Glossary of Everyday Investment Terms

By on July 25, 2018

Keeping up with the increasing number of investment or wealth management products and services in the marketplace today can be confusing. This glossary will make it easier for you to understand commonly used investment terms and set yourself on a path for sustained equity growth and long-term wealth.

Speak with your trusted financial advisor to have these terms explained more completely and discuss with you those relevant to your situation.

40 Investment Terms To Know Before Meeting With Your Broker

  1. Asset Allocation – The process of dividing investments among different types of investments (such as stocks, bonds, real estate, cash, etc.) to balance risk and reward based on an individual’s or institution’s specific financial situation, risk tolerance and goals. Asset allocation does not assure a profit or protect against loss.
  2. Balance Sheet – A financial statement which summarizes a company’s assets, liabilities and shareholders equity at a specific date.
  3. Bond – A contract between a borrower and a lender in which the borrower promises to pay the face value at maturity and to pay interest at a specified rate at regular intervals. Bonds are usually issued by government agencies, municipalities and corporations.
    Short-term Bond – Matures in less than three years from the date of issue.
    Mid-term Bond – Matures in three to ten years from the date of issue.
    Long-term Bond – Matures in ten or more years from the date of issue.
  4. Broker – An agent who handles the public’s orders to buy and sell securities, commodities or other property.
  5. Capital Asset – An economic resource (such as cash, securities or real estate) that is owned or controlled by an entity or person.
  6. Capital Gain or Loss – The difference between the sales price and the price at which a capital asset was purchased. When the difference is positive, the difference is referred to as a capital gain. When the difference is negative, it is a capital loss. An unrealized capital gain is an investment that has not been sold yet but would result in a profit if sold.
    Long-term Capital Gain – Gain on the sale of a capital asset held for more than 12 months (for most types of capital assets).
    Short-term Capital Gain – Gain on the sale of a capital asset held for one year or less.
  7. Commodities – Any good (such as grains, fruits/food stuffs, coffee, livestock, oils, and metals) that are traded on national exchanges. These exchanges deal in both “spot” trading for current delivery and “futures” trading for delivery in future months.
  8. Common Stock – A unit of ownership in a corporation which entitles stockholders to a share in the company’s profits or losses by receiving dividends and capital gains or losses in the stock’s share price.
  9. Compounding – Earning interest not only on the original investment amount (principal ), but also on accumulated interest reinvested.
  10. Consumer Price Index (CPI) – A measure that examines the weighted average prices of consumer goods and services (such as transportation, food and medical care). Used as an indicator for the cost of living.
  11. Conversion – The taxable movement of money from a qualified retirement plan or Traditional IRA to a Roth IRA.
  12. Corporate Bonds – A debt security issued by a company, backed by the company’s current physical assets or the payment ability of earnings from future operations. Usually corporate bonds have higher interest rates and are considered higher risk than government bonds.
  13. Credit Risk – The risk of loss of principal investment stemming from a borrower’s fails to earn future cash flows needed to repay a loan or otherwise meet a contractual obligation. Credit risk relates to the potential return of an investment (for example, the yields on bonds correlate strongly to their perceived credit risk), and investors are compensated for assuming credit risk with interest payments from the borrower or issuer of a debt obligation.
  14. Discretionary Account – An account in which the customer gives authority in writing to the representative to exercise his/her own judgment with respect to purchasing or selling securities without obtaining the client’s prior approval on the details of each trade.
  15. Distributions – Payment from the fund of dividends or capital gains of the portfolio. Distributions may be paid in cash or reinvested to purchase additional shares of the fund.
  16. Direct rollover – A tax-free movement of funds from a qualified retirement plan to another qualified plan or an IRA. *Note: rolling pre-tax money in a qualified plan directly to a Roth IRA would be a taxable event.
  17. Diversification – A asset allocation strategy that spreads a portfolio’s investments over a range of securities, industries and/or asset classes. The goal of diversification is to reduce risk of portfolio losses by being subject to failures of any one security sector, or asset class. Diversification does not assure a profit or protect against loss.
  18. Dividend – A payment of cash or stock that is distributed to shareholders. Dividends are financed by profits, and are announced by the company’s board of directors before they are distributed to shareholders.
  19. Dividend Reinvestment – Investors to use their cash dividends to purchase additional shares of the same stock or mutual fund.
  20. Dividend Yield – When there is no reported capital gains, investors will assess how much a company paid out in dividends relative to its share price to determine a stock’s return on investment.
  21. Equity – 1.) Any stock or any other security representing ownership interest in a corporation is one of the principal asset classes. 2.) Total net worth or value of an asset. For example, in real estate, it is the difference between what a property is worth (market value) and what the owner owes (mortgages) against that property.
  22. Fixed Annuity – An annuity that guarantees a specific rate of return and/or a fixed payment, for the investors lifetime or for a specified period.
  23. Index – A pricing benchmark, usually managed by a third-party, that measures changes in performance of a group of securities, mutual fund or other investment. You cannot invest in an index, they are used to read the market.
  24. Indirect rollover – The movement of funds from a qualified retirement plan to the custodian of the new retirement account. The old custodial company will distribute a check to the shareholder who must roll the money into another qualified plan or IRA within 60 days to avoid paying tax on the funds.
  25. Liquidity – The ability to convert an investment asset or security to cash without suffering a noticeable loss in value.
  26. Market Capitalization – The total value of the issued shares of a company (the share price times the number of shares outstanding in the market) as the total equity value of a company. Capitalization values are often used as an index on public opinion of a company’s net worth and a determining factor in some forms of stock valuation. Investors use company size classifications to estimate capital appreciation and risk.
    Large-Cap: Greater than $10 billion
    Mid-Cap: $5 – $10 billion
    Small-Cap: Less than $5 billion
  27. Market Risk – The volatility of a stock price relative to the overall market. When a stock is said to have a beta greater than 1, it is expected to change value up or down more frequently than the market (volatile). When beta is less than 1, the stock is expected to move less than the market.
  28. Money Market Account (MMA) or Money Market Deposit Account (MMDA) – An interest-bearing, FDIC-insured bank account that offers a competitive rates (based on current interest rates in the money markets) in exchange for large cash deposits. Many accounts place restrictions on the number of transactions you can make in a month, and require a certain balance be maintained in the account to receive the higher rate of interest.
  29. Municipal Bond – A debt security issued by a state, municipality or local government to finance its capital expenditures. These bonds earn interest may be exempt from taxation. Some municipal bonds may be subject to alternative minimum tax.
  30. Mutual Fund – A collective investment vehicle which combines the cash of numerous investors to purchase securities on their behalf. These funds must be registered and regulated by the SEC (see below). The fund manager is a professional who decides which securities to buy and sell in order to meet the investment objective of the portfolio.
  31. Net Asset Value – The price at which a mutual fund sells or redeems its shares, calculated by dividing the net market value of the fund’s assets by the number of outstanding shares.
  32. Price/earnings Ratio (P/E Ratio) – The market price of a stock divided by the company’s annual earnings per share. This ratios is often used to estimate potential future growth of an investment (a higher P/E Ratio may indicate strong future growth over lower P/E ratios).
  33. Portfolio – A group of financial assets (such as stocks, bonds, and cash) which may be held by individual investors and/or managed by financial professionals (mutual funds), hedge funds, banks and other financial institutions.
  34. Portfolio Re-balancing – This process involves moving assets from outperforming investments to under performing investments in order to match original asset allocations and diversification to realign with an investor’s tolerance for risk and expectations for returns. Investors often wish to buy more of the best-performing investments while selling the worst-performing investments, however the aim is to balance risk with returns.
  35. Risk – Often perceived in terms of the dollar amount an investor will or could lose over a relatively short period, these risks are easy to identify and potentially quantify. Risk should also be perceived from the standpoint of longevity to ensure you have saved enough and managed your portfolio in a manner that provides an adequate level of income on an inflation-adjusted basis in retirement.
    Short-term Risks: Market volatility.
    Long-term Risks: Not earning enough return to grow (or even maintain) your buying power.
  36. Securities – A term used to describe a broad range of investment instruments, including stocks and bonds, mutual funds, options, and municipal bonds.
  37. Securities and Exchange Commission (SEC) – An independent U.S. federal agency that administers, regulates and supervises the U.S. securities industry to protect investors against malpractice, and gives companies an incentive to operate under full disclosure with their investors.
  38. Stocks – An instrument that signifies an ownership position in a corporation (equity), and represents a claim on some proportional share in the corporation’s profits and losses.
  39. Strategic Investment Planning – Planning which focuses on objectives and goals.
  40. Variable Annuity – A type of annuity that allows for the investment of assets in various portfolios of stocks, bonds and cash. The rate of return will fluctuate in value, reflecting the performance of the investment portfolios chosen. The income or interest earned is tax-deferred until the time of withdrawal.

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