.
Pension Plan: A retirement plan established by a corporation to provide income benefits to employees after they retire. There is generally a number of years of service requirement in order to qualify for a full pension. Unfortunately, only the government and a few remaining corporations still offer pensions, most have switched to 401ks. To learn all about 401ks and other tax deferred accounts, read our read our 401k, IRA and Roth IRA Guide.
Performance Driven Strategies: A strategy in which the investor or professional money manager is attempting to outperform an index, such as the S&P; 500. They are actively choosing stocks, bonds, funds and other investments to try to generate returns greater than the market average. Examples of performance driven strategies are Growth Investing and Value Investing. The opposite approach is a passive strategy, and an example would be Index Investing (ETFs & Index Funds).
Personal Finance: The application of practical financial and economic principles to an individual�s or family�s decisions. Examples of personal finance are budgeting, tax planning, investing and insurance planning.
Portfolio: A collection of assets, such as stocks, bonds and mutual funds, held by an institution or by a private individual.
Portfolio Analysis Tools: Tools used by investing professionals and technically savvy self-directed investors to monitor and analyze a portfolio. Over the last decade, the functions these tools can perform has expanded greatly. High quality investing sites are able to offer asset allocation and diversification analysis, performance tracking, and investment advice. To learn about today�s top portfolio analysis tools, read our Morningstar.com: The power of institutional investors at your fingertips article. To see what tools top online brokerages offer, check out our 2008 Online Brokerage Rankings.
Portfolio Mix: An important piece of diversification and a component of one of the 10 Basic Investing Principles . Many Investors attempt to create a broad portfolio mix to minimize risk and maximize returns. They invest in a wide variety of industries, categories and geographies to ensure that when one specific area goes south, it doesn�t take the entire portfolio down with it. A broad mix would mean choosing several different categories that don�t strongly correlate with each other so that one event can�t ruin your entire portfolio.
Portfolio Overlap: This concept frequently applies to Mutual Fund Investors. Portfolio overlap occurs when several funds in an investor�s portfolio own the same stock, bond or other asset. For example, if your portfolio consists of two funds and both own 20% Microsoft, your portfolio consists of 20% Microsoft due to the overlap of the two funds. This can often create situations in which a portfolio is too heavily weighted in a few stocks.
Portfolio Rebalancing: See Rebalancing
Potential Return: When we talk about potential return at Money-and-Investing.com we are usually talking about capital appreciation or, in layman�s terms, an increase in the price of a stock. Every strategy has a different way to estimate an investment�s potential return, there isn�t one specific method, there are many. To learn how potential returns are estimated using different strategies, read any of our popular Investing Strategy Reviews. You can learn all about Growth Investing, Value Investing, Mutual Fund Investing, Momentum Investing, Income Investing and many other popular strategies.
Precious Metals: When we discuss precious metals at Money-and-Investing.com we are usually referring to the most commonly traded precious metal commodities; gold, silver and platinum. Precious metals can act as investments. You can buy them directly, through funds or through futures and options contracts. Most investors that buy precious metals are either using them as a hedge against inflation or as an alternative to stock investments. Often, precious metals are inversely correlated with market, economic and currency trends, making them a good hedge against recessions and market corrections.
Price Appreciation: Also referred to as capital appreciation and it simply means the share price of a security increased. To learn about this and other stock basics, read our Introduction to Stocks guide.
Price-to-Book Ratio: This ratio compare�s a stock�s market value to its book value. The formula is current share price / prior quarter�s book value per share. This is a critical component of Value Investing. Value Investors make investing decisions based on whether or not they think a company is undervalued and the P/B Ratio is one of the strategy�s fundamental valuation measures. To learn more about this ratio and about the Value Investing Strategy, read our Value Investing Strategy Review.
Price-to-Earnings Ratio (P/E Ratio): The share price divided by the earnings per share. The P/E Ratio is a good measure of how expensive a stock is in terms of it�s current or projected earnings. This is a critical component of Growth Investing. Growth Investors make investing decisions based on whether or not they think the current P/E Ratio is in line with future earnings estimates. To learn more about this ratio and about Growth Investing, read our Growth Investing Strategy Review.
Pricing Power: An economic term that refers to the impact that a change in price has on the demand for a product or service. An example would be if Nintendo decides to increase the price of their Wii gaming console by $50 per unit and stores continue to sell out of the product. Consumers are willing to pay the higher price (demand is still strong) even though no additional benefit was added to the product so the Wii has strong pricing power.
Primary Market: The only time most investors will ever participate in the primary market is when they buy IPO shares of a new company. During the initial stock offering of a company that is being introduced to the exchange, the transaction is considered to happen in the primary market. From that point forward, all trading of the company�s shares after the initial sale are considered to occur in the secondary market.
Principal: There are two common definitions and both are relevant to investing discussions. The first definition of principal is the amount borrowed or still owed on a loan, excluding interest. The second definition of principal is a person who authorizes an agent or broker to make decisions on his behalf.
Professional Fund Manager: The person responsible for investing a mutual fund's assets, implementing its investment strategy, and managing the day-to-day portfolio trading. This individual or team of individuals manages a mutual fund's portfolio of stocks, bonds and other securities.
Profit Margin: The net profit of an institution or of an investment expressed as a percentage. The calculation is the net income or net profit divided by the total revenue. Investors use this to determine how efficiently a company manages their business. Higher profit margins vs competitors in the same industry suggests that a company has competitive advantages and that their business is well managed. To learn more about various valuation and performance calculations and which strategy each is associated with, read any of our popular Investing Strategy Reviews.
Prospectus: There are two common definitions of prospectus, the first relates to Mutual Funds and the second relates to IPOs.
Mutual Fund Prospectus: All mutual funds are required to make a prospectus available to potential and current investors. The document will divulge the fund�s history, performance, manager background, strategy, financial statements, and expenses. The goal is to provide an investor all the information needed to make an informed decision. Everything must be disclosed, it is illegal for a mutual fund to hide any relevant information that could impact an investor�s decision. To learn more about mutual fund investing, read our Mutual Fund Basics guide.
IPO Prospectus: These documents are required by the SEC whenever a company is about to be offered to the public in an IPO. Like the mutual fund prospectus, the purpose of the IPO prospectus is to disclose all relevant information about the company and the stock offering so that the investor can make a completely informed decision.
Proven Market Beater: When we use this term at Money-and-Investing.com we are usually referring to analysts, fund managers or investment advisors that have beaten the market for long periods of time. Generally, a proven market beater must have beaten the major indices for at least a 5 year period, preferably longer. This information must also be verifiable through an independent rating agency such as the Hulbert Financial Digest or through an investment research site such as Morningstar.com. To learn about a few of today�s most popular proven market beaters, read our Can you afford outstanding investing advice? article.
Purchase Requirements: Many mutual funds have purchase requirements. The most common are minimum investment amounts, funds that are only open for additional investment from current investors and funds that are only open to investors that are clients of a particular brokerage or fund family. To learn more on this topic, read our Introduction to Mutual Funds (includes our popular mutual fund checklist) guide.
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Quote: The traditional definition of a quote is the most recent price, the current bid price, the current ask price and usually the daily volume. However, the definition needs to be updated. Technology has drastically changed what it means to receive a �quote�. Sites like Schwab.com, Ameritrade, and Morningstar offer investors an enormous amount of data when you pull a quote. The quality, quantity and depth of information is astonishing. Only a decade ago, you couldn't have compiled this much research even if you worked the entire day, and it all pops up instantly.
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Rally:A short period of time in which the majority of stocks on the market are currently increasing in value because stock prices are rising. Rallies can happen in bull or bear markets, but they generally follow periods of choppy or declining prices.
Rate Cut: This refers to cutting the discount rate charged by the Federal Reserve bank to member banks. The Fed uses cuts and increases in the discount rate to try to manage inflation and economic growth. By decreasing the rate, they encourage spending and growth and by increasing the rate they can temper inflationary pressure.
Real Estate Investment Trust (REIT): REITs own properties and mortgages. The structure of a REIT allows investors to trade them on major exchanges like a stock and provides investors a liquid method of investing in real estate. REITs offer high yields but, unlike stocks, their dividends are taxed at your normal tax rate since they are not qualified dividends. REITs must distribute 90% of their profits to investors.
Realize a Profit: Whenever you sell an investment for more than you bought it for, you have realized a profit. The significance is that, as soon as you realize a profit, you have created a taxable transaction unless you�re trading in a tax-deferred account such as a 401k, IRA and Roth IRA account. When you realize a profit you owe short-term capital gains tax on the profit if you held it for less than a year and long-term capital gains tax on the profit if you held it for longer than a year.
Realized Gain: Whenever you sell an investment for more than you bought it for, you have a realized gain. The significance is that, as soon as you realize a gain, you have created a taxable transaction unless you�re trading in a tax-deferred account such as a 401k, IRA and Roth IRA account. When you realize a gain you owe short-term capital gains tax on the profit if you held it for less than a year and long-term capital gains tax on the profit if you held it for longer than a year.
Rebalance: ETFs, Index Funds and other index tracking investment vehicles rebalance daily to precisely match whatever Index they are tracking. Daily rebalancing is necessary because, not only do the holdings in any index frequently change, there are also distribution and dividend events that can change the percentage distribution of a portfolio if it isn�t rebalanced to compensate. Investors also occasionally rebalance their portfolios to reflect their target asset allocation and diversification mix. To learn all about ETFs and Index Funds, read our Complete Index Investing Guide.
Recession: The technical definition of a recession is two consecutive quarters of negative economic growth as measured by a country�s gross domestic product (GDP). Often, recessions don�t follow the technical definition. Economists may look back at periods of time and decide that, while the technical definition wasn't met, factors such as a slow economy, higher unemployment, decreased consumer spending or decreased company revenues show that the country did experience a recessionary period.
Redemption Fees: A fee charged by mutual fund companies to discourage short-term trading of mutual funds. The typical redemption period is from 60 to 180 days but the period of time is at the fund�s discretion so they can be longer. To learn more about mutual fund expenses, read our Mutual Fund Investing Guide (including our popular Mutual Fund Checklist).
Redemption Period: The length of time an investor is required to hold a mutual fund before selling to avoid a fee. They typical redemption period is from 60 to 180 days but the period of time is at the fund�s discretion so they can be longer. To learn more about mutual fund expenses, read our Mutual Fund Investing Guide (including our popular Mutual Fund Checklist).
REITs: See Real Estate Investment Trust
Regular IRA & Roth IRA Distributions: Refers to retirement distributions from tax-deferred IRA & Roth IRA accounts. Distributions can begin at age 59 1/2 or when the owner becomes disabled. There is no mandatory withdrawal for Roth IRAs, but regular IRA holders must start withdrawing funds at age 70 1/2 unless they are still employed. IRA distributions are taxed since you are allowed to reduce your income in the year that you contribute. Roth IRA distributions are tax-free since you paid taxes when you contributed them. To learn more about tax-deferred accounts, read our 401k, IRA & Roth IRA Guide.
Relative Price Strength: A measure of the price behavior of a stock, fund or other security compared to a benchmark such as an index, an industry or a competitor. The calculation is simply the price of one security divided by the price of another. Any change over time in the ratio signals a price strengthening or weakening. For example, if stock X trades at $50 and stock Y trades at $100, the relative price is $50/$100 = 0.5. If, a year later, the ratio is $75/$100 = 0.75 then the relative price strength of stock X is strong in relation to stock Y. Read our Momentum Investing Strategy Review for more on this topic.
Relevant Benchmark: This is Investing Principle #5 in our 10 Basic Principles of Investing guide. One of the most common and costly mistakes that new investors make is not measuring their performance against an appropriate benchmark. Many don�t compare to ANY benchmark, much less an appropriate one. What is the danger? The biggest drawback is you will never really know how well or poorly you are investing. Regardless of your strategy or goals, you should always compare your month-over-month and annual performance to an appropriate benchmark. For example, if you�ve chosen to purchase large growth stocks and technology stocks a good index to compare too would be the NASDAQ 100. If you outperform the index for several years in a row, then you have proven that you are good at implementing your strategy of buying high-potential growth and technology stocks. However, if you are underperforming the index, you either need to study your strategy more or just buy an Index Fund or ETF that tracks the NASDAQ 100.
Retirement Distributions: See Regular IRA & Roth IRA Distributions
Return on Equity: A measure of a corporation's profitability that helps investors determine how much income a company is generating with the money shareholders have invested. ROE can be used to compare a company’s profitability over time, to a benchmark or to competitors. The calculation is Net Income / Shareholder’s Equity.
Revenue: The amount of sales, interest and other income a company generates during a specific period of time. This is the top line on the income statement of the financials. This is an important measure for Growth Investors who base many of their investing decisions on revenue growth. To learn more on this topic, read our Growth Investing Strategy Review
Resistance: When we talk about resistance at Money-and-Investing.com we are referring to the technical analysis definition. Resistance is the price or price range that a stock has trouble breaking through. Resistance is usually a result of profit-taking or fear in the market place. When a stock reaches a new high, many investors take a profit which pushes the price back down, and this behavior is what creates the resistance level.
Risk-Adjusted Basis: When the returns of a stock, fund or other security are adjusted for risk, they are said to be stated on a “Risk-Adjusted Basis”. Risk-adjustment calculations incorporate factors such as volatility, standard deviation, price strength, and other risk measures to come up with risk-adjusted returns. Risk-adjusted returns are useful because they allow you to calculate the relative return for assets that it would otherwise be difficult to compare, such as stocks and bonds.
Risk Averse: An investor that will usually choose the least risky investment. In the event that two securities appear to offer the same return potential, risk averse investors will always choose the one with least risk. To learn more about your own personal investing profile, read our Introduction to Investing Strategies guide.
Risk Management: The process of identification, analysis and either acceptance or mitigation of uncertainty in investment decision-making. Essentially, risk management occurs anytime an investor or fund manager analyzes and attempts to quantify the potential for losses in an investment and then takes the appropriate action (or inaction) given their investment objectives and risk tolerance. (Source = Investopedia)
Risk Tolerance: A measure of an investor’s comfort level with fluctuations in stock prices and portfolio value. Low risk tolerance means investors are scared out of the market easily. This often leads to buying high and selling low. High risk tolerance means investors are able to withstand a lot of uncertainty and losses in a portfolio. If combined with a good long-term strategy, high risk tolerance can greatly improve an investor’s chance of beating the market. If combined with poor strategy implementation and reckless behavior, a high risk tolerance can lead to substantial losses from buying overly speculative investments.
Risk Vs Return: Most investors (especially successful ones) are constantly trying to find the perfect balance of risk and return. Optimizing Risk Vs Return can minimizes the risk of losses while maximizing returns. When we say Risk Vs Return, we are usually referring to this balancing act. A few of the methods investors employ to optimize risk vs return are diversification, buying different types of assets, and developing a sound risk management program. To learn more about this and other related topics, read our 10 Basic Principles of Investing article.
Roth 401k: While they�re a new animal (only around since 2006), we believe Roth 401k�s will become popular quickly. The differences between a 401K and a Roth 401K are nearly the same as the differences between an IRA and a Roth IRA. If your employer offers one, remember that the Roth 401K will give you much more flexibility around withdrawing money and will also allow you to withdraw tax free distributions at retirement. For the record� don�t withdraw money until retirement! But it�s nice to have the option in case of emergencies. Obviously you also lose the tax deduction advantage up front, but most people finish their careers in a higher tax bracket than they started anyway. This is a particularly strong option for career minded people that are likely climb the corporate ladder getting raises all along the way, you�ll definitely finish in a higher tax bracket so this should be a no-brainer for you. To learn more about tax-deferred accounts, read our 401k, IRA & Roth IRA Guide.
Roth IRA: A tax-deferred savings account. You pay taxes when you contribute to a Roth IRA but once inside, your money can grow tax-free until retirement. The greatest benefit of a Roth IRA is that, at retirement age (59 �), you can withdraw money tax-free. This is a particularly strong option for career minded people that are likely climb the corporate ladder getting raises all along the way, you�ll definitely finish in a higher tax bracket so investing in a Roth IRA should be a no-brainer for you. To learn more about tax-deferred accounts, read our 401k, IRA & Roth IRA Guide.
Roth IRA Limits: Because a Roth IRA offers huge tax-breaks and tax-advantages, legislators limit the amounts that can be contributed per year. Requirements are based on income and age and they change every year. For a complete list of Roth IRA limits, requirements, and other summary information, check out our 2008 401k, IRA & Roth IRA Limits chart.
Russell 1000: 1000 of the largest and most widely held US companies. Good benchmark for any large cap US stocks.
Russell 2000: Index that tracks 2000 small cap companies, average market cap is $466Million. Good benchmark for growth and small cap US stocks.
Russell 3000: This is a broad US index, it includes all publicly traded US stocks. Good benchmark for mutual fund investors and well diversified stock investors.
Russell Mid Cap: Index of medium sized US companies, avg market cap = $3.2Billion. Good benchmark for mid cap US stocks.
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S&P 400: Index of medium sized US companies, avg market cap = $1.9Billion. Good benchmark for mid cap US stocks.
S&P 500: 500 of the largest and most widely held US companies. One of the most widely followed indices and a good measure of US economic health. Good benchmark for any large cap US stocks.
Seasonality: When we talk about seasonality at Money-and-Investing.com we are either talking about the periodic fluctuation of security prices or fluctuations in demand for products and services. The two usually go hand in hand. For example, the annual christmas shopping rush is an example of seasonality. There is an increase in product and service demand which also results in an increase in revenues and profits which push retail stock prices up.
Seasoned (in reference to IRA & Roth IRA withdrawals): When we use the term seasoned during an investment discussion, we are referring to contributions made to a Roth IRA. Contributions are considered to be seasoned after they have been in the account for at least five years. If you start retirement distributions before your Roth IRA contributions are seasoned, you will experience tax penalties on withdrawals.
Screening Tools: Screening tools are stock, fund, bond and ETF querying tools. Investing Research sites and Online brokerages have tools that will allow you to select from hundreds of criteria and then pull investments that meet all of the criteria you have selected. These are essential tools for self directed investors because they allow you to quickly create lists of high-potential investments. You can spend more time on detailed analysis and less time trying to identify investments that meet your basic investing criteria. To learn more about these and many other tools, read our Morningstar.com: The Power of Institutional Investors at your Fingertips.
Secondary Market: This is where securities are traded after their initial public offering. Securities in the secondary market are referred to as common stock. Secondary market trading makes up over 90% of trading volume.
Selection Criteria: The set of criteria investors use to identify investments that align with their investment goals and risk tolerance. Every strategy has a different type of investment criteria and these criteria are usually customized by investors. Read our article on 8 of the world's most popular investing strategies for more on this topic. The most common way to test investments against a set of investing criteria is via screening tools, charting software or mathematical models. To learn more about these tools, read our Morningstar.com: The Power of Institutional Investors at your Fingertips.
Sell Limit: When you set an order to automatically sell a security at or below a specified price. Sell Limits allow investors to ensure that they sell a security when it reaches a price that they feel signals performance deterioration. This takes psychology out of the equation. Investors that set sell limits don't have to worry about having the discipline to sell when a stock is underperforming or constantly keep track of the price because sell limits automate the trade.
Sensex: India’s version of the Dow. This index contains 30 of the largest and most actively traded stocks on the Bombay Stock Exchange. Popular Bombay Stock Exchange index and a good measure of India’s economic health. Good benchmark for any stock on the Bombay Stock Exchange.
Share Price: The price at which a stock is currently trading or the price of the last transaction.
Shareholder: Any person, company, or other institution that owns at least one share in a company.
Shareholder Value: See Market Capitalization
Shareholder's Equity: An institution's total assets minus its total liabilities.
Sharpe Ratio: The Sharpe Ratio uses standard deviation to compare an investment’s risk and returns. The higher the Sharpe Ratio the better an investment’s returns have been relative to the risk it has taken on. The Sharpe Ratio is valuable because it is a relative measure, it allows Momentum Investors to accurately compare the risk and performance of completely different types of assets to each other. For more information on this and other important investing ratios, read our Momentum Investing Strategy Review.
Short Selling: Short selling occurs when options traders place a bet that an investment will decline in value. Short selling means betting against a security. Short sellers don't trade the actual security, they short sell through a derivative (option) whose value is based entirely on the underlying asset.
Situation: Situation is one of the three ways we categorize stocks at Money-and-Investing.com. Read our Introduction to Stocks for more on this topic. Situation, is the vaguest of the three categories, but it gives you an idea of how investors view a stock and often about the management style of the executives that run the company. The four broad situations are Blue Chip Stocks, Value Stocks, Income Stocks, and Growth Stocks. Unlike the other two categories, there is some overlap within these groups.
Small Cap: Refers to stocks with a relatively small market capitalization. The definition of small cap can varies among brokerages, but generally it is a company with a market capitalization of between $300 million and $1 billion.
Small Cap Growth: Small stocks, usually $300 million to $1 billion, with high P/E Ratios and rapidly increasing earnings.
Smith, Thurman: Thurman Smith, editor of Equity Fund Outlook, has been managing private accounts using diversified stock funds since 1980. His fund selection model takes a lot into account, but the primary criteria is his Investment Skill Quotient. This calculation divides the growth potential by the risk exposure to estimate how effectively a fund is managed. Since Thurman’s newsletter has beaten the market soundly for the last 15 years, we believe his calculation is a pretty good performance indicator. Equity Fund Outlook provides strategy analysis and explanations, clear and easy to follow buy/sell instructions, and model portfolios. To learn more about Thurman and several other of today's top investors, read our Can you afford outstanding investing advice?
Social Security Benefits: The benefits individuals receive when they reach retirement age as long as they have contributed enough to social security during their lifetime qualify. Benefits can include social security retirement checks, disability pay, and medicare health insurance.
Soros, George: (Source = Wikipedia) Soros is famously known for "breaking the Bank of England" on Black Wednesday in 1992. With an estimated current net worth of around $8.5 billion, he is ranked by Forbes as the 80th-richest person in the world. Former Federal Reserve Chairman Paul Volcker wrote in 2003 in the foreword of Soros' book The Alchemy of Finance: "George Soros has made his mark as an enormously successful speculator, wise enough to largely withdraw when still way ahead of the game. The bulk of his enormous winnings is now devoted to encouraging transitional and emerging nations to become 'open societies,' open not only in the sense of freedom of commerce but - more important - tolerant of new ideas and different modes of thinking and behavior."
Standard & Poor's Credit Rating Service: A leading global rating agency committed to providing the world's credit markets with independent, timely and prospective credit opinions across the fixed income global marketplace.
Standard & Poor's 500: See S&P; 500
Standard Deviation: Standard Deviation measures how much an investment deviates from its average. For example, if $5 is one standard deviation for a stock that averages $40 and it is currently trading at $55 this tells a Momentum Investor two important things. One, the stock is very volatile and two, it has a lot of positive momentum since it is currently trading three standard deviations above its average. To learn more about this and other important technical analysis and statistical measures, read our Momentum Investing Strategy Review.
Statistical Analysis: When using statistical analysis in investing, analysts are using mathematical formulas to make trend and price predictions or analyze the historical patterns of a population of stocks, bonds or other securities. For example, analysts may study historical pricing trends to create models that can predict future performance based on historical price patterns.
Statistical Measures:See Statistical Analysis
Stock Market: On stock market exchanges, investors can buy a small share of ownership in stocks that meet their investment criteria. Companies are often willing to sell partial ownership (stock) to investors through a stock market because they want to grow or because they want to avoid debt. To learn more on this topic, read our Stock Market Basics guide.
Stock Market Behavior: Since the stock market mirrors the decisions made by investors, we call the price fluctuations that result stock market behavior. This is an appropriate term since the stock market is definitely emotion driven in the short-term. Stock market behavior is related to investor psychology, which is the the herd mentality that is so obvious when you watch short-term stock market behavior. To learn more about stock market behavior and investor psychology, read our 10 Basic Principles of Investing article.
Stock: A type of security that signifies ownership in a corporation and represents a claim on part of the corporation's assets and earnings. There are two main types of stock: common and preferred. Common stock is the stock traded in over 90% of transactions and it usually entitles the owner to receive dividends and confers voting rights for major decisions such as mergers or acquisitions. Preferred stock generally does not have voting rights, but has a higher claim on assets and earnings than the common shares. For example, owners of preferred stock receive dividends before common shareholders and have priority in the event that a company goes bankrupt and is liquidated.
Stocks: See Stock
Subprime Mortgage Crisis: (Source = Wikipedia) The subprime mortgage crisis is an ongoing economic problem manifesting itself through liquidity issues in the global banking system owing to foreclosures which accelerated in the United States in late 2006 and triggered a global financial crisis during 2007 and 2008. The crisis began with the bursting of the US housing bubble and high default rates on "subprime" and other adjustable rate mortgages (ARM) made to higher-risk borrowers with lower income or lesser credit history than "prime" borrowers. Loan incentives and a long-term trend of rising housing prices encouraged borrowers to assume mortgages, believing they would be able to refinance at more favorable terms later. However, once housing prices started to drop moderately in 2006–2007 in many parts of the U.S., refinancing became more difficult. Defaults and foreclosure activity increased dramatically as ARM interest rates reset higher. During 2007, nearly 1.3 million U.S. housing properties were subject to foreclosure activity, up 79% from 2006.
The mortgage lenders that retained credit risk (the risk of payment default) were the first to be affected, as borrowers became unable or unwilling to make payments. Major banks and other financial institutions around the world have reported losses of approximately U.S. $379 billion as of May 21, 2008. Owing to a form of financial engineering called securitization, many mortgage lenders had passed the rights to the mortgage payments and related credit/default risk to third-party investors via mortgage-backed securities (MBS) and collateralized debt obligations (CDO). Corporate, individual and institutional investors holding MBS or CDO faced significant losses, as the value of the underlying mortgage assets declined. Stock markets in many countries declined significantly.
Supply and Demand: In economics, supply and demand describes market relations between prospective sellers and buyers of a good. The supply and demand determines the price and quantity sold in a market.
Support: When we talk about support at Money-and-Investing.com we are referring to the technical analysis definition. Support is the price or price range that a stock has trouble breaking below. Support is usually a result of investors buying investments that they believe have become oversold. When a stock approaches a new low (the support range), many investors jump in because they feel that overselling has created a bargain price and a buying opportunity. This behavior is what creates the support level.
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Take a Profit: Whenever you sell an investment for more than you bought it for, you have taken a profit. The significance is that, as soon as you take a profit, you have created a taxable transaction unless you’re trading in a tax-deferred account such as a 401k, IRA and Roth IRA account. When you take a profit you owe short-term capital gains tax on the profit if you held the investment for less than a year and long-term capital gains tax on the profit if you held it for longer than a year.
Tax Bracket: The IRS creates income ranges and each different range is subject to a different marginal tax rate.
Tax Deferred Account: Accounts that allow interest, dividends and capital gains to accumulate tax free regardless of trading activity for as long as funds remain in the account. Money will be taxed at contribution and withdrawal, depending on the type of account you choose, but you will never pay taxes on any profits while the money remains in a tax deferred account. The most popular tax deferred accounts are 401Ks, IRAs and Roth IRAs. To learn more about tax deferred accounts, read our 401k, IRA and Roth IRA Guide.
Tax Free Distributions: Tax distributions from Roth IRAs and Roth 401Ks are tax free because the money is taxed up front when funds are contributed. This is an outstanding benefit to those with long careers with promotions and pay raises ahead of them. Since you will inevitably be at a higher tax bracket and income range when it's time for you to retire, tax free distributions from your Roth retirement accounts will be a huge benefit. To learn more about tax deferred accounts, read our 401k, IRA and Roth IRA Guide.
Tax Free Investing:See Tax Deferred Account
Tax Efficient: Investments that have fewer and smaller tax consequences than other investments are said to be tax efficient. For example, you would consider a growth fund that turns it's portfolio over three times per year and creates a lot of short term capital gains that are taxed at your regular tax rate to be Tax inefficient. You would consider a value fund that only turns 20% of it's portfolio over during a given year and only creates long term capital gains taxed at 15% to be tax efficient.
Tax Liability: The amount of tax debt due to the IRS. Examples of taxable events that create tax liability are selling stocks for a profit or selling products to consumers to generate revenue.
Tax Management: See Tax Planning
Tax Planning: A process of money management designed to build and protect net worth and minimize tax liability.
Tax Rate: The rates at which an individual's income and a corporation's profits are taxed. For individuals, the IRS creates income ranges and each different range is subject to a different marginal tax rate. Company's are taxed based on the business structure and accounting method that they choose.
Tax Shelter: A legal entity designed to minimizing taxable income and tax liability. The most popular forms of tax shelters are 401Ks, IRAs, Trusts and Roth IRAs. To learn more about tax shelters, read our 401k, IRA and Roth IRA Guide.
Taxable Account: Any account in which the earnings are fully taxable. Online brokerage accounts and savings accounts are examples of common taxable accounts.
Taxable Income: When you subtract every allowable adjustment from the gross income, the amount you are left with is the taxable income. Taxable income is used to calculate the total amount of taxes due for a specified period of time, typically an annual period for individuals.
Tech Boom: (Source = Investopedia) A pronounced and unsustainable market rise attributed to increased speculation in technology stocks. A tech bubble is highlighted by rapid share price growth and high valuations based on standard metrics like price/earnings ratio or price/sales ratio. The technology stocks involved in a bubble may be confined to a particular industry (such as internet software or fuel cells), or cover the entire technology sector as a whole, depending on the strength and depth of investor demand. At the peak of a bubble, many fledging tech companies will seek to go public through initial public offerings (IPOs) in an attempt to capitalize on heightened investor demand. Contrary to popular belief, there have been several tech booms and bubbles in the history of the stock market, but most people associate "Tech Boom" with the late 90's due to the incredible run-up in stock prices and the severe crash that followed.
Tech Crash: Most people think of the recessionary period from 2000-2002 when they think of the tech crash. Because of the aggressive speculation during the tech boom, there was a rapid runup in share prices. When investors finally realized that actual earnings and growth couldn't support valuations, people fled the market in droves. Combined with accounting scandals at Enron and WorldCom, deteriorating economic conditions and extremely bearish sentiment, the 2000-2002 tech crash was a long and steep decline across all of the major indexes, especially the NASDAQ.
Technical Analysis: A method of evaluating securities based on historical price patterns, statistical measures, chart patterns and market activity. Technical analysts use charts, statistics and other aspects of technical analysis to identify patterns that can help them predict future price behavior.
Technology Stocks: A stock that is in the technology sector. There are many different definitions for the technology sector, but examples of common components are software, biotechnology, and networking.
Telecom: A general term for all industries and companies providing data, phone service or entertainment to consumers and businesses. Examples are telephone, cable television, satellite, and VOIP companies.
"The Fed": See Federal Reserve Bank
Ticker: An arrangement of characters (usually letters) representing a particular security listed on an exchange. Every listed security must have a unique ticker symbol to facilitate the trading and avoid confusing securities with one another.
Time the Market: Market Timers use fundamental analysis, technical analysis and historical data to build predictive mathematical models. These market timing models are designed to predict what the market is going to do and time when it will react to changing conditions. They don’t try to time the performance of an individual investment, they try to predict the broad market indexes such as the S&P 500 and then base individual investment decisions on the overall market direction. A Market Timer’s goal is to be in the right investments at the right time. To learn more about market timing, read our Market Timing Strategy Review.
Tokyo Stock Exchange: (Source = Wikipedia) TSE, located in Tokyo, Japan, is the second largest stock exchange market in the world by market value, second only to the New York Stock Exchange. It currently lists 2,271 domestic companies and 31 foreign companies, with a total market capitalization of over 5 trillion USD.
Total Market Value: See Market Capitalization
Total Shares Outstanding: The total number of common and preferred stock shares currently held by investors and by the company's officers. Shares that have been repurchased by the company are not considered outstanding stock.
Traditional Fund: Traditional Funds offer a broader array of funds and strategies to choose from but typically cost more to manage than an ETF since many follow a strategy rather than just being pegged to an Index. This means they require active management rather than passive management. Many also require that you hold them for a certain length of time before selling or you will incur penalty charges or Redemption Fees. One advantage to traditional funds is that, unlike stocks and ETFs, many traditional funds have no transaction fees involved when you purchase them. To learn more about mutual funds read our Mutual Fund Guide or our Complete ETF & Index Fund Investing Guide.
Traditional Investing Strategy: Strategies that require active management, investing research and trading decisions. Examples of active strategies are Growth Investing, Value Investing, and Momentum Investing.
Transaction Fees: Fees charged by online brokerages and local brokers for stock, fund, bond and other security trades. Fees can range anywhere from $1.50 for a stock trade at SoGoTrade to $75 for a mutual fund trade at Fidelity so do your homework before you choose an online brokerage. Start with our 2008 Online Brokerage Review.
Treasuries: Negotiable debt obligations issued by the US government at various schedules and maturities. The length of time until maturity determines whether the treasury is a Treasury bill, Treasury bond or Treasury Note.
Treasury Bills: Negotiable debt obligations issued by the US government. Treasury Bills are short term treasuries that mature in one year or less.
Treasury Bonds: Negotiable debt obligations issued by the US government. Treasury Bonds are long term treasuries that have maturities of between 10 and 30 years.
Treasury Notes: Negotiable debt obligations issued by the US government. Treasury Notes are medium term treasuries that have maturities of between 1 and 10 years.
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Undervalued: A stock that is undervalued is one in which the long-term fundamentals justify a higher price than the stock is currently trading at. A stock can become undervalued when investors overreact to bad news and push the stock price artificially low. Typically, value stocks have relatively low price-to-book ratios, low debt-to-equity ratios and high dividend yields. To learn more about value investors, read our Value Investor Strategy Guide.
Unrealized Gain: An increase in the value of a security that has not yet been realized because the investment hasn't been sold. Until an investment is sold, any increase in the share price will be unrealized gain. The term is relevant to taxation because as soon as you sell an investment, you create a realized gain, which is a taxable event.
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Valuations: Valuation is the practice of trying to determine a security's true current and future value in the market. Investors that specialize in valuation primarily perform fundamental analysis, which is a rigorous analysis of every piece of a financial statement and an attempt to value intangible assets such as brand strength and patents. Popular valuation ratios are price-to-book value, return on equity, and debt-to-equity ratio. To learn more about valuation, read our Value Investor Strategy Guide.
Value Fund: A mutual fund that primarily holds stocks that are deemed to be undervalued in price and that are likely to pay dividends.
Value Investor: Value investors use fundamental analysis to identify investments that they believe the market has undervalued. They believe the market overreacts to good and bad news, which means stock price fluctuation won't necessarily correlate with a company's underlying value. Typically, value investors select stocks with relatively low price-to-book ratios, low debt-to-equity ratios and high dividend yields. To learn more about value investors, read our Value Investor Strategy Guide.
Value Stocks: Value stocks are undervalued compared to their underlying value. Their long-term fundamentals justify a higher price than the stock is currently trading at. A stock can become undervalued when investors overreact to bad news and push the stock price artificially low. Typically, value stocks have relatively low price-to-book ratios, low debt-to-equity ratios and high dividend yields. To learn more about value investors, read our Value Investor Strategy Guide.
Volatility: A measure of the fluctuation in the market price of a security. A security that is considered highly-volatile has frequent and large price fluctuations while low-volatility securities trade within tight ranges. An examples of a highly volatile investment is a growth stock and an example of low volatility is a bond.
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Wilshire 5000: This is a broad US index, it includes all publicly traded US stocks. Very popular index for any well diversified portfolio. Particularly popular with mutual fund investors.
WorldCom: Prior to 2002, WorldCom was the nation's 2nd largest telecom in the world at $63.4 Billion. They hold the dubious distinction of filing the largest bankruptcy in US history nearly a month after revealing that they improperly booked $3.8 Billion in expenses. Congrats...
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Xenocurrency: A currency that is traded outside of its own borders. For example, the US dollar acts as a xenocurrency when a european country buys the US dollar as a hedge against inflation.
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Yield: The annual percentage return that the dividends provide to investors on either common or preferred stock. For bonds, the yield is the return of a bond when you factor in the coupon payments and bond price's current discount or premium.
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Z-Score: This score shows the position of a particular data point relative to the sample's mean. This is a useful measure for technical analysts because it tells them how far away from the norm a measurement is. For example, a Z-Score that is five standard deviations away from the mean would be an extremely low probability event.
Zero Coupon Bond: These bonds are sold at a deep discount compared to regular bonds because they make no periodic interest payments to investors. Instead, investors receive the principal and interest at the time of maturity. The extra risk that investors take on when they choose to forgo income until maturity is why these bonds generally offer higher yields.
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