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Glossary

401(K) Plan

A qualified plan established by employers to which eligible employees may make salary deferral (salary reduction) contributions on a post-tax and/or pretax basis. Employers may make matching or non-elective contributions to the plan on behalf of eligible employees and may also add a profit-sharing feature to the plan.

Active Management

The use of human element, such as a single manager, co-managers or a team of managers, to actively manage a funds portfolio. Active managers rely on analytical research, forecasts and their own judgment and experience in making investment decisions on what securities to buy, hold and sell. The opposite of active management is called passive management, better known as “indexing.”

Investors who believe in active management do not follow the efficient market hypothesis. They believe it is possible to profit from the stock market through any number of strategies that aim to identify mis-priced securities.

Investment companies and fund sponsors believe it’s possible to outperform the market and employ professional investment managers to manage one or more of the company’s mutual funds. The objective with active management is to produce better returns than those of passively managed index funds. For example, a large cap stock fund manager would look to beat the performance of the Standard & Poor’s 500 Index. Unfortunately, for a large majority of active managers, this has been difficult. This phenomenon is simply a reflection of how hard it is, no matter how smart the manager, to beat the market.

American Stock Exchange

The third largest stock exchange by trading volume in the United States. The AMEX is located in New York City and handles about 10 Percent of all securities traded in the U.S.

Asset Class/Category

Is a type of investment, such as stocks, bonds, real estate or cash

Asset Allocation

Investment strategy that aims to balance risk and reward by apportioning a portfolio’s assets according to an individual’s goals, risk tolerance and investment time horizon. The three main asset classes (equities, fixed income, and cash & equivalents) have different levels of risk and return so each will behave differently over time.

Bid/Ask Spread

The amount by which the ask price exceeds the bid. This is essentially the difference in price between the highest price that a buyer is willing to pay for an asset and the lowest price for which a seller is willing to sell it. For example, if the bid price is $20 and the ask price is $21 then the bid-ask spread is $1.

Bonds

A debt investment in which an investor loans money to an entity (corporate or government) that borrows the funds for a defined period of time at a fixed interest rate. Bonds are used by companies, municipalities, states and the U.S. And foreign governments to finance a variety of projects and activities.

Bonds are commonly referred to as fixed-income securities and are one of the three main asset classes, along with stocks and cash equivalents.

Certificate of Deposit (CD)

A savings certificate entitling the bearer to receive interest. A CD bears a maturity date, a specified fixed interest rate and can be issued in any denomination. CDs are generally issued by commercial banks and are insured by the FDIC. The term of a CD generally ranges from one month to five years.

Commissions

A service charge assessed by a broker of investment advisor in return for providing investment advice and/or handling the purchase or sale of a security. Most major, full-service brokerage derive most of their profits from charging commissions on client transactions. Commissions vary widely from brokerage to brokerage.

Correlation

In the world of finance, a statistical measure of how two securities move in relation to each other. Correlations are used in advanced portfolio management.

Diversification

A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique contends that a portfolio of different kinds of investments will, on average, yield higher returns and pose a lower risk than any individual investment found within the portfolio.

Diversification strives to smooth out unsystematic risk events in a portfolio so that the positive performance of some investments will neutralize the negative performance of others. Therefore, the benefits of diversification will hold only if the securities in the portfolio are not perfectly correlated.

Efficient Frontier

A line created from the risk-reward graph, comprised of optimal portfolios.

Equities

A stock or any other security representing an ownership interest.

In terms of investment strategies, equity (stocks) is one of the principal asset classes. The other two are fixed-income (bonds) and cash/cash equivalents. These are used in asset allocation planning to structure a desired risk and return profile for an investor’s portfolio.

Fixed Income

A type of investing or budgeting style for which real return rates or periodic income is received at regular intervals at reasonably predictable levels. Fixed-income budgeters and investors are often one and the same – typically retired individuals who rely on their investments to provide a regular, stable income stream. This demographic tends to invest heavily in fixed-income investments because of the reliable returns they offer.

Individual Retirement Account (IRA)

An investing tool used by individuals to earn and earmark funds for retirement savings. There are several types of IRAs: Traditional IRAs, Roth IRAs, SIMPLE IRAs and SEP IRAs.

Traditional and Roth IRAs are established by individual taxpayers, who are allowed to contribute 100 percent of compensation (Self-employment income for sole proprietors and partners) up to a set maximum dollar amount. Contributions to the Traditional IRA may be tax deductible depending on the taxpayer’s income, tax filing status and coverage by an employer-sponsored retirement plan. Roth IRA contributions are not tax-deductible.

SEPs and SIMPLEs are retirement plans established by employers. Individual participant contributions are made to SEP IRAs and SIMPLE IRAs.

Market Timing

The act of attempting to predict the future direction of the market, typically through the use of technical indicators or economic data.

The practice of switching among the mutual fund asset classes in an attempt to profit from the changes in their market outlook.

Mutual Fund

A mutual fund is a company that brings together money from many people and invests it in stocks, bonds, or other assets. The combined holding of stocks, bonds or other assets the fund owns are knows as its portfolio. Each investor in the fund owns shares, which represent a part of these holdings.

NASDAQ

A computerized system that facilitates trading and provides price quotations on more that 5000 of the more actively traded over the counter stocks. Created in 1971, the NASDAQ was the world’s first electronic stock market.

Stocks on the NASDAQ are traditionally listed under four-or-five-letter ticker symbols. If the company is a transfer from the New York Stock Exchange the symbol may be comprised of three letters.

New York Stock Exchange (NYSE)

A stock exchange based in New York City, which is considered the largest equities-bases exchange in the world based on total market capitalization of its listed securities. Formerly run as a private organization, the NYSE became a public entity in 2005 following the acquisition of electronic trading exchange Archipelago. The parent company of the New York Stock Exchange is now called NYSE Euronext, following a merger with the European exchange in 2007.

Also known as the “Big Board,” the NYSE relied for many years on floor trading only using the open outcry system. Today, more than half of all NYSE trades are conducted electronically, although flood traders are still used to set pricing and deal in high volume institutional trading.

Passive Management

A style of management associated with mutual and exchange-traded funds (ETFs) where a fund’s portfolio mirrors a market index. Passive management is the opposite of active management in which a fund manager(s) attempts to beat the market with various investing strategies and buying/selling decisions of a portfolio’s securities. Also known as “passive strategy,” “passive investing” or “index investing.”

Portfolio

A grouping of financial assets such as stocks, bonds and cash equivalents, as well as their mutual, exchange-traded and closed-fund counterparts. Portfolios are held directly by investors and/or managed by financial professionals.

Return

The gain or loss of a security in a particular period. The return consists of the income and the capital gains relative on an investment. It is usually quoted as a percentage.

Risk

The chance that an investment’s actual return will be different than expected. This includes the possibility of losing some or all of the original investment. Risk is usually measured by calculating the standard deviation of the historical returns or average returns of a specific investment.

Risk Tolerance

The degree of uncertainty that an investor can handle in regard to a negative change in the value of his or her portfolio.

Roth IRA

An individual retirement plan that bears many similarities to the traditional IRA, but contributions are not tax deductible and qualified distributions are tax-free. Similar to the other retirement plan accounts, non-qualified distributions from a Roth IRA may be subject to a penalty upon withdrawal.

Securities Exchange Commission (SEC)

A government commission created by Congress to regulate the securities markets and protect investors. In addition to regulation and protection, it also monitors the corporate takeovers in the U.S. The SEC is composed of five commissioners appointed by the U.S. The SEC is composed of five commissioners appointed by the U.S. And approved by the senate. The statutes administered by the SEC are designed to promote full public cocksure and to protect the investing public against fradulent and manipulative practiced in the securities markets. Generally, most issues of securities offered in interstate commerce, through the mail or on the internet, must be registered with the SEC.

Standard Deviation

The measure of the dispersion of a set of data from its mean. The more spread apart from the data, the higher the deviation. Standard deviation is calculated as the square root of variance.

In finance, standard deviation is applied to the annual rate of return of an investment to measure the investments volatility. Standard deviation is also known as historical volatility and is used by investors as a gauge for the amount of expected volatility.

Stock

There are two main types of stock: common and preferred. Common stock usually entitles the owner to vote at shareholders’ meetings and to receive dividends. 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.

Also known as “shares” or “equity.”

Stock market (The “market)

The market in which shares are issued and traded either through exchanged or over-the-counter markets. Also known as the equity market, it is one of the most vital areas of a market economy as it provides companies with access to capital and investors with a slice of a ownership in the company and the potential of gains based on the company’s future performance.

Stock Picking/Selection

A situation in which an analyst or investor uses a systematic form of analysis to conclude that a particular stock will make a good investment and, therefore, should be added to his or her portfolio. The position can be either long or short and will depend on the analyst’s or investor’s outlook for the particular stock’s price.

Treasury Bills (T-Bills)

A short-term debt obligation backed by the U.S. Government with a maturity of one year or less. T-Bills are sold in denominations of $1,000 up to a maximum purchase of $5 million and commonly have maturities of one month (four weeks), three months (13 weeks) or six months (26 weeks).

T-Bills are issued through a competitive bidding process at a discount from par, which means that rather than paying fixed interest payments like conventional bonds, the appreciation of the bond provides the return to the holder.

Track-record Investing

Using an investment’s performance in the past as an indicator of whether it will perform well in the future.

Turnover

In accounting, the number of times an asset is replaced during a financial period.

The number of shares traded for a period as a percentage of the total shares in a portfolio or of an exchange.

Value Stocks

The strategy of selecting stocks that trade for less than their intrinsic values. Value investors actively seek stocks of companies that they believe the market has undervalued. They believe the market overreacts to good and bad news, resulting in stock price movements that do not correspond with the company’s long-term fundamentals. The result is an opportunity for value investors to profit by buying when the price is deflated.

Typically, value investors select stocks with lower-than-average price-to-book or price-to-earnings ratios and/or high dividends yields.

Volatility

A statistical measure of the dispersion of return for a given security or market index. Volatility can either be measure by using the standard deviation or variance between returns from that same security or market index. Commonly, the higher the volatility, the riskier the security.