A B C D E F G H I J K L M N O P Q R S T U V W X Y Z
Alpha - The excess return over a risk-free rate of a given security when the excess
return of the market as a whole (or a selected segment of the market) is zero.
A positive alpha indicates that the investment has earned on average a premium
above that expected for the level of market variability. A negative alpha
indicates that the investment received, on the average, a premium lower than
that expected for the level of market variability.
Minimum Tax - Commonly referred to as AMT, the alternative minimum tax is a federal tax
on taxable income as adjusted for specific tax-preference items, such as passive
losses from tax shelters and interest paid on certain municipal bonds. The
intent of the tax is to ensure that nearly all individuals pay at least some
tax on their incomes. The alternative minimum tax is most likely to apply
to individuals with high incomes when a relatively large portion of their
income is sheltered from taxation under normal reporting.
debt offerings contain both AMT and non-AMT bonds. Municipal bonds paying
interest that is subject to AMT are sometimes referred to as private activity
bonds and usually offer slightly higher yields than non-AMT bonds from the
same issuer. These private activity bonds are issued when funds are to be
used for non-essential purposes and pay taxable interest unless specifically
exempted by the Federal government. Examples of tax-exempt private activity
bonds include airports, waste disposal facilities and government mass transportation
systems. Except for non-profit college and hospital bonds, interest from tax-exempt
private activity bonds is subject to AMT.
Weighted Maturity - The length of time, in days or years, until the
average security in a bond fund or money-market fund will mature or be redeemed
by its issuer. The average maturity is weighted according to the dollar amounts
invested in the various securities in the fund. This measure indicates a fixed-income
fund's sensitivity to changes in interest rates. In general, the longer a
fund's averge weighted maturity, the more its share price will fluctuate in
response to changing interest rates.
Basis - Basis, also called cost basis or tax basis, refers to the acquisition cost
of an asset adjusted for capital distributions or stock dividends. A security's
basis is used in calculating gains and losses for tax purposes.
Point - A basis point refers to a value equaling one one-hundreth
of a percent (1/100 of 1%). Basis point, is used to measure yield differences
among bonds, for example, there is a 30 basis point difference between two
bonds if one yield 5.3% and the other yields 5.0%.
Market - A bear market is an extended period of general price declines
in an individual security of other asset, such as silver or real estate; a
group of securities; or the securities market as a whole. Nevertheless, even
during widespread bear markets, it is possible to have bull markets in particular
stocks or groups of stocks, i.e. stocks of gold-related companies often move
against major trends in the security markets. If you are "bearish"
on a particular stock or the market as a whole, you would be of the opinion
that it is headed for a period of generally falling prices.
Beta - A measure of a security's sensitivity to the movement of the general market,
in either direction. For example, a beta of greater than one indicates that
the security's excess return varies more than proportionately with the excess
return of the market. Thus it presents greater opporunity for gain and greater
risk for loss than the market as a whole.
Sky Laws - A popular name for state laws and regulations that
cover the offering and sale of securities within state boundaries. These
laws have been enacted to protect the public against securities frauds.
Although the laws differ among states, most also include provisions regarding
the licensing of individuals who sell securities.
is believed to have originated when a judge ruled that a particular stock
had about the same value as a patch of "blue sky."
Funds - Bond funds invest primarily in bonds issued by a corporation
, a municipality or a government agency. A bond is basically a long-term promissory
note which the issuer agrees to repay the principal on a specified maturity
date, along with periodic interest payments over the life of the bond.
Markets - A bull market is an extended period of generally rising
prices in an individual item, such as stock or gold; a group of items, such
as commodities or oil stocks; or the market as a whole. Hence, someone who
is "bullish" is of the belief that a particular stock or the market
as a whole is headed for a period of generally rising prices.
Option/Callable Bond - A Call Option permits its holder to purchase
a specific asset at a predetermined price until a certain date. For example,
an investor may purchase a call option on XYZ Corp. stock that confers the
right to buy 100 shares at $50 per share until October 17. For investors who
think a stock will go up significantly, call options may permit a profit from
a smaller investment (the premium the holder pays for the call option plus
the predetermined price for the stock) than it would take the stock at the
current market value.
bonds allow the issuer the right to repurchase the issue of bonds at a predetermined
price before maturity. Bonds are usually called when interest rates fall so
significantly that the issuer can save money by issuing new bonds at lower
rates. A call feature is normal for nearly all long-term bond issues.
Appreciation/Capital Appreciation Fund - Capital appreciation
refers to an increase in the market value of a security.
funds are mutual funds whose objective is to seek long-term growth of capital
for its investors by purchasing securities for the fund's portfolio that will
increase in value over the longer term. Dividends or dividend income is secondary.
Gains Distribution - Payments to investment company or mutual
fund shareholders which are based on the gains from securities in the
portfolio that have been sold. These gains are passed through to the shareholders
and are taxable to the shareholders.
distributions from mutual funds usually occur once each year and most often
are paid near the end of each calendar year.
Loss - The amount by which the cost basis of a capital asset exceeds
the proceeds from the sale. In the case of securities, such as stocks or bonds,
if you sell your security for less than your original purchase price, you
may incur a capital loss. Under current law, up to $3,000 of net capital can
be used annually to reduce ordinary income. Capital losses can be used without
limit to reduce capital gains.
Capitalization - The capitalization value of a company or corporation is determined by the
current market price of its issued and outstanding common stock. Capitalization
is calculated by multiplying the latest reported common shares outstanding
by the latest available closing price per share.
Shares - A certificate is evidence of ownership of a bond or shares
of stock. A certificate contains detailed information relating to the issuer
and the owner, including the issuer's name, particulars of the issue, the
number of shares or the principal amount of the bonds, and the name and address
of the owner. The back of the certificate may contain further details about
the issue including a provision for transferring ownership.
shares indicate that the owner of the security or the shares of a mutual fund
holds them in "certificate share" form rather than book-entry form,
for which the purchaser simply receives a receipt.
Clip - To detach the interest coupons from a bearer bond. These coupons must be
presented to a bank, a brokerage house, or the issuer's agent in order for
the holder of the bearer bond to receive interest payment.
Paper - Short-term, unsecured promissory notes issued by corporations
to finance short-term credit needs. These notes are generally sold at a discount
from face value with maturities ranging from 30 - 270 days. Although the large
denominations ($25,000 minimum) of these notes usually keep individual investors
out of this market, the notes are popular investments for money-market mutual
Stock - The term "common stock" refers to a class of capital
stock of a company with no preference to dividends or any distribution of
assets of the company. Common stock usually conveys voting rights and is often
termed "capital stock" if it is the only class of stock that a company
has outstanding (that is, the company has neither preferred nor multiple classes
of common stock). Common stockholders are the residual owners of a company
in that they have a claim to what remains after every other party has been
paid, and the value of their claim depends on the success of the firm.
Deferred Sale Charge - Also referred to as a "CDSC," the
contingent deferred sales charge is a mutual fund redemption fee that is reduced
or eliminated for specified holding periods. For example, a fund might charge
a 6% redemption fee for a holding period of less than one year, a 5% fee for
a holding period of one to two years and so forth.
Security - Convertibles are corporate securities (usually preferred
shares or bonds) that, at the option of the holder, may be exchanged for
another asset, generally a fixed number of shares of common stock. Their
prices are influenced by changes in interest rates and the values of the
assets into which they may be exchanged.
are appropriate for investors who want higher income than is available from
common stock, along with the possibility of greater appreciation than regular
bonds offer. From the issuer's standpoint, the convertible feature is used
to enhance the marketability of the underlying security.
Coupon - The coupon refers to the annual interest paid on a debt security or bond.
A coupon is usually stated in terms of the rate paid on a bond's face value.
For example, a 6% coupon, $1,000 principal amount bond would pay its owner
$60 in interest annually. A coupon is set at a the time a security is issued,
and for most bonds, stays the same until maturity.
also mean the detachable part of the coupon bond that must be presented to
the issuer for payment every six months in order to receive interest.
Risk - Credit Risk is the risk that a borrower will be unable to make
payment of interest or principal in a timely manner.
CUSIP - Committee on Uniform Securities Identification Procedures - the CUSIP is
a unique identification number that is assigned to stock and bond certificates
in an effort to improve the efficiency of clearning operations.
Account - A custodian refers to an individual or organization
that holds in custody and safekeeping someone else's assets. These assets
may be cash, mutual fund shares, securities, or virtually anything of
account is an account controlled by a custodian rather than the owner of the
assets. Custodian accounts are often used for minors or other individuals
who are unable or unwilling to handle their own assets.
Deflation/Disinflation - Deflation is a reduction in consumer or wholesale prices - generally referring
to more than just a temporary decline. Disinflation is a slowdown in the rate
of inflation. For example, a drop in the inflation rate from 4% in one year
to 2% in the next is indicative of disinflation. Generally disinflation is
positive for security prices, but can be difficult for individual companies
that have made investment and borrowing decisions based on a belief that inflation
Receipts - A negotiable certificate that represents a company's publicly
traded debt or equity which entitles the holder to dividends and capital gains
on the underlying security. Depositary receipts are created when a company's
shares or bonds are delivered to a depositary's custodian bank, who in turn
instruct the depositary to issue the receipts. Depositary receipts facilitate
the trading of foreign securities, and inclulde but are not limited to those
issued by domestic banks (American Depositary Receipts), foreign banks (Global
or European Depositary Receipts) and broker-dealers (depositary shares).
Rate - Distribution rate calculations compare the actual income
distributed over the last 12 months to the price per share at the end
of the period. They may include short-term capital gains distributed during
the prior 12 months. Distribution rates are not considered to be standard
calculations since they may vary from fund group to fund group.
Diversification - Investing in a number of different security issues for the purpose of
spreading and reducing the risks inherent in all investing. For example,
an investor seeking diversification for a stock portfolio would purchase
equities of companies that are not similarly affected by the same variable,
i.e., an investor would not combine large investment positions in airlines,
trucking and automobile manufacturing because each industry is significantly
affected by oil prices and interest rates. Proper investment diversification
requires a sufficient number of different assets to adequately spread
Averaging - A system of buying securities at regular intervals
with a fixed dollar amount. Under this system, investors buy by the dollars'
worth rather than by the number of shares. If each investment is of the
same number of dollars, payments buy more shares when the price is low
and fewer when the price is high.
downswings in price benefit investors if they continue the periodic purchases
in both good times and bad. Dollar-cost averaging is based on the belief that
the market or a particular stock or mutual fund will rise in price over the
long term and that it is not possible to identify intermediate highs and lows.
Jones Industrial Average - The Dow Jones Industrial Average, of DJIA,
is a trademark for one of the oldest and most widely quoted measures of stock
market price movements. The Average is calculated by adding the share prices
of 30 large, seasoned industrial firms such as IBM, Exxon, AT&T, Westinghouse,
and GM and dividing the sum by a figure that is adjusted for such things as
stock splits and substitutions. The DJIA, frequently called "the Dow"
celebrated its 100th birthday in 1996, and it is interesting to note that
General Electric is the only original stock that still remains in the Average.
Duration - The number of years required to receive the present value of future payments,
both interest and principal, from a bond. The duration is determined by calculating
the present value of the principal and each coupon, and then multiplying each
result by the period of time before payment is to occur. The concept of duration
is used to relate the sensitivity of bond price changes to changes in interest
Funds - Equity funds invest primarily in equity securities, or stock,
of selected companies. Quite simply, stock is an ownership share or shares
of a corporation, which generally allows the owner or shareholder specific
rights, such as voting and dividends.
Privilege - The Exchange Privilege give a shareholder the right to
exchange shares in one mutual fund for shares in another fund managed by the
same firm - or within one fund family. The rate at which shares are exchanged
is determined by differences in relative values.
is designed to allow investors to move their money among funds generally without
incurring additional sales fee as their investment goals change. For example,
exchange privileges would enable an investor to put money in an aggressive
growth stock fund when they expect the market to turn up sharply, and then
switch to a money-market or more conservative fund when they anticipate a
Ratio - The proportion of assets required to pay annual operating
expenses and management fees of a mutual fund. If a fund charges an annual
fee of 50 cents per $100 of net assets, the expense ratio will be 0.5%. Expense
ratios usually range from 0.4% to 1.5%, depending on the type of fund, the
size of the fund and the degree of cost control employed by its managers.
The expense ratio is independent of any sales fees or charges.
of Funds - A group of mutual funds operated by the same investment
management company. Investors are often able to transfer investments between
mutual funds within a particular family of funds at no charge, or at a nominal
charge. For example, an investor with shares in a growth fund could move funds
out of the growth fund and into a money-market fund or a bond fund without
paying a new sales charge if each of these funds is managed by a single investment
First-Out - An accounting procedure for identifying the order in which
items are used or sold. With FIFO, the oldest remaining items are assumed
to have been sold first. During a period of inflation this procedure tends
to keep costs lower for accounting purposes, and results in higher reported
profits and a greater tax liability.
Yield Curve - At any particular time, similar yields on bonds of similar
risk at all maturity lenghts. During a period of a flat yield curve an investor
would receive approximately the same yield on a long-term bond as he or she
would on a short-term bond, although the former would be subject to greater
To Quality - A movement by investors to acquire higher-quality , lower-risk
securities. For example, an investor might sell bonds rated lower than BBB
(non-investment grade) and invest the proceeds in bonds rated AA or AAA. A
flight to quality usually occurs when investors expect a deterioration in
Contact - A Futures Contract is an agreement to take delivery by the
buyer of the contract or make delivery by the seller of the contract of a
specific commodity on a particular date. The commodities and contracts are
standardized in order that an active resale market will exist.
contracts are available for a variety of items, including grains, metals and
foreign currencies. The various organized futures exchanges specialize in
certain types of contracts, i.e. corn, oats, soybeans and wheat are traded
on the Chicago Board of Trade, while the Commodity Exchange in New York handles
trades in cooper, gold and silver. Other futures markets include the Chicago
Mercantile Exchange, the Coffee, Sugar and Cocoa Exchange, and the International
Monetary Market, etc.
Investing - Investing with the objective or goal of growth of capital
is referred to as growth-oriented investing. In pursuit of this objective,
an investor might select either growth stocks or growth mutual funds.
stocks are those expected to have above-average increases in earnings
and revenues. These companies usually retain most earnings for reinvestment,
and therefore pay smaller dividends. These stocks often sell at relatively
high PE ratios and are subject to wide swings in their price.
funds are investment companies whose major objective is long-term capital
growth. Growth funds may offer substantial potential gains over time, but
can vary significantly in price during bull and bear markets.
Inflation - A general increase in the price level of goods and services. Inflation tends
to have a negative impact on security prices, especially fixed-income securities,
primarily because it forces interest rates higher. Not all securities are
affected to the same degree by inflation. For example, long-term bonds tend
to be affected to a greater extent than short-term bonds, and preferred stock
tends to be affected to a greater degree than many common stocks. A point
to keep in mind is that a certain amount of inflation is already built into
most security prices.
Public Offering - Just as the name indicates, an initial public offering
is 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 outside
capital and a public market for their stock. Investors purchasing stock in
IPOs generally assume large risks for the possibility of large gains. Companies
usually try to schedule initial public offerings during bull markets that
are accompanied by strong investor demand for the securities of small companies
with new concepts.
Rate Risk - The risk that interest rates will rise and reduce the
market value of an investment refers to Interest Rate Risk. Long-term fixed-income
securities subject their holders to the greatest amount of interest rate risk.
Conversely, short-term securities, such as Treasury bills, are influenced
much less by interest rate movements. Common stock prices can also be affected
by interest rate changes, although the linkage is less clear than is the case
with debt securities and preferred stock.
Yield Curve - An unusual relationship between bond yields and maturity
lengths that results when interest rates on long-term bonds are lower than
interest rates on short-term bonds. Inverted refers to the downward slope
of the curve that is drawn to depict this relationship.
Company - A company or trust that uses its capital to invest in
other companies. There are two principal types of investment companies
- the open-end, or mutual fund, and the closed-end. Shares in closed-end
investment companies, some of which are listed on the New York Stock Exchange,
are readily transferable in the open market and are bought and sold like
funds sell their own new shares to investors, stand ready to buy back their
shares when redeemed, and are not listed. Open end-funds are called such because
their capitalization is not fixed, and they issue more shares as demand requires.
Grade - Investment grade relates to a bond being suitable for purchase
by institutions under the "prudent man" rule. Investment grade is
restricted to those bonds graded BBB and above by the rating agencies. The
two most recognized independent rating agencies for municipal bonds are Moody's
and Standard & Poor's.
Standard & Poor's ratings for investment grade bonds are as follows -
AAA highest quality; AA high quality; A good quality; and BBB medium quality.
Any rating below these four investment grades, such as BB, B, etc. would be
considered to be more speculative relative to the higher rated bonds. These
lower grade bonds, however, are usually higher-yielding because of their more
Objective - The financial objective, or financial goal that an
investor uses to determine which kind of investment is appropriate. For
example, if an investor's objective is growth of capital, he/she may choose
growth-oriented mutual funds or individual stocks. If the investor is
more interested in income, he/she might purchase income-oriented mutual
funds or individual bonds.
of investment objectives, combined with the risk tolerance of the investor,
helps them narrow their search to an investment vehicle designed for their
needs at a particular time.
Tenancy with Right of Survivorship - Asset owernship for two or more
persons in which each owner holds an equal share and may give away or sell
that share without permission of the other owner(s). In the event of death,
an owner's share is equally divided among the surviving co-owners. Also referred
to as JTWROS.
Ownership - Ownership of an asset, such as property or securities,
by two or more parties. Joint ownership of property has advantages and disadvantages
compared with individual ownership. For example, the property automatically
passes to the co-owners upon the death of one of the other owners. Also, with
one type of joint ownership, one owner can sell the property without the permission
of the other owners.
Bond/Junk Muni-Bond Fund - Junk bonds are high-risk, high-yield debt
securities that, if rated, are graded less than BBB. These securities are
most appropriate for risk-oriented investors, and are sometimes called "high-yield
bonds." A junk muni-bond fund is a mutual fund or unit trust investing
in relatively low-grade tax-exempt bonds in order to earn a higher rate of
return. The bonds purchased for this portfolio are generally rated below this
Laddering - An investment strategy in which bonds or certificates of deposit that have
different maturities are assembled for a portfolio. For example, an investor
with $100,000 might invest $20,000 in bonds with a 2-year maturity, $20,000
in bonds with a 6-year maturity and so forth. Principal from matured bonds
or CDs is either spent or reinvested in additional bonds or CDs with longer
maturities at the top of the ladder. A laddered portfolio hedges interest
rate changes by providing liquidity with short-term securities while also
providing a relatively steady source of income with long-term fixed-income
Cap - Large cap refers to stocks or mutual funds that invest in stocks
of big corporations ($1 billion or more) that have considerable retained earnings
and a large amount of common stock outstanding. Large cap stocks, which are
generally well-known, include the ones listed in the Dow Jones Averages. Please
note that the dollar amount of ranges vary somewhat and may overlap, depending
on the funds or the index defining them.
First-Out - An accounting method for identifying the order in which
items are used or sold. With last-in, first-out, the most recently acquired
items are assumed to be sold first. During a period of inflation, last-in,
first-out accounting tends to result in high costs that reduce reported profits.
The reduced profits result in a lower income-tax liability.
Liquidity/Liquidate - Liquidity refers to the ability of the market in a particular security to
absorb a reasonable amount of buying or selling at reasonable price changes.
Liquidity is one of the most important characteristics of a good market.
is the act of selling stock or debt securities. For example, a portfolio manager
might decide to "liquidate" a position by selling all of the shares
held in the portfolio.
Call - A call to an investor for additional funds when the market
value of securities in the investor's margin account has fallen to the point
that the investor's equity (the value of the securities minus the amount owed)
does not meet an established minimum. If the investor does not supply the
required money or securities, the firm will sell a certain number of securities
sufficient to bring the account into conformity. A maintenance call is a type
of margin call.
Call - A margin is the amount paid by the customer when using a brokerage
firm's credit to buy or sell a security. Under Federal Reserve regulations,
the initial margin required since 1945 has ranged from the current rate of
fifty percent of the purchase price up to one-hundred percent. A margin call
is a demand upon a customer to put up money or securities with the brokerage
firm. The call is made when a purchase is made, or if a customer's equity
in a margin account declines below a minimum standard set by the Exchange
or by the firm.
Mid-Cap - Mid-cap stocks or mutual funds usually are companies with a market capitalization
of $500 million to $3 billion - $5 billion, or mutual funds that invest in
companies that size.
Initial Investment - When used in the context of a mutual fund or
investment company, the minimum initial investment is the lowest dollar amount
required to open an account. These initial investments may vary dramatically
from one fund or company to another. Once the minimum initial investment requirement
has been met and the account is established, subsequent investments or additions
are typically allowed in any amount.
Fund - A money market fund is a mutual fund that sells shares of ownership
and uses the proceeds to purchase short-term , high-quality securities such
as Treasury bills, negotiable certificates of deposit and commercial paper.
Income earned by shareholders is received in the form of additional shares
of stock in the fund (usually priced at $1 each). Although no fees are generally
charged to purchase or redeem shares in a money-market fund, an annual management
charge or fee is generally levied by the fund's advisers.
pays a return that varies with short-term interest rates, is relatively liquid,
but varies in yields and features. Investments in money-market funds are neither
insured nor guaranteed by the U.S. Government, and there are no assurances
that the funds will be able to maintain stable net asset values. Both taxable
and tax-exempt varieties of money-market funds are available.
Bond Insurance -Municipal bond insurance is a guarantee from a third
party that principal and interest will be paid to a bondholder. This insurance
is written by private corporations for a fee paid by issuers to obtain higher
credit ratings and lower interest costs, but does not remove market risks.
There are several insurers of municipal bonds in the U.S. including MBIA,
AMBAC, and FGIC.
Municipal Bond Insurance Association, is a consortium of five private casualty
insurance companies formed in 1974 to guarantee interest and principal payments
on municipal debt. Aetna Casualty, Aetna Insurance, Continental, Fireman's
Fund and Travelers made up this consortium.
Financial Guaranty Insurance Corporation, is a private insurer of interest
and principal payments on municipal bond issues.
American Municipal Bond Assurance Corporation, is a subsidiary of MGIC Investment
Corporation, an insurer of tax-exempt portfolios of mutual funds and unit
investment trusts as to payment of interest and principal.
Securities - Shares in a pool of mortgages or other debt. These securities
are generally pass-through securities, which means that principal and interest
payments on the underlying securities (less servicing fees) are passsed through
to shareholders on a pro-rata basis. These securities involve prepayment risk,
which is the risk that the underlying mortgages or other debt may be refinanced
or paid off prior to their maturities during periods of declining rates. In
that case, a portfolio manager may have to reinvest the proceeds of the securities
at a lower rate. Potential market gains on a security subject to prepayment
risk may be more limited than potential market gains on a comparable security
not subject to prepayment risk.
Funds - A mutual fund is an investment company that continually offers
new shares and stands ready to redeem existing shares from the shareholders.
Mutual funds are regulated by the Investment Company Act of 1940 and vary
substantially in terms of types of investments, their sales charges and their
management fees. Mutual funds offer their shareholders the opportunity to
pool money with other investors with similar investment objectives. Other
benefits include continuous professional management of the fund's securities,
diversification, or part ownership of dozens of different securities to help
spread the risk, and easy-to-track performance. Automatic reinvestment of
earnings and ready liquidity also add to the list of benefits of mutual fund
investing - which helps to explain their popularity. There are currently more
than 9,000 mutual funds available, and this number is growing each and every
return and principal value of an investment in a mutual fund will fluctuate,
so that an investor's shares, when redeemed, may be worth more or less than
their original cost.
NASDAQ - The National Association of Securities Dealers Automated Quotation System
is a computerized system for storing and displaying current price quotations
on the securities traded on the NASDAQ stock market. The NASDAQ market is
sometimes referred to as the "over-the-counter" market, or the market
that trades the common stock of companies not listed on a major exchange such
as the New York or American Stock Exchange. The NASDAQ Composit Index indicates
price movements of securities in the NASDAQ market and was initiated in 1971.
Asset Value - Net Asset Value, or NAV, is the valuation of an investment
company's or mutual fund's shares calculated by dividing the value of the
net assets (i.e., the value of the assets less the liabilities) by the total
number of shares outstanding.
NAV is most
commonly referred to as the price per share an investor would receive when
selling a fund's shares back to the fund, or redeeming shares. Certain funds
impose sales charges and/or redemption fees upon redemption, thereby reducing
the principal amount an investor will receive upon the sale of shares. Net
asset value per share is similar in concept to book value per share for other
types of securities.
Lot - An odd lot is a unit of trading in securities that is made up
of fewer than 100shares of stock of $25,000 face amount of bonds.
Contract - An option is a contract that permits the owner, depending
on the type of option held, to purchase or sell an asset at a fixed price
until a specific date. An option to purchase an asset is a "call"
and an option to sell an asset is a "put." Depending on how an investor
uses options, the risks can be quite high. Investors in options must be correct
on timing as well as on valuation of the underlying asset to be successful.
Par - When referring to a common stock share, par means a dollar amount assigned
to the share by the company's charter. Par value may be used to compute the
dollar amount of common shares on the balance sheet. Par value has little
relationship to the market value of common stock, and many companies issue
"no-par" stock but give a stated per share value on the balance
sheet. In preferred stock, par signifies the dollar value upon which dividends
par value is the face amount of the bond, usually $1,000.
Point - When referring to shares of stock, a point means $1. For example, if XYZ
Corp. shares rise 3 points, each share has risen $3. In the case of bonds,
a point mean $10, since a bond is quoted as a percentage of $1,000. A bond
that rises 3 points gains 3 percent of $1,000, or $30 in value. An advance
from 87 to 90 would mean an advance in value from $870 to $900.
In the case
of market averages, the word point means merely that and nothing more. For
example, if the NYSE Composite Index rises from 488 to 489, it has risen a
point. A point in this index is not equivalent to $1.
Stock - Preferred stock is a security that shows ownership in a company
that gives the holder a claim prior to the claim of common stockholders on
earnings and also generally on assets in the event of liquidation. Most preferred
stock issues pay a fixed dividend set at the time of issuance. Because no
maturity date is stipulated, these securities are priced on dividend yield
and trade much like long-term corporate bonds.
Ratio - The price/earnings ratio, or PE, is a popular way to compare
stocks selling at various price levels. The PE ratio is the price of a share
of stock divided by earnings per share for a twelve-month period. For example,
a stock selling for $50 per share with earnings of $5 per share is said to
be selling at a PE ratio of 10. Price/earnings ratios vary significantly among
companies, among industries, and over time. A relatively high PE ratio is
usually an indication that investors believe the firm's earnings are likely
Statement - A proxy is the written authority to act or speak for
another party. Proxies are sent to stockholders or mutual fund shareholders
by management in order to solicit authority to vote the owners' shares
at annual meetings.
statement is the material which accompanies the solicitation of a proxy from
stockholders/shareholders. The statement lists the items to be voted on, such
as the nominees for directors or trustees, the auditing firm being recommended,
and resolutions submitted by management and shareholders.
Offering Price - Public Offering Price, of POP, is the price at which
securities are offered for sale to the public, or the price an investor will
pay when buying shares of a mutual fund. The public offering price includes
any applicable sales charges.
Option - A Put Option conveys to its holder the right, but not the
obligation, to sell a specific asset at a predetermined price until a certain
date. In most cases puts have 100 shares of stock as the underlying asset.
For example, an investor may purchase a put option on XYZ Corp. common stock
that confers the right to sell 100 shares at $80 per share until September
21. Puts are sold for a fee by other investors who incur an obligation to
purchase the asset if the option holder decides to sell. Investors purchase
puts in order to take advantage of a decline in the price of the asset.
Redemption - When referring to mutual fund or investment company shares,
a qualified redemption is the proceeds from the sale of another mutual fund
or investment company for which the shareholder incurred a sales charge.
redemption could then allow the shareholder to purchase shares of another
mutual fund at net asset value, without incurring additional sales charges.
Lot - A round lot is a unit of trading or a multiple thereof in a
particular type of security. For stocks, the unit of trading in a round lot
is 100 shares, or 200 shares, etc. For corporate, municipal and government
bonds, a round lot is usually considered to be $100,000 of principal amount
of securities per trade.
Yield - The SEC has defined the standard yield calculation for
all non-money funds. The purpose of the standard calculation is to provide
shareholders with the ability to compare performance data of different
funds. The standard calculation: compares the income for the last 30 days,
annualized, as a percentage of the price per share at the end of the period;
uses the yield to maturity method of accreting discounts and amortizing
premiums; and does not take into account reinvestment of income and capital
Cap - Small cap is a term used for small capitalization stocks
or for mutual funds that invest in small cap stocks. Small cap stocks
generally have a market capitalization (which is arrived by multiplying
shares outstanding by the stock price) of $500 million or less. A microcap
stock generally has a market capitalization of $50 million or less. Small
cap and microcap stocks are usually less established and less well known,
but often faster growing than larger companies.
& Poor's - Standard & Poor's, or S&P, is an investment
advisory service that publishes financial data. This subsidiary of McGraw-Hill
also rates debt securities and distributes a series of widely followed stock
indices. The most recognized of these stock indices is Standard & Poor's
500 Stock Index, or S&P 500, which is an inclusive index made up of 500
stock prices including 400 industrials, 40 utilities, 20 transportation and
40 financial issues.
Name - Securities held in the name of the brokerage firm holding the
certificate instead of the customer's name are said to be held in "street
name." This occurs when the securities have been bought on margin, or
when the customer wishes the security to be held as such.
registered in street name simplifies trading because no delivery of or signature
on the certificate is required.
Swap - To trade one asset for another. For example, the sale of a block of bonds
and the purchase of another block of similar market value. Swaps may be made
to achieve many goals, including establishing a tax loss, upgrading credit
quality, extending or shortening maturity, etc.
Freedom Day - "Does Tax Freedom Day fall on April 15th - the
deadline for filing of individual tax returns in the U.S.?" No, in fact
the average employed American will be working for the government well beyond
April 15th. Indeed, according to the National Tax Foundation, most of us will
not be working for ourselves until after May 3, 2001 (National Tax Freedom
Day). In other words, in terms of the amount of taxes we have to pay each
year, every dollar earned up until May 3rd goes toward paying federal, state
and local taxes!
reality of the situation is that no tax freedom until after May 3rd for the
average American vividly illustrates how important it is to plan our financial
Equivalent Yield - The pretax yield that provides the same return
as a specified after-tax yield. The taxable equivalent yield is calculated
by dividing the tax-free yield by the difference obtained from subtracting
the applicable tax rate from the number "1."
for an investor who pays federal taxes at the rate of 40%, an after-tax yield
of 6% has a taxable equivalent yield of 0.06/(1 - 0.40), or 10%; i.e. an investor
who earns a tax-free yield of 6% would have to earn 10% in a taxable investment
to equal the tax-free return or yield.
by the Entirety - A type of asset owernship limited to married couples
in which each spouse holds an equal share of the asset, but neither may sell
of give away an interest without the other's permission. If one spouse dies,
the deceased's share automatically passes to the surviving spouse.
in Common - A type of asset ownership for two or more persons in which,
upon the death of one owner, his or her share passes to heirs if a will is
left, or to the estate if no will is left, rather than to the co-owners. Transactions
involving the property or asset require written permission of all the owners.
Return - "Is using total return an accurate measure when comparing
different fund?" In simple terms, total return is one measurement of
a fund's performance. It measures the change in value of a hypothetical investment
in a fund over a given period of time, assuming that all dividends and capital
gains distributions are reinvested in additional shares.
however, about comparing total returns of different funds. Many variables
affect total return, and probably the most important variable is the fund's
investment objective. Total return does not take into consideration whether
the fund is a domestic equity fund, a government bond fund, an international
equity fund, a municipal bond fund, a state-specific municipal bond fund (like
many of the funds in the Aquilasm Group of Funds), or any of the
other numerous types of funds. This is important, since each type of fund
offers different benefits to its investors.
you hear that one fund has a higher total return than another fund over a
specific period of time, ask yourself, "why?" and remember to compare
apples with apples and oranges with oranges.
on Death Registration - Transfer on Death, or TOD, Registration
is available to the owners of securities or mutual fund shareholders who
reside in states which have adopted the Uniform TOD Act. The purpose of
TOD registration is to enable the owner/shareholder to designate one or
more beneficiaries to receive the shares in the account automatically
upon the owner's death, outside of probate. The owner retains all normal
rights of ownership during her/her lifetime.
on Death Registration generally results in assets passing with minimal delay,
and can be an important estate planning tool.
Tax-Exempt - Relating to a municipal bond, trust or fund paying interest
that is free of federal, state and local income taxation for individuals residing
in certain localities. This situation results from the fact that most, but
not all states and localities exempt municipal bond interest from taxation
if the bonds are issued within that particular state. Triple tax exemption
is of particular interest to investors residing in high-tax states and localities.
Rate - Turnover refers to the trading volume of a market, of a
particular security or the number of times that an asset is replaced during
a given period.
rate is the trading volume in a particular stock during a time period (generally
one year) as a percentage of the total number of shares of that stock outstanding.
The turnover rate adjusts for the differences in outstanding shares and provides
a measure of the relative activity in a stock. For an investment company or
mutual fund, the volume of portfolio issues traded as a percentage of the
number of issues in the portfolio measures the fund's portfolio turnover.
Underwriter - An investment banker that acts to guarantee the sale of a new securities
issue by purchasing the securities for resale to the public. The underwriter
acts as the middleman between the corporation or municipal issuer issuing
new stocks or bonds and the public.
one or more underwriters buy outright from a corporation or municipal issuer
a new issue of stocks or bonds. The group forms a syndicate to sell the securities
to individuals and institutions.
Investment Trust - An unmanaged portfolio of securities put together
by an investment adviser and sold in units to investors by brokers. Units
of the trust usually sell for $1,000 including a sales commission at the time
of the initial offering. Sponsoring brokers usually maintain a secondary market
for the units, the value of which depends on the value of the securities held
by the trust. Because of the initial sales charge, unit investment trusts
are usually not attractive for short-term trading.
Treasuries/Bills/Bonds/Notes - Treasuries refer to all bonds backed
by the full faith and credit of the U.S. Government that are issued through
the Department of the Treasury. The safety of Treasuries is the benchmark
against which all other debt securities are measured.
Bills are short-term (one year or less) debt securities of the U.S. Government
sold in minimum amounts of $10,000 and multiples of $5,000 above the minimum.
Bills with 13-week and 26-week maturities are auctioned each Monday, while
52-week bills are auctioned every four weeks. These obligations, which
are very easy to resell, may be purchased through commercial banks, brokers,
or directly from the Federal Reserve.
Note is an intermediate-term (1 - 10 years), interest-bearing debt obligation
issued in denominations of $1,000 or more. The notes are sold by cash
subscription, in exchange for outstanding or maturing government issues,
or at auction.
Bond is longer-term interest-bearing debt of the U.S. Treasury, with maturities
of 10 years or longer. These bonds are issued in minimum denominations of
$1,000 and are quoted and traded in thirty-seconds of a point.
Investing - Investing with the objective or goal of selecting undervalued
securities is referred to as value-oriented investing. In pursuit of this
objective, an investor might select either value stocks or value mutual funds.
stocks are defined as those considered undervalued on the basis of the
value of the company's assets. For example, an investor may look for a
stock in which current assets exceed total liabilities on a per share
basis by more than the market price of the stock. Value investing emphasizes
asset value more than earnings projections.
are investment companies whose major objective is the selection and purchase
of securities for the portfolio which management believes to be undervalued
in relationship to their intrinsic value and projected growth rate of the
underlying companies. A value fund would strive to capitalize on these companies
by owning stock in them prior to the recognition of their potential by the
Volatility - When referring to an investment, volatility is the relative rate at which
a security or mutual fund share tends to move up or down in price. Volatility
is usually measured by comparing percentage changes in the price with those
in a market average, such as the New York Stock Exchange Common Stock Index,
between the same dates. For example, if the asset value of a fund advanced
15% while the NYSE index rose 10%, the volatility of the fund would be 15
divided by 10, or 1.50.
Warrant - A Warrant or Subscription Warrant is a type of security, usually issued
together with a bond or preferred stock, that permits its owner to purchase
a specific number of shares of stock at a predetermined price. That price
is usually higher than the market price at the time of issuance. For example,
a warrant may give an investor the right to purchase ABC Corp. common stock
at a price of $25 per share until October 1, 2007.
is usually issued to enhance the marketability of the accompanying security,
and their values are generally more volatile than the value of the underlying
stock or bond.
Sale - The illegal purchase or repurchase of an asset within 30 days
of the sale date of a basically identical asset that was sold in order to
take a tax loss. For example, if an investor sold a security at a loss and
then immediately repurchased the same security or a basically identical security,
the Internal Revenue Service would consider the transaction a wash.
Yield - Yield is the percentage return on an investment - also referred to as return.
In the case of a mutual fund yield, it is a measure of net income (dividends
and interest) earned by the securities in the fund's portfolio less fund expenses
for a specified period. A fund's yield is expressed as a percentage of the
maximum offering price per share on a specified date. A given investment can
have a variety of yields because of the many methods used to measure yield.
yield is just one measurement of return for tax-free municipal bonds, and
it is the pre-tax yield that provides the same return as a specified after-tax
Curve/Yield Spread - The yield curve is the relation between bond
yields and maturity lengths at any particular time. The yield curve usually
has a positive slope because yields on long-term bonds generally exceed yields
on short-term bonds. The shape of the yield curve is influenced by a number
of factors including the relative risk between long and short-term securities
and by investors' expectations as to the level of future interest rates.
refers to the difference in yield, at a given time, between two bonds or between
different segments of the bond market. For example, the yield spread between
AAA-rated bonds and A-rated bonds may be one half of 1% at a particular time.
Likewise, the yield spread between long-term taxable and non-taxable bonds
may be 2%. Yield spread may be caused by various factors including maturity
difference, risk difference or taxability difference.
to Maturity - The annual return on a bond held to maturity when interest
payments and price appreciation (if priced below par) or depreciation (if
priced above par) are considered. The yield to maturity is greater than the
current yield when the bond is selling at a discount and less than the current
yield when the bond is selling at a premium.
are generally on a yield to maturity basis, although an investor who sells
a bond before maturity may earn a yield different from the yield to maturity
as calculated at the time the security was purchased.