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| 401(k) Glossary of Common Terms |
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ACTIVE MANAGEMENT
"Hands on" portfolio management of a fund with the
sole purpose of trying to outperform the return of an unmanaged
or passive benchmark or index. Active managers use economic
data, investment research, market forecasts, etc. to help make
investment decisions.
ADVISORY FEE
The amount paid by a fund company to the investment manager
for managing or advising the fund's portfolio. Sometimes referred
to as management fee. At the client level, an advisory fee is
paid to a financial advisor for portfolio oversight, financial
planning, and other related services.
AFTER TAX RETURN
The return from an investment after all income taxes have been
accounted for and deducted. The SEC has adopted a number of
rule and form amendments requiring mutual funds to disclose
standardized after-tax returns. The amendments require a mutual
fund to disclose standardized after-tax returns for 1-, 5-,
and 10-year periods in the risk/return summary of the prospectus.
ALPHA
A mathematical measurement of the amount of return expected
from an investment. For example, an alpha of 1.20 indicates
that a stock is projected to rise 20% in a year when the return
on the market and stock's beta are both zero. Generally, a low
priced investment in relation to its alpha is considered a good
choice because of its undervalued status.
ANNUITY
An insurance contract that guarantees a fixed or variable payment
to the annuitant, or contract owner. The two phases of an annuity
contract are the accumulation and distribution periods.
ASSET ALLOCATION
The process of apportioning investments among various asset
classes, such as stocks, bonds, commodities, real estate, collectibles
and cash equivalents. Asset allocation affects both the risk
and return of investors, and is often used as a core strategy
in basic financial planning.
ASSET CLASS
Refers to the categorization of an asset. Representative asset
classes include, equities, bonds, commodities, etc.
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| B |
BACK END LOAD
See Deferred Sales Charge.
BASIS POINT
Measurement used to quote bonds. One basis point is equal to
0.01%, or one one-hundredth of one percent. 100 basis points
is equal to 1%, whereas 50 basis points would equal one half
percent, or 0.50%.
BASKET
A unit or group of securities. Baskets can be arranged according
to industry/sector, market capitalization, and security type.
BEAR MARKET
A prolonged period of declining prices in stocks, bonds, or
commodities. A bear market in stocks is precipitated by negative
economic activity or a series of events that have a negative
influence upon stocks. A bear market in bonds is caused by rising
interest rates.
BENCHMARK
A standard index used for measuring the performance of
an investment. The goal of most money managers and investors
is to outperform their respective benchmark.
BETA
A volatility measurement of a fund or stock versus the Standard
& Poor's 500 Stock Index. A fund or stock with a higher
beta than the Standard & Poor's 500 will rise or fall greater.
To the contrary, a stock or a fund with a low beta will rise
or fall less.
BOND
A debt instrument issued by corporations and governments to
raise capital. Interest on the outstanding debt is paid to bondholders
at specific intervals, with the principal amount of the loan
paid on the bond maturity date.
BROKER/DEALER
An individual or firm that acts as principal in a securities
transaction.
BULL MARKET
A prolonged period of increasing prices in stocks, bonds, or
commodities.
BUY AND HOLD
A market strategy that involves purchasing and owning an investment
for a long time, often years. This permits investors to receive
favorable capital gains treatment on any potential profits.
Buy and hold also helps investors to focus less on the short-term
market performance or fluctuations of their investments. |
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CDSC
See Deferred Sales Charge.
CERTIFICATE OF DEPOSIT (CD)
A debt instrument that is issued and insured by a bank. Interest
payments are made to the depositor and CD maturities range from
a few weeks to several years.
CLOSED-END FUND
Investment companies that issue a fixed number of shares, which
trade on a stock exchange.
CLOSE
Refers to the price of the last trade of a security at the end
of the market day. Close is also used in reference to the last
half hour of trading sessions on the major exchanges.
CLOSET INDEX FUND
An actively managed fund that closely mimics the volatility
and performance of a respective index.
COMMISSION
Transaction fee paid to a broker for executing a securities
trade. Commission amounts vary and are often dependent on the
size of trade, the frequency of trades, and sometimes the size
of the brokerage account.
Discount brokers tend to charge lower commissions for trades
versus full service brokers.
COMMON STOCK
Units of ownership in a corporation.
COMPOUND INTEREST
Interest earned on a principal sum plus interest earned from
an earlier time period. Compound interest can happen daily,
quarterly, annually, or on another basis. |
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| D |
DECLARATION DATE
The date on which a company or fund announce the amount and
payment date of the next quarterly dividend.
DEFERRED SALES CHARGE
A sales charge deducted from an investment for exiting early,
or before the sales charge ceases to exist. Mutual fund class
B and C shares often carry a deferred sales charge. Also called
back end load, CDSC or contingent deferred sales charge.
DEFINED BENEFIT PLAN
A retirement plan that agrees to pay a specified amount to each
retiree after so many years of service, or time at the company.
Contributions grow tax-deferred and can by made by both employers
and employees, or only the employer.
DEFINED CONTRIBUTION PLAN
A retirement plan that whose benefits are dependent upon the
investment performance and the total contributions made by the
employer and employee. Contributed funds grow tax-deferred,
and a discretionary match by the employer is sometimes offered.
Employees are given investment options, and they bear the risk
of how those selections perform. Popular defined contribution
plans include 401(k), 403(b), and 457.
DEFLATION
Decline in the price of goods and services. Opposite of inflation.
DIRECT ROLLOVER
A distribution from a qualified plan or IRA account sent directly
to the account custodian. Direct rollovers avoid early withdrawal
penalties imposed by the Internal Revenue Service.
DOW JONES INDUSTRIAL AVERAGE (DJIA)
The DJIA is a widely followed index that is used as a barometer
of stock market performance. This stock index is based upon
30 major companies, or components in diversified industries,
such as banking, consumer staples, retail, healthcare, and technology.
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EMERGING MARKET
Refers to the financial market or economy of a developing nation,
which is often new or has a short history.
ENHANCED INDEXING
This market strategy seeks incremental outperformance of a benchmark
index without changing the profile characteristics of the index.
By using leverage, options trading, or another mechanism, enhanced
indexing offers the potential of outperforming a benchmark index.
EQUITY INDEX ANNUITY
A type of annuity contract that allows the potential of stock
market linked growth without the potential of any market type
losses.
EXCHANGE
Main location where securities or futures trading takes place.
EXPENSE RATIO
The Includes investment management administrative costs, and
12b-1 fees. The expense ratio does not include the cost of acquiring
a fund, such as commissions and loads.
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FEDERAL
FUNDS RATE
Interest rate charged by banks with excess reserves at a Federal
Reserve district bank to banks needing overnight loans to meet
reserve requirements. Set by the Federal Reserve Board, this
is a heavily watched and key indicator of whether interest rates
rise or fall.
FEDERAL OPEN-MARKET COMMITTEE (FOMC)
FMOC has 12 members responsible for interest rate and credit
policies of the Federal Reserve System. Also referred to as
the Fed.
FIXED INCOME INVESTMENT
Refers to an investment that pays a fixed rate or percentage
of return.
401(k) PLAN
Type of defined contribution plan commonly offered to employees
in the non-government private or public business sector.
403(b) PLAN
Type of defined contribution plan commonly offered to teachers
or employees in the non-profit business sector.
457 PLAN
Type of defined contribution plan most offered to employees
of local, state, or federal government.
FRONT END LOAD
Refers to the sales charge imposed on investors entering certain
mutual funds that have sales charge or load. Front end loads
are capped at 8.5% by regulators.
FUND OVERLAP
Fund overlap refers to the duplication in owning two or more
funds that have the same identical securities and/or underlying
investment strategy. Investors are effectively paying twice
for double work. They pay one fund company to execute xyz strategy,
and then they pay a competing fund or fund company again to
do the exact same work.
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| G |
GLOBAL
FUND
A type of mutual fund, closed end fund, or ETF designed to give
exposure to any international or emerging market, including
the United States.
GOLD FUND
A type of mutual fund or ETF designed to give exposure to gold
related securities. This can include stocks in companies engaged
in the production, processing, or mining of gold. Often used
to hedge against inflation and currency risks.
GOVERNMENT SECURITIES
Securities issued by U.S. government agencies and international
governments. U.S.Treasuries are generally considered the safest,
because they are backed by the full faith and credit of the
government.
GROWTH AND INCOME FUND
A mutual fund, closed end fund, or ETF with both the growth
of capital and income as the primary investment objective.
GROWTH FUND
A mutual fund, closed end fund, or ETF with the growth of capital
as the primary investment objective.
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INCOME FUND
A mutual fund, closed end fund, or ETF that has generating income,
as the primary investment objective. Income can be derived from
various sources, including interest, dividends, and capital
gains.
INCOME TAX
Annual tax levied on all personal and corporate income by state
and federal government authorities.
INDEX
A statistical measure used to track the aggregate performance
of stock, bond, and commodities markets. Widely followed indexes
include those developed and managed by Standard & Poor's,
Russell, and Dow Jones.
INDEX FUND
A mutual fund or ETF that seeks to match the exact performance
of a specific market or benchmark index. Index funds are sometimes
referred to as passive funds, and are popular for their tax
efficiency and low fees. Popular index funds include those that
track the S&P, Russell, and Dow Jones indices.
INDEXING
Investment strategy that seeks to match the exact performance
of a specific market or benchmark index.
INDIVIDUAL RETIREMENT ACCOUNT (IRA)
A retirement plan that allows individuals to contribute and
grow money in tax-deferred account.
INFLATION
An increase in the cost and price of goods and services. Opposite
of deflation.
INTEREST RATE RISK
Refers to the certain risk that interest rates will fluctuate
and these changes may adversely impact the value of a portfolio.
For example, an investor with long-term bonds may suffer a reduction
in the value of those bonds as interest rates rise.
INVESTMENT GRADE
Bonds whose issuers are rated AAA to BBB for safety and ability
to repay principal by Standard & Poor's or Moody's Investors
Service.
INVESTMENT STYLE
Indicates the approach of an investment manager in selecting
securities. For example, a certain manager may be value oriented,
whereas another may emphasize growth.
INVESTMENT TIME HORIZON
Refers to the length of time an investor plans to invest for. |
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JOINT
OWNERSHIP
Equal ownership by two or more people, who have the right of
survivorship.
JUMBO CD
Certificate of deposit with a minimum denomination of $100,000.
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LOAD
Refers to an upfront or deferred sales charge imposed upon the
initial entry or early exit of a mutual fund investment.
LIQUIDITY
The ability to buy or sell an asset rapidly and in large quantity
without substantially affecting the price of the asset.
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MONEY MARKET FUND
A fund that seeks to maintain a stable net asset value of $1
per share. Money market funds are generally considered to be
conservative; however they are not guaranteed by the U.S. government
and can lose value.
MUTUAL FUND
A pool of investments managed by a fund management company.
Mutual funds, are also called "open-end" investment
companies and they can be divided into three broad categories:
stock funds, bond funds, and money market funds. Mutual funds
are considered "open-end" for two reasons. First,
they are required to redeem (or buy back) outstanding shares
at any time upon a shareholder's request, and at a price based
on the current value of the fund's net assets. Second, although
not required, virtually all funds continuously offer new fund
shares to the public. |
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NASDAQ
A computerized system that offers brokers/dealers with price
quotations for securities traded over the counter as well as
securities traded on other exchanges, like the NYSE.
NEW YORK STOCK EXCHANGE (NYSE)
Established in 1792, the NYSE is the oldest and largest stock
exchange in the United States. It's located on Wall Street.
NO-LOAD FUND
A type of mutual fund that does not impose a sales commission
or charge on investments made.
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OPPORTUNITY
COST
Refers to the highest price or rate of return an alternative
course would provide.
OPTIONS
An incentive stock option plan is granted to corporate executives
and employees if certain financial goals are met. Options are
often granted at below market prices. |
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PLAN
SPONSOR
Refers to the individual or company responsible for sponsoring
401(k) and other retirement benefits for the employees.
PROSPECTUS
A legal document that explains the risks of investing in a particular
mutual fund or exchange traded fund. The prospectus will usually
discuss performance history, fees, risks, and experience of
the portfolio managers. All investment company products are
required by law to be accompanied by a prospectus.
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QUALIFIED
PLAN
Refers to a retirement plan (such as a 401(k), 403(b), or 457)
that qualifies for special tax treatment from the IRS.
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ROLLOVER
A transfer from one qualified tax-deferred pension plan (such
as a 401k plan) into another (such as a new employer's 401k
plan) that does not expose the money to early withdrawal penalties
nor income taxation. An IRA rollover is a common choice for
employees leaving a company: the money goes from the former
employer's 401k into an Individual Retirement Account (IRA),
where it continues to grow and compound tax-free.
ROTH IRA
A retirement plan that offers no upfront deductions for contributions
but instead offers income tax free withdrawals for owners and
beneficiaries if certain provisions are met.
RUSSELL 2000
A popular benchmark and small cap index constructed of 2000
small companies.
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SECURITIES
AND EXCHANGE COMMISSION (SEC)
Governmental regulatory body charged with the responsibility
of overseeing and enforcing the law as it pertains to securities
and investment related matters.
S&P 500
A leading market cap weighted stock index composed of 500 publicly
traded companies.
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TICKER
SYMBOL
The lettering system used to identify a stock, mutual fund,
or ETF on an exchange. Also called trading symbols.
TURNOVER
Relates to the frequency with which a money manager is buying
and selling securities within a fund. High portfolio turnover
translates into higher trading costs, which fund investors must
pay. Low portfolio turnover is better because it lessens the
impact of trading and tax related costs. Also referred to as
turnover.
12b-1 FEE
12b-1 fees, also known as distribution fees, are one component
of a mutual fund's annual fund operating expenses and can be
thought of as an alternate way of paying sales-related expenses,
such as compensating investment professionals. A fund can have
12b-1 fees only if its board of directors has approved a 12b-1
plan authorizing their payment.
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U.S.
GOVERNMENT SECURITIES
Denotes direct government obligations of the United States government.
This includes debt instruments such as Treasury bills, bonds,
and notes as well as savings bonds.
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VESTING
The right an employee receives through length of service time
to keep employer-contributed benefits such as payments made
to a pension plan, 401(k), profit sharing plan, or other retirement
plan.
VOLATILITY
Refers to the level and frequency of fluctuations in the price
of a particular stock, bond, or other type of security. |
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WINDOW
DRESSING
Denotes the selling of weak performing stocks or bonds by money
managers just before the end of each reporting quarter, so they
don't appear as significant investment positions. This selling
activity is often accompanied with buying activity of strong
performing stocks and bonds. After quarterly reports are issued,
the portfolio will reveal holding positions in strong performing
stocks and bonds, despite the fact that the majority of the
capital gains in these were never experienced by shareholders.
Window dressing is a cosmetic affect and adds little or no value.
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YIELD
Generally refers to an investor's return on capital.
YIELD CURVE
A graph showing the term structure of interest rates by plotting
the bond yields in the same class of quality with varying maturities.
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ZERO
COUPON BOND
A debt security that is sold at a deep discount and pays no
periodic interest to bondholders. As the maturity day approaches,
the bond is redeemed at face value.
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