Common Terms
The Language of Investing
These terms may be new or confusing to you – but they are my second language.
I can help you make sense of how the stock market works – and how my experience as a bond and stock trader will maximize your profits.
ACTIVE MANAGEMENT – An investment approach that seeks to exceed the average returns of the financial markets. Active managers rely on research, market forecasts, and their own judgment and experience in selecting securities to buy and sell.
ASSET ALLOCATION – The distribution of your funds among various investment alternatives or asset classes. Typically, asset allocation is expressed in percentages; for example, 40% equities, 40% fixed income, 20% cash.
ASSETS - Resources owned by a company, fund, or individual; i.e. cash, investments, money due, materials, inventories, etc.
BACK-END LOAD FEE - The fund company compensates the fund salesperson, but you often pay a redemption fee if you cash in your fund units before a set time period.
BALANCED FUND – A fund that seeks both growth and income, with stability of principal, through a portfolio that includes both stocks and bonds.
BEAR MARKET - A market in which prices are falling, or expected to do so.
BOND - A debt security issued by corporations, governments, or their agencies, in return for cash from lenders and investors. A bond holder is a creditor, not a shareholder.
BULL MARKET - A market in which prices are rising, or expected to do so.
COMMODITY - A tradable item that can generally be further processed and sold; i.e. metals, wheat, coal, etc.
COMPOUND INTEREST - Interest which is calculated on both the principal and interest previously earned.
DIVIDEND - The amount of a corporation’s after-tax earnings that it pays to its shareholders.
DOW JONES INDEX - A leading index of U.S. stock market prices.
EFT / EXCHANGE TRADED FUNDS - An investment vehicle traded on the stock exchanges. An ETF holds assets such as stocks or bonds and trades at approximately the same price as the net asset value of its underlying assets over the course of the training day. Most ETF's track an index, such as the S&P 500 or MSCI EAFE.
EQUITIES – Also called stocks. A security representing ownership rights in a company. A stockholder is entitled to share in the company’s profits, some of which may be paid out as dividends.
FINANCIAL ANALYST - A person trained to advise on the risk and return characteristics of investments and in the management of investment portfolios.
FIXED-INCOME SECURITIES – Also called bonds. Essentially, these are loans that you make to a government or corporation (called the issuer) when it needs to raise the cash. They have a maturity date, which is the date the issuer is obligated to repay you the principal, or face amount, of the bond. Bonds also generally pay you interest until their maturity date.
FRONT LOAD FEE - This is the fee paid to the salesperson or adviser selling you the fund. This is a one-time cost upon purchase. You pay this directly to the adviser. This is not included as part of the MER as it is a one-time cost.
GROWTH FUND – A mutual fund that generally invests in stocks of companies believed to have above-average potential for growth in revenue and earnings. These stocks typically have low dividend yields and above-average prices in relation to such measures as earnings and book value.
HIGH YIELD BOND – A bond that has a rating of BB or lower and that pays a higher yield to compensate for its greater risk. Also known as junk bonds.
INDEX - A numerical measure of price movement in financial markets.
INDEX FUND – A passively-managed mutual fund that seeks to match the performance of a particular market index.
INFLATION-INDEXED SECURITIES – Bonds issued by the U.S. government, government agencies, or corporations, whose principal and interest payments—unlike those of conventional bonds—are adjusted over time to reflect inflation.
INVESTMENT - An asset acquired for the purpose of producing income and/or capital gains.
LIQUIDITY - The ability of an investment to be easily converted into cash with little- to no loss of capital and a minimum of delay.
MARKET - A public place where buyers and sellers conduct transactions, either directly or via intermediaries.
MER - The management expense ratio is a measure of management fees as a percentage of assets in the fund. It's the annual cost of owning the fund. This includes paying the money manager, administrative, legal and accounting costs and trailer fees.
MONEY MARKET FUND – A mutual fund designed to provide safety of principal and current income by investing in securities that mature in one year or less, such as bank certificates of deposit, commercial paper and U.S. Treasury bills. Money market funds seek to maintain a stable $1 net asset value. Money market funds have the lowest risk of any type of mutual fund, but may offer the lowest potential for gains.
MUTUAL FUND – A diversified, professionally managed portfolio of securities that pools the assets of individuals and organizations to invest toward a common objective such as current income or long-term growth.
NATIONAL ASSOCIATION OF SECURITIES DEALERS AUTOMATED QUOTATIONS (NASDAQ) - The New York-based U.S. stock exchange that specializes in technology companies.
NET ASSET VALUE (NAV) – The market value of a mutual fund’s total assets, minus liabilities, divided by the number of shares outstanding. The value of a single share is also called its share value or share price.
NO-LOAD FUNDS - These funds have no load fees associated with the purchase. This is often because the adviser selling the fund works for the company that runs the fund.
OPTION - An agreement that conveys the right, but not the obligation, to the holder to buy or sell a particular security at a stipulated price within a stated period of time.
PASSIVE MANAGEMENT – A low-cost investment strategy in which a mutual fund attempts to match - rather than outperform - a particular stock or bond market index; also known as indexing.
PORTFOLIO - An investor’s collection of investment holdings, usually with reference to its composition.
PROSPECTUS - A legal document, required by the Securities Act of 1933, setting forth the complete history and current status of a security or fund; it must be made available whenever an offer to sell is made to the public.
RETURN - The amount of money received annually from an investment, usually expressed as a percentage.
RISK - The measurable likelihood of loss or less-than-expected returns.
SECURITIES AND EXCHANGE COMMISSION (SEC) - The U.S. regulatory authority for the securities industry.
SECURITIES – The general name used to describe stocks, government obligations, corporate bonds, or ownership rights, such as options or futures.
SECURITY - The paper right to a tradable asset.
SIMPLE INTEREST - Interest that is paid on the initial investment alone.
SPECIAL FEES - These include account et-up fees, annual fees associated with registered accounts, fees for selling shortly after purchasing a fund, and charges for switching between funds. They can be included in the MER or the company may bill you directly.
STOCK - An instrument that signifies an ownership position (equity) in a corporation.
TOTAL RETURN – A percentage change, over a specified time period, in a mutual fund’s net asset value, adjusted to reflect the reinvestment of all dividend and capital gain distributions.
TRAILER FEES - The adviser selling you the fund is compensated by the fund with a fee based on the small percentage (0.25 to 0.5 percent of your fund assets, in exchange for offering you ongoing advice about the fund. A trailer fee is not a load fee.
TREND - The current general direction of movement security or commodity prices.
VALUE FUND – A mutual fund that emphasizes stocks of companies whose current market values are generally regarded as trading below their intrinsic market values. A value company often pays regular dividend income to shareholders and sells at relatively low prices in relation to its earnings or book value
VOLATILITY - The extent of fluctuation in share price, interest rates, etc. The higher the volatility, the less certain an investor is of return; therefore, volatility is one measure of risk.
