401(k)

You participate in a 401(k) retirement savings plan by deferring part of your salary into an account set up in your name. Any earnings in the account are federal income tax deferred. If you change jobs, 401(k) plans are portable, which means that you can move your accumulated assets to a new employer's plan, if the plan allows transfers, or to a rollover IRA. With a traditional 401(k), you defer pretax income, which reduces the income tax you owe in the year you make the contribution. You pay tax on all withdrawals at your regular rate, determined by your filing status and tax bracket. With the newer Roth 401(k), which is offered by some but not all employers who offer traditional 401(k)s, you contribute after-tax income. Earnings accumulate tax deferred, but your withdrawals are completely tax free if your account has been open at least five years and you're at least 59 1/2. In either type of 401(k), you can defer up to the federal cap, plus an annual catch-up contribution if you're 50 or older. However, you may be able to contribute less than the cap if you're a highly compensated employee (HCE) or if your employer limits contributions to a percentage of your salary. Your employer may match some or all of your contributions, based on the terms of the plan you participate in, but matching isn't required. With a 401(k), you are responsible for making your own investment decisions by choosing from among investment alternatives offered by the plan. These alternatives may include mutual funds, variable annuity separate accounts, fixed-income investments, and sometimes company stock. Your plan may also offer a brokerage window that allows you to select among a wide range or investments through a designated account. You may owe an additional 10% federal tax penalty if you withdraw from a 401(k) before you reach 59 1/2. You must normally begin to take minimum required distributions by April 1 of the year following the year you turn 70 1/2 unless you're still working. When you retire or leave your job for any reason you may roll over your traditional 401(k) assets into a traditional IRA and your Roth 401(k) assets into a Roth IRA. You may also rollover your traditional 401(k) to a Roth IRA and pay the tax that is due on the combined value of your contributions and earnings.

403(b)

403(b) plan, sometimes known as a tax-sheltered annuity (TSA) or a tax-deferred annuity (TDA), is an employer sponsored retirement savings plan for employees of not-for-profit organizations, such as colleges, hospitals, foundations, and cultural institutions. Some employers offer 403(b) plans as a supplement to -- rather than a replacement for -- defined benefit pensions. Others offer them as the organization's only retirement plan. Your contributions to a traditional 403(b) are tax deductible, and any earnings are tax deferred. Contributions to a Roth 403(b), which some but not all employers offer, are made with after-tax dollars, but the withdrawals are tax free if the account has been open at least five years and you're 59 1/2 or older. There's an annual contribution limit, but you can add an additional catch-up contribution if you're 50 or older. Other catch-up provisions may apply as well. With a 403(b), you may be responsible for making your own investment decisions by choosing among investment alternatives offered by the plan, though not all plans offer choice. You can roll over your assets to another employer's plan if the plan allows transfers or an IRA when you leave your job, or to an IRA when you retire. You may roll your traditional 403(b) into a traditional IRA without tax consequences. You may also roll a traditional 403(b) to a Roth IRA and pay the tax that's due on your combined contributions and earnings. You may withdraw without penalty once you reach 59 1/2, or sometimes earlier if you retire. You must begin required withdrawals by April 1 of the year following the year you turn 70 1/2 unless you are still working. In that case, you can postpone withdrawals until April 1 following the year you retire.

457

The tax-deferred retirement savings plans known as 457 plans are available to state and municipal employees. Like traditional 401(k) and 403(b) plans, the money you contribute and any earnings that accumulate in your name are not taxed until you withdraw the money, usually after retirement. The contribution levels are set each year at the same level that applies to 401(k)s and 403(b)s, though 457s may allow larger catch-up contributions. You also have the right to roll your plan assets over into another employer's plan, including a 401(k) or 403(b), or an individual retirement account (IRA) when you leave your job.

529 college savings plan

Each 529 college savings plan is sponsored by a particular state or group of states, and while each plan is a little different, they share many basic elements. When you invest in a 529 savings plan, any earnings in your account accumulate tax free, and you can make federally tax-free withdrawals to pay for qualified educational expenses, such as college tuition, room and board, and books at any accredited college, university, vocational, or technical program in the United States and a number of institutions overseas. Some states also exempt earnings from state income tax, and may offer additional advantages to state residents, such as tax deductions for contributions. You must name a beneficiary when you open a 529 savings plan account, but you may change beneficiaries if you wish, as long as the new beneficiary is a member of the same extended family as the original beneficiary. In most cases, you may choose any state's plan, even if neither you nor your beneficiary lives in that state. There are no income limits restricting who can contribute to a plan, and the lifetime contribution limits are more than $300,000 in some states. Currently you are also eligible to open more than one account for the same beneficiary by using plans from different states. You can make a one-time contribution of $68,000, or double that amount if you and your spouse make a joint gift, without incurring potential gift tax, provided you don't make another contribution for five years. Or, you may prefer to add smaller amounts each year, up to the annual gift exclusion. That's $14,000 for each recipient in 2013.

529 prepaid tuition plan

With a prepaid tuition plan, you purchase tuition credits at current rates to be used at some point in the future when your beneficiary attends one of the colleges or universities participating in the plan. Most prepayment plans are sponsored by individual states and apply to the public institutions in the state, some state plans cover both public and private institutions in the state, and the Private College 529 plan includes more than 270 participating private institutions nationwide. In the case of state plans, either you or your beneficiary may have to live in the sponsoring state. This rule does not apply to the Private College plan. You owe no income tax on any appreciation in the value of the tuition credits if they are used to offset tuition. With a state-sponsored plan, you may be able to transfer the face value of the credits but not the potential gains to a nonparticipating school if your child doesn't attend a participating one. Some states and the Private College plan guarantee that your credits will cover the cost you prepay. That is, if you play for a semester's tuition at a specific school at today's rate, your tuition certificate will cover a semester's tuition at that school when you redeem the certificate no matter how much it costs then. There may be a time limit, such as 30 years.

Account balance

An account balance is the amount of money in a financial account. For example, a savings account balance is the amount of money in the savings account. An account balance may also refer to the amount of money outstanding on a loan, line of credit, or credit card. Your credit card balance, for example, is the amount of money you owe a credit card company. With your 401(k), your account balance, also called your accrued benefit, is the amount your 401(k) account is worth on a date that it's valued. For example, if the value of your account on December 31 is $250,000, that's your account balance. You use your 401(k) account balance to figure how much you must withdraw from your plan each year, once you start taking required distributions after you turn 70 1/2. Specifically, you divide the account balance at the end of your plan's fiscal year by a divisor based on your life expectancy to determine the amount you must take during the next fiscal year.

Actively managed fund

Managers of actively managed mutual funds buy and sell investments to achieve a particular goal, such as providing a certain level of return or beating a relevant benchmark. As a result, they generally trade much more frequently than managers of passively managed funds whose goal is to mirror the performance of the index a fund tracks. While actively managed funds may provide stronger returns than index funds in some years, they typically have higher management and investment fees.

Adjustable rate mortgage (ARM)

An adjustable rate mortgage is a long-term loan you use to finance a real estate purchase, typically a home. Unlike a fixed-rate mortgage, where the interest rate remains the same for the term of the loan, the interest rate on an ARM is adjusted, or changed, during its term. The initial rate on an ARM is usually lower than the rate on a fixed-rate mortgage for the same term, which means it may be easier to qualify for an ARM. You take the risk, however, that interest rates may rise, increasing the cost of your mortgage. Of course, it's also possible that the rates may drop, decreasing your payments. The rate adjustments, which are based on changes in one of the publicly reported indexes that reflect market rates, occur at preset times, usually once a year but sometimes less often. Typically, rate changes on ARMs are capped both annually and over the term of the loan, which helps protect you in the case of a rapid or sustained increase in market rates. However, certain ARMs allow negative amortization, which means that if market rates rise higher than the cap, any unpaid interest is capitalized and added to the loan principal. This increases the amount you own on the loan, though there is a cap on the amount of interest that can be added.

Adjusted gross income (AGI)

Adjusted gross income is total, or gross, income from taxable sources minus certain exclusions. Income includes salary and other employment income, interest and dividends, and long- and short-term capital gains and losses. Potential exclusions include, among others, unreimbursed business expenses, interest on education loans, certain costs of higher education, contributions to a deductible individual retirement account (IRA), and alimony you pay. You figure your AGI on page one of your federal tax return, and it serves as the basis for calculating the income tax you owe. Your modified AGI is used to establish your eligibility for certain tax or financial benefits, such as deducting your IRA contribution or qualifying for certain tax credits.

After-tax contribution

An after-tax contribution is money you put into your 401(k) or other employer-sponsored retirement savings plan either instead of or in addition to your pretax contribution. You make an after-tax contribution if you've chosen to participate in a Roth 401(k) or Roth 403(b) arrangement rather than your employer's traditional tax-deferred 401(k) or 403(b). When you eventually withdraw from your account, the after-tax contributions are not taxed again. Neither are the earnings if you follow the withdrawal rules for these accounts. You also make after-tax contributions to Roth individual retirement accounts (Roth IRAs), education savings accounts, and 529 plans. The contributions are not taxed at withdrawal and neither are the earnings if you follow the rules that apply. If you make what are known as excess deferrals, or after-tax contributions to a tax-deferred account, that money is not taxed at withdrawal either. These after-tax contributions are permissible if the amount your employer allows you to contribute is less than the federal cap and you are making up the difference. However, since pretax contributions and all earnings in the account are tax deferred, figuring the tax that's due on your distributions may be more complicated than if you had made only pretax contributions.

Aggressive-growth fund

Aggressive-growth mutual funds buy stock in companies that show rapid growth potential, including start-up companies and those in hot sectors. While these funds and the companies they invest in can increase significantly in value, they are also among the most volatile. Their values may rise much higher -- and fall much lower -- than the overall stock market or the mutual funds that invest in the broader market.

Alimony

Alimony is income a separated or divorced person is required to pay to his or her former spouse. The amount and the payment schedule is stipulated in the separation agreement or divorce decree. The payer has the right to deduct the payment, and the payee must declare the money as income, when they file their annual federal income tax returns.

Alternative minimum tax (AMT)

The alternative minimum tax (AMT) was designed to ensure that all taxpayers pay at least the minimum federal income tax for their income level, no matter how many deductions or credits they claim. The AMT is actually an extra tax, calculated separately and added to the amount the taxpayer owes in regular income tax. Some items that are usually tax exempt become taxable and special tax rates apply. For example, income on certain tax-free bonds is taxable. Increasing numbers of taxpayers trigger the AMT if they deduct high state and local taxes or mortgage interest expenses, exercise a large number of stock options, or have significant tax-exempt interest.

Analyst

A financial analyst tracks the performance of companies and industries, evaluates their potential value as investments, and makes recommendations on specific securities. When the most highly respected analysts express a strong opinion about a stock, there is often an immediate impact on that stock's price as investors rush to follow the advice. Some analysts work for financial institutions, such as mutual fund companies, brokerage firms, and banks. Others work for analytical services, such as Value Line, Inc., Morningstar, Inc., Standard & Poor's, or Moody's Investors Service, or as independent evaluators. Analysts' commentaries also appear regularly in the financial press, and on radio, television, and the Internet.

Annual percentage rate (APR)

A loan's annual percentage rate, or APR, is the cost of credit on a yearly basis, expressed as a percentage of the loan amount. The APR, which is usually higher than the nominal, or named, rate you pay for a loan, includes any up-front fees as well as the annual interest rate. In most cases, however, the APR on a credit card is the same as the nominal rate because no up-front frees are included. You use APR, which is a more accurate picture of the cost of borrowing than the interest rate alone, to compare various loans you're considering.

Annual percentage yield (APY)

Annual percentage yield is the amount paid on the principal of an interest-bearing investment or account in a year, expressed as a percentage. For example, if you earn $60 on a $1,000 certificate of deposit (CD) between January 1 and December 31, your APY is 6%, or $60 divided by $1,000. When the APY is the same as the interest rate an investment or savings account pays, you are earning simple interest. But when the APY is higher than the nominal, or named, interest rate, the interest is compounded, which means you earn interest on accumulated interest.

Annual renewable term insurance

An annual renewable term life insurance contract can be renewed each year without filling out a new application or passing a physical exam. However, the premium, or the amount you pay for the policy, isn't fixed, and goes up each time you renew. Policies with five- or ten-year terms may also be renewable, with comparable increases in their premiums.

Annual report

An annual report is an overview of the past year, including income and balance sheets, that every publicly held corporation is required to provide to its shareholders. In most cases, the report contains not only financial details but also a message from the chairman, a description of the company's operations, and an overview of its achievements. Most annual reports are glossy affairs that also serve as marketing pieces. Copies are generally available from the company's investor relations office or can be downloaded from the company's website. The company's 10-K report is a more comprehensive look at its finances.

Annuity

Originally, an annuity simply meant an annual payment. That's why the retirement income you receive from a defined benefit plan each year, usually in monthly installments, is called a pension annuity. But an annuity is also an insurance company product that's designed to allow you to accumulate tax-deferred assets that can be converted to a source of lifetime annual income. When a deferred annuity is offered as part of a qualified plan, such as a traditional 401(k), 403(b), or tax-deferred annuity (TDA), you can contribute up to the annual limit and typically begin to take income from the annuity when you retire. You can also buy a nonqualified deferred annuity contract on your own. With nonqualified annuities, there are no federal limits on annual contributions and no required withdrawals, though you may begin receiving income without penalty when you turn 59 1/2. An immediate annuity, in contrast, is one you purchase with a lump sum when you are ready to begin receiving income, usually when you retire. The payouts begin either right away or within the first 13 months, and the annuity company promises the income will last your lifetime. With all types of annuities, the guarantee of lifetime annuity income depends on the claims-paying ability of the company that sells the annuity contract.

Annuity contract

An annuity contract is the legal agreement between the insurance company issuing an annuity and the consumer who purchases the annuity. The contract spells out the terms and conditions of the agreement, including the guarantees the issuer provides, the way the return is calculated, the premiums and payment schedule, and the payout provisions.

Appreciation

Appreciation occurs when an asset such as stock, real estate, or personal property increases in value although no improvements or modification have been made to explain the increase. Some personal assets, such as fine art or antiques, may appreciate over time, while others -- such as electronic equipment -- usually lose value, or depreciate. Certain investments also have the potential to appreciate. A number of factors can cause an asset to appreciate, among them inflation, uniqueness, or increased demand.

Approved charge

An approved charge, or allowable amount, is the covered cost an insurance company sets for each medical procedure or office visit when the coverage is traditional fee-for-service health insurance. If your bill exceeds the approved charge, the difference between the approved charge and the claim that's submitted to the insurance company for reimbursement is considered an excess charge. You are responsible for that amount in addition to a percentage of the approved charge. Medicare establishes approved charges for medical procedures and office visits. If you participate in Original Medicare, there's a legal limit on what a doctor, laboratory, or other medical provider can charge in excess of the approved amount.

Ask

The ask -- a shortening of asked price -- is the price at which a market maker or broker offers to sell a security or commodity. With open-end mutual funds, the ask is the net asset value (NAV) plus the sales charge, if one applies. In this case, the ask is known as the maximum offering price (MOP). In contrast, the bid is the highest price another market maker or broker is willing to pay for a security. The difference between the ask and the bid is called the spread. Bid and ask prices are typically reported at the end of the trading day for commodities and over-the-counter (OTC) transactions. In contrast, last, or closing, prices are reported for exchange-traded and national market system securities.

Asset

Assets are everything you own that has any monetary value, plus any money you are owed. Assets include money in bank accounts, stocks, bonds, mutual funds, equity in real estate, the value of your life insurance policy, and any personal property that people would pay to own. When you figure your net worth, you subtract the amount you owe, or your liabilities, from your assets. Similarly, a company's assets include the value of its physical plant, its inventory, and less tangible elements, such as its reputation.

Asset allocation

Asset allocation is a strategy for managing risk in your investment portfolio, with the goal of maximizing return over the long term. Specifically, asset allocation means dividing your assets on a percentage basis among different broad categories of investments, called asset classes. Stock, bonds, and cash are examples of asset classes, as are real estate and derivatives such as options and futures contracts. Most financial services firms suggest particular asset allocations for certain categories or groups of clients and fine-tune those allocations for individual clients. The asset allocation model -- specifically the percentages of your investment principal allocated to each investment category you're using -- that's appropriate for you at any given time depends on many factors, such as the goals you're investing to achieve, how much time you have to invest, your tolerance for risk, the direction of interest rates, and the market outlook. Ideally, you adjust or rebalance your portfolio from time to time to bring the actual allocation that results from market performance back in line with the model you've selected. Or, you might realign your model as your financial goals, your timeframe, or the market situation changes, a process known as reallocation.

Asset class

An asset class is a specific category of investment, distinguished in a defining way from every other asset class. For example one asset class may include equity investments while another class is made up of debt investments. Stock, bonds, and cash -- including cash equivalents -- are major asset classes. So are real estate, derivative investments, such as options and futures contracts, and precious metals. When you allocate the assets in your investment portfolio, you decide what proportion of its total value will be invested in each of the different asset classes you're including.

Asset management account (AMA)

All-in-one asset management accounts provide the financial advantages of an investment account combined with the convenience of an interest-bearing checking account. AMAs generally offer check-writing and ATM privileges, credit cards, direct deposit, and automatic transfer between accounts, as well as access to reduced-rate loans and other perks. There are usually annual fees and minimum account requirements. AMAs are offered by many brokerage firms and mutual fund companies, and are also known as central asset accounts (CAAs) or cash management accounts (CMAs).

Asset-backed security

Asset-backed securities, also known as asset-backed bonds, are secured by loans or by money owed to a company for merchandise or services purchased on credit. For example, an asset-backed security is created when an investment firm bundles debt, such as credit card. student, or car loans, and sells fixed-income investments that convey the right to receive the principal and interest payments made on those loans.

Audit

An audit is a professional, independent examination of a company's financial statements and accounting documents following generally accepted accounting principles (GAAP). An IRS audit, in contrast, is an examination of a taxpayer's return, usually to question the accuracy or acceptability of the information the return reports.

Automatic enrollment

Using an automatic enrollment provision included in a retirement savings plan, an employer has the right to enroll employees in the 401(k) or similar plan at the point the employees meet eligibility requirements. If you don't want to participate, you must refuse, in writing, to be part of the plan. In an automatic enrollment, the plan sponsor determines the percentage of earnings you contribute and how your contribution is invested, choosing among a three potential alternatives. You have the right to change either or both of those choices if you stay in the plan.

Average daily balance

The average daily balance method is one of the ways that the finance charge on your credit card may be calculated. The credit card issuer divides the balance you owe each day by the number of days in your billing cycle and multiplies the result by the interest rate to find the finance charge for each day in the period. If this is the method your creditor uses, the larger the payment you make and the earlier in the cycle you make it, the smaller your finance charge will be.

Back-end load

A back-end load, or a contingent deferred sales charge, may be due on Class B mutual fund shares if you sell your holdings in the fund during the first six or seven years after you purchase them. The charge is a percentage of the value of the assets you're selling. In addition, the annual asset-based management fee is higher on back-end load funds than on front-end load funds, or Class A shares, for which you pay the sales charge at the time you purchase. The percentage of the asset value you pay as a back-end load typically drops by a percentage point each year the charge applies -- perhaps starting at 7% and ending at 1% after seven years -- and then is dropped. At that time, Class B shares are converted to Class A shares. Fund companies that sell Class B shares must provide data demonstrating the overall cost of purchasing these shares in comparison to purchasing Class A shares.

Bad debt

A bad debt is one that has not been paid, and for which there’s no expectation of future repayment. Bad debts may be written off, or deducted as a loss, on your individual tax return if you have previously included the amount as income or if you have loaned cash. In the case of a cash loan, you must be able to demonstrate that the transaction was a loan and not a gift. Somewhat different rules apply to businesses, including C corporations, which may have business or nonbusiness bad debt. Business debts are deductible from gross income. Nonbusiness debts may be deducted only if they are totally worthless after reasonable steps have been taken to collect.

Balance of payments

Balance of payment accounts -- the current account and the capital account -- are the record of the financial transactions between one country and the rest of the world during a specific period of time. The current account includes credits and debits in goods and services and in investment earnings. The capital account includes transfer of capital and the buying and selling of certain other assets. In some systems there is a third account, called the financial account, and certain transactions otherwise in the capital account are in the financial account. As one example, the US current account reports all the payments US residents, businesses, and government agencies make to the residents, businesses, and government agencies of other countries for goods and services and all of the payments US entities receive from other countries for the goods and services it supplies. The former are debits and the later are credits. If all transactions are included, the balance of payments is theoretically equal, or zero, with the current account in balance with the capital account, with the credit in one offset by the debit in the other. In practice there are discrepancies for a variety of reasons. What trade imbalances mean continues to be a controversial topic, with some economists arguing that they are a serious problem that must be remedied, and others insisting they are not.

Balanced fund

Balanced funds are mutual funds that invest in a portfolio of common stocks, preferred stocks, and bonds to meet their investment goal of seeking a strong return while moderating risk. Balanced funds generally produce more income than stock funds, though their total return may be less than stock fund returns in a strong stock market. In a flat or falling stock market, however, disappointing returns on equity investments may or may not be offset by a stronger performance from a balanced fund's fixed-income investments. Balanced funds are one of the three default investments a 401(k) sponsor may select when an automatic enrollment provision is included in the plan. Balanced funds are sometimes described as a type of asset allocation fund, which provides the opportunity to spread your money among asset classes with one investment. However, the turnover ratio is a balanced fund is often lower than in a typical asset allocation fund, making the balanced fund more tax efficient.

Bankruptcy

Bankruptcy means being insolvent, or unable to pay your debts. In that case, you can file a bankruptcy petition to seek a legal resolution. Chapter 7 bankruptcy, which allows you to discharge your unsecured debts but may result in your losing your home, car, or other secured debt, is available only to those whose earn less than the median for their state or qualify because of special circumstances. With Chapter 11 bankruptcy, also called reorganization bankruptcy, you work with the court and your creditors to repay debt over three to five years. However, some debts are not reduced by a declaration of bankruptcy, including past due federal income taxes, alimony, and higher education loans. Similarly, when you hear that a company is reorganizing or is "in Chapter 11," it means it has filed for bankruptcy.

Basis

Basis is the total cost of buying an investment or other asset, including the price, commissions, and other charges. If you sell the asset, you subtract your basis, also known as your cost basis, from the selling price to determine your capital gain or capital loss. If you give the asset away, the recipient's basis is the same amount as yours. But if you leave an asset to a beneficiary in your will, the person receives the asset at a step-up in basis, which means the basis of the asset is reset to its market value as of the time of your death.

Basis point

A basis point is one-hundredth of a percent, or 0.01%, with 100 basis points equaling 1%. Changes in the yields on bonds, notes, and other fixed-income investments are measured in basis points because they fluctuate regularly, typically by a few hundredths of a percentage point. For example, when the yield on a bond changes from 6.72% to 6.65%, it has dropped 7 basis points. Similarly, small changes in the interest rates charged for mortgages or other loans are reported in basis points, as are the fees you pay on various investment products, such as annuities and mutual funds. For example, if the average management fee is 1.4%, you might hear it expressed as 140 basis points. Your percentage of ownership in certain kinds of investments may also be stated in basis points, and in this case each basis point equals 0.01% of the whole investment.

Bear hug

A bear hug is a hostile corporate takeover bid that squeezes out opposition with the generosity of its terms. A bear hug generally features a per-share bid that’s higher than the current market price. This compels the target company’s board of directors to accept the bid even though they oppose the takeover because they are obligated as fiduciaries to act in the best interest of shareholders. The acquiring company may take its offer to shareholders first, another approach to squeezing management to agree, or it may offer part of the purchase price in cash.

Bear market

A bear market is sometimes described as a period of falling securities prices and sometimes, more specifically, as a market where prices have fallen 20% or more from the most recent high. A bear market in stocks is triggered when investors sell off shares, generally because they anticipate worsening economic conditions and falling corporate profits. A bear market in bonds is usually the result of rising interest rates, which prompts investors to sell off older bonds paying lower rates.

Bear raid

A bear raid is a strategy for undermining the price of a stock by selling shares short to undercut the value of the firm. It may involve rumors and other damaging speculation about the target company. The short seller gains if this manipulation is successful by being able to repay the borrowed shares with shares purchased at the new lower price. In an attempt to control speculative short selling, the SEC has enacted a rule instituting a short-sale circuit breaker for any stock whose price drops 10% or more during a trading day. It’s designed to curtail the impact of a bear raid while still allowing stockholders to sell in a falling market to prevent an actual loss and speculators to sell short at a price higher than the national best bid level. While stock manipulation, including orchestrated bear raids, is illegal, it is also difficult to detect and prosecute.

Bear trap

A bear trap catches short sellers who anticipate a falling stock price but discover that the price rises instead. They must purchase and replace shares they borrowed and sold with shares that are more expensive. This miscalculation may result from misjudging the fortunes of a single stock or the overall stock market, if it swings from bearish to bullish.

Behavioral finance

Behavioral finance combines psychology and economics to explain why and how investors sometimes act against their own best interest and to analyze how acting on their biases can affect the overall market as well as individual investors' portfolios. Behavioral finance theorists point to the market phenomenon of hot stocks and market bubbles, from the Dutch tulip bulb mania that caused a market crash in the 17th century to the more recent examples of junk bonds in the 1980s and Internet stocks in the 1990s, to validate their positions. Behavioral finance is in conflict with the perspective of efficient market theory, which maintains that investment decisions are based on rational foundations, like analyzing the fundamental financial health and performance of a company before making a buy or sell decision.

Benchmark

An investment benchmark is a standard against which the performance of an individual security or group of securities is measured. For example, the average annual performance of a class of securities over time is a benchmark against which current performance of members of that class and the class itself are measured. When the benchmark is an index tracking a specific segment of the market, the changing value of the index not only measures the strength or weakness of its segment but is used to evaluate the performance of individual investments within the segment. For example, the Standard & Poor's 500 Index (S &P 500) and the Dow Jones Industrial Average (DJIA) are the most widely followed benchmarks for large-company US stocks and the funds that invest in those stocks. There are other indexes that serve as benchmarks for both broader and narrower segments of the US equities markets, of international markets, and of other types of investments such as bonds, mutual funds, and commodities. In a somewhat different way, the changing yield on the 10-year US Treasury bond is a benchmark of investor attitudes. A lower yield is an indication that investors are putting money into bonds, driving up the price, possibly because they expect stock prices to drop. Conversely, a higher yield indicates investors are investing elsewhere. Originally the term benchmark was a surveyor's mark indicating a specific height above sea level.

Beneficiary

A beneficiary is the person or organization who, after your death, receives the assets you own in a tax-deferred retirement or is paid the death benefit of an insurance policy on your life. Similarly, if you have established a trust, the beneficiary you name receives the assets of the trust. And if you have set up education savings account, the beneficiary you name has the right to use the assets that have accumulated in the account. A retirement plan, such as an IRA or 401(k), pays your beneficiary the value of the accumulated assets or requires the beneficiary to withdraw assets either as a lump sum or over a period of time, depending on the plan. Some retirement plans require that you name your spouse as beneficiary or obtain his or her notarized written permission to name someone else. A life insurance policy pays your beneficiary the face value of your policy minus any loans you haven't repaid when you die. An annuity contract pays your beneficiary the accumulated assets as dictated by the terms of the contract. You may name any person or institution -- or several people and institutions -- as beneficiary or contingent beneficiary of a trust, a retirement plan, annuity contract, or life insurance policy. A contingent beneficiary is one who inherits the assets if the primary beneficiary has died or chooses not to accept them.

Bid

The bid is the price a market maker or broker is willing to pay for a security, such as a stock or bond, at a particular time. In the real estate market, a bid is the amount a buyer offers to pay for a property.

Black swan

A black swan is an event that takes people by surprise, having been virtually impossible to predict, and has bad -- even disastrous – consequences. The term was first used in this way in 2007 by Nassim Nicholas Taleb, in a book entitled The Black Swan: The Impact of the Highly Improbable, which critiqued the failure of historically based financial risk modeling to anticipate improbable events.

Board of directors

A board of directors is the governing body of a corporation. The members of the board are collectively responsible for the corporation’s actions and policies and have a fiduciary responsibility to the firm’s shareholders. The board, whose members are elected by the corporation’s shareholders, adopts the corporation’s bylaws, selects its chief executive, determines his or her compensation and that of other senior executives, sets corporate objectives and policies, authorizes any dividends and the issuance of new shares, and participates on corporate committees. Most corporate boards include insiders and independents chosen from outside the organization, although the audit committee of a public corporation must have entirely outside members. Boards may range in size, but must have the minimum number required by the state where they are incorporated. Directors are paid for their participation, often handsomely.

Bond

Bonds are debt securities issued by corporations and governments. Bonds are, in fact, loans that you and other investors make to the issuers in return for the promise of being paid interest, usually but not always at a fixed rate, over the loan term. The issuer also promises to repay the loan principal at maturity, on time and in full. Because most bonds pay interest on a regular basis, they are also described as fixed-income investments. While the term bond is used generically to describe a variety of debt securities, bonds are specifically long-term issues, with maturities longer than ten years.

Bond fund

A bond mutual fund invests in a portfolio of bonds to meet its investment objective -- typically to provide regular income to its shareholders. The appeal of bond funds is that you can usually invest a much smaller amount of money than you would need to buy a portfolio of bonds, making it easier to diversify your fixed-income investments. Unlike individual bonds, however, bond funds have no maturity date and no guaranteed interest rate because their portfolios aren't fixed. Also unlike individual bonds, they don't promise to return your principal. You can choose among a variety of bond funds with different investment strategies and levels of risk. Some funds invest in long-term, and others in short-term, bonds. Some buy government bonds, while others buy corporate bonds or municipal bonds. Finally, some buy investment-grade bonds, while others focus on high-yield bonds.

Bond rating

A bond rating is an opinion of the creditworthiness of a bond or the bond's issuer. Independent rating agencies, such as Standard & Poor's, Moody's Investors Service, and Fitch, assign these ratings, which are interpreted as a statement about the likelihood of default. Ratings systems differ from one rating agency to another but usually have at least 10 categories, ranging from a high of AAA (or Aaa) to a low of D. There are also notches, or variations within ratings, indicated by a plus (+) or a minus (-). Bonds ranked BBB (or Baa) or higher are considered investment-grade bonds. Those with a lower rating are considered speculative grade. Rating agencies also have somewhat different criteria and use somewhat different methodology in reaching their conclusions.

Bondholder

A bondholder is an investor who owns a bond. A bondholder has the right to collect the interest the bond pays, sell the bond in the secondary market, gift it, leave it as a bequest, or redeem it at maturity. Since most bonds are book-entry securities, a bondholder’s record of ownership is typically electronic rather than in certificate form.

Book value

Book value is the net asset value (NAV) of a company's stocks and bonds. Finding the NAV involves subtracting the company's short- and long-term liabilities from its assets to find net assets. Then you divide the net assets by the number of shares of common stock, preferred stock, or bonds to get the NAV per share or per bond. Book value is sometimes cited as a way of determining whether a company's assets cover its outstanding obligations and equity issues. Further, some investors and analysts look at the price of a stock in relation to its book value, which is provided in the company's annual report, to help identify undervalued stocks. Other investors discount the relevance of this information. In a different usage, book value is the current value of an asset, as recorded in a company's balance sheet. The current value is the asset's cost minus its annual depreciation. Book value isn't necessarily a reflection on what the asset is actually worth, in practical terms.

Breakpoint

A breakpoint is the mutual fund account balance you need to qualify to pay a reduced front-end load or sales charge on new purchases in the fund. In many cases, the first breakpoint is $25,000, with further reductions for each additional $25,000 or $50,000. For example, if the standard load were 5.5%, it might drop to 5.25% at $25,000, to 5% at $50,000, and perhaps as low as 2.5% if your account value reached $250,000. Fund companies may offer this cost saving. They are not required to do so, but if they do use breakpoints, they must ensure that all clients who qualify get the discount. In calculating breakpoints, some fund companies combine the value of all of your investments in the mutual funds they offer. Others may count the investments of all the members of your household toward the breaskpoint or give you credit for purchases you promise to make in the future.

Broker

A broker acts as an agent or intermediary for a buyer or a seller, or, less commonly, for both. The buyer, seller, and broker may all be individuals, or one or more may be a business or other institution. For example, a stockbroker works for a brokerage firm, and handles client orders to buy or sell stocks, bonds, commodities, and options in return for a commission. A real estate broker represents the seller in a real estate transaction and receives a commission on the sale. A mortgage or insurance broker acts as an intermediary in finding a mortgage or insurance policy for his or her clients and also receives a commission.

Brokerage account

To buy and sell securities, you establish a brokerage account with a broker-dealer, also known as a brokerage firm. Transactions are credited to or debited from that account. In some cases, your brokerage account may be part of a larger package of financial services known as an asset management account or something similar. You can have multiple brokerage accounts if you prefer. The assets in each account are insured by the Securities Investor Protection Corporation (SIPC) for up to $500,000 to protect you against the bankruptcy of the firm holding your account.

Brokerage firm

Brokerage firms, also known as broker-dealers, are licensed by the Securities and Exchange Commission (SEC) to buy and sell securities for clients and for their own accounts. When a brokerage firm buys or sells securities it owns, it is acting as a principal in that transaction. When it buys or sells for a client's account it is acting as an agent. Firms may maintain research departments for their own and their clients' benefit. They may also provide a range of financial products and services, including financial planning, asset management, and educational programs. Brokerage firms come in all sizes, from one- or two-person offices to huge firms with offices around the world. They are sometimes differentiated as full-service or discount firms, based on pricing structure and client relationships. All firms are members of FINRA, the securities industry self-regulatory organization, and must comply with the regulations of the exchanges where they trade. Some brokerage firms exist entirely online, and nearly all firms offer the option of placing orders electronically rather than over the telephone.

Broker-dealer

A broker-dealer (B/D) is a brokerage firm that holds a license granted by the Securities and Exchange Commission (SEC) to act as a broker, or agent, to buy and sell securities for its clients' accounts. The firm may also act as principal, or dealer, and trade securities for its own inventory. Some broker-dealers act in both capacities, depending on the circumstances of the trade or the type of security being traded. For example, your order to purchase a particular security might be filled from the firm's inventory provided you are notified that this has happened. A broker-dealer must evaluate whether or not an investment is suitable for a particular client and may advise clients on investment choices. Most charge clients a commission to execute a trade. Employees of a broker-dealer must pass qualifying exams administered by FINRA, which also regulates their activities, and register with the securities exchanges where their trades are executed. B/Ds range in size from independent one-person offices to large international firms.

Budget

A budget is a spending plan you use to allocate your income to cover your expenses and to track how closely your actual expenditures line up with what you had planned to spend. A budget covers a specific time period, typically a year. The goal is to end the year in the black, which means you have covered your expenses, increased your savings, and maintained a debt-to-income ratio of less than 40%. You budget for essential expenses, like housing, food, clothing, transportation, and savings as well as for discretionary expenses, like vacations or entertainment. To be prepared for unexpected expenses, you include an emergency or rainy day fund in your budget. Businesses and governments also create budgets to govern their expenditures for a fiscal year -- though like individuals they make regular adjustments to reflect financial reality. And, like individuals, businesses and governments can find themselves in trouble if their spending consistently outpaces their income.

Bull market

A bull market is a prolonged period when stock prices as a whole are moving upward, although the rate at which those gains occur can vary widely from bull market to bull market. The duration of a bull market, the severity of the falling market that follows, and the time that elapses until the next upturn are also different each time. Well-known, extended bull markets in the United States began in 1923, 1949, 1982, and 1990.

Buy-and-hold

Buy-and-hold investors take a long-term view of investing, generally keeping a bond from date of issue to date of maturity and holding onto shares of a stock through bull and bear markets. Among the advantages of following a buy-and-hold strategy are increased opportunity for your assets to compound and reduced trading costs. Among the risks are continuing to hold investments that are no longer living up to reasonable expectations.

Cafeteria plan

Cafeteria plans, more formally known as flexible spending plans, are employee benefits that provide the option of participating in a range of tax-saving programs. Some but not all employers offer them. If you enroll in a cafeteria plan, you choose the percentage of your pretax income to be withheld from your paycheck, up to the limit the plan allows. You allocate your money to the parts of the plan in which you want to participate. For example, you may be able to set aside money to pay for medical expenses that aren't covered by insurance, for child care, or for additional life insurance coverage. As you incur these kinds of expenses, you are reimbursed from the amount you have put into the plan or you use a debit card linked to the plan to pay for the expenses. Since you owe no income tax on the money you defer to the plan or amounts you spend for qualified expenses, you actually have more cash available for these expenses than if you were spending after-tax dollars. However, you must estimate the amount you're going to contribute before the tax year begins, and you forfeit any money you've set aside but don't spend. For example, if you've set aside $1,500 for medical expenses but spend only $1,400, you lose the $100. In some plans the deadline for spending the money in your flexible spending account is December 31. Other plans provide up to a three-month extension.

Call

Call has multiple meanings in investment and financial markets. In the bond markets, a call is an issuer's right to redeem bonds it has sold before the date they mature. With preferred stocks, the issuer may call the stock to retire it, or remove it from the marketplace. In either case, it may be a full call, redeeming the entire issue, or a partial call, redeeming only a portion of the issue. When a bank makes a secured loan, it reserves the right to demand full repayment of the loan -- referred to as calling the loan -- should the borrower default on interest payments. Finally, when the term refers to options contracts, holding a call contract gives you the right to buy the underlying instrument at a specific price by a specific date. Selling a call contract obligates you to deliver the underlying instrument if the call is exercised and you're assigned to meet the call.

Cap

A cap is a ceiling, or the highest level to which something can go. For example, an interest rate cap limits the amount by which an interest rate can be increased over a specific period of time. A typical cap on an adjustable rate mortgage (ARM) limits interest rate increases to two percentage points annually and six percentage points over the term of the loan. In a different example, the cap on your annual contribution to an individual retirement account (IRA) is $5,500 in 2013, provided you have earned at least that much. If you're 50 or older, you can make an additional catch-up contribution of $1,000 each year.

Capital

Capital is money that is used to generate income or make an investment. For example, the money you use to buy shares of a mutual fund is capital that you're investing in the fund. Companies raise capital from investors by selling stocks and bonds and use the money to expand, make acquisitions, or otherwise build the business. The term capital markets refers to the physical and electronic environments where this capital is raised, either through public offerings or private placements.

Capital appreciation

Capital appreciation is an increase in a capital asset's fair market value that's the result of changing market conditions rather than the infusion of new investment money. For example, if a stock increases in value from $30 a share to $40 a share, it shows capital appreciation. Some stock mutual funds that invest for aggressive growth are called capital appreciation funds.

Capital gain

A capital gain is the difference between the purchase price and the sale price of a capital asset when the sale price is higher than the purchase price. For example, if you buy 100 shares of stock for $20 a share and sell them for $30 a share, you realize a capital gain of $10 a share, or $1,000 in total. If you have owned the stock for more than a year before selling it, you have a long-term capital gain. If you hold the stock for less than a year, you have a short-term capital gain.

Capital gains distribution

A capital gains distribution is the profit, minus fees, that a mutual fund company pays out to its shareholders when it sells investments in its portfolio for more than the price at which it purchased them. These distributions are made on a regular schedule, often at the end of the year. If they are short-term gains on assets held less than a year, which is typical, you pay tax on the gain at the same rate you pay on ordinary income. If they are long-term gains, you pay tax at your long-term capital gains rate. No tax is due if the fund is held in a tax-deferred or tax-free account. Most funds offer the option of automatically reinvesting all or part of your capital gains distributions to buy more shares.

Capital gains tax (CGT)

Capital gains tax is due on profits you realize on the sale of a capital asset, such as stock, bonds, or real estate. Long-term gains, on assets you own more than a year, are generally taxed at a lower rate than your ordinary income while short-term gains are taxed at the rate you pay on ordinary income. In 2013, long-term capital gains tax rates on most investments is 15% for anyone whose marginal federal tax rate is 25% or higher, and 0% for anyone whose marginal rate is 10% or 15%. However, for a single person with adjusted gross income (AGI) of $400,000 or a couple filing a joint tax return with an AGI of $450,000, the rate is 20%. There are some exceptions. For example, long-term gains from real estate investment trust (REIT) are taxed at the same rate as your ordinary income and capital gains from collectibles are taxed at maximum rate of 28%. In addition, single filers with an AGI of $200,000 and married couples filing a joint return with an AGI of $250,000 pay a 3.8% surtax on capital gains and other investment income. You may be exempt from capital gains tax on profits of up to $250,000 on the sale of your primary home if you're single and up to $500,000 if you're married and file a joint return, provided you meet the requirements for this exemption.

Capital loss

A capital loss is the difference between the purchase and sales prices of a capital asset when the sales price is less than the purchase price. For example, if you buy 100 shares of stock at $30 a share and sell when the price has dropped to $20 a share, you realize a capital loss of $10 a share, or $1,000. Although nobody wants to lose money on an investment, there is a silver lining. You can use capital losses to offset capital gains in computing your income tax. However, you must use short-term losses to offset short-term gains and long-term losses to offset long-term gains. If you have a net capital loss in any year -- that is, your losses exceed your gains -- you can usually deduct up to $3,000 of this amount from regular income on your tax return. You may also be able to carry forward net capital losses and deduct on future tax returns.

Capital market

Capital markets are the physical and electronic environments where equity and debt securities and other investment products are sold. When you place an buy order through a brokerage firm or use a dividend reinvestment plan (DRIP), you're participating in a capital market. In primary markets, businesses and governments seek capital from investors by issuing securities and other financial products. In secondary capital markets, investors buy and sell these issues to make a profit, which they can reinvest to make the primary market more robust. The stronger and more liquid a country's capital market is, the more easily economic growth and expansion can be achieved.

Capital preservation

Capital preservation is a strategy for protecting the money you have available to invest by choosing insured accounts or fixed-income investments that promise return of principal. The downside of capital preservation over the long term is that by avoiding the potential risks of more aggressive investing, you exposure yourself to greater inflation risk. That's the case because your investments are unlikely to increase enough in value to offset the gradual loss of purchasing power that's a result of even moderate inflation.

Car insurance

Car insurance covers theft of and damage to your car or damage that your car causes, plus liability protection in case you are sued as a result of an accident. Your state may require proof of insurance before you can register your car. As a car owner, you pay premiums set by the insurance company based on the value of your car and the risk the company believes you pose. The insurance company agrees to cover your losses, subject to a deductible and the limits specified in the contract. Some states have insurance pools that allow car owners who have been turned down elsewhere to obtain coverage.

Cash

Cash includes the bills and coins of a country’s or economic union's currency. Cash, also known as ready money, is legal tender within the issuing country's borders. As such, it can be used on the spot to pay for goods and services. The seller or creditor must accept it. Paper checks and money orders that can be exchanged for bills and coins and balances in checking and savings accounts that can be withdrawn as bills and coins are sometimes considered cash.

Cash cow

A cash cow can be milked for a steady stream of income as long as its product or service is in steady demand. The term is used to describe reliably profitable businesses that pay regular, larger-than-average dividends and have modest marketing and advertising budgets. When a cash cow is a division or subsidiary of a large corporation, it may provide operating capital for other, less profitable though often higher profile divisions.

Cash equivalent

Cash equivalents are short-term, low-risk investments, such as 13-week US Treasury bills or short-term certificates of deposit (CDs). The Financial Accounting Standards Board (FASB) defines cash equivalents as highly liquid securities with maturities of less than three months. Liquid securities typically are those that can be sold easily with little or no loss of value. The short term helps protect against inflation risk. Banks CDs are insured by the Federal Deposit Insurance Corporation (FDIC) and US Treasury bills are backed by the full faith and credit of the US government, which limits credit risk.

Cash flow

Your personal cash flow includes the money coming into your accounts and the money you are spending over a specific period such as a year. To determine if your cash flow is positive or negative, you subtract the money you receive (from wages, investments, and other income) from the money you spend on expenses (such as housing, transportation, and other costs). If there's money left over, your cash flow is positive. If you spend more than you have coming in, it's negative. Cash flow is a measure of changes in a company's cash account during an accounting period, specifically its cash income minus the cash payments it makes. For example, if a car dealership sells $100,000 worth of cars in a month and spends $35,000 on expenses, it has a positive cash flow of $65,000. But if it takes in only $35,000 and has $100,000 in expenses, it has a negative cash flow of $65,000. Investors often consider cash flow when they evaluate a company, since without adequate money to pay its bills, the company will have a hard time staying in business.

Cash value

Cash value is the amount that an account is worth at any given time. For example, the cash value of your 401(k) or IRA is what the account is worth at the end of a period, such as the end of a business day, or at the end of the plan year, often December 31. The cash value of an insurance policy is the amount the insurer will pay you, based on your policy's cash reserve, if you cancel your policy. The cash value is the difference between the amount you paid in premiums and the actual cost of insurance plus other expenses.

Cashier's check

A cashier’s check is a check issued by a bank and signed by a bank representative in the amount the payer names amd made out to a third party he or she designates. To initiate the creation of a cashier's check, you authorize the transfer of money equal to the amount of the check, plus the fee for preparing it, if any, from your account to the bank’s account. The payee can be certain that the check will clear since it is drawn on the bank’s account. That assurance explains why these checks are preferred to personal checks, and sometimes required, especially for large transactions. Limits, if any, on the size of a cashier’s check are higher than the limits on bank or post office money orders. Typically once the payer mails or delivers the check, he or she cannot stop payment. The only record the payer has that payment has been made is the receipt the bank provides when it creates the check.

Catastrophic health insurance

Catastrophic health insurance covers healthcare expenses above the maximum your regular health insurance will pay. Many health insurance policies cap, or limit, the total amount they will pay to cover hospital, medical, and other cost of care during your lifetime.

Central bank

Most countries have a central bank, which issues the country's currency and holds the reserve deposits of other banks in that country. It also either initiates or carries out the country's monetary policy, including keeping tabs on the money supply. In the United States, the 12 regional banks that make up the Federal Reserve System act as the central bank. This multibank structure was deliberately developed to ensure that no single region of the country could control economic decision-making.

Certificate of deposit (CD)

Certificates of deposit (CDs) are time deposits with fixed terms, typically ranging from three months to five years. On traditional bank CDs, you earn compound interest at a fixed rate, which is determined by the current interest rate and the CD's term. Adjustable-rate and market-rate CDs may also be available, though specific terms and conditions apply. When you purchase a CD from a bank, your account is insured by the Federal Deposit Insurance Corporation (FDIC) up to the per depositor limit. You usually face a penalty if you withdraw funds before your CD matures. With a bank CD, you often forfeit some or all of the interest that has accrued up to the time you make the withdrawal. CDs sold by brokers and other intermediaries may have terms up to 20 years. FDIC insurance may or may not apply to CDs you purchase through a third party, depending on the original issuer. Penalties for early withdrawal are usually steeper than on bank CDs, and you may have trouble liquidating your investment before the end of the term as there is no organized market.

Certified check

A certified check is a personal check that the bank at which the account is held guarantees will be paid. This assurance is communicated by the word “Certified” stamped on the face of the check. At the time the check is certified, the bank withdraws an amount equal to the amount of the check from the payer’s account and holds it in reserve until the check is cashed. Once the check is mailed or delivered to the payee, the payer cannot stop payment. However, since the check is drawn on the payer’s account, the cancelled check or its facsimile provides a record of payment.

Certified financial planner (CFP)

Certified financial planner (CFP) is a certification the Certified Financial Planner Board of Standards, Inc. (CFP Board) grants to planners who have met its professional standards and agreed to follow its code of professional ethics. Meeting professional standards involves passing the CFP certification exam, which applicants qualify to take by demonstrating mastery of the subject areas covered by financial planning, including banking, education planning, estate planning, insurance, investing, and tax planning. There are also continuing education requirements to maintain the certification. Most CFPs are specialists, concentrating in one or two areas of planning. Some CFPs charge fees only, some charge commissions on the products they sell, and some charge a combination of commissions and fees. CFP is among the best-known and most widely respected financial planning certifications.

Checking account

Checking accounts are transaction accounts that allow you to authorize the transfer of money to another person or organization either by writing a check that includes the words "Pay to the order of" or by making an electronic transfer. Banks and credit unions provide transaction accounts, as do brokerage firms and other financial services companies that offer banking services. Money in transaction accounts is insured by the Federal Deposit Insurance Corporation (FDIC) up to per depositor limit.

Claim

You file an insurance claim when you send your insurance company required documentation asking the company to pay for one of the qualifying losses or expenses your policy covers.

Closing costs

Closing costs are fees and other expenses that are due when a real estate purchase is finalized at an event called the closing. Closing costs are generally the responsibility of the buyer. In some cases, the seller may offer to pay certain closing costs to attract buyers or close the sale more quickly. Closing costs vary depending on the area where the property is located and may be either prepaid or nonrecurring. Prepaid costs cover expenses that will be due periodically, including home insurance premiums and real estate taxes, and that are held in escrow. Nonrecurring costs pay for securing a mortgage and transferring the property, and may include a filing fee to record the transfer of ownership, mortgage tax, attorneys' fees, credit check fees, title search and title insurance expenses, home inspection fees, an appraisal fee, and any up-front interest charges you have agreed to pay the lender. The lender will give you a good faith estimate (GFE) of your closing costs before the closing date, so you'll know approximately how much money you need to have available at closing -- often 5% to 10% of your mortgage loan amount. Many closing costs are tax deductible, so it's a good idea to consult with your tax adviser.

Closing price

The closing price of a stock, bond, option, or futures contract is the last trading price before the exchange or market on which it is traded closes for the day. With after-hours trading, however, the opening price at the start of the next trading day may be different from the closing price the day before. When a security is valued as part of an estate or charitable gift, its value is set at the closing price on the day of the valuation of the estate.

Coinsurance

Coinsurance is the portion, usually calculated on a percentage basis, that you must pay as your share of approved doctor or hospital bills when you are covered by a fee for service plan including Original Medicare. The healthcare insurer pays a different, usually larger, percentage. In other words, you and your insurer divide the responsibility for paying doctor and hospital bills by splitting the costs. With an 80/20 coinsurance split, for example, your insurer would pay 80%, or $80 of a covered $100 medical bill, and you would pay 20%, or $20. Some policies set a cap on your out-of-pocket expenses, so that the insurance company covers 95% to 100% of the cost once you have paid the specified amount. Coinsurance may also apply when you buy insurance on your home or other real estate. In that case, insurers may require you to insure at least a minimum percentage of your property's value -- usually about 80% -- and may reduce what they will cover if you file a claim but have failed to meet the coinsurance requirement. Coinsurance also describes a situation in which two insurers split the risk of providing coverage, often in cases when the dollar amount of the potential claims is larger than a single insurer is willing to handle. This type of coinsurance is also called reinsurance.

Collateral

Collateral is something of monetary value, such as stock, bonds, or real estate, that is used to guarantee repayment on a loan. Loans guaranteed by collateral are also known as secured loans. If the borrower defaults and fails to fulfill the terms of the loan agreement, the collateral, or some portion of it, may become the property of the lender. For example, if you borrow money to buy a car, the car is the collateral. If you default, the lender can repossess the car and sell it to recover the amount you borrowed.

Commission

A commission is a sales charge on a a transaction. Securities brokers and other sales agents typically charge a commission when they buy or sell on behalf of a client or act as intermediary in a sale. With traditional, full-service brokers, the charge is usually a percentage of the total cost of the trade, though some brokers may offer favorable rates to frequent traders. Online brokerage firms, on the other hand, usually charge a flat fee for each transaction, regardless of the value of the trade. The flat fee may have certain limits, however, such as the number of shares being traded at one time. The commissions on some transactions, such as stock trades, are reported on your confirmation slip. But commissions on other transactions are not reported separately. In the case of cash value life insurance, for example, the commission may be as large as a year's premium.

Commodity

Commodities are bulk goods and raw materials, such as grains, metals, livestock, oil, cotton, coffee, sugar, and cocoa, that are used to produce consumer products. Commodities are bought and sold on the cash market, and they are traded on the futures exchanges in the form of futures contracts. Commodity prices are driven by supply and demand. When a commodity is plentiful -- tomatoes in August, for example -- prices are comparatively low. When a commodity is scarce because of a bad crop or because it is out of season, the price will generally be higher. You can buy options on many commodity futures contracts to participate in the market for less than it might cost you to buy the underlying futures contracts. You can also invest through commodity funds.

Common stock

Common stock is issued by a publicly traded corporation to raise capital from outside investors. After issue, the stock trades in the secondary market, either on an exchange or over-the-counter (OTC). Purchasing shares gives investors equity, or ownership, in the corporation and the right to vote for the corporation's board of directors and benefit from its financial success. The corporation may pay out a portion of its profits as dividends to its stockholders if the board of directors declares a dividend. Stockholders have the right to sell their shares in the marketplace and realize a capital gain if the share value has increased, hold the stock in their portfolios, gift it, or leave it to their heirs. However, neither dividends or share-price increases are guaranteed, and investors can lose money if the company falters and the share price falls or if equity markets in general fall.

Community property

In states where a community property law applies, all assets, investments, and income that are acquired by a married couple during a marriage are community property. That is, they are owned equally by the married couple. The nine community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. For example, if you're married, live in one of these states, and buy stock, half the value of that stock belongs to your spouse even if you paid the entire cost of buying it. In a divorce, the value of the community property must be divided equally even if the parties to the divorce no longer live in a community property state. However, property you owned before you married or that you received as a gift is generally not considered community property.

Compound interest

Compound interest is paid on the combined value of the original principal and any interest that has been added to the principal while it was invested or on deposit. For example, say you earn 5% compound interest on $100 every year for five years. You'll have $105 after one year, $110.25 after two years, $115.76 after three years, and $127.63 after five years because the base on which the interest is paid increases each year. Without compounding, you earn simple interest, and your earnings don't accumulate as quickly. For example, if you earned 5% simple interest on $100 for five years, you would have $125. A larger base or a higher rate, or both, provide even more pronounced differences. In addition, the more frequently compounding occurs -- daily or monthly rather than annually for example -- the faster earnings accumulate. These differences are difficult to see on small balances, however. Compound interest earnings are reported as annual percentage yield (APY), and the APY is higher than the nominal, or named, rate the account pays.

Compounding

Compounding occurs when your investment earnings or savings account interest is added to your principal, forming a larger base on which future earnings may accumulate. As your investment base gets larger, it has the potential to grow faster. And the longer your money is invested, the more you stand to gain from compounding. For example, if you invested $10,000 earning 8% annually and reinvested all your earnings, you'd have $21,589 in your account after 10 years. If instead of reinvesting you withdrew the earnings each year, you would have collected $800 a year, or $8,000 over the 10 years. The $3,589 difference is the benefit of 10 years of compound growth.

Confirmation

A confirmation documents the details of a securities transaction, such as the purchase or sale of a stock or shares of a mutual fund. Stock confirmations include the price, any fees, the trade and settlement dates, and the commission if it applies. These documents are your backup for calculating capital gains and losses. You'll also receive a confirmation to reaffirm orders you place, such as a good 'til canceled order to buy or sell a certain stock at a stop or limit price. In addition, activity in your trading account, such as stock splits, spinoffs, or mergers will trigger a confirmation notice.

Conscience fund

Conscience funds, also known as socially responsible funds, allow you to invest in companies whose business practices are in keeping with your personal values. For example, you can choose mutual funds that invest in companies that have exceptional environmental or social records, or that refuse to invest in companies that manufacture certain products or have certain employee benefit practices. Each fund explains the principles it follows in its prospectus and describes the screens, or set of criteria, it uses to identify acceptable underlying investments.

Consumer confidence index

The consumer confidence index is released each month by the Conference Board, an independent business research organization. It measures how a representative sample of 5,000 US households feel about the current state of the economy, and what they anticipate the future will bring. The survey focuses specifically on the participants' impressions of business conditions and the job market. Economic observers follow the index because when consumer attitudes are positive they are more likely to spend money, contributing to the very economic growth they anticipate. But if consumers are worried about their jobs, they may spend less, contributing to an economic slowdown.

Consumer price index (CPI)

The consumer price index (CPI) is compiled monthly by the US Bureau of Labor Statistics and is a gauge of inflation that measures changes in the prices of basic goods and services. Some of the things it tracks are housing, food, clothing, transportation, medical care, and education. The CPI is used as a benchmark for making adjustments in Social Security payments, wages, pensions, and tax brackets to keep them in tune with the buying power of the dollar. It's often incorrectly referred to as the cost-of-living index.

Contract

A contract is an agreement between two or more parties, in which one party assumes an obligation to provide or deliver something and the other party or parties agree to pay for it. Contracts vary widely in subject and specific terms. For a contract to be legally enforceable each party must be legally competent to make the agreement, and all parties must agree to the terms. That may be described as mutuality or a “meeting of the minds.” If a contract is breached, the aggrieved party can seek damages or restitution in court, though an acceptable resolution is not assured. The more specific and clear the contract, the more likely the plaintiff is to be successful. That helps to explain the level of detail that most formal contracts contain.

Contribution limit

A contribution limit, also known as a contribution cap, is the largest amount that can be added to an account on which a limit is imposed. Contribution limits apply to most employer-sponsored defined contribution plans, including 401(k)s, 403(b)s, 457s, thrift savings plans, SIMPLEs, SEP-IRAs, profit-sharing plans, and money purchase plans. Contribution limits also apply to individual retirement arrangements (IRAs) and to Coverdell education savings accounts. Most contribution limits are imposed by Congress and updated either annually or in response to predetermined increases in the rate of inflation. However, individual states may set contribution limits for plans not governed by federal rules, including contributions to 529 college savings plans and nonqualified annuity contracts. In addition, employers may impose contribution limits on employee contributions that are different from the Congressional limits. In that case, the lower of the two limits takes precedence.

Cost-of-living adjustment (COLA)

A cost-of-living adjustment (COLA) results in a wage or benefit increase that is designed to help you keep pace with increased living costs that result from inflation. COLAs are usually pegged to increases in the consumer price index (CPI). Federal government pensions, some state pensions, and Social Security are usually adjusted annually, but only a few private pensions provide COLAs.

Coupon

Originally, bonds were issued with coupons, which you clipped and presented to the issuer or the issuer's agent -- typically a bank or brokerage firm -- to receive interest payments. Bonds with coupons are also known as bearer bonds because the bearer of the coupon is entitled to the interest. Although most new bonds are electronically registered rather than issued in certificate form, the term coupon has stuck as a synonym for interest in phrases like the coupon rate. When interest accumulates rather than being paid during the bond's term, the bond is known as a zero coupon.

Coupon rate

The coupon rate is the interest rate that the issuer of a bond or other debt security promises to pay during the issue's term. For example, a bond that is paying 6% annual interest has a coupon rate of 6%. The term is derived from the practice, now discontinued, of issuing bonds with detachable coupons that had to be presented to the issuer or the issuer's agent in order to collect a scheduled interest payment. Today, most bonds are registered, and interest is paid by check or, increasingly, by electronic transfer.

Crash

A crash is a sudden, steep drop in stock prices. The downward spiral is intensified as more and more investors, seeing the bottom falling out of the market, try to sell their holdings before these investments lose all their value. The two great US crashes of the 20th century, in 1929 and 1987, had very different consequences. The first was followed by a period of economic stagnation and severe depression. The second had a much briefer impact. While some investors suffered huge losses in 1987, recovery was well under way within three months. In the aftermath of each of these crashes, the federal government instituted a number of changes designed to reduce the impact of future crashes.

Credit bureau

A credit bureau, more accurately known as a credit reporting agency, collects information about the way consumers use credit and make that information available to anyone with a legitimate business need to see it, including potential lenders, landlords, insurers, and current or prospective employers. The three major national credit reporting agencies are Equifax, Experian, and TransUnion. They keep records of the credit accounts you have, how much you owe, your payment habits, and the lenders and other businesses that have accessed your credit report. Credit reporting agencies store additional information about you as well, such as your present and past addresses, Social Security number, employment history, and information in the public record, including bankruptcies, liens, and any judgments against you. Using that information, each agency creates a credit report and credit score. However, there are certain things, by law, your credit report can't include, including your age, race, religion, political affiliation, or health records. You are entitled to a free copy of your credit report from each of the three major credit reporting agencies once every twelve months, but you have to request them through the Annual Credit Report Request Service (www.annualcreditreport.com or 877-322-8228). If you've recently been denied credit, are unemployed, on public assistance, or have a reason to suspect identity theft or credit fraud, you're also entitled to a free report. In those cases, you should contact the relevant credit reporting agency or agencies directly.

Credit limit

A credit limit, also known as a credit line, is the maximum amount of money you can borrow under a revolving credit agreement. For instance, if you have a credit card with a credit limit of $3,000, and you charge $1,000, you can spend $2,000 more before you reach your credit limit. And if you repay the $1,000 before the end of the billing cycle without making additional purchases, your credit limit is back up to $3,000 again. Card issuers may not charge an over-limit fee unless you agree ahead of time to the charge, and they may add only one over-limit fee per billing cycle.

Credit line

A credit line, or line of credit, is a revolving credit agreement that allows you to charge purchases, write checks, or make cash withdrawals of amounts up to your credit limit. When you use the credit -- sometimes called accessing the line -- you owe interest on the amount you borrow. When that amount has been repaid you can borrow it again. A home equity line of credit (HELOC) is secured by your home, but other credit lines, such as an overdraft arrangement linked to your checking account and credit cards, are unsecured. In general, the interest rate on a secured credit line is lower than the rate on an unsecured line.

Credit quality

Credit quality is a measure of the financial strength of a specific debt security, such as a corporate or government bond or a securitized debt obligation, and of the likelihood that its issuer will default. Credit quality is expressed in relative terms by credit rating agencies, using rating scales that group issues by the level of risk they pose.

Credit rating

A credit rating is an independent evaluation of the credit risk, or likelihood of default, posed by an issuer of debt or by a specific debt issue. These opinions are based on the financial and nonfinancial criteria set by the credit rating agency making the assessment. A debt issuer's credit rating, sometimes described as its creditworthiness, is an assessment of its ability and willingness to pay interest and repay principal in a timely way, based on the terms of its obligations. A debt issue's credit rating, sometimes described as its credit quality, is based on the creditworthiness of its issuer, the terms of the obligation, and other factors. Credit rating scales generally range from AAA or Aaa at the high end to D (for default) at the low end.

Credit rating agency

Credit rating agencies assess the creditworthiness of corporations and governments who issue debt securities. Agencies also rate the credit quality of specific issues, such as individual bonds and securitized debt obligations. The focus of an agency's assessment is the relative risk that an issuer or a security will default. Some agencies may also consider the potential for investors to recover their assets if default occurs. Ratings serve as a resource for individual and institutional investors seeking debt securities that match their risk tolerance. Issuers rely on credit ratings to help determine the interest rates they must pay to attract investors. In addition, a business or financial institution may use credit ratings to assess counterparty risk, which is the potential that another institution, with which it is doing business, will default. Agencies may be paid for their services by collecting a fee from the issuers or arrangers of the debts they are rating. Alternately, they may operate under a subscription model and charge users for access to their findings.

Credit report

A credit report is a summary of your financial history compiled by a credit reporting agency. Potential lenders, landlords, and employers use your credit report to help them evaluate whether you are a good credit risk. The three major credit-reporting agencies are Experian, Equifax, and Transunion. These agencies collect certain types of information about you, primarily your use of credit and information in the public record, and sell that information to qualified recipients. As a provision of the Fair and Accurate Credit Transaction Act (FACT Act), you are entitled to a free copy of your credit report once every twelve months from each of the credit reporting agencies. You also have a right to see your credit report at any time if you have been turned down for a loan, an apartment, or a job because of poor credit. You may also question any information the credit reporting agency has about you and ask that errors be corrected. If the information isn't changed following your request, you have the right to attach a comment or explanation, which must be sent out with future reports.

Credit risk

Credit risk, also called default risk or counterparty risk, is the risk that a borrower will fail to make interest payments or repay borrowed principal on schedule. As an investor, you are concerned with credit risk every time you invest in corporate, municipal, or government bonds. Corporate bonds with very low ratings, also known as junk bonds, carry a higher risk that the company will default. The same is true for bonds issued by governments that seem likely to have trouble meeting their contractual obligation to repay their debts. As a borrower, perhaps seeking a mortgage or car loan, you’re on the other side of the credit risk consideration. The bank or loan company looks at your credit history when deciding whether to make the loan and setting your interest rate. If you have a history of trouble repaying your debts, you will probably have to pay a higher rate of interest to secure a loan, just as a company with a low S &P or Moody’s bond rating must offer a higher rate when issuing debt.

Credit score

Your credit score is a number, calculated based on information in your credit report, that lenders use to assess the credit risk you pose and the interest rate they will offer you if they agree to lend you money. Most lenders use credit scores rather than credit reports since the scores reduce extensive, detailed information about your financial history to a single number. There are actually two competing credit scoring systems, FICO, which is the standard, and VantageScore, which was developed by the three major credit bureaus. Their formulas give different weights to particular types of credit-related behavior, though both emphasize paying your bills on time and the amount of credit you are using in relation to your credit limits. They also have different scoring systems, ranging from 300 to 850 for FICO to 501 to 999 for AdvantageScore. The best -- or lowest -- interest rates go to applicants with the highest scores. Because your credit score and credit report are based on the same information, it's very unlikely that they will tell a different story. It's smart to check your credit report from each of the three major credit reporting agencies at least once every 12 months, which you can do for free at www.annualcreditreport.com or by calling 877-322-8228. It may also be a good idea to review your credit score if you anticipate applying for a major loan, such as a mortgage, in the next six months to a year. That allows time to bring your score up if you fear it's too low. But since scores vary, confirm with potential lenders which score they will use, and check that one.

Credit union

Credit unions are not-for-profit financial institutions established to meet the banking needs of employee and community associations, labor unions, church groups, and other organizations. Some credit unions restrict membership to a fairly narrow group of customers, while others define their membership criteria broadly and welcome a more diverse group. Credit unions tend to charge lower fees for their products and services and offer lower interest rates on the loans they make than commercial banks do. Credit unions also tend to pay higher interest rates on savings accounts than their for-profit competitors. Deposits at most credit unions are insured by the National Credit Union Share Insurance Fund (NCUSIF), the equivalent of the Federal Deposit Insurance Corporation (FDIC), which insures bank deposits. Large credit unions offer a range of products and services that are as comprehensive as those at large banks. At smaller credit unions, however, services and hours may be more limited, and a few may not be insured.

Creditor

A creditor is a person or institution that lends money to a borrower. For example, if you take a mortgage or car loan, the lender is your creditor. But if you buy a bond, you are the creditor because the money you pay to make the purchase is actually a loan to the issuer.

Creditworthy

The term creditworthy describes a person or institution seeking to borrow as an acceptable risk, with the means and the will to repay what they borrow, plus interest, in accordance with the terms of the loan. A creditworthy borrower is more likely to be offered credit on desirable terms, including the lowest interest rate a lender has available.

Cyclical stock

Cyclical stocks tend to rise in value during an upturn in the economy and fall during a downturn. They usually include stock in industries that flourish in good times, including airlines, automobiles, and travel and leisure. In contrast, stock in industries that provide necessities such as food, electricity, gas, and healthcare products tend to be more price-stable, as do companies that provide services that reduce the expenses of other companies. Those stocks are sometimes called countercyclicals.

Date of maturity

The date of maturity, or maturity date, is the day on which a bond or certificate of deposit (CD) term ends. On that date, the bond issuer repays the principal and makes the final interest payment. The bank issuing the CD follows your instructions to roll the balance into a new CD or deposit the amount in a linked account. If you don't provide instructions, a CD is generally rolled over for the same term at the current rate. When date of maturity is used in connection with mortgages or other personal loans, the date of maturity is the day your last payment is due and your debt is repaid.

Day trader

A day trader buys and then resells investments within a very short time, perhaps a few seconds, minutes, or hours, and rarely holds them overnight. The strategy is to take advantage of rapid price changes to make money quickly, often by buying and selling in large volume so just pennies per trade can add up to a profit. The risk is that a day trader can lose substantial amounts of money since no one can predict how or when prices will change. This risk is compounded by the fact that technology does not always keep pace with investors' orders. So if you authorize a sale at one price, the price at which the trade is actually executed at may be higher or lower, wiping out potential profit or creating a loss. In addition, day traders pay transaction costs on each buy and sell order. The gains must be large enough to offset those costs in order to come out ahead.

Dealer

A dealer buys and sells securities for his or her brokerage firm's accounts, or for his or her individual account, adding liquidity to the marketplace and seeking to profit from the spread between the prices at which transactions are executed. In the over-the-counter (OTC) market, dealers -- called market makers -- provide the current bid and ask prices for specific securities. These dealers commit themselves to buy or sell a fixed number of shares -- typically 100 -- of a security in which they make a market at the price they have quoted.

Death benefit

A death benefit is money your beneficiary collects from your life insurance policy if you die while the policy is still in force. In most cases, the beneficiary receives the face value of the policy as a lump sum. However, the death benefit is reduced by the amount of any unpaid loans you've taken against the policy. Some retirement plans, including Social Security, also provide a one-time death benefit to your beneficiary at the time of your death.

Debit

A debit is a amount that has been subtracted from am account, reducing its balance. For example, checking account debit reflects the amount of a withdrawal, electronic payment, check, or fee that has been taken out of the account. When debit is used as a verb, it refers to the act of taking money out of an account.

Debit card

A debit card -- sometimes called a cash plus card or a check card -- allows you to make point-of-sale (POS) purchases by swiping the card through the same type of machine you use to make credit card purchases. Sometimes you authorize a debit card transaction with your personal identification number (PIN). Other times, you sign a receipt just as you would if you were charging the purchase to your credit card. You can also use the card to make ATM withdrawals or transfer money between your accounts at the issuing bank or other financial institution. When you use a debit card, the amount of your purchase is debited, or subtracted, from your account and transferred electronically to the seller's account. The debit may occur within 24 hours or less of the time the transaction is done, especially when you authorize it with a PIN. It could take longer when you sign the receipt. You have some of the same protections against loss with a debit card as you do with a credit card, but there is one important difference. While $50 is the most you can ever be responsible for if your credit card is lost or stolen, you could lose more than $50 if your debit card is lost or stolen and you do not report it in a timely way. If you delay reporting a fraudulent use for more than two business days after discovering the theft, you could lose up to $500. And if you wait more than 60 days after receiving a bank statement that includes a fraudulent use of your card, you could lose all the money withdrawn after the 60-day deadline, including any amount that can be accessed from your overdraft line of credit. You can find the specific rules on the Federal Trade Commission website at www.ftc.gov.

Debt

A debt is an obligation to repay an amount you owe. Debt securities, such as bonds or commercial paper, are forms of debt that bind the issuer, such as a corporation, bank, or government, to repay the security holder. Debts are also known as liabilities.

Debt ceiling

A debt ceiling, also known as a debt limit, is the highest amount that a government is authorized to borrow by issuing new bonds. Municipal debt ceilings are common and increasing the ceiling may require voter approval. Exceeding its debt ceiling may mean a city’s credit rating is reduced, increasing the interest it must pay to attract new bond buyers. National debt ceilings are the exception rather than the rule around the world, although the US debt ceiling has been in place since 1917. If the US government wants to borrow more than the current ceiling, the president must seek authorization from Congress.

Debt security

Debt securities are interest-paying bonds, notes, bills, or money market instruments that are issued by governments or corporations. Some debt securities pay a fixed rate of interest over a fixed time period in exchange for the use of the principal. In that case, that principal, or par value, is repaid at maturity. Some are pass-through securities, with principal and interest repaid over the term of the loan. Still other issues are sold at discount, with interest included in the amount paid at maturity. US Treasury bills, corporate bonds, commercial paper, and mortgage-backed bonds are all examples of debt securities.

Debt-to-equity ratio (D/E)

A company's debt-to-equity ratio (D/E) indicates the extent to which the company is leveraged, or financed by credit. A higher ratio is a sign of greater leverage. You find a company's debt-to-equity ratio by dividing its total long-term debt by its total assets minus its total debt. You can find these figures in the company's income statement, which is provided in its annual report. Average ratios vary significantly from one industry to another, so what is high for one company may be normal for another company in a different industry. From an investor's perspective, the higher the D/E ratio, the greater the risk you take in investing in the company. But your potential return may be greater as well if the company uses the debt to expand its sales and earnings.

Deductible

A deductible is the dollar amount you must pay for healthcare, damage to your property, or any other insurable claim before your insurance company begins to cover its share of the cost. For example, if you have a health insurance policy with an annual $300 deductible, you have to spend $300 of your own money before your insurer will pay whatever portion of the rest of the year's bills it has agreed to cover. Generally speaking, the higher the deductible you agree to pay, the lower your insurance premiums tend to be. However, the deductible for certain coverage is fixed by the insurance provider and is not negotiable. That's the case with Original Medicare.

Deduction

A deduction is an amount you can subtract from either your gross income or your adjusted gross income (AGI) to reduce your taxable income, and therefore the taxes you owe, when you file your income tax return. Certain deductions, technically known as adjustments, such as contributions to a traditional IRA or interest payments you make on a college loan, are subtracted from your gross income to reduce your AGI. These adjustments are available only to taxpayers who qualify based on specific expenditures or income limits, or both. Other deductions are more widely available. For example, you can take a standard deduction for general expenditures, an amount that's fixed each year for each tax status. If your expenses for certain costs, such as home mortgage interest, real estate taxes, and state and local income taxes, total more than the standard deduction, you have the option to itemize deductions instead for an additional reduction in your taxable income.

Default

A default occurs if a person or institution responsible for repaying a loan or making an interest payment fails to meet that obligation on time. If you are in default, you may lose any property that you put up as collateral to arrange a secured loan. For example, if you fail to repay your car loan, your lender may repossess the car. Defaulting has a negative impact on your credit history and your credit score, which generally makes it difficult to borrow again or to borrow at a reasonable rate if you do manage to be approved for a loan. If you default, creditors may sue you, arrange to have your wages garnished, or take other measures to recover their losses. In fact, default is a major contributor to a poor credit history. A bond issuer who defaults may not pay interest when it comes due, fail to repay the principal at maturity, or fail to do both.

Deferment

A deferment is temporary relief from the obligation to repay a federal Stafford or Perkins student loan on schedule. You must apply and qualify for deferment by meeting one of the requirements the federal government has set. If you are in default on your loan you are ineligible. If you have a subsidized Stafford or Perkins loan, no interest is due during a deferment. If you have an unsubsidized Stafford loan, you must pay interest on the loan's outstanding balance. Any amounts you don't pay are capitalized, or added to the principal of the loan. Parents and graduate students with a Parent Loan for Undergraduate Students (PLUS) may also qualify for deferment.

Defined benefit plan

A defined benefit plan -- popularly known as a pension -- provides a specific benefit for retired employees, either as a lump sum or as income for the rest of their lives. Sometimes the employee's spouse receives the benefit for life as well. The pension amount usually depends on the employee's age at retirement, final salary, and the number of years on the job. All the details are spelled out in the plan. However, an employer may end its defined benefit plan or replace this traditional source of retirement income with defined contribution or cash balance plans.

Defined contribution plan

In a defined contribution retirement plan, the benefits -- that is, what you can expect to accumulate and ultimately withdraw from the plan -- are not predetermined, as they are with a defined benefit plan. Instead, the retirement income you receive will depend on how much is contributed to the plan, how it is invested, and what the return on the investment is. One advantage of defined contribution plans, such as 401(k)s, 403(b)s, 457s, and profit-sharing plans, is that you often have some control over how your retirement dollars are invested. Your choice may include stock or bond mutual funds, annuities, guaranteed investment contracts (GICs), company stock, cash equivalents, or a combination of these choices. An added benefit is that, if you switch jobs, you can take your accumulated retirement assets with you, either rolling them into an IRA or a new employer's plan if the plan accepts transfers.

Deflation

Deflation, the opposite of inflation, is a gradual drop in the cost of goods and services, usually caused by a surplus of goods and a shortage of cash. Although deflation seems to increase your buying power in its early stages, it is generally considered a negative economic trend. That's because it is typically accompanied by rising unemployment, falling production, and limited investment.

Deposit

A deposit is a sum of money added to an account at a financial institution, such as a bank or credit union, for safekeeping. You can deposit money in a checking or savings account. Checking account deposits are known as demand deposits, or call deposits, and can be withdrawn or transferred to a third party at any time. Savings account deposits are subject to a limited number of covered transfers and withdrawals, such as payments to a third party from a money market account. However, non-covered transfers and withdrawals, including cash withdrawals by the depositor, are not limited by law but may be limited by the terms of your agreement with the bank or credit union. You can also deposit money in a term, time, or fixed deposit, where the money earns interest, typically at a set rate, and must remain for a fixed period of time if you wish to avoid a penalty for early withdrawal.

Depreciation

Depreciation occurs as certain assets, such as buildings and equipment, lose value over time. Common wisdom maintains, for example, that a car depreciates 20% in value when you drive it off the dealer's lot. Corporations and other business entities, such as partnerships and limited liability companies (LLCs), can amortize, or write off, the cost of such an asset over its estimated useful life, reducing their taxable income without reducing their revenue. If you invest in nontraded real estate investment trusts (REITs), equipment leasing trusts, and energy exploration and development partnerships, you may also be entitled to depreciate your shares of the assets owned through the trust or partnership.

Depression

A depression is a severe and prolonged downturn in the economy. Prices fall, reducing purchasing power. There tends to be high unemployment, reduced productivity, shrinking wages, and general economic pessimism. Since the Great Depression following the stock market crash of 1929, the governments and central banks of industrialized countries have monitored their economies and, when required, adjusted their economic policies in a effort to prevent another financial crisis of this magnitude. The most recent, and perhaps the most severe, threat to world-wide economic stability since that date came to a head in 2008 in the wake of the subprime mortgage meltdown and the ensuing credit freeze.

Derivative

Derivatives are financial products, such as futures contracts, options, and mortgage-backed securities. Most of the value of a derivative is based on the value of an underlying commodity, security, or other financial instrument. For example, the changing value of a crude oil futures contract depends primarily on the upward or downward movement of oil prices. Similarly, sn equity option's value is determined by the relationship between its strike price and the value of the underlying stock, the time until expiration, and the stock price volatility. Certain derivatives investors, called hedgers, are interested in the underlying instrument. For example, a baking company might buy wheat futures to help manage the cost of producing its bread in the months to come. Other derivatives investors, called speculators, are interested in the profit to be made by buying and selling a contract at the most opportune time. Listed derivatives are traded on organized exchanges or markets, and the contracts follow standard terms. Other derivatives are customized to meet specific needs and are traded over-the-counter (OTC) or in private transactions.

Direct deposit

Direct deposit is the electronic transfer of money from a payer, such as your employer or a government agency, directly into an account you designate. Direct deposit is faster and cheaper than sending a check and also more secure, which is why both payers and financial institutions prefer this system. In fact, banks may offer some free checking services or other benefits if your paychecks are deposited directly. Similarly, mutual funds may reduce the minimum amount you must invest if you agree to make purchases by direct deposit to your fund account.

Disclosure

A disclosure document explains how a financial product or offering works. It also details the terms to which you must agree in order to buy it or use it, and, in some cases, the risks you assume in making such a purchase. For example, publicly traded companies must provide all available information that might influence your decision to invest in the stocks or bonds they issue. Mutual fund companies are required to disclose the risks and costs associated with buying shares in the fund. Government regulatory agencies, such as the Securities and Exchange Commission (SEC), self-regulating organizations, state securities regulators, and FINRA require such disclosures. Similarly, federal and local governments require lenders to explain the costs of credit, and banks to explain the costs of opening and maintaining an account. Despite the consumer benefits, disclosure information isn't always easily accessible. It may be expressed in confusing language, printed in tiny type, or so extensive that consumers choose to ignore it.

Discount

When bonds sell for less than their face value, they are said to be selling at a discount. Bonds sell at a discount when the interest rate they pay is lower than the rate on more recently issued bonds or when the financial condition of the issuer weakens. In the case of rising interest rates, demand for older, lower-paying bonds drops as investors put their money into newer, higher-paying alternatives, so the prices of the older bonds drop. If a rating agency reduces a bond's rating, the market price tends to drop because investors demand a higher yield for the additional risk they take in buying the bond. Similarly, closed-end mutual funds may trade at a discount to their net asset value (NAV) as a result of weak investor demand or other market forces. Preferred stocks may also trade at a discount. In contrast, certain bonds, called original issue discount bonds, or deep discount bonds, are issued at a discount to par value, or full face value, but are worth par at maturity.

Discount brokerage firm

Discount brokerage firms charge lower commissions than full-service brokerage firms when they execute investors' buy and sell orders but may provide fewer services to their clients. For example, they may not offer investment advice or maintain independent research departments. Because of the information and online account access on most brokerage websites, differences between full-service and discount firms are less apparent to the average investor.

Disposable personal income (DPI)

Disposable personal income (DPI) is the amount that’s left after income taxes, FICA taxes, and other required amounts are withheld from gross income. DPI is the money you have available to spend on your essential and discretionary household expenses, to save, and to invest

Dispute resolution

Dispute resolution -- sometimes called alternative dispute resolution -- refers to methods of resolving conflicts between parties or individuals that don't involve litigation. Mediation and arbitration are two forms of dispute resolution that are frequently used when conflicts arise between investors and the brokers or investment advisers with whom they work. If you have a conflict that you've been unable to resolve by talking with your broker and his or her firm, you can file a complaint with FINRA, the self-regulatory body that regulates brokerage firms and uses mediators and arbitrators to help resolve disputes. If your conflict is with a registered investment adviser, you should contact the Securities and Exchange Commission (SEC). Advocates of dispute resolution note that it tends to be quicker, cheaper, and less confrontational than litigation.

Distribution

A distribution is money a mutual fund pays its shareholders either from the dividends or interest it earns or from the capital gains it realizes on the sale of securities in its portfolio. Unless you own the fund through a tax-deferred or tax-free account, you owe federal income tax on most distributions, the exception being interest income from municipal bond funds. That tax is due whether or not you reinvest the money to buy additional shares in the fund. You'll owe tax at your regular rate on short-term gains and on income from interest. The tax on qualifying dividends and long-term gains is calculated at your long-term capital gains rate. Your end-of-year statement will indicate which income belongs to each category. The term distribution is also used to describe certain actions a corporation takes. For example, if a corporation spins off a subsidiary as a standalone company, it will issue shares in that subsidiary to current stockholders. That's considered a distribution. Corporate dividends may also be described as distributions.

Diversification

Diversification is an investment strategy. When you diversify, you spread your investment dollars among different sectors, industries, and securities within a number of asset classes. A well-diversified stock portfolio, for example, might include small-, medium-, and large-capitalization domestic stocks, stocks in six or more sectors or industries, and international stocks. The goal is to protect the value of your overall portfolio in case a single security or market sector takes a serious downturn. Finding the diversification mix that's right for your portfolio depends on your age, your assets, your tolerance for risk, and your investment goals. Diversification may help protect your portfolio against certain market and management risks without significantly reducing the level of return you realize. But it does not guarantee you will realize a profit or insure you against losses in a market downturn.

Dividend

A dividend is a portion of a corporation's earnings that the board of directors may choose to pay out to shareholders as a return on investment. These dividends, which are often declared quarterly, are usually in the form of cash, but may be paid as additional shares or scrip. You may be able to reinvest cash dividends automatically to buy additional shares if the corporation offers a dividend reinvestment program (DRIP) or direct purchase plan (DPP). Dividends are taxable income unless you own the investment through a tax-deferred account, such as an employer-sponsored retirement plan or individual retirement account. This rule applies whether you reinvest the dividends or take the money. However, dividends on most US and many international stocks are considered qualifying dividends. This means you owe tax at your long-term capital gains rate, provided you have owned the stocks the required length of time. Dividends paid by real estate investment trusts (REITs), mutual savings banks, and certain other investments aren't considered qualifying and are taxed at the same rate you pay on ordinary income or at a predetermined rate such as 28%.

Dividend reinvestment plan (DRIP)

A dividend reinvestment plan (DRIP) allows shareholders of a publicly held company to reinvest dividends in company stock as they are paid or buy additional shares directly, without using a brokerage firm. Enrolling in a DRIP enables you to build your investment gradually, taking advantage of dollar cost averaging and usually paying only a minimal transaction fee for each purchase. Many DRIPs will also buy back shares at any time you want to sell, in most cases for a minimal sales charge. However, depending on company policy, your sell order may not be executed immediately. You have the right to transfer shares you hold in a DRIP program to a brokerage account. One potential drawback of purchasing through a DRIP is that you accumulate shares at different prices over time, making it more difficult to determine your cost basis -- especially if you want to sell some of but not all your holdings.

Dividend yield

Dividend yield is the ratio of the per-share dividend divided by the current per-share market price, expressed as a percentage. For example, if a stock whose market price is $35 a share pays a dividend of 75 cents per share, the dividend yield is 2.14% ($0.75 ÷ $35 = 0.0214, or 2.14%). Dividend yield increases as the price per share drops and drops as the share price increases. Dividend yield does not tell you what you're earning based on your original investment or the income you can expect to earn in the future. However, some investors seeking current income or following a particular investment strategy look for high-yielding stocks.

Dollar cost averaging

Dollar cost averaging means adding a fixed amount of money on a regular schedule to an investment account, such as a mutual fund, retirement account, or a dividend reinvestment plan (DRIP). Since the share price of the investment fluctuates, you buy fewer shares when the share price is higher and more shares when the price is lower. The advantage of this type of formula investing, which is sometimes called a constant dollar plan, is that, over time, the average price you pay per share is lower than the actual average price per share. But to get the most from this approach, you have to invest regularly, including during prolonged downturns when the prices of the investment drop. Otherwise you are buying only at the higher prices. Despite its advantages, dollar cost averaging does not guarantee a profit and doesn't protect you from losses in a falling market.

Dow Jones Industrial Average (DJIA)

The Dow Jones Industrial Average (DJIA), sometimes referred to as the Dow, is the best-known and most widely followed market indicator in the world. It tracks the performance of 30 blue chip US stocks. Though it is called an average, it actually functions more like an index. The DJIA is quoted in points, not dollars. It's computed by totaling the weighted prices of the 30 stocks and dividing by a number that is regularly adjusted for stock splits, spin-offs, and other changes in the stocks being tracked. The companies that make up the DJIA are changed from time to time at the discretion of the editors of The Wall Street Journal.

Down payment

A down payment is the amount, usually stated as a percentage, of the total cost of a property that you pay in cash as part of a real estate transaction. The down payment is the difference between the selling price and the amount of money you borrow to buy the property. For example, you might make a 10% down payment of $20,000 to buy a home selling for $200,000 and take a $180,000 mortgage. With a conventional mortgage, you're usually expected to make a down payment of 10% to 20%. But you may qualify for a mortgage that requires a smaller down payment, perhaps as little as 3%. The upside of needing to put down less money is that you may be able to buy sooner. But the downside is that your mortgage payments will be larger and you'll pay more interest, increasing the cost of buying.

Durable power of attorney

A durable power of attorney gives the agent -- called the attorney-in-fact -- named by the grantor of the power the right to make legal and financial decisions on his or her behalf. For example, an attorney-in-fact has the right to buy and sell property on the grantor's behalf and handle his or her banking and investment accounts. The grantor retains the right to revoke the power or name a new agent at any time. An agent with durable power of attorney continues to have the power to act if the grantor becomes incompetent. That's not the case with a regular power of attorney, which is terminated in such circumstances. However, not all states allow durable powers.

Early withdrawal

An early withdrawal occurs when a term deposit, such as a certificate of deposit (CD), is cashed in before it matures or when assets are distributed from a tax-deferred or tax-free retirement savings plan before the account owner turns 59 1/2. There is usually a penalty for early withdrawal, imposed by the issuer in the case of a CD or the federal government if it's a tax-deferred savings plan. The penalty for an early CD withdrawal is loss of some or all of the interest that has accrued on the balance. The penalty for an early withdrawal from an IRA or similar account is a 10% tax penalty in addition to whatever other taxes are due on the withdrawn amount. However, you may be able to withdraw the money in your tax-deferred account without penalty under certain circumstances. For example, if you withdraw IRA assets to pay for higher education, to buy a first home, or for other qualified reasons, the penalty may be waived.

Earned income

Earned income is pay you receive for work you perform, and includes salaries, wages, tips, and professional fees. Your earned income is included in your gross income, along with unearned income from interest, dividends, and capital gains. If you have earned income, you're eligible to contribute to an individual retirement account (IRA).

Earned income credit (EIC)

The earned income tax credit (EIC) reduces the income tax that certain low-income taxpayers would otherwise owe. It's a refundable credit, so if the tax that's due is less than the amount of the credit, the difference is paid to the taxpayer as a refund. To qualify for the EIC, a taxpayer must work, earn less than the government's ceiling for his or her filing status and family situation, meet a set of specific conditions, and file the required IRS schedules and forms.

Earnings

Corporate earnings are a company's profits after expenses have been paid. Earnings history is one of the key indicators that fundamental analysts use to evaluate a company as a potential investment. However, there are several ways to report earnings. The broadest is reported earnings, which is defined by generally accepted accounting principles (GAAP). Others include pro forma earnings, EBITDA, free cash flow, and core earnings. Each method produces different results because of the data that is included in the calculation. The permissible variations may make it difficult to make meaningful comparisons among the earnings of different companies. Your earnings, on the other hand, include salary and other compensation for work you do, as well as income from assets you own, such as interest, dividends, and capital gains.

Earnings per share (EPS)

Earnings per share (EPS) is calculated by dividing a company's total earnings by the number of outstanding shares. For example, if a company earns $100 million in a year and has 50 million outstanding shares, the earnings per share are $2. Earnings per share can also be calculated on a fully diluted basis, by adding outstanding stock options, rights, and warrants to the outstanding shares. The results report what EPS would be if all of those options, rights, and warrants were exercised and the company had to issue more shares to meet its obligations. Earnings and other financial measures are provided on a per share basis to make it easier for you to analyze the information and compare the results to those of other investments.

Economic indicator

Economic indicators are statistical measurements of current business conditions. Changes in leading indicators, including those that track factory orders, stock prices, the money supply, and consumer confidence, forecast short-term economic strength or weakness. In contrast, lagging indicators, such as business spending, bank interest rates, and unemployment figures, move up or down in the wake of changes in the economy. The Conference Board, a nonprofit business research firm, releases its weighted indexes of leading, lagging, and coincident indicators every month. Though the individual components are also reported separately throughout the month, the indicators provide a snapshot of the economy's overall health.

Education savings account (ESA)

An education savings account (ESA) is a tax-deferred account established in the name of a minor child to accumulate money that can be withdrawn tax free to pay his or her qualified education expenses. There is no limit to the number of ESA accounts you can set up for different beneficiaries, but no more than a total of $2,000 can be contributed in a single beneficiary's name in any calendar year. Money withdrawn from an ESA can be used at any level of education from kindergarten through graduate school. But must be used by the time the ESA beneficiary turns 30. You may switch the original beneficiary of an ESA to another member of the same extended family at ant time. There are no restrictions on using ESA money in the same year the student uses other tax-free savings, or the student, parent, or guardian takes a tax credit for educational expenses. But you can't take a credit for expenses covered with tax-free ESA withdrawals. To qualify to make a full $2,000 contribution to an ESA, your modified adjusted gross income (MAGI) must be $95,000 or less if you're a single taxpayer, and your right to make any contribution at all is phased out at a MAGI of $110,000. The comparable MAGI range if you're married and file a joint return is $190,000, phased out at $220,000. Your ESA contribution is not tax deductible, but you may invest the money in any assets that are available through the custodian you choose for the account. Many of the banks, mutual funds, and other financial institutions that act as custodians for IRAs also offer ESAs.

Efficient market

An efficient market is one in which the information that investors need to make buy, sell, or hold decisions is widely available, thoroughly analyzed, and regularly used. This is the case with securities traded on the major US stock markets. The assumption is that the price of a security is a clear indication of its value at the time it is traded because investors know everything that can be known about the security and have factored that knowledge into the price. Conversely, an inefficient market is one in which there is limited information available for making rational investment decisions and limited trading volume.

Electronic bill payment

If you have an electronic bill payment arrangement with your bank, your bills are sent to an account you designate and the bank pays them automatically each month by deducting the money from that account and transferring it to your payees, either electronically or by check. The advantage of using electronic payment is that your bills will be paid on time, though it is your responsibility to ensure that there is enough money on deposit to cover what's due. When the payments are made to credit accounts with the same bank, you may be offered a slightly reduced interest rate for using the service. However, you'll want to investigate whether there's an added fee for automatic payment and how much flexibility you have in determining how much of a bill's balance due is paid each month on credit accounts where you have the option to pay less than the full amount owed.

Electronic funds transfer (EFT)

Electronic funds transfer (EFT) allows financial institutions to exchange billions of dollars every day without physically moving paper money. The system covers all electronic credit and debit transactions, direct deposits, ATM transactions, online bill payments, and wire transfers. Transactions are governed by the EFT Act of 1978, which has been amended a number of times, implemented through Federal Reserve Regulation E (Reg E). According to the US Department of the Treasury, it costs the federal government only nine cents to issue an EFT payment but 86 cents to make a traditional check payment.

Elephant

An elephant is an institutional investor large enough to influence security prices with its trading decisions. For example, if a mutual fund, insurance company, bank, or pension fund were to liquidate a stock position, the volume of trading would likely lower the stock’s price. And if several elephant-sized institutional investors acted in the same way within a short period, they could create a stampede. More typically, however, elephants tend to make a concerted effort to avoid revealing their investment intentions or roiling the markets in this way. Elephants should not be confused with white elephants, which are investments or business interests that cannot attract buyers because of their extremely high operating or maintenance costs.

Emergency fund

An emergency fund is designed to provide financial back-up for unexpected expenses or for a period when you aren't working and need income. To create an emergency fund, you generally accumulate three to six months' worth of living expenses in a secure, liquid account so that the money is available if you need it. It's a good idea to keep your emergency fund separate from other savings or investment accounts and replenish it if you withdraw. But you don't have to limit yourself to low-interest savings accounts, and might consider other liquid accounts, such as money market funds, that may pay higher interest. If you're single or have sole responsibility for one or more dependents, you may want to consider an even bigger emergency fund, perhaps large enough to cover a year's worth of ordinary expenses.

Emerging markets fund

Emerging markets mutual funds invest primarily in the securities of countries in the process of building a market-based economy. Some funds specialize in the markets of a certain region, such as Latin America or Southeast Asia. Others invest in a global cross-section of countries and regions.

Employee stock ownership plan (ESOP)

An ESOP is a trust to which a company contributes shares of newly issued stock, shares the company has held in reserve, or the cash to buy shares on the open market. The shares go into individual accounts set up for employees who meet the plan's eligibility requirements. An ESOP may be part of a 401(k) plan or separate from it. If it's linked, an employer's matching contribution may be shares added to the ESOP account rather than cash added to an investment account. If you're part of an ESOP and you leave your job, you have the right to sell your shares on the open market if your employer is a public company. If it's a privately held company, you have the right to sell them back at fair market value. The vast majority of ESOPs are offered by privately held companies.

Employer-sponsored retirement plan

Employer-sponsored retirement plans may be either a defined benefit plan or a defined contribution plan. Some employers offer their employees both types of plans. An employer offering a defined benefit plan funds the plan, also known as pension, and invests the plan's assets in order to meet its obligation to pay a specific amount of retirement income to eligible employees. The amount is calculated according to a formula in the plan. An employer offering a defined contribution plan may or may not put money into the plan on behalf of the employees, based on the type of plan it is. In some plans only the employer contributes, in other plans only the employees contribute, and in still others both contribute. The amount of retirement income a defined contribution plan provides is not fixed by formula but determined by the amount contributed to the plan, the way the contributions are invested, and the return those investment provide. Any employer may offer a defined benefit plan, but defined contribution plans vary by type of employer. For example, 403(b) plans may be offered only by tax-exempt, nonprofit employers, and 457 plans only by state and municipal governments. Corporate employers who contribute to a retirement plan can take a tax deduction for the amount of their contribution and may enjoy other tax benefits. However, the plan must meet certain Internal Revenue Service (IRS) guidelines. Offering a retirement plan may also make the employer more attractive to potential employees. However, employers are not required to offer plans. If they do, they can make the plan as generous or as limited as they choose as long as the plan meets the government's nondiscrimination guidelines.

Equal Credit Opportunity Act (ECOA)

The Equal Credit Opportunity Act (ECOA) is designed to ensure that all qualified people have access to credit. It forbids lenders from rejecting credit applicants on the basis of race, gender, marital status, age, or national origin and requires lenders to consider public assistance in the same light as other forms of income. The act says that creditors must approve or reject your application within 30 days if you've filed a complete application, and, if you ask within 60 days, must provide an explanation for turning you down. The ECOA requires creditors to provide specific reasons for rejecting you and forbids indefinite or vague explanations. If you feel you're being discriminated against and the lender does not respond to your complaints, you can contact the attorney general of your state or the government agency that oversees the creditor. By law, the creditor must provide that information. If you can't get the information from the creditor, you can contact the Federal Trade Commission at www.ftc.gov.

Equity

In the broadest sense, equity is ownership. If you own stock, you have equity in the company that issued the stock even though your stake is very small. Equity also refers to the difference between an asset's current market value -- the amount it could be sold for -- and any debt or claim against it. For example, if you own a home currently valued at $300,000 but still owe $200,000 on your mortgage loan, your equity in the home is $100,000. As the loan is paid off, your equity increases. The same is true if you own stock in a margin account. The stock may be worth $50,000 in the marketplace, but if you have a loan balance of $20,000 in your margin account because you financed the purchase, your equity in the stock is $30,000.

Escrow

Escrow is an arrangement for holding assets in reserve until the terms of a contract or an agreement are fulfilled. When the terms are either met or aborted, the assets are released to the person or institution to which they are due. The person or organization that holds the assets is the escrow agent, and the account in which the assets are held is an escrow account. The assets may be money, securities, real estate, or a deed. For example, if you make a down payment on a home, the money is held in escrow until the sale is completed and the money is paid to the seller or the deal falls through and it's returned to you. Amounts you prepay to cover property taxes and insurance premiums as part of your regular mortgage payment are also held in escrow until those bills come due and are paid. In that case, you may earn interest on the amount in the escrow account.

Estate

Your estate includes everything you own in your own name and your share of anything you own with other people. Following your death, your assets, which may include cash, investments, retirement accounts, business interests, real estate, precious objects and antiques, and personal effects, are valued to determine your gross estate. Then outstanding debts, which may include income taxes, loans, or other obligations, are paid, and tax-exempt bequests plus any costs of settling the estate are subtracted to find the taxable estate. If the value of your taxable estate is larger than the exempt amount established by the uniform tax credit for the year of valuation, federal estate taxes may be due. Depending on the state where you live and the size of your taxable estate, state taxes may be due as well.

Estimated tax

Estimated tax is paid in advance to the Internal Revenue Service (IRS) on income that is not subject to withholding or if the taxes withheld on regular income will not cover the total that will be due. Income on which estimated taxes are due may include self-employment, interest, dividends, alimony, rent, investments, and prize winnings. These payments are due on four dates throughout the year, beginning in April and ending the following January. In general, you must pay estimated taxes if your withholding plus any refundable credits will not cover 90% of the amount due when you file your tax return for the current year or 100% of the amount you owed in the previous year. Different rules apply for farmers, fishermen, and high-income earners. To calculate the estimated tax due, you must first calculate your expected adjusted gross income (AGI), taxable income, taxes, deductions, and credits for the current year. Then you use IRS Form 140-ES to figure your estimated tax. You may face a penalty if you underpay or fail to pay these taxes. If you have income from salaries and wages, you can avoid paying estimated taxes by withholding more from your earnings.

Euro

The euro is the common currency of the European Monetary Union (EMU). The national currencies of the participating countries were replaced with euro coins and bills on January 1, 2002.

Exchange

Traditionally, an exchange has been a physical location for trading securities where transactions were handled, at least in part, by an open outcry or dual auction system. Two examples in the United States are the New York Stock Exchange (NYSE), which has the largest trading floor in the world, and the Chicago Board Options Exchange (CBOE). However, the definition is evolving. Traditional exchanges handle an increasing number of trades electronically, off the floor. Nasdaq and other totally electronic securities markets, without trading floors, have been granted exchange status by the Securities and Exchange Commission (SEC). The term exchange also refers to the act of moving assets from one fund to another in the same fund family or from one variable annuity subaccount to another offered through the same contract.

Exchange rate

The exchange rate is the price at which the currency of one country can be converted to the currency of another. Although some exchange rates are fixed by agreement, most fluctuate or float from day to day. Daily exchange rates are listed in the financial sections of newspapers and can also be found on financial websites.

Exchange traded fund (ETF)

Exchange traded funds (ETFs) resemble open-ended mutual funds but are listed on a stock exchange and trade like stock through a brokerage account. You buy shares of the fund, which in turn owns a portfolio of stocks, bonds, commodities, or other investment products. You can use traditional stock trading techniques, such as buying long, selling short, and using stop orders, limit orders, and margin purchases. The ETF doesn't redeem shares you wish to sell, as a mutual fund does. Rather, you sell in the secondary market at a price set by supply and demand. ETF prices change throughout the trading day rather than being set at the end of the trading day, as open-end mutual fund prices are. Each ETF has a net asset value (NAV), which is determined by the total market capitalization of the securities or other products in the portfolio, plus dividends but minus expenses, divided by the number of outstanding shares issued by the fund. The market price and the NAV are rarely the same, but the differences are typically small for the most widely traded conventional ETFs. That's due to a unique process that allows institutional investors to buy or redeem large blocks of shares at the NAV with in-kind baskets of the fund's securities or other products. Most ETFs are linked to a market index, which determines the fund's portfolio. While the majority of the indexes are traditional, some are described as fundamental. In those indexes, components of the index are identified on the basis of selective criteria, such as their performance, rather than their market capitalization or some other objective standard.

Expense ratio

An expense ratio is the percentage of a mutual fund's or variable annuity's total assets deducted to cover operating and management expenses. Those expenses include employee salaries, custodial and transfer fees, distribution, marketing, and other costs of offering the fund or contract. However, they don't cover trading costs or commissions. For example, if you own shares in a fund with a 1.25% expense ratio, your annual share is $1.25 for every $100 in your account, or $12.50 on an account valued at $1,000. Expense ratios vary from one fund company to another and among different types of funds. Typically, international equity funds have among the highest expense ratios, and index funds among the lowest. From an investor's perspective, expense ratios are a valuable tool for assessing the cost of investing in particular funds and for comparing the costs of funds with similar investment objectives.

Face value

Face value is the dollar value of a bond or note. It's generally $1,000 per bond, except in the case of US Treasury issues, when it is $100. Some bonds may have other face values. Face value, also known as par value, is the amount the issuer has borrowed, usually the amount you pay to buy the bond at the time it is issued, and the base amount you are repaid at maturity, provided the issuer doesn't default. Issuers may pay more than par, especially in the case of an early redemption. However, bonds may trade at a discount, which is less than face value, or at a premium, which is more than face value, in the secondary market. That's the bond's market value, and it changes regularly, based on changes in the interest rate, a change in rating from one of the major credit rating agencies or indication that the rating might change, and supply and demand driven by investors perceptions of the investment markets or economy. The face value of a life insurance policy is the amount the beneficiary receives when the insured person dies. It's also known as the policy's death benefit.

FACT Act (Fair and Accurate Credit Transactions Act)

The Fair and Accurate Credit Transaction (FACT) Act gives every consumer the right to request a free report from each of the three major credit reporting agencies -- Equifax, Experian, and TransUnion -- once every 12 months. The goal is to allow consumers to check the accuracy of what is being reported about them and to detect potential identity theft early. To obtain your free reports, you must request them through the Annual Credit Report Request Service (www.annualcreditreport.com or 877-322-8228). Staggering your requests for the free reports -- for instance, ordering one in January, the second in May, and the third in September -- means you can keep an eye on your credit throughout the year. You're also entitled to free reports directly from the credit reporting agencies if you've recently been denied credit, have been turned down for a job, are on public assistance, or have reason to suspect that you're a victim of credit fraud or identity theft.

Fair market value

Fair market value is the price you would have to pay to buy a particular asset or service on the open market. The concept of fair market value assumes that both buyer and seller are reasonably well informed of market conditions. It also assumes that neither is under undue pressure to buy or sell, and that neither intends to defraud the other.

Fat finger trade

A fat finger trade occurs when a trader inadvertently enters incorrect information on an electronic keyboard when placing a buy or sell order for execution. The result is similarly unintended but may be extremely serious. Classic examples include too many -- or too few -- zeros or the substitution of one letter for another, as “m” as in “million” for “b” and in “billion”. Circuit breakers or other safeguards to stop volatile trading may limit the effect of trading errors, whether caused by human fingers or glitches in electronic trading programs, before they cause major problems.

Federal deficit

The federal deficit is the negative balance that is created when the federal government spends more in a fiscal year than it collects in taxes and other revenue. That is, its outlays exceed its receipts. The deficit is measured both in dollar terms and as a percentage of the gross domestic product (GDP). The government raises the money it needs to supplement its income from taxes and other revenues to pay its bills by selling US Treasury bills, notes, and bonds to institutional and individual investors. The interest it owes on that debt is itself an expense that must be repaid. The total outstanding obligations are the federal debt. In contrast, in periods of strong economic growth, when tax revenues increase, there may be a federal surplus.

Federal Deposit Insurance Corporation (FDIC)

The Federal Deposit Insurance Corporation (FDIC) insures deposits in banks and thrift institutions, assuring bank customers that their savings and checking accounts are safe. The coverage is up to $250,000 per depositor per bank for individual, joint, and trust accounts, and for individual retirement accounts (IRAs). Business accounts are also insured. You may qualify for more than $250,000 coverage at a single bank, provided your assets are deposited in different types of accounts or are registered in different ways. For example, you are insured for up to $250,000 in accounts registered in your own name and for another $250,000 for your share of jointly held accounts. In addition, your individual retirement account (IRA) is insured up to $250,000 if the money is invested in bank products, such as certificates of deposit (CDs). So is a trust account you may establish at the bank. However, if you purchase mutual funds, annuities, or other investment products through your bank, those assets are not insured by the FDIC even if they carry the bank name. The FDIC, which is an independent agency of the federal government, also regulates more than 5,000 state chartered banks that are not members of the Federal Reserve System.

Federal Reserve bank

A Federal Reserve bank is one of 12 district banks of the Federal Reserve System, the central bank of the United States. Each of the banks is owned by the banks in its region that are members of the system. Each district bank has a president and a board of directors. It oversees the banks in its region, acts as the depositary for their funds, and provides a variety of other financial services, including emergency loans through its discount window. Each district bank accumulates and reports on the economic situation in its region. That data is collated with data from the other 11 banks and published regularly in a report known as the Beige Book.

Federal Reserve System

The Federal Reserve System, sometimes known as the Fed, is the central bank of the United States. The Federal Reserve System, which was established in 1913 to stabilize the country's financial system, includes 12 regional Federal Reserve banks, 25 Federal Reserve branch banks, all national banks, and some state banks. Member banks must meet the Fed's financial standards. Under the direction of a chairman, a seven-member Federal Reserve Board oversees the system and determines national monetary policy. Its goal is to keep the economy healthy and its currency stable. The Fed's Open Market Committee (FOMC) sets the discount rate and establishes credit policies. The Federal Reserve Bank of New York puts those policies into action by buying and selling government securities.

Federal Trade Commission (FTC)

The Federal Trade Commission (FTC) is a federal agency with two primary functions: protecting consumers from fraud and unfair business practices and maintaining a competitive marketplace for US businesses. In its consumer protection capacity, it enforces federal laws, including those governing online privacy for children, the do-not-call registry, and fair credit reporting, among others. The FTC provides information and education about fraud, scams, identity theft, unfair financial practices, and false advertising to alert consumers to potential problems. It also investigates consumer complaints. The FTC reviews corporate mergers and acquisitions to prevent the potentially negative impact of decreased competition, especially in those areas that would have a significant direct impact on consumers.

Fee-for-service

Fee-for-service health insurance requires you pay your medical bills and file a claim for reimbursement from your insurance company. You may use healthcare providers of your choice. Most fee-for-service plans pay a percentage -- often 70% to 80% -- of the amount they allow for each covered office visit or medical treatment after you have paid an annual deductible, which the insurer sets. You pay the balance of the approved charge plus any amount that exceeds the approved charge. Your share of the approved charge is called coinsurance. If you are enrolled in Original Medicare, which is a fee-for-service plan, your healthcare provider will file the insurance claim on your behalf.

FICO score

A FICO score represents an assessment of your creditworthiness calculated using a complex, proprietary formula that weighs the timeliness of your credit payments, the amount of debt you carry relative to your available credit, the type of debt you use, and a number of other factors. The information used to assign a FICO score, which ranges from 300 to 850, is included in credit reports compiled about you by one or more of the national credit reporting agencies. The top 20% of credit profiles receive a FICO score over 780 and the lowest 20% receive scores under 620. Lenders use your credit score to assess your credit risk, or the likelihood that you will default on a loan and offer the best -- or lowest -- interest rates to credit applicants with the highest scores. The Equal Credit Opportunity Act (ECOA) prohibits factors such as race, color, gender, religion, national origin, or marital status from being considered in any credit scoring system, including FICO. FICO, originally an acronym for the Fair Isaac Corporation, is the best-known of these systems in the United States.

Fiduciary

A fiduciary is an individual or organization legally responsible for managing assets on behalf of someone else, usually called the beneficiary. The assets must be managed in the best interests of the beneficiary, not for the personal gain of the fiduciary. However, the concept of acting responsibly can be broadly interpreted, and may mean preserving principal to some fiduciaries and producing reasonable growth to others. Executors, trustees, guardians, and agents with powers of attorney are examples of individuals with fiduciary responsibility. Firms known as registered investment advisers (RIAs) are also fiduciaries.

Finance charge

The finance charge, or total dollar amount you pay to borrow, includes the interest that's charged plus any fees for arranging the credit, if they apply. A finance charge is expressed as an annual percentage rate (APR) of the amount you owe, which allows you to compare the costs of different loans. The Truth-in-Lending Law requires your lender to disclose the APR you'll be paying and the way it is calculated before you agree to the terms of the loan. However, the finance charge does not include any late fees or other penalties that you may incur.

Financial asset

A financial asset may be a security, the balance of a bank account or retirement account, a certificate of deposit, or other nontangible property with monetary value. Financial assets are also described as investable assets, as distinguished from other holdings, such as real estate. A chief difference between the two is that investable assets are cash or easy to turn into cash at the prevailing market price, while other holdings may be more difficult to liquidate. In the case of a business, accounts receivable are considered a financial asset.

Financial institution

There are two types of financial institutions: depository institutions and nondepository institutions. Depository institutions, such as banks and credit unions, accept deposits from their clients, pay interest on those deposits, and use the deposits to make loans. Nondepository institutions, such as insurance companies, brokerage firms, and mutual fund companies, buy and sell financial products to their clients or on their clients' behalf. Many financial institutions provide both depository and nondepository services.

Financial plan

A financial plan is a document that describes your current financial status, identifies your financial goals and when you want to achieve them, and suggests strategies to meet those goals. You can use your plan as a benchmark to measure the progress you're making and update your plan as your goals and time frame change. Financial planners and other investment professionals can help you create a plan, identify appropriate investments and insurance, and monitor your portfolio. You may pay a one-time fee to have a plan created, or it may be included as part of a fee-based account with an investment adviser or financial planner.

Financial planner

A financial planner evaluates your personal finances and helps you develop a financial plan to meet both your immediate needs and your long-term goals. Some, but not all, planners have credentials from professional organizations. Some well-known credentials are Certified Financial Planner (CFP), Chartered Financial Consultant (ChFC), Certified Investment Management Analyst (CIMA), and Personal Financial Specialist (PFS). A PFS is a Certified Public Accountant (CPA) who has passed an exam on financial planning. Some planners are also licensed to sell certain investment or insurance products. Fee-only financial planners charge by the hour or collect a flat fee for a specific service, but don't sell products or earn sales commissions. Other planners don't charge a fee but earn commissions on the products they sell. Still others both charge fees and earn commissions but may offset their fees by the amount of commission they earn.

Financial pyramid

A financial pyramid is an iconic representation of a balanced relationship of different types of financial assets in a investment portfolio. The base of the pyramid is made up of nonvolatile liquid assets and the apex of assets with investments that have the highest potential return and greatest investment risk. Between the two, other levels, which grow increasingly smaller as they near the apex, include securities that provide income, those with the potential for long-term capital growth, and more volatile investments with higher potential returns and greater risk.

FINRA

FINRA, the acronym of the Financial Industry Regulatory Authority, is the largest self-regulatory organization (SRO) in the United States. It writes and enforces rules governing the securities industry as well as enforcing federal securities laws. FINRA has jurisdiction over all broker-dealers and registered representatives, and has authority to discipline firms and individuals who violate the rules. It regulates trading in stocks, mutual funds, variable annuities, corporate bonds, and futures and options contracts on securities. It also acts as the SRO for a number of securities exchanges. FINRA reviews materials that investment companies provide to their clients and prospective clients to ensure those materials comply with the relevant guidelines. The FINRA website also provides investor education and alerts on current issues of importance to investors. Through its BrokerCheck database, FINRA provides a resource for investors to check the credentials of people and firms. In addition, FINRA resolves disputes between broker-dealers and their clients, through either mediation or arbitration. FINRA was created in 2007 by the merger of NASD (formerly the National Association of Securities Dealers) and the regulatory and enforcement divisions of the New York Stock Exchange (NYSE).

First dollar coverage

First dollar coverage means that your health insurance plan pays its share of your covered in-network services beginning with the first service you receive in a plan year. In a high deductive health plan or fee-for-service plan, the insurer begins to pay its share of covered services after you have met the deductible for the plan year. The deductible varies by plan.

Fixed-rate mortgage loan

A fixed-rate mortgage loan is a long-term loan that you use to finance a real estate purchase, typically a home. Your borrowing costs and monthly payments remain the same for the term of the loan, no matter what happens to market interest rates. This predetermined expense is one of a fixed-rate loan's most attractive features, since you always know exactly what your mortgage will cost you. If interest rates rise, a fixed-rate mortgage works in your favor. But if market rates drop, you have to refinance to get a lower rate and reduce your mortgage costs. Typical terms for a fixed-rate mortgage are 15, 20, or 30 years, though you may be able to arrange a different length. With a hybrid mortgage, which begins as a fixed-rate loan and converts to an adjustable rate, the fixed-term portion is often seven or ten years.

Flash crash

The flash crash of May 2010 was a rapid drop and nearly as rapid a recovery in the level of the Dow Jones Industrial Average (DJIA). The 600-point loss occurred within five minutes, most of the recovery in the next minute and a half, and the full recovery in fewer than 20 minutes. Differences of opinion about the causes of the crash persist. They include lack of liquidity coupled with, or perhaps triggered by, rapid buying and selling by high frequency traders (HFTs) and the interaction of trading algorithms. Glitches in the system seem not to have been a factor, though they have caused other problems. Efforts to institute changes that are effective in preventing future flash crashes are ongoing.

Flexible spending account

Some employers offer flexible spending accounts (FSAs), sometimes called cafeteria plans, as part of their employee benefits package. You contribute a percentage of your pretax salary, up to the limit your plan allows, which you can use to pay for qualifying expenses. Qualifying expenses include medical costs that aren't covered by your health insurance, childcare, care for your elderly or disabled dependents, and life insurance. The amount you put into the plan is not reported to the IRS as income, which means your taxable income is reduced. However, you have to estimate correctly the amount you'll spend during the year when you arrange to have amounts deducted from your paycheck. Once you decide on the amount you are going to contribute to an FSA for a year, you cannot change it unless you have a qualifying event, such as marriage or divorce. If you don't spend all that you had withheld within the year -- or in some plans within the year plus a two-and-one-half month extension -- you forfeit any amount that's left in your account. In some plans you pay for the qualifying expenses and are reimbursed when you file a claim. In other plans, you use a debit card linked to your account to pay expenses directly from the account.

Float

In investment terms, a float is the number of outstanding shares a corporation has available for trading. If there is a small float, stock prices tend to be volatile, since one large trade could significantly affect the availability and therefore the price of these stocks. If there is a large float, stock prices tend to be more stable. In banking, the float refers to the time lag between your depositing a check in the bank and the day the funds become available for use. For example, if you deposit a check on Monday, and you can withdraw the cash on Friday, the float is four days and works to the bank's advantage. Float is also the period that elapses from the time you write a check until it clears your account, which can work to your advantage. However, as checks are increasingly cleared electronically at the point of deposit, this float is disappearing. In a credit account, float is the amount of time between the date you charge a purchase and the date the payment is due. If you have paid your previous bill in full and on time, you don't owe a finance charge on the amount of the purchase during the float.

Forbearance

A forbearance provides temporary relief from the obligation to repay a federal Stafford or Perkins student loan on schedule once the repayment period has begun. You must apply for and be granted a forbearance, though the qualifying standards are lower than for receiving a deferment. However, if you are in default on your loan, you are not likely to receive a forbearance. Interest is due on the outstanding loan during a forbearance, whether you have a subsidized or unsubsidized Stafford loan. Any interest amounts you don't pay during the forbearance period are capitalized, or added to the principal of the loan. Parents and graduate students with a Parent Loan for Undergraduate Students (PLUS) may also qualify for a forbearance.

Foreclosure

Foreclosure occurs when your lender repossesses your home because you have defaulted on your mortgage loan or home equity line of credit. You default by failing to pay interest and repay the principal you owe on time. Foreclosed property is often sold at auction to allow the lender to recover some of or all the outstanding debt.

Form 1099

Form 1099 is an Internal Revenue Service (IRS) document used to report income from a source other than employee compensation to the payee and the IRS. In fact, there are more than a dozen varieties of Form 1099, each one used to report a different type of income. For example Form 1099-B reports income from the sale of securities, Form 1099-DIV from dividends and capital gains, Form 1099-G from government benefits, and Form 1099-R from retirement plans. Taxpayers who receive Form 1099s are required to include the amounts the forms report when they file their income tax return for the year in which the income was paid.

Free Application for Federal Student Aid (FAFSA)

The FAFSA, which college and graduate students must file each year they apply for financial aid, determines financial eligibility for federal Stafford loans as well as many grants, scholarships, and other federal and non-federal loans. Undergraduates must include their parents' financial information as well as their own. Graduate students and independent undergraduates are required to include only their own financial records. The filing deadline is June 30 of the year for which you need funding, but applications may be filed any time after January 1.

Freeriding

Freeriding occurs in different ways but generally involves attempting to profit by manipulating the system. An investor may buy and immediately sell a security before the initial transaction has cleared and settled, in effect paying for the purchase with the proceeds of the sale. This violation of Federal Reserve Regulation T requires freezing the investor’s account for 90 days. Equally unacceptable, a member of the underwriting syndicate of an initial public offering (IPO) may hold back part of the issue and sell it later at a price higher than the IPO price. This is a violation of Securities and Exchange Commission (SEC) and Financial Industry Regulatory Authority (FINRA) rules.

Fringe benefits

Fringe benefits compensate employees, above and beyond their salaries, by providing a number of nice-to-have advantages, from paid vacations and retirement plans to company cars, expense accounts, in-house gyms, and subsidized childcare. These benefits are not mandated by law but are effective in attracting and keeping employees by improving quality of life and enhancing income by reducing the number of things that have to be paid for out-of-pocket. Most fringe benefits are tax deductible for the employer but not taxable to the employee. However, in some cases, such as company cars, non-business use may be considered taxable compensation.

Front-end load

A front-end load is a sales charge that you pay when you purchase shares of a mutual fund. Shares purchased with a front-end load are often identified as Class A shares. The drawback of a front-end load is that a portion of your investment pays the sales charge rather than being invested, reducing the initial account value. However, the annual asset-based fees on Class A shares tend to be lower than on shares with back-end or level loads. In addition, if you pay a front-end load, you may qualify for reduced sales charges if the assets in your account reach a certain milestone, known as a breakpoint. A typical initial breakpoint is $25,000.

Full faith and credit

Full faith and credit underlies federal and municipal governments promises to make interest payments and repay the principal of certain debt securities they issue. It reflects the governments' ability to raise money through taxes, borrowing, and other nontax revenues. All US Treasury securities, the securities of certain US government agencies, and the general obligation issues of municipal governments are backed by their issuers' full faith and credit. Municipal revenue bonds are not.

Full retirement age

Full retirement age (FRA) is the age at which a Social Security participant is eligible for his or her full benefit based on contributions made to the program. For people born through 1954, FRA is 66, and, for those born in 1960 and later, it is 67. For those born from 1955 through 1959, FRA increases in two-month increments each year. Though all participants are eligible to receive benefits beginning at 62, taking them at any point before FRA permanently reduces the amount a participant receives by a fixed percentage. Conversely, waiting beyond FRA to collect increases the benefit by a fixed percentage each year until the participant turns 70. FRA is sometimes referred to as normal retirement age (NRA).

Full-service brokerage firm

Full-service brokerage firms usually offer their clients a range of services in addition to executing their buy and sell orders. These firms usually have full-time research departments and investment analysts who provide information the firm's brokers share with clients. In addition, some employees of the firm may be qualified to provide investment advice, develop financial plans, or design strategies for meeting financial goals. Full-service firms tend to charge higher commissions and fees than discount brokerage firms or firms that operate only online. However, some full-service firms offer online services and reduce their fees for transactions handled though a client's online account.

Fund manager

A fund manager is the person or team responsible for overseeing the operations and investment decisions of a fund, such as a mutual fund, a pension fund, or an endowment fund. While a mutual fund manager works to achieve the investment objective and follow the investment strategy stated in the fund’s prospectus, he or she may also bring a distinctive flavor and style to the fund’s operation. This applies to other types of funds as well. An effective manager can improve the performance of his or her fund dramatically. As a result, some investors may follow a manager who moves from one fund to another.

Ghosting

Ghosting occurs when two or more market makers, who normally compete to attract business, conspire to manipulate a stock’s price and increase their profits. Working in collaboration, first one and then another offers to buy at a price higher or sell at a price lower than the current market price to generate trading at the new price. Ghosting is illegal but can be difficult to detect.

Gift tax

A gift tax is a tax on the combined total value of the taxable gifts you make that exceed your lifetime federal tax-exempt limit, which is determined by the uniform tax credit. Any tax that's due is figured as a percentage of the value of your gifts over the tax-exempt amount. However, you can make annual tax-free gifts to as many individuals as you like. As long as the value of the gifts to each individual is less than the annual limit set by Congress those amounts don't count against your lifetime tax-free limit. In 2013, you can make lifetime gifts and leave an estate of up to $5.25 million combined, without owing gift and estate tax. The top tax rate if tax is due on amounts over that limit is 40%. In future years the exempt amount will be indexed for inflation, using the base of $5 million. If your spouse dies before you do, any part of the exempt amount that has not been used can be carried over and added to the amount you can give away or leave as a tax-free estate. In addition, you can make annual tax-free gifts of $14,000 per recipient, and a married couple can give $28,000, regardless of the source of the money, provided both people agree to the gift. Gifts to qualifying nonprofits are not taxed and don't count against your lifetime limit. The percentage of the gift which you can take as a tax deduction varies by the type of gift. If you're married, you can give your spouse gifts of any value at anytime, totally tax free, provided he or she is a US citizen. There are annual limits on spousal gifts when the spouse is not a citizen. You are not required to report the tax-free gifts on your tax return, but you must report gifts whose value exceeds the annual tax-free limit on IRS Form 709 for the year you make them. The tax becomes due when the cumulative total exceeds the unified tax credit that applies.

Global fund

Global, or world, mutual funds invest in US securities as well as those of other countries. In that way, they differ from international funds, which invest only in non-US markets. Although global funds may keep as much as 75% of their assets invested in the United States, fund managers are able to take advantage of opportunities they see in various overseas markets.

Go public

A corporation goes public when it issues shares of its stock in the open market for the first time, in what is known as an initial public offering (IPO). An IPO means that at least some of the shares will be held by members of the general public rather than exclusively by the investors who founded and funded the corporation initially or the current owners or management.

Good faith deposit

A good faith deposit is a sum of money provided by a buyer to a seller, which demonstrates the buyer's intention to purchase. For instance, if you've decided on a home you want to buy, you generally make a good faith deposit to support your bid. A good faith deposit, also called a binder or earnest money, is usually a fixed amount that's standard in the community where you're buying. It's different from a down payment. That's a larger cash payment, figured as a percentage of the purchase price, which you make when you sign the contract to purchase the property. If you and the seller can't agree on the terms of the sale, you generally get your good faith deposit back.

Good faith estimate

A good faith estimate is a written summary provided by your mortgage lender. It shows the amount you can expect to pay at your real estate closing to cover all the fees and expenses that are part of arranging your mortgage loan. It includes, among other things, the title search and title insurance, lawyers' fees, transfer taxes, and filing fees. The total amount of a good faith estimate is in addition to the down payment you will make.

Government bond

A government bond is a debt security issued by the federal government. They're also known as government obligations. US Treasury bills, notes, and bonds are examples of government bonds. You can buy and sell these issues directly using a Treasury Direct account or through a broker. Treasurys are backed by the full faith and credit of the US government, and the interest they pay is exempt from state and local, though not federal, income taxes. The cash raised by the sale of Treasurys is used to finance a variety of government activities.

Grace period

A credit card grace period is the number of days between the date a card issuer sends your billing statement and the date your payment is due. By law, it must be at least 21 days. In most cases, if you have paid the previous balance in full and on time, and you haven't taken any cash advances, there's no finance charge. The grace period on a federal student loan allows you to defer repayment so that the first installment isn't due until six or nine months after you graduate or are no longer enrolled at least half time. The timing depends on the type of loan. There's also a grace period in which to pay an insurance policy premium before the policy is canceled or to pay your mortgage, rent, or other bill before it is delinquent. The period typically ranges from 15 days to a month after the due date, though it may be shorter or longer.

Green fund

A green fund is one of the ways to describe a mutual fund that selects investments based on a commitment to environmental principles. Not all green funds stress exactly the same values. A fund that seeks environmentally friendly businesses -- say those that use alternative fuels -- may not be concerned about what those companies manufacture. Another fund may avoid any company in what it considers an unacceptable industry, despite the company's individual environmental record. In every case, the fund's approach is described in its prospectus.

Gross domestic product (GDP)

Gross domestic product (GDP) is the total value of all the goods and services produced within a country's borders. When that figure is adjusted for inflation, it is called the real gross domestic product, and it's generally used to measure the growth of the country's economy. In the United States, the GDP is calculated and released quarterly by the Department of Commerce.

Growth and income fund

Growth and income mutual funds invest in securities that provide, as their name suggests, a combination of growth and income. This type of fund generally funnels assets into common stocks of well-established companies that pay regular dividends and increase in value at a regular, if modest, rate. The balance of the fund's portfolio is in high-rated bonds and preferred stock.

Growth stock

A growth stock is the stock of a corporation whose earnings are accelerating at a faster-than-average rate and whose market value increases as investor demand pushes up the stock price. Most growth stocks do not pay dividends while they are expanding, though they may do so eventually. Their price-to-earnings ratio is typically higher than the market average, reflecting shareholder expectation of continued appreciation. Growth stocks typically expose investors to greater risks than the stock of mature, slower-growing companies but have the potential to provide strong returns.

Guarantor

A guarantor, or co-signer, adds his or her signature to your loan note, agreeing to repay the debt if you default. If lenders are concerned about your income, your credit history, or other risk factors when you apply for a loan, they may require that you provide a guarantor whose income or credit history poses less risk than you do before they will allow you to borrow. Laws governing who may serve as a guarantor vary from state to state. Some states require that your guarantor be a resident of the state where you're obtaining the loan, while others will accept guarantors from out of state as well.

Gunslinger

A gunslinger is an investor who takes excessive risk in a quest for outsized return, often by using leverage to purchase highly speculative investments. The term may apply to an individual or to portfolio manager.

Hardship withdrawal

A hardship withdrawal, also known as a hardship distribution, occurs when you take money out of your 401(k) or other qualified retirement savings plan to cover pressing financial needs. You must qualify to withdraw by meeting the conditions your plan imposes in keeping with Internal Revenue Service (IRS) guidelines. For example, you may have to demonstrate how urgent the situation is and prove you have no other resources. Some qualifying situations are purchasing your primary home, covering out-of-pocket medical expenses for yourself or a dependent, and paying college tuition for yourself or a dependent. However, if you're younger than 59 1/2, you must pay a 10% tax penalty plus income tax on the amount you withdraw. You also will not be permitted to contribute to the plan again for six months.

Head of household

Head of household is an IRS filing status that you can use if you are unmarried or considered unmarried on the last day of a tax year and provide at least half the cost of maintaining a home for one or more qualifying dependents. Qualifying dependents include your child, grandchild, or other relative who lives in your home for more than half the year, or a parent whether or not he or she lives in your home. The advantage of filing as head of household is that you can take a higher standard deduction than if you filed as a single taxpayer, and you owe less federal income tax than you would as a single, assuming all other details are the same. Filing as head of household also means you qualify for certain deductions and credits that would not be available to you if you used the married-filing-separate-returns status.

Health insurance

Health insurance covers some or all of the cost of treating an insured person's illnesses or injuries. In some cases, it pays for preventive care, such as annual physicals and diagnostic tests. You may have health insurance as an employee benefit from your job or, if you qualify, through the federal government's Medicare or Medicaid programs. You may also buy individual health insurance directly from an insurance company or be eligible through a plan offered by a group to which you belong. As you do with other insurance contracts, you pay premiums to purchase coverage, and the insurer pays some of or all your healthcare costs, based on the terms of your contract. Some health insurance requires that you meet an annual deductible before the insurer begins to pay. There may also be coinsurance, which is your share, on a percentage basis, of each bill, or a copayment, which is a fixed dollar amount, for each visit. Health insurance varies significantly from plan to plan and contract to contract. Generally, most plans cover hospitalization, doctors' visits, and other skilled care. Some plans also cover some combination of prescription drugs, rehabilitation, dental care, and innovative therapies or complementary forms of treatment for serious illnesses.

Health savings account (HSA)

A health savings account (HSA) is designed to accumulate tax-free assets to pay current and future healthcare expenses. To open an HSA, you must have a qualifying high deductible health plan (HDHP) either through your employer or as an individual. If you have an employer's plan, your contributions to the HSA are made with pretax income, and your employer may contribute as well. If you have an individual plan, you may deduct your contributions in calculating your adjusted gross income (AGI). Congress sets an annual limit on the amount you can contribute to an HSA, which you set up with a financial institution such as a bank, brokerage firm, insurance company, or mutual fund company that offers these accounts. No tax is due on money you withdraw from the HSA to pay qualified medical expenses such as doctor's visits, hospital care, eyeglasses, dental care, and medications for yourself if you have an individual plan, or you, your spouse, and your dependents if you have a family plan. If you are between 55 and 65 you may also make an annual catch-up contribution to your account. But you may not contribute additional money once you turn 65. Any money that's left over in your HSA at the end of the year is rolled over and continues to accumulate tax-free earnings, which you can use for future healthcare costs. Once you're 65, you can use the money in the HSA for nonmedical expenses without paying a penalty, but you'll owe income taxes on those withdrawals. If you are younger than 65, you can also spend money from your HSA on nonmedical expenses, but you'll owe income taxes plus a 10% tax penalty on these amounts.

Hedge fund

Hedge funds are private investment partnerships open to institutions and wealthy individual investors. These funds, which typically require a multi-year commitment of assets, pursue returns through a number of investment strategies. These strategies might include holding both long and short positions, investing in derivatives, using arbitrage, and speculating on mergers and acquisitions. Many hedge funds use leverage, which means investing borrowed money to boost returns. A hedge fund's general partner, who is a major investor, is entitled to substantial management and performance fees from the limited partners. Because of the substantial risks associated with hedge funds, securities laws limit participation to accredited investors whose assets meet or exceed Securities and Exchange Commission (SEC) guidelines. However, there is continuing debate about the type and level of regulation that should apply to these essentially unregulated investment vehicles.

Hedging

Hedging is designed to reduce or eliminate financial risk by holding equal but opposite positions. You can use a number of strategies to achieve this goal. One approach is using offsetting investments, where one is often a derivative. For example, you sell a stock short because you expect its price to drop. At the same time, you buy a call option on the same stock that you would exercise if the stock price went up. Similarly, you might hedge currencies or interest rates with a futures contract, in the same way that producers and users of agricultural products use futures. A long-short hedging strategy means holding some stocks long and selling others short, so that gains in some positions can offset losses in others. Or you might hedge against inflation by including a number of high-yield, high-risk investments in an otherwise moderate portfolio. Hedging is sometimes compared to insurance, with the cost of the offsetting investment the equivalent of the insurance premium. A contrasting point of view is that hedging replaces the need for insurance.

High deductible health plan (HDHP)

A high deductible health plan (HDHP) covers healthcare expenses but requires substantially higher than average out-of-pocket expenditures before the insurer providing the plan begins to pay its portion of your qualifying expenses. However, the premiums for an HDHP are generally lower than the premiums for traditional fee-for-service, participating provider organization (PPO), or a health maintenance organization (HMO) plan. The federal government establishes the minimum out-of-pocket expenses a plan must require to qualify as an HDHP and the maximum out-of-pocket costs a participant must be required to pay for covered services. Plan providers may require a higher minimum but not a higher maximum. Nonqualifying expenses do not count toward the deductible or the out-of-pocket maximum. If you participate in an HDHP, you are eligible to contribute tax-free income to a health savings account (HSA), which allows you to make tax-free withdrawals to pay for qualifying medical care that's not covered by your plan.

High-yield bond

High-yield bonds are bonds whose ratings from independent rating services are below investment grade. As a result, to attract investors, issuers of high-yield bonds must pay a higher rate of interest than the rates that issuers of higher-rated bonds with the same maturity are paying. The higher rate translates to more income, which is the higher yield. High-yield bonds may also be described, somewhat more graphically, as junk bonds.

Homeowners insurance

Homeowners insurance is a contract between an insurance company and a homeowner to cover certain types of damage to the property and its contents, theft of personal possessions, and liability in case of lawsuits based on incidents or events that occur on the property. To obtain the insurance, which is based on the value of the home and what is covered in the policy, you pay a premium set by the insurance company. For each claim there's generally a deductible -- a dollar amount -- that you must pay before the insurer is responsible for its share. If you have a mortgage loan, your lender will require you to have enough homeowners insurance to cover the amount you owe on the loan. Homeowners insurance policies vary substantially from contract to contract and from insurer to insurer as well as from region to region. Almost all policies have exclusions, which are causes of loss that are not covered. All the coverage and exclusions of a particular policy are spelled out in the terms and conditions.

Hope scholarship tax credit

A Hope scholarship tax credit was created to allow you to subtract money you spent on qualified education expenses for yourself, your spouse, or a dependent child when you filed your tax return for the year the payments were made. However, the Hope scholarship has been supplanted by the American Opportunity Credit (AOC). The AOC expands the benefits of the Hope scholarship and the amount of the credit from $2,000 to $2,500. To be eligible, the taxpayer's modified adjusted gross income (MAGI) must be less than the ceiling Congress sets.

Hostile takeover

A hostile takeover occurs when an outside party assumes control of a target company despite the objections of the current management and board of directors. Typically the acquirer tenders an offer to buy outstanding shares by a certain date at a price high enough to encourage a sufficient number of shareholders to accept. However, the attempted acquisition doesn’t come as a shock. Any person or corporation seeking to acquire more than five percent of a company’s stock must file a Tender Offer Statement with the Securities and Exchange Commission (SEC) and notify the target company and the exchange on which it is listed. Management may resist a hostile takeover attempt in an effort to force the price higher or to prevent it entirely, perhaps by encouraging a competitive offer from a more acceptable source or employing one of a number of techniques designed to make the acquirer’s life miserable.

Identity theft

Identity theft is the unauthorized use of your personal information, such as your name, address, Social Security number, or credit account information. People usually steal your identity to make purchases or obtain credit, though they may also use the data to apply for a driver's license or other form of official identification.

In the tank

In the tank means that the value of an security, other financial asset, or financial market has lost significant value quickly. For example, if the price of a stock that has been trading at $25 a share drops to $10 a share or less, it could be described as being in the tank. Similarly, if a market falls into bear territory by dropping 20% or more, the same description could apply.

Income dividend

An income dividend, also known as an income distribution, consists of the dividends and interest a mutual fund receives from its underlying investments and passes through to its shareholders. In a taxable account, income dividends are taxable in the year they are received, although income that derives from qualified dividends is taxed your long-term capital gains rate rather than at the same rate as your ordinary income. The mutual fund provides the relevant information on the 1099-DIV it provides for each tax year. The tax applies whether the distribution is reinvested to buy additional shares in the fund, as is often the case, or paid to you in cash. If you hold the fund in a tax-deferred account, income dividends become part of the account’s asset value and are taxed at withdrawal at the same rate as your ordinary income. The required pass-through of all dividends and interest is mandated by the Investment Company Act of 1940, which governs mutual and other funds.

Income property

Income property is land or buildings a buyer purchases for their income-producing potential. The income may be from rent that tenants pay or the sale of products grown on the property. Individuals may invest in income property on their own or through a real estate investment trust (REIT) or other real estate partnership. The appeal of investing in income property includes the opportunity to write off certain expenses and the prospect of being able to sell at a net capital gain. The risks of investing in income property include the possibilities that it will remain vacant or unproductive, that the income will not cover the operating costs, that the property could be illiquid in a tight market, or, if a buyer could be found, that the sale price would produce a net loss.

Income statement

An income statement, also called a profit and loss statement, shows the revenues from business operations, expenses of operating the business, and the resulting net profit or loss of a company over a specific period of time. In assessing the overall financial condition of a company, you'll want to look at the income statement and the balance sheet together, as the income statement captures the company's operating performance and the balance sheet shows its net worth.

Income tax

An income tax is a tax imposed by a federal, state, or local government on the income of individuals and corporations within its jurisdiction. In the United States, individuals pay federal tax on their taxable income, which they calculate by subtracting exemptions and deductions for which they are eligible from their gross income, which includes both earned and unearned income. Tax credits for which they are eligible may be subtracted from the tax due. Corporations pay tax on their net earnings. The federal tax rate that applies for individuals is designed to be progressive and is determined by filing status and income bracket. In 2013, there are seven brackets and seven corresponding tax rates: 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. The corporate rate is 35%. State and local governments establish their own rates and brackets. Some states and most localities do not tax income.

Indemnity insurance

An indemnity insurance policy pays up to a fixed amount when you make a claim, often on a per-day basis. The premiums on health insurance indemnity plans may be lower than on other heathcare plans, but the fixed payments may cover only a portion of your medical bills. Some people use indemnity plans as supplements to, rather than substitutes for, more comprehensive health insurance. Others use low-cost indemnity plans for short-term coverage.

Index

An index reports changes up or down, usually expressed as points and as a percentage, in a specific financial market, in a number of related markets, or in an economy as a whole. Each index -- and there are a large number of them -- measures the market or economy it tracks from a specific starting point. That point might be as recent as the previous day or many years in the past. For those reasons, indexes are often used as performance benchmarks against which to measure the return of investments that resemble those tracked by the index. A market index may be calculated arithmetically or geometrically. That's one reason two indexes tracking similar markets may report different results. Further, some indexes are weighted and others are not. Weighting means giving more significance to some elements in the index than to others. For example, a market capitalization weighted index is more influenced by price changes in the stocks of the companies with the highest market capitalizations than by price changes in the stocks of smaller companies.

Index fund

An index fund is designed to mirror the performance of a stock or bond index, such as Standard & Poor's 500 Index (S &P 500) or the Russell 2000 Index. To achieve this goal, the fund purchases all the securities in the index, or a representative sample of them, and adds or sells investments only when the securities in the index change. Each index fund aims to keep pace with its underlying index, not outperform it. This strategy can produce strong returns during a bull market, when the index reflects increasing prices and sometimes reinvested dividends. But it may produce disappointing returns during economic downturns, when an actively managed fund might take advantage of investment opportunities if they arise to outperform the index. Because the typical index fund's portfolio is not actively managed, most index funds have lower-than-average management costs and smaller expense ratios. However, not all index funds tracking the same index provide the same level of performance, in large part because of different fee structures.

Individual retirement account (IRA)

Individual retirement accounts are one of two types of individual retirement arrangements (IRAs) that provide tax advantages as you save for retirement. Everyone with earned income may contribute to a tax-deferred IRA. Those whose modified adjusted gross income is less than the annual cap for his or her filing status qualifies to contribute to a Roth IRA. There are annual contribution limits, catch-up provisions if you're 50 or older, and restrictions on withdrawals before you turn 59 1/2. Tax-deferred IRAs have required minimum distributions (RMDs) after you turn 70 1/2. Earnings withdrawn from a traditional IRA are taxed at the same rate as your ordinary income. So are the contributions if you qualified to deduct them for the year they were added to your account. Earnings in a Roth IRA are income tax free at withdrawal if you are at least 59 1/2 and your account has been open at least five years. Contributions to a Roth IRA are never deductible. You open an individual retirement account with a financial services firm, such as a bank, brokerage firm, or investment company, as custodian. The accounts are self-directed, which means you can choose among the investments available through your custodian.

Individual retirement annuity (IRA)

An individual retirement annuity is one variety of individual retirement arrangement (IRA). With an an individual retirement annuity, your money goes into either a fixed or variable annuity offered by the insurance company you have chosen as custodian. If you choose a fixed account, you earn the return guaranteed by the contract. If you choose a variable account, you select annuity funds, or subaccounts, from among those available in the contract. Your return depends on the performance of the funds you have chosen, minus fees and expenses. In contrast, with an individual retirement account you may invest your contributions in any of the investment alternatives available through your account custodian. Both types of IRA have the same annual contribution limit, catch-up provisions if you're 50 or older, and withdrawal restrictions before you turn 59 1/2. In addition, both are available in two varieties: traditional, also known as tax deferred, and Roth. With a tax-deferred account, required minimum distributions (RMD) are required after you turn 70 1/2. No RMDs are required from a Roth account. One criticism of individual retirement annuities is that because annuities are already tax-deferred, there is no additional tax benefit in selecting the IRA.

Inflation

Inflation is a persistent increase in prices, often triggered when demand for goods is greater than the available supply or when unemployment is low and workers can command higher salaries. Moderate inflation typically accompanies economic growth. But the US Federal Reserve Bank and central banks in other nations try to keep inflation in check by decreasing the money supply, making it more difficult to borrow and thus slowing expansion. Hyperinflation, when prices rise by 100% or more annually, can destroy economic, and sometimes political, stability by driving the price of necessities higher than people can afford. Deflation, in contrast, is a widespread decline in prices that also has the potential to undermine the economy by stifling production and increasing unemployment.

Inflation rate

The inflation rate is a measure of changing prices, typically calculated on a month-to-month and year-to-year basis and expressed as a percentage. For example, each month the Bureau of Labor Statistics calculates the inflation rate that affects average urban US consumers, based on the prices for about 80,000 widely used goods and services. That figure is reported as the Consumer Price Index (CPI). Inflation has averaged about 3% annually in the United States since 1926, though it has been much higher in some years.

Inherited IRA

An inherited IRA is an IRA that passes to a beneficiary at the death of the IRA owner. If you name your spouse as the beneficiary of your IRA, your spouse inherits the IRA at your death. At that point, your spouse can choose to convert it to his or own property. But if you name anyone other than your spouse, that beneficiary inherits the right to income from your IRA, which is registered in your name as deceased owner and the beneficiary's name, using the beneficiary's Social Security number. You may also name one or more contingent beneficiaries who would inherit if your primary beneficiary died before you did or chose to refuse the bequest.

Initial public offering (IPO)

An initial public offering (IPO) may occur when a company reaches a certain stage in its growth. It marks the first time that the company issues stock for sale to the investing public. The goal may be to raise capital, to provide liquidity for the existing shareholders, or a number of other financial reasons. Any company planning an IPO must register its offering with the Securities and Exchange Commission (SEC). In most cases, the company works with an investment bank, which underwrites the offering. That means marketing the shares being offered to the public at a set price with the expectation of making a profit.

Insider trading

Insider trading occurs when managers of a publicly held company, members of its board of directors, or anyone who holds more than 10% of the company buys or sells shares. This trading is legal, provided it's based on information available to the public. It is illegal, however, if the decision is based on knowledge of corporate developments, such as executive changes, earnings reports, or acquisitions or takeovers that haven't yet been made public. It is also illegal for people who are not part of the company, but who gain access to private corporate information, to trade the company's stock based on this inside information. The list includes lawyers, investment bankers, journalists, or relatives of company officials.

Insufficient funds

You have insufficient funds (ISF) if you don't have enough money available in your checking account to cover the checks you've written or electronic debits you've authorized. Insufficient funds are also known as nonsufficient funds (NSF) A check written against insufficient funds is informally called a returned check, a bounced check, or a bad check. If you write one, your account is considered overdrawn. Unless you have overdraft protection, which is a line of credit linked to your checking account that can be used to cover overdrafts, your bank will charge you an ISF fee, often up to $39 per check. If the bank does not cover the amount because you don't have a line of credit, which it has the right to do, the check or an electronic copy is returned unpaid to the payee who deposited it. In addition to the fee you're charged, the payee's bank may also charge a fee for depositing a check written against insufficient funds. If you have agreed to overdraft protection for your bank-linked debit card, the bank will allow you to spend or withdraw more that your available balance and charge you a fee when you do. If you do not agree to overdraft protection, your attempts to withdraw will be denied.

Insurance dividend

An insurance dividend is an annual return of premium paid to owners of cash-value life insurance policies. The rate at which the dividend is calculated varies from year to year, based on the insurer’s investment earnings, its administrative costs, and the claims it has paid, known as its mortality costs. The more it earns, the lower its expenses, and the fewer insured people that die, the higher the dividend is likely to be. The dividend is nontaxable and may be taken as cash, credited toward future premiums, or used to buy additional insurance.

Insurance premium

An insurance premium is the amount a policyholder pays to be covered by his or her insurance policy. Premiums may be paid annually, quarterly, or some other schedule acceptable to payer and payee. The amount of the premium is determined by the type of policy, the extent of the coverage, the degree of risk the insured poses to the insurer, and the need to be competitive. Insurance premiums on group policies tend to be lower than those on individual policies. So do premiums on policies with higher deductibles. In general, coverage remains in force as long as the premiums are paid. If the policyholder defaults the coverage ends.

Interest

Interest is what you pay a lender as compensation for borrowing money using a loan, credit card, or line of credit. It is calculated at either a fixed or variable rate that's expressed as a percentage of the amount you borrow, pegged to a specific time period. For example, you may pay 1.2% interest monthly on the unpaid balance of your credit card. Interest also refers to the income, figured as a percentage of principal, that you're paid for making your money available to a borrower by purchasing a bond, depositing money in a savings account or certificate of deposit (CD), or making other interest-paying investments. With simple interest, earnings are figured on the principal. With compound interest, the earnings are added to the principal to form a new base on which future interest is calculated. Interest is also a share or right in a property or asset. For example, if you are half-owner of a vacation home, you have a 50% interest.

Interest rate

Interest rate is the percentage of the face value of a bond or the balance in a deposit account that you receive as income on your investment. If you multiply the interest rate by the face value or balance, you find the annual amount you receive. For example, if you buy a bond with a face value of $1,000 with a 6% interest rate, you'll receive $60 a year. If you buy the bond at a higher or lower price than it's face value, your annual percentage yield (APY) will differ from the nominal, or named, interest rate. Similarly, if you earn compound interest on a deposit account, your APY will be higher than the account's nominal rate. Similarly, the percentage of principal you pay for the use of borrowed money is the loan's interest rate. If there are no other costs associated with borrowing the money, the interest rate is the same as the annual percentage rate (APR). But if fees and other charges apply, the APR will be higher than the nominal interest rate.

Interest rate options

Interest rate options are options on the spot yields of the most recently issued US Treasury securities with short-, mid-, or long-term rates. As the spot yield changes, there is a corresponding change in the market value of the contract. Interest rate options are cash-settled, European-style options. Cash-settled means that contract holders who exercise in-the-money options receive cash rather than the underlying securities. The amount is the difference between the strike price and the settlement value at exercise times $100. European-style means that exercise can occur only at expiration, not before, though contracts can be closed out with an offsetting trade before expiration. Investors use these options, which are standardized contracts listed on a regulated options exchange, either to help control their exposure to, or to capitalize on, changes in interest rates. Investors buy call options if they expect interest rates to go up and put options if they expect rates to go down before expiration. If an options buyer, or holder, is correct, the value of his or her contract increases. Investors sell interest rate options for the income the premium provides or to hedge the value of Treasurys they own or plan to buy.

Interest-only mortgage

With an interest-only mortgage loan, you pay only the interest portion of each scheduled payment for a fixed term, often five to seven years. After that, your payments increase, often substantially, to cover the accumulated unpaid principal plus the balance of the loan and the interest. Before the higher payments begin, you may renegotiate your loan at the current interest rate or pay off the outstanding balance. However, it's possible that interest rates may have risen, in which case you will end up paying a higher rate on the entire unpaid principal. If you have regularly invested the principal you weren't repaying and realized a return higher than the loan's interest rate, you could come out ahead. However, many borrowers don't invest the savings. One risk with interest-only loans is that you may not be able to meet the higher payments once full repayment begins, especially if the interest-only payments themselves were a stretch.

Internal Revenue Service (IRS)

The Internal Revenue Service (IRS) is an independent US government agency within the US Department of the Treasury whose primary role is collecting federal personal income, estate, excise, and gift taxes as well as federal corporate taxes and Social Security and Medicare taxes. The IRS is responsible for explaining and enforcing the provisions of the Internal Revenue Code (IRC) and has the power to bring criminal and civil cases against taxpayers who violate the tax law. The IRS, which was created in its present form is 1952, is run by a commissioner appointed by the president and approved by the US Senate. Its operations were last overhauled in 1998, with the goal of improving its relationship with taxpayers.

International fund

An international mutual fund invests in stocks, bonds, cash equivalents, or other investment products that are traded in overseas markets, or in indexes that track these markets. Like other mutual funds, international funds have investment objectives and strategies, and pose certain risks, including the risk that currency fluctuations may greatly affect the fund's value. Some international funds focus on countries with established economies, some on emerging markets, and some on a mix of the two. US investors may buy international funds to diversify their portfolios, since owning a fund is usually simpler than investing in individual securities abroad. A different group of funds, called global or world funds, also invest in overseas markets but typically keep a substantial portion of their portfolios in US securities.

Investment bank

An investment bank is a financial institution that helps companies take new bond or stock issues to market, usually acting as the intermediary between the issuer and investors. Investment banks may underwrite the securities by buying all the available shares at a set price and then reselling them to the public. Or the banks may act as agents for the issuer and take a commission on the securities they sell. Investment banks are also responsible for preparing the company prospectus, which presents important data about the company to potential investors. In addition, investment banks handle the sales of large blocks of previously issued securities, including sales to institutional investors, such as mutual fund companies. Unlike a commercial bank or a savings and loan company, an investment bank doesn't usually provide retail banking services to individuals.

Investment club

If you're part of an investment club, you and the other members jointly choose the investments the club makes and decide on the amount each of you will contribute to the club's account. Among the attractions of investment clubs is that they allow investors to commit only modest amounts, share in a diversified portfolio, and learn from each other's research. However, clubs don't guarantee a profit and may provide disappointing returns. While clubs may establish themselves informally, many groups use the resources of BetterInvesting, an investor education membership organization. It provides information on how to start an investment club and support services to existing clubs.

Investment company

An investment company is a firm that offers open-end funds, called mutual funds, closed-end funds, sometimes called investment trusts, or exchange traded funds to the public. By describing a company offering the funds as an investment company, it's easier to distinguish the company from the funds that it offers. For example, a single investment company might offer an aggressive-growth fund, a growth and income fund, a US Treasury bond fund, and a money market fund. Or a closed-end investment company might offer an international fund focused on a single country, such as Ireland, or a region, such as Latin America.

Investment horizon

An investment horizon is the point in time when you hope to achieve a particular investment goal. That horizon, sometimes called your time frame, may be fixed or flexible, depending on the nature of the goal and the investment decisions you make. For example, the horizon for paying for college is often a fixed because most students enroll the year they graduate from high school. Retirement may have a more flexible horizon if you have the choice about when you will stop working. The landscape can be more complicated if you have more than one investment goal, and therefore there's more than one horizon in the picture.

Investment income

Investment income -- sometimes called unearned income -- is the money that you collect from your investments. It may include stock dividends, mutual fund distributions, and interest from CDs, interest-bearing bank accounts, bonds, and other debt instruments. You may also have rental income from real estate or other assets you own for investment purposes. Capital gains you realize from selling investments for more than you paid to acquire them may also be considered investment income. Your net investment income is what you have left over after you subtract your investment expenses, such as fees and commissions.

Investment objective

An investment objective is a financial goal that helps determine the type of investments you make. For example, if you want a source of regular income, you might select a portfolio of high-rated bonds and dividend-paying stocks. Each mutual fund describes its investment objective in its prospectus, along with the strategy the fund manager follows to meet that objective. Mutual fund investors often look for funds whose stated objectives are compatible with their own goals.

Investment style

Investment style refers to the approach that investors, including professional money managers, take in selecting individual investments and assembling portfolios as they seek to achieve their investment goals. For example, a mutual fund that is focused on small-cap stocks might seek long-term capital appreciation by choosing aggressive growth stocks. Another small-cap fund with the same objective might build a portfolio of underpriced value stocks. Evaluating a fund's investment style -- which may be described as aggressive, moderate, conservative, or contrarian and also as value investing or growth investing -- is an important consideration in choosing among mutual funds and ETFs. You'll want to be sure that any fund you purchase is compatible with your individual risk tolerance.

IRA rollover

An IRA rollover occurs when assets are moved from an employer-sponsored retirement plan to an IRA. You owe no income tax on the rolled over money at the time you move it if you deposit the full amount into the new IRA within 60 days or arrange a direct transfer from the existing account to the new account. Future earnings are also tax-deferred. If you're moving money from an employer's retirement plan to an IRA yourself, the plan administrator is required to withhold 20% of the total to prepay taxes that may be due if the rollover is not completed. That 20% is credited to you when you file your income tax return for the year the rollover occurred, provided you've deposited the full amount into the new account on time, having supplied the 20% that's been withheld from other sources. Any amount you don't deposit within the 60-day period is considered an early withdrawal and you'll have to pay tax on it. You might also have to pay a 10% tax penalty for early withdrawal if you're younger than 59 1/2. However, if you arrange a direct transfer from your plan to the rollover IRA nothing is withheld and the full value is moved to the IRA.

Issue

An issue is a security that a corporation, government, or government agency offers for sale. The entity offering the issue is the issuer.

Issuer

An issuer is a corporation, government, agency, or investment trust that offers securities, such as stocks and bonds, for purchase by investors. Issuers may sell the securities through an underwriter as part of a public offering or as a private placement.

Itemized deduction

An itemized deduction is an amount a taxpayer is entitled to subtract from his or her adjusted gross income (AGI) to determine taxable income. Examples of itemized deductions are state and local taxes, mortgage interest, charitable contributions, and uninsured healthcare costs.

Junk bond

Junk bonds carry a higher-than-average risk of default, which means that the bond issuer may not be able to meet interest payments or repay the loan when it matures. Except for bonds that are already in default, and may be rated D, junk bonds have the lowest ratings, usually Caa or CCC, assigned by rating services such as Moody's Investors Service, Standard & Poor's (S &P), and Fitch Ratings. Issuers offset the higher risk of default on junk bonds by offering substantially higher interest rates than are being paid on investment-grade bonds. That's why junk bonds are also known, more positively, as high-yield bonds.

Laddering

Laddering is an investment strategy that calls for establishing a pattern of rolling maturity dates for a portfolio of fixed-income investments. Your portfolio might include intermediate-term bonds or certificates of deposit (CDs). For example, instead of buying one $15,000 CD with a three-year term, you buy three $5,000 CDs maturing one year apart. As each CD comes due, you can reinvest the principal to extend the pattern. Or you could use the money for a preplanned purchase, have it available to take advantage of a new investment opportunity, or use it to cover unexpected expenses. You can use laddering to pay for college expenses, with a series of zero coupon bonds coming due over four years, in time to pay tuition each year. If you ladder, you can avoid having to liquidate a large bond investment if you need just some of the money. You can also avoid having to reinvest your entire principal at a time when interest rates may be low.

Large-capitalization stock

Large-capitalization stocks, also known as large-caps, are stocks issued by the largest corporations, with market capitalizations of $10 billion or more. However, that dollar value isn't fixed and may change to reflect what's happening to the value of the overall stock market. Market cap is figured by multiplying the number of either the outstanding or floating shares by the current share price. Large-cap stock prices are generally considered less volatile than stock prices of smaller companies, in part because investors are inclined to believe that the bigger companies' financial reserves will help them weather economic downturns. However, market capitalization is always in flux. Today's large-cap stock can drop out of the category if the share price plunges either in a general market downturn or as a result of internal problems. And the opposite is true as well. Many of the country's largest companies began life as start-ups.

Lease

A lease is a legal agreement that provides for the use of something -- typically real estate or equipment -- in exchange for payment. Once a lease is signed, its terms, such as the rent, cannot be changed unless both parties agree. A lease is usually legally binding, which means you are held to its terms until it expires. If you break a lease, you could be held liable in court.

Level term insurance

With a level term life insurance policy, your annual premium remains the same for the term, which may be as long as 10 or 20 years. The death benefit also remains the same. If the policy is guaranteed renewable, you can extend coverage for an additional term without having to qualify again, though the annual premium will increase because you're older. Although the cost of insurance in the first few years will probably be higher for a level term than an increasing term policy, the total cost of a level term with the same benefit is usually less. As with all term policies, you don't build up a cash reserve and your coverage ends at the end of the term or at any time you stop making payments.

Leverage

Leverage is an investment technique in which you use a small amount of your own money to make an investment of much larger value. In that way, leverage gives you significant financial power. For example, if you borrow 90% of the cost of a home, you are using the leverage to buy a much more expensive property than you could have afforded by paying cash. If you sell the property for more than you borrowed, the profit is entirely yours. The reverse is also true. If you sell at a loss, the amount you borrowed is still due and the entire loss is yours. Buying stock on margin is a type of leverage, as is buying a futures or options contract because you pay substantially less than the cost of the underlying instrument. Leveraging can be risky if the underlying instrument doesn't perform as you anticipate. At the very least, you may lose your investment principal plus any money you borrowed to make the purchase. With some leveraged investments, you could be responsible for even larger losses if the value of the underlying product drops significantly.

Liability

In personal finance, liabilities are the amounts you owe to creditors, or the people and organizations that lend you money. Typical liabilities include your mortgage, car and education loans, and credit card debt. To figure your net worth, or the value of what you own, you subtract your liabilities from your assets. In business, liabilities refer to money a company owes its creditors and any claims against its assets.

Lien

A lien exists when you owe money to a lender on a vehicle or other asset, such as real estate, that has been used as collateral on a loan. When you own an asset on which there's a lien, you risk having it repossessed if you default and don't make the required payments in full and on time. In addition, an asset on which there's a lien generally can't be sold or refinanced until the lienholder has been repaid. In the case of real estate, however, the repayment may occur simultaneously with finalizing a replacement loan or a secondary lien may be created if the borrower has enough equity in the property.

Life insurance

Life insurance is a contract you sign with an insurance company, obligating it to pay a death benefit of a certain value to the beneficiaries you name. In most cases, the payment is made at the time of your death, but certain policies allow you to take a portion of the death benefit if you are terminally ill and need the money to pay for healthcare. You may select either term or permanent insurance. With a term policy, you are insured for a specific period of time provided you stay current on your payments. When the term ends, you must renew the policy for another term or change your coverage. Otherwise, you're no longer insured. With a permanent policy, you buy coverage for your lifetime. You pay an annual premium, typically billed monthly or quarterly, for your policy. The insurer sets the cost, based on your age, health, lifestyle, and other factors. With a permanent policy, your premium is fixed, but with a term policy it typically increases when you renew your coverage to reflect the fact that you're older.

Lifecycle fund

A lifecycle fund, which is a fund of funds, invests in a group of individual mutual funds. Investors may select such a fund to help meet their investment objectives without having to select individual funds. Some companies offer a set of lifecycle funds, each with a different level of risk and potential return, from conservative to aggressive. In that case, you may choose a fund that's structured to help you reach your goals within the time frame you've allowed or at the level of risk you are comfortable taking. The typical pattern is for younger investors to choose a more aggressive lifecycle fund, and those nearing retirement to choose a more conservative fund. With target date funds, which are a type of lifecycle fund, you choose a fund associated with your target retirement year, such as 2025 or 2040. The fund manager reallocates your portfolio periodically. The pattern is to provide a more conservative mix as you near retirement.

Lifetime learning credit

The lifetime learning credit allows an eligible taxpayer to take an annual tax credit of up to $2,000 for money spent qualified higher educational expenses for himself or herself, a spouse, or a dependent. To be eligible, the taxypayer's modified adjusted gross income (MAGI) must fall within the annual limits that Congress sets for each filing status. Those limits tend to increase slightly each year. The tax credit can be used for expenses incurred for undergraduate, postgraduate, vocational, or professional studies or for qualifying coursework-based education that isn't part of a degree- or certificate-granting program. Even if you are paying for more than one person's education, you can take only one lifetime learning credit per year. If you claim the credit while you're taking withdrawals from tax-free college savings plans such as a 529 college savings plan or an education savings account (ESA), you'll have to plan carefully. Your withdrawals will lose their qualified status and be subject to tax and penalty if you use them to pay for the same expenses for which you claim the tax credit. You can't take the credit, though, if you claim a tuition and fees deduction in calculating your adjusted gross income or deduct the amount as a business expense.

Line of credit

A line of credit is a revolving credit arrangement you establish with a lender. The lender sets the credit limit, which is the most you can borrow under the arrangement. When you borrow against a line of credit, you pay interest on the amount of money you actually borrow, not on the available balance, or full amount you are able to borrow. For example, if you have a $10,000 line of credit on a credit card, you may borrow as much or as little as you want up to that amount, and you pay interest only on the amount you have borrowed. If you carry a balance of $3,000, you pay interest on only that amount, but there is still $7,000 available for you to borrow. Once you repay the $3,000 you borrowed, you can borrow it again. A line of credit may be secured with collateral, or unsecured. A line of credit on a credit card is usually unsecured, for example. But if you have a home equity line of credit, your home serves as collateral against the amount you borrow.

Liquidity

The term liquidity is used to describe the potential for converting an asset to cash easily and quickly, with little or no loss of value. For example, you can typically redeem shares in a money market mutual fund at $1 a share, though the price is not guaranteed. Similarly, a certificate of deposit (CD) has liquidity in the sense that you can redeem it at any time for at least the amount you put into it. However, you may forfeit some or all of the interest you had expected to earn if you liquidate before the end of the CD's term. The difference between cash-equivalent investments and securities like stock and bonds, however, is that securities constantly fluctuate in value. So while securities have liquidity in the sense that you may be able to sell them readily, you might sell for less than you paid to buy them if you sold when the price was down.

Living will

A living will is a legal document that describes the type of medical treatment you want -- or don't want -- if you are terminally ill or unable to communicate your wishes. Like wills that provide instructions about your assets, living wills must be signed and have two or more witnesses to be valid. They must also meet the standards of the state where they are executed, and may need to be redrafted if you move to a different state. You can use a healthcare proxy or durable power of attorney for healthcare to authorize someone to act as your agent to authorize that the wishes you express in your living will are followed. It, too, should be signed and witnessed. Because there are still unresolved questions about the extent of your agent's authority, it may be wise to get legal advice in preparing the documents.

Load

A load is the sales charge, or commission, you may pay if you buy mutual fund shares through a broker or other financial professional. If the sales charge is levied when you purchase the shares, it's called a front-end load. If you pay when you sell shares, it's called a back-end load or contingent deferred sales charge. With a level load, you pay a percentage of your investment amount each year you own the fund as on ongoing sales charge.

Load fund

A load fund is a mutual fund on which you pay a sales charge or commission when you buy or sell shares or, in some cases, each year you own the fund. The charge is the load. Most load funds are sold by brokers or other investment professionals. The load, which is figured as a percentage of the transaction or of your account value, compensates them for their time. Load funds may be identified as Class A, Class B, or Class C funds, or by some other letter designation. Class A funds have a front-end load, which means you pay the charge when you buy. Class B funds have a back-end load, or a charge when you sell, for several years after the date of purchase. Class C funds have a level load, or a charge each year you own the fund. You can find the loads and the comparative cost of different classes of a fund in the fund's prospectus.

Loan consolidation

Loan consolidation is the process of combining separate loan obligations with different rates and repayment schedules into a single loan. This typically lowers your monthly payments and extends the repayment term, but is likely to increase the overall cost of borrowing. Most federal education loans can be consolidated at a fixed rate that does not exceed 8.25% and may be lower. The rate remains in effect for the life of the consolidated loan. Student borrowers may consolidate after they graduate, leave school, or are enrolled less than half-time. Parents with PLUS loans may consolidate once the loans are fully disbursed. Borrowers who are delinquent or in default must meet certain requirements before they can consolidate their loans.

Loan note

A loan note is a promissory agreement describing the terms of a loan and committing the person or institution borrowing the money to live up to those terms. For example, a mortgage loan note states the principal balance, the interest rate, the discount points, a payment schedule and due date, and any potential penalties for violating the repayment terms. When the required repayment has been made, the agreement between the parties ends.

Managed account

A managed account is a portfolio of securities chosen and managed by a professional investment manager to meet the account's investment objective. Investors in the managed account own the securities in its portfolio rather than shares of a pooled fund of the securities. As a managed account investor, you maybe able to request, through your broker, that the manager exclude certain investments in the account's portfolio from your individual portfolio, which you can't do with a mutual fund. And, you might request that the manager sell certain holdings in your portfolio to realize capital gains or losses or postpone such a sale to the next tax year. There are no phantom gains in managed accounts. Those gains can occur if a mutual fund realizes a profit from selling an investment and credits you with a capital gain even if there has been no actual increase in your account value as a result of holding the security. However, the minimum investment is usually higher for a managed account than for a mutual fund. The annual fees may also be higher than the fees for holding a mutual fund of similar value or a fund invested to meet the same objective.

Marginal tax rate

Marginal tax rate is the rate you pay on the portion of your income that falls into the highest of the seven tax brackets that have been established in the US tax system. Some taxpayers have income in just one bracket and some have income in all seven. Each bracket has a minimum and maximum dollar amount, which varies by filing status. Income in the lowest bracket is taxed at 10%, and the rate increases by bracket to 15%, 25%, 28%, 33%, 35%, and 39.6%. For instance, if you have a taxable income that falls across three brackets, you would pay at the 10% federal tax rate on the first portion, the 15% rate on the next portion, and the 25% rate on only the third portion. Your marginal rate would be 25%. However, your marginal tax rate is higher than your effective tax rate, which is the average rate you pay on your combined taxable income. That's because you're paying tax at your marginal, or maximum, rate only on the top portion of your income. Keep in mind that your marginal tax rate applies only to tax on ordinary income and does not take into account other tax liabilities -- such as realized long-term capital gains, which are taxed at your long-term capital gains rate, or tax credits for which you may be eligible, which may reduce the actual tax you pay.

Market

Market is a generic term for a location in which transactions occur. Traditionally, a securities market was a place -- such as the New York Stock Exchange (NYSE) -- where members met to buy and sell securities. In the age of electronic trading, however, the term market is used to describe the organized activity of buying and selling securities, even if those transactions do not occur at a specific location.

Market capitalization

Market capitalization is a measure of the value of a company, calculated by multiplying the number of either the outstanding shares or the floating shares by the current price per share. For example, a company with 100 million shares of floating stock that has a current market value of $25 a share would have a market capitalization of $2.5 billion. Outstanding shares include all the stock held by shareholders, while floating shares are those outstanding shares that actually are available to trade. Market capitalization, or cap, is one of the criteria investors use to choose a varied portfolio of stocks, which are often categorized as small-, mid-, and large-cap. Generally, large-cap stocks are considered the least volatile, and small caps the most volatile. The term market capitalization is sometimes used interchangeably with market value, in explaining, for example, how a particular index is weighted or where a company stands in relation to other companies.

Market cycle

A market cycle is the movement from a period of increasing stock prices and strong performance, through a period of weak performance and falling prices and back again to new strength. Cycles recur periodically, though not on a predictable schedule. The length of each full cycle, and each phase within it, varies from several months to several years. The top of a cycle is called a peak and the bottom a trough. A market cycle generally runs ahead of the concurrent economic cycle. For example, investors may begin to sell stocks because they anticipate a recession, or turn bullish in the early stages of a recovery. However, not all sectors of the financial market operate on the same schedule. For example, some stocks, such as utilities, have historically prospered in the downward phase of the stock market cycle when most other stocks have underperformed. Similarly, the stock market tends to operate on a different cycle than the bond or commodities markets. These overlapping but distinct cycles are the basis of the investment strategy known as asset allocation.

Market price

A security's market price is the price at which it is currently trading in an organized market. A good indication of the market price of a stock selling on the New York Stock Exchange (NYSE) or the Nasdaq Stock Market is the last reported transaction price. However, if you give a market order to buy securities, then market price means the current ask, or offer. If you give a market order to sell, market price means the current bid.

Market risk

Market risk, also known as systemic risk, is risk that results from the characteristic behavior of an entire market or asset class. One example of this type of risk is that the market prices of existing bonds generally fall as interest rates rise because investors are not willing to pay par value to own a bond that pays less interest than other bonds available in the marketplace. So if you wanted to sell your existing bonds, you would probably have to settle for less than you paid to buy them. Asset allocation is generally considered an antidote for market risk, since if your portfolio includes multiple asset classes it tends to be less vulnerable to a downturn in any one class. However, this strategy does not eliminate risk or guarantee a profit.

Market value

The market value of a stock or bond is the current price at which that security is trading. Market value is also a synonym for market capitalization, or the value of a corporation based on the number of outstanding or floating shares multiplied by the current market price. In a more general sense, if an item has not been priced for sale, its fair market value is the amount a buyer and seller agree upon. That's assuming that both know what the item is worth and neither is being forced to complete the transaction.

Matching contribution

A matching contribution is money your employer adds to your retirement savings account, such as a 401(k) or a SIMPLE. It's usually a percentage of the amount you contribute up to a cap that the employer sets, such as 50% of your contribution up to 5% of your salary. The matching amount and any earnings are tax deferred until you withdraw them from your account. In most plans, employers are not required to match contributions, but may do so if they wish. Employers also determine, within federal guidelines, how long you have to work for the company in order to be fully vested in the matching contributions.

Maturity date

Maturity date is the date on which a bond or other fixed-income investment must be repaid. At that time, the full face value of the bond (and sometimes the final interest payment) are paid to the bondholder. Other debt instruments, such as mortgage-backed securities, pay back the principal over the life of the debt, similar to the way a mortgage is amortized, or paid down. While these instruments also have a maturity date, it marks the payment of the last installment of the loan as well as the last interest payment. Certificates of deposit (CDs) also have maturity dates on which you may withdraw the principal and interest without penalty or roll over the money into a new CD.

Medicaid

Medicaid is a federal government program run by the individual states. It's designed to provide assistance to people who can't afford skilled or custodial healthcare. There are strict financial standards governing who qualifies for assistance, though there is significant variation from state to state in the way the program is managed.

Medicare

Medicare is a federal government insurance program designed to provide healthcare coverage for people 65 or older, certain disabled people, and people with chronic kidney disease. Anyone who qualifies for Social Security is automatically eligible for Medicare at 65. This includes the spouses of people whose work records qualify them even if the spouses did not participate in Medicare themselves. Part A, which covers hospital and certain other costs, is provided when you enroll. You can also sign up for Part B, which covers doctor visits and related costs, and Part D, which covers prescription medicines, at the same time. You pay separate premiums for Parts B and D. The premiums are set annually and carry surcharges for people whose incomes are above the annual ceilings. If you postpone applying for Parts B and D after the date you are eligible and don't have equivalent or better coverage -- called creditable coverage -- from another plan, you face a permanent surcharge when you do enroll. You may also have a choice between Original Medicare, which is a fee-for-service plan run by the government, or a Medicare Advantage plan if one is available where you live. Medicare Advantage plans are private insurer plans.

Merger

A merger occurs when two or more companies consolidate by exchanging common stock, and the resulting single company replaces the old companies. The shareholders of the old companies receive prorated shares in the new company. A merger is typically a tax-free transaction, meaning, among other things, that shareholders owe no capital gains taxes on the stock that is being exchanged. A merger is different from an acquisition, in which one company purchases, or takes over, the assets of another. The acquiring company continues to function and the acquired company ceases to exist. Shareholders of the acquired company receive shares in the new company in exchange for their old shares. Despite their differences, mergers and acquisitions are invariably linked, often simply described as M & A.

Mid-capitalization stock

A mid-capitalization (mid-cap) stock is issued by a corporation whose market capitalization falls in a range between a that of a small company and and that of a large one. The dollar values assigned to these categories are arbitrary and change to reflect the overall state of the stock market. That is, the values are higher in a strong market environment and lower in a weak one. Market capitalization is figured by multiplying the number of either the outstanding or the floating shares by the current share price. Investors tend to buy mid-cap stocks for their growth potential and for the diversification they add to a portfolio. Their prices are typically lower than those of large-caps, and they are less likely to pay dividends. At the same time, the stock price tends to be less volatile than small-caps, in part because they have more resources with which to weather an economic downturn.

Minimum finance charge

A minimum finance charge is a fee collected by a credit card issuer each billing period if the actual finance charge you owe isn't equal to or larger than the minimum the issuer has set. For example, if the minimum finance charge is 50 cents, and you owe $5 in finance charges, the minimum would not apply. But if you had incurred no finance charges, you'd owe 50 cents. It may also apply if your card agreement does not include a grace period. Not all issuers impose a minimum finance charge, however. So if you regularly pay your bill in full and on time, you will prefer an issuer who does not impose this fee.

Modified adjusted gross income (MAGI)

Your modified adjusted gross income (MAGI) is your adjusted gross income (AGI) plus exclusions or deductions you may have taken for housing expenses or income earned outside the United States or for income received as a resident of American Samoa or Puerto Rico. If your MAGI is less than the annual minimum and maximum levels set by Congress for your filing status, you qualify for various tax adjustments, deductions, and credits. Some of these include the right to subtract student loan interest, take a deduction for your contributions to a tax-deferred IRA, make contributions to a Roth IRA, and take the American Opportunity, Lifetime Learning, and adoption tax credits. However, the specific MAGI that makes you eligible for each adjustment, deduction, or credit tends to be different from the MAGI that makes you eligible for others.

Money market

The money market isn't a place. It's the continual buying and selling of short-term liquid investments. Those investments include Treasury bills, certificates of deposit (CDs), commercial paper, and other debt issued by corporations and governments. These investments are also known as money market instruments.

Money market account

Money market accounts are bank deposit accounts that permit a limited number of cash transactions per month and typically pay interest at rates comparable to or slightly below the rate on short-term certificates of deposit (CD) from the same institution. As bank products, money market accounts have the safety of Federal Deposit Insurance Corporation (FDIC) protection, currently up to $250,000 per depositor per account type. One potential drawback may be that some banks reduce the interest they pay, impose fees, or both if your money market account balance falls below a specific amount. However, they are not time deposits, and therefore more liquid than CDs.

Money market fund

Money market mutual funds invest in stable, short-term debt securities, such as commercial paper, Treasury bills, and certificates of deposit (CDs), and other short-term instruments. The fund's management tries to maintain the value of each share in the fund at $1. Unlike bank money market accounts, money market mutual funds are not insured by the Federal Deposit Insurance Corporation (FDIC). However, since they're considered securities at most brokerage firms, they may be insured by the Securities Investor Protection Corporation (SIPC) against the bankruptcy of the firm. In addition, some funds offer private insurance comparable to FDIC coverage. Tax-free money market funds invest in short-term municipal bonds and other tax-exempt short-term debt. No federal income tax is due on income distributions from these funds, and in some cases no state income tax. While taxable funds may offer a slightly higher yield than tax-free funds, you pay income tax on all earnings distributions. Many money market funds offer check-writing privileges, which do not trigger capital gains or losses, as writing a check against the value of a stock or bond fund would.

Money order

A money order entitles the person named as payee on the order to receive the specific amount of cash shown on the order. You can use money orders in place of checks if you don't have a checking account or if the payee requires a guaranteed form of payment. You can purchase money orders at banks, post office branches, credit unions, and other financial institutions. You can use money orders to send money internationally as well as within the United States. The United States Postal Service (USPS) has agreements with 30 countries that allow recipients to cash USPS money orders in post offices in those countries. Sellers sometimes impose a limit on the size of the money orders they sell, and they typically charge a fee for each order. However, those fees are less than for guaranteed bank checks. One drawback of a money order is that you have no proof that payment was received.

Mortgage

A mortgage is a debt instrument that establishes a lien on real estate is being used as collateral, or security, for a mortgage loan in the name of the mortgagee, or lender, who makes the loan. The lien means the property can't be sold without paying off the loan. Until the mortgage loan is paid in full, you have the use of the property, but not the title to it. When the loan is repaid, the mortgage ends, the lien is removed, and you own the property. But if you default, or fail to repay the loan, the mortgagee may exercise its lien on the property and take possession of it.

Mortgage loan

A mortgage loan is a long-term loan used to finance the purchase of real estate. As the borrower, or mortgagor, you repay the lender, or mortgagee, the loan principal plus interest, gradually building your equity in the property. The interest may be calculated at either a fixed or variable rate of the loan principal. The term of the loan is typically between 10 and 30 years. While you repay the mortgage loan, you have use of the property, but not the title to it. When the loan is repaid in full, the mortgagee's lien on the property is removed, and the property is yours. But if you default, or fail to repay, the mortgagee may exercise its lien and repossess the property.

Mortgage-backed security (MBS)

Mortgage-backed securities are created when a sponsor buys mortgages from lenders, pools them, and packages them for sale to the investing public, a process known as securitization. MBS are available through government agencies, quasi-public corporations such as Fannie Mae and Freddie Mac, banks, brokerage firms, or other financial institutions. The money raised by selling the securities may be used to buy additional mortgages, making more money available to lend. The most common mortgage-backed securities, also known as pass-through securities, are self-amortizing, and pass along the interest and principal the borrowers pay over the term of the security. Mortgage-backed securities known as collateralized debt obligations (CDOs) or real estate mortgage investment conduits (REMICs) are structured differently. While a CDO or REMIC passes through payments on the underlying mortgages, the issue is divided into what are known as tranches that pay different interest rates, carry different levels or risk, and mature in sequence. The principal is repaid to bondholders in the order in which the tranches are stacked, so the holders of the shortest-term tranche are repaid first, the next shortest second, and so on. CDOs constructed with subprime mortgages but given high ratings from credit rating firms were an important contributing factor to the financial crisis of 2008.

Municipal bond (muni)

Municipal bonds are debt securities issued by state or local governments or their agencies to finance government operations or special projects. For example, a state may float a bond to fund the construction of highways or college dormitories. The interest munis pay is usually exempt from federal income taxes, and is also exempt from state and local income taxes if you live in the state where the bond was issued. However interest on certain munis may be vulnerable to the alternative minimum tax (AMT). Tax-exempt munis generally pay interest at a lower rate than similarly rated corporate bonds of the same term. However, they appeal to investors in the highest tax brackets, who may benefit most from the tax-exempt income. However, interest on certain types of munis is taxable, as are any capital gains you realize from selling a muni for more than you paid to buy it. In addition, some muni interest may be vulnerable to the alternative minimum tax (AMT).

Municipal bond fund

Municipal bond funds invest in municipal bonds. Interest earnings from these funds are free from federal income tax and, in the case of a single state fund, from state and local taxes for residents of that state. However, interest on some municipal bond funds be subject to the alternative minimum tax (AMT). One advantage of these bond funds is that buyers can invest a much smaller amount than they would need to put together a diversified portfolio of municipal bonds on their own. However, the interest rate on a bond fund is not fixed, as the fund portfolio changes over time. Nor is there the promise of return of principal.

Mutual fund

A mutual fund is a professionally managed investment product that sells shares to investors and pools the capital it raises to purchase investments. A fund typically buys a diversified portfolio of stock, bonds, or money market securities, or a combination of stock and bonds, depending on the investment objectives of the fund. Mutual funds may also hold other investments, such as derivatives and cash. A fund that makes a continuous offering of its shares to the public and will buy any shares an investor wishes to redeem, or sell back, is known as an open-end fund. An open-end fund trades at its net asset value (NAV). The NAV is the value of the fund's portfolio plus money waiting to be invested, minus operating expenses, divided by the number of outstanding shares. Open-end funds may be actively managed, which means the fund's manager or managers choose the components of the portfolio, or they may be index funds. The components of an index fund are determined by the index it tracks. Load funds -- those that have upfront or back-end sales charges -- are sold through brokers or financial advisers. No-load funds are sold directly to investors by the investment company offering the fund and don't impose sales charges. Both types of mutual funds may charge 12b-1 fees to pass on the cost of marketing and providing shareholder services. All mutual funds charge management fees, though at different rates, and they may also levy other fees and charges, which are included in the fund's expense ratio. These costs plus the trading costs, which aren't included in the expense ratio, reduce the return you realize from investing in the fund. A fund that sells a predetermined number of shares to the public is known as a closed-end fund. The shares of a closed-end fund trade on a stock exchange the way common stock does.

Nasdaq OMX Stock Market

The Nasdaq OMX Stock Market is the world's oldest and largest electronic stock market. It has no central trading location or exchange floor. Instead it uses a fully automated, open market, multiple dealer trading system, with many market makers competing to handle transactions in each individual stock. Nasdaq OMX handles more initial public offerings than any other US exchange. It lists many emerging companies as well as industry giants, especially in biotechnology, communications, financial services, media, retail, technology, and transportation.

National Association of Securities Dealers Automated Quotation System (NASDAQ)

NASDAQ is a computerized stock trading network that allows brokers to access price quotations for stocks being traded electronically or sold on the floor of a stock exchange.

National Credit Union Administration (NCUA)

The National Credit Union Administration (NCUA) is an independent federal agency that authorizes the establishment and oversees the administration of most federal- and state-chartered credit unions in the United States. The National Credit Union Share Insurance Fund (NCUSIF) arm of the agency insures credit union deposits to $250,000 per depositor for each type of account, just as the Federal Deposit Insurance Corporation (FDIC) does bank deposits. NCUA is funded by member credit unions and is backed by the full faith and credit of the federal government.

National debt

The national debt is the total value of all outstanding Treasury bills, notes, and bonds that the federal government has issued to investors. The government holds some of this debt itself, in accounts such as the Social Security, Medicare, Unemployment Insurance, and Highway, Airport and Airway Trust Funds. The rest is held by individual and institutional investors, both domestic and international, or by non-US governments. Interest on the national debt is a major item in the federal budget, but the national debt is not the same as the federal budget deficit. The deficit is the amount by which federal spending exceeds federal income in a fiscal year. There is a debt ceiling imposed by Congress, but in most circumstances, the ceiling has been routinely raised when outstanding debt approaches that level.

Net asset value (NAV)

Net asset value (NAV) is the dollar value of one share of a mutual fund or exchange traded fund (ETF). NAV is calculated by totaling the value of the fund's holdings plus money awaiting investment, subtracting operating expenses, and dividing by the number of outstanding shares. A fund's NAV changes regularly, though day-to-day variations are usually small. With a mutual fund, the NAV is reset at the end of each trading day, while with an ETF, the NAV changes throughout the day. The NAV is the price per share an open-end mutual fund pays when you redeem, or sell back, your shares. With no-load mutual funds, the NAV and the offering price, or what you pay to buy a share, are the same. With front-load funds, the offering price is the sum of the NAV and the sales charge per share and is sometimes known as the maximum offering price (MOP). The NAV of an exchange traded fund (ETF) or a closed-end mutual fund may be higher or lower than the market price of a share of the fund. With a broad-based and frequently traded ETF, however, the difference is usually quite small because of a unique mechanism that allows institutional investors to buy or redeem large blocks of ETF shares at the NAV with an in-kind basket of the fund's securities.

Net change

Net change is the difference between the closing price of a stock, bond, or mutual fund, or the last price of a commodity contract and the closing price on the previous trading day. It may also simply be referred to as change. When the security or contract has gained value, the positive net change is expressed with a plus sign and a number, such as +0.50, meaning that the price was up 50 cents. On days that a price falls, the negative net change is expressed with a minus sign and a number, such as -1, meaning that the price was a dollar lower.

Net income

Net income is the amount of money a corporation has earned after subtracting all of the expenses of producing its goods or services from the income or revenue it has realized from sales of those goods or services.

Net worth

A corporation's net worth is the retained earnings, or the amount left after dividends are paid, plus the money in its capital accounts, minus all its short- and long-term debt. Its net worth is reported in the corporation's 10-K filing and annual report. Net worth may also be called shareholder equity, and it's one of the factors you consider in evaluating a company in which you're considering an investment. To figure your own net worth, you add the value of the assets you own, including but not limited to cash, securities, personal property, real estate, and retirement accounts, and subtract your liabilities, or what you owe in loans and other obligations. If your assets are larger than your liabilities, you have a positive net worth. But if your liabilities are more than your assets, you have a negative net worth. When you apply for a loan, potential lenders are likely to ask for a statement of your net worth.

New York Stock Exchange (NYSE)

The New York Stock Exchange (NYSE) is one of the securities exchanges operated in the United States by NYSEEuronext. It's the oldest securities exchange in the country and the largest traditional exchange in the world, although it is now a hybrid market that combines in-person and electronic trading. Trading on the floor of the exchange is by double auction system, handled by floor brokers representing buyers and sellers, and by specialists -- one for each listed security. NYSEArca, another NYSEEuronext market, is entirely electronic and trading is direct and anonymous.

No-load mutual fund

A no-load mutual fund is sold directly to investors by the investment company that sponsors the fund. There is no sales charge, or load, when you buy or sell shares. To limit short-term turnover in potentially volatile funds, some no-load fund companies may charge a redemption fee if you sell newly purchased shares before a certain period has elapsed. That potential is described in the fund's prospectus. Some fund companies charge an annual asset-based fee, called a 12b-1 fee, to offset their marketing and shareholder costs. Your share of this fee is a percentage of the value of your holdings in the fund. You may also be able to buy no-load funds through a mutual fund network, sometimes known as a mutual fund supermarket, typically sponsored by a discount brokerage firm. If you have an account with the firm, you can choose among no-load funds sponsored by a number of different investment companies. Front-end load funds that charge a sales commission and no-load funds making similar investments tend to produce similar total returns over the long term -- say ten years or more. But it can take an investor that long to offset the higher cost of buying the load fund.

Noncompetitive bid

A noncompetitive bid is one that's entered before the deadline on bids for a US Treasury issue by investors who can't or don't wish to meet the minimum purchase requirements for competitive bidding on that issue. Noncompetitive bidders can invest as little as $100 or as much as $5 million in each new issue through TreasuryDirect, an online system that allows you to buy government securities without going through a bank or a brokerage firm. For example, the Treasury sells T-bills to all noncompetitive buyers whose bids arrive by the weekly deadline for a price equal to what competitive bidders pay for that week's issue. A noncompetitive bid may also be known as a noncompetitive tender.

Nondiscrimination rule

Nondiscrimination rules govern the administration of qualified retirement plans, including 401(k) plans. Among other things, the rules prevent highly paid employees from receiving more generous matching contributions to their plan accounts than other employees do. However, employers may offer supplementary nonqualified plans to which antidiscrimination rules don't apply. Unlike contributions to qualified plans, however, contributions to nonqualified plans are not tax deductible and are recorded on the company's books rather than being deposited in an account in the employee's name.

Nonprofit

A nonprofit is a charitable, cultural, or educational organizations that exists for reasons other than providing a profit for their owners, directors, or members. However, these organizations can generate income to pay for their activities, salaries, and overhead by charging for services, making investments, and soliciting donations and memberships. A nonprofit arts center, for instance, may charge patrons for tickets and event subscriptions. Nonprofits incorporate in the states where they operate and are exempt from the state income taxes that for-profit corporations must pay. Some but not all qualify for federal tax-exempt status under section 501(c)(3) of the Internal Revenue Code. Contributions to federally qualifying organizations are tax deductible, though tax rules govern the percentage of your income you may deduct for gifts to different types of nonprofits. In exchange for these tax benefits, nonprofits must comply with some of the same financial reporting rules that for-profit corporations follow. For instance, nonprofits generally must follow corporate governance rules and make their financial reports available to the public.

Nonsystemic risk

Nonsystemic risk results from unpredictable factors, such as poor management decisions, successful competitive products, or suddenly obsolete technologies that may affect the securities issued by a particular company or group of similar companies. Portfolio diversification, which means spreading your investment among a number of asset classes and subclasses and individual issuers within those subclasses, can help counter nonsystemic risk though it can't eliminate it.

Note

A note is a debt security that promises to pay interest during the term that the issuer has use of the money, and to repay the principal on or before the maturity date. For US Treasury securities, a note is an intermediate-term obligation -- as opposed to a short-term bill or a long-term bond. There are Treasury notes that mature in two, three, five, seven, or ten years from their issue date. A borrower also signs a note at the time he or she takes a loan. The note details the terms of the loan, including the term, the interest rate, and the consequences of default.

Not-for-profit

A not-for-profit organization pays taxes and may make a profit, but those profits are not distributed to its owners or members. Private clubs, sports organizations, political organizations, and advocacy groups are examples of not-for-profit institutions. Contributions to these not-for-profits are not tax deductible. Until it became a publicly traded company in 2006, the New York Stock Exchange was a not-for-profit membership association.

Offering price

A security's offering price is the price at which it is taken to market at the time of issue. It may also be called the public offering price. For example, when a stock goes public in an initial public offering (IPO), the underwriter sets a price per share known as the offering price. Subsequent share offerings are also introduced at a specific price. When the stock begins to trade, its market price may be higher or lower than the offering price. The same is true of bonds, where the offering price is usually the par, or face, value. In the case of open-end mutual funds, the offering price is the price per share of the fund that you pay when you buy. If it's a no-load fund or you buy shares with a back-end load or a level load, the offering price and the net asset value (NAV) are the same. If the shares have a front-end load, the sales charge is added to the NAV to arrive at the offering price.

Online brokerage firm

An online brokerage firm conducts interactions with its clients electronically, by telephone, or by mail, but never in person. The firm executes your orders and confirms them electronically, typically debiting or crediting a linked bank account. You can give buy or sell orders at any time for execution when the markets open. Some online firms are divisions of traditional brokerage firms, while others operate exclusively in cyberspace. Most of them charge much smaller trading commissions than conventional firms. Online firms typcially provide extensive investment data and analysis, including regularly updated market news, on their websites.

Online trading

Online trading is conducted electronically. Market orders placed when the markets are open are executed immediately, and orders placed when the markets are closed are executed at opening. Limit orders are executed only at the authorized price or better, as they are in floor trading. Stop orders become market orders when the designated price is reached. Clearance and settlement of online trades is the same as process for floor trades.

Open market

In an open market, any investor with the money to pay for securities is able to buy those securities. US markets, for example, are open to all buyers. In contrast, a closed market may restrict investment to citizens of the country where the market is located. Closed markets may also limit the sale of securities to overseas investors, or forbid the sale of securities in specific industries to those investors. In some countries, for example, overseas investors may not own more than 49% of any company. In others, overseas investors may not invest in banks or other financial services companies. The term open market is also used to describe an environment in which interest rates move up and down in response to supply and demand. The Federal Reserve's Open Market Committee assesses the state of the US economy on a regular schedule. It then instructs the Federal Reserve Bank of New York to buy or sell Treasury securities on the open market to help control the money supply.

Open-end mutual fund

Open-end funds mutual funds issue and redeem shares on a continuous basis in response to investor demand. Most mutual funds are open-end funds. Open-end mutual funds trade at their net asset value (NAV). But if the fund has a front-end sales charge, that charge is added to the NAV to determine the selling price, or maximum offering price (MOP). NAV is the value of the fund's investments, plus money awaiting investment, minus operating expenses, divided by the number of outstanding shares. An open-end fund is the opposite of a closed-end fund, which issues shares only once. After selling its initial shares, a closed-end fund is listed on a securities market and trades like stock. The sponsor of the fund is not involved in those transactions and does not redeem shares investor wish to sell. However, an open-end fund may be closed to new investors at the discretion of the fund management, usually because the fund has grown very large.

Opening

At opening, trading begins for the day on a particular market or in a particular security or commodity. For example, New York Stock Exchange (NYSE) opens at 9:30 ET. The first transaction in a single security may be at that time or at a later time. Opening may also refer to a security or commodity's opening price, or the first price at which it trades on a particular day. Sometimes the opening price on one day is the same as the closing price the night before. But that's not always the case, especially with stocks or contracts that are traded in after-hours markets or when other factors affect the markets when the stock or commodity is not trading.

Option

An option is a derivative security that you buy or sell to participate in certain investment markets without actually purchasing an investment traded in those markets. If you purchase a listed option to buy, which is known as a call, you pay a one-time premium that's a fraction of the cost of buying the underlying instrument, which may be an individual stock, a stock index, a futures contract, a currency, or a debt security. That purchase gives you the right to buy the underlying at a specific price, called the strike price, by a specific date, called the expiration date. For example, when a particular stock is trading at $75 a share, you might buy a call option giving you the right to buy 100 shares of that stock at a strike price of $80 a share. If the price reaches $80 or above, you can exercise the option and buy the stock or sell the option, potentially at a net profit. If the stock price doesn't go higher than the strike price before the option expires, you don't exercise. Your only cost is the money that you paid for the premium. Similarly, you may buy a put option, which gives you the right to sell the underlying instrument at the strike price. In this case, you may exercise the option or sell it at a potential profit if the market price drops below the strike price. In contrast, if you sell a put or call option, you collect a premium and must be prepared to deliver (in the case of a call) or purchase (in the case of a put) the underlying instrument. That will happen if the investor who holds the option decides to exercise it and you're assigned to fulfill the obligation. To neutralize your obligation to fulfill the terms of the contract before an option you sold is exercised, you may choose to buy an offsetting option.

Origination fee

An origination fee is an amount, usually calculated as a percentage of a mortgage loan or home equity loan, which a lender charges for processing your application. The origination fee may be subtracted from the amount of the loan or you may pay the fee separately.

Over-the-counter (OTC)

Securities that trade over-the-counter (OTC) are not listed on an organized stock exchange, such as the New York Stock Exchange (NYSE) or the Nasdaq Stock Market. Common stocks, corporate, government, and municipal bonds (munis), money market instruments, and other products, such as forward contracts and certain options, may trade OTC. Some but not all of these products are registered with the Securities and Exchange Commission (SEC). Generally speaking, the OTC market is a negotiated market conducted between brokers and dealers using telephone and computer networks.

Own-occupation policy

If you purchase an own-occupation disability insurance policy, you are entitled to receive benefits if a disability prevents you from performing the skilled work for which you have been trained. Some other disability policies pay a benefit only if you are unable to do any type of work for which you're qualified.

Paper loss

A paper, or unrealized, loss occurs if you hold an asset that decreases in value. If you sell the asset for less than you paid to buy it, your paper loss becomes an actual loss, or realized loss. Until you sell, there's always the potential that the asset will rebound, turning your paper loss into a paper profit. On the other hand, you may decide to sell at a loss because you expect the asset's value to decrease further. You use paper losses and paper gains to calculate the current value of your investment portfolio.

Paper profit

A paper profit, or unrealized gain, occurs if you hold an asset that has increased in value since the date of purchase. If you sell the asset, your paper profit becomes an actual profit, or realized gain. You owe no capital gains tax on a paper profit, though you use paper value when calculating the current worth of your investment portfolio. The risk with a paper profit is that it may disappear before you realize it. On the other hand, you may postpone selling because you expect the value to increase further.

Par value

Par value is the face value, or named value, of a stock or bond. With stocks, the par value, which is frequently set at $1, is used as an accounting device but has no relationship to the actual market value of the stock. But with bonds, par value, usually $1,000 but $100 in the case of US Treasury issues, is the amount you pay to purchase at issue and the amount you receive when the bond is redeemed at maturity. Par is also the basis on which the interest you earn on a bond is figured. For example, if you are earning 6% annual interest on a bond with a par value of $1,000, that means you receive 6% of $1,000, or $60. While the par value of a bond typically remains constant for its term, its market value does not. That is, a bond may trade at a premium, or more than par, or at a discount, which is less than par, in the secondary market. The market price of a bond is based on changes in the interest rate, the bond's rating, or other factors.

Passively managed

A passively managed index mutual fund or exchange traded fund (ETF) is one whose portfolio changes only when the make-up of the index it tracks changes. For example, a mutual fund that tracks the Standard & Poor's 500 Index (S &P 500) buys and sells securities only when the S &P index committee announces which companies have been added to and dropped from the index. In contrast, when mutual funds are actively managed, their managers select investments with an eye for enabling the fund to achieve its investment objective and outperform its benchmark index. Their portfolios tend to change more frequently as a result. They also tend to have higher fees. The performance of passively managed indexed investments and their risk profiles tend to correspond closely to the asset class or subclass that the index tracks.

Penny stock

Stocks that trade for less than $1 a share are often described as penny stocks. Penny stocks change hands over-the-counter (OTC) and tend to be extremely volatile. Their prices may spike up one day and drop dramatically the next. The fluctuations reflect the unsettled nature of the companies that issue them and the relatively small number of shares in the marketplace. While some penny stocks may produce big returns over the long term, many turn out to be worthless. Institutional investors tend to avoid penny stocks, and brokerage firms typically warn individual investors of the risks involved before handling transactions in these stocks. However, penny stocks are sometimes marketed aggressively to unsuspecting investors.

Pension

A pension is an employer plan that's designed to provide retirement income to employees who have vested -- or worked enough years to qualify for the income. Defined benefit plans promise a fixed income, usually paid for the employee's lifetime or the combined lifetimes of the employee and his or her spouse. The employer contributes to the plan, invests the assets, and pays out the benefit, which is typically based on a formula that includes final salary and years on the job. You pay federal income tax on your pension at your regular rate, so a percentage is withheld from each check. If the state where you live taxes retirement income, those taxes are withheld too. However, you're not subject to Social Security or Medicare withholding on pension income. In contrast, the retirement income you receive from a defined contribution plan depends on the amounts that were added to the plan, the way the assets were invested, and their investment performance. The way a particular plan is structured determines if you, your employer, or both you and your employer contribute and what the ceiling on that contribution is.

Performance

Performance, expressed as a percentage, measures the total return an investment provides over a specific period. It can be positive, representing a gain in value, or negative, representing a loss. While return is reported on a second-to-second and day-to-day basis, short-term results are less significant an indicator of strength or weakness than performance over longer periods, such as one, five, or ten years. Past performance is one of the factors you can use to evaluate a specific investment, but there's no guarantee that those results will be repeated in the future. What past performance can tell you is the way the investment has previously reacted to fluctuations in the markets, and, in the case of managed funds, something about the skills of the manager. An investment is said to outperform when its return is stronger than the return of its benchmark or peers over the same period. Conversely, it is said to underperform if its results lag behind those of its benchmark or peers.

Periodic interest rate

The periodic interest rate, sometimes called the nominal rate, is the interest rate a lender charges on the amount you borrow. Lenders are also required to tell you what a loan will actually cost per year, expressed as an annual percentage rate (APR). The APR combines any fees the lender may charge with a year of interest charges to give you the true annual interest rate. That allows you to compare loans on equal terms. For example, suppose you take a $10,000 loan at 10% interest. You pay an origination fee of $350, so you actually borrow $9,650. Since you are getting a smaller loan, but repaying the full $10,000 with interest, the APR is closer to 10.35%. The periodic rate is also the interest rate a bank or other financial institution pays on amounts you deposit. If you're earning compound interest, the periodic rate will be lower than the annual percentage yield (APY).

Perkins loan

A Perkins loan is a low-interest federal loan that's available to undergraduate and graduate students who demonstrate significant financial need when they complete the Free Application for Student Aid (FAFSA). The loans are awarded by the colleges and universities that participate in the federal Perkins Loan Program. These institutions determine the size of individual loans based on need and the amount they have available to lend. You may be eligible to have your Perkins loan obligation canceled if you are employed in certain public service, military, or teaching positions.

Personal identification number (PIN)

A personal identification number (PIN) is a combination of numbers, letters, or both that you use to access your checking and savings accounts, credit card accounts, or investment accounts electronically. You also need a PIN to authorize certain debit card purchases as well as for identification in other situations, such as accessing cell phone messages. A PIN is one way to help protect your accounts against unauthorized use since presumably no other person would know the four- to six-letter or letter-and-digit code you have chosen. PINs are not foolproof, however, if you don't take steps to ensure that your code remains private or if you select a readily guessed code.

Phishing

Phishing is one way that identity thieves use the Internet to retrieve your personal information, such as passwords and account numbers. The thieves' techniques include sending hoax emails claiming to originate from legitimate businesses and establishing phony websites designed to capture your personal information. For example, you may receive an urgent email claiming to come from your bank and directing you to a website where you're asked to update or verify your account number or password. By responding you give identity thieves an opportunity to steal your confidential information. Phishing is difficult to detect because the fraudulent emails and websites are often indistinguishable from legitimate ones and the perpetrators change identities regularly.

PITI

PITI is an acronym for principal, interest, taxes, and insurance -- the four elements of a monthly mortgage payment. Principal is the loan amount. Interest is the rate at which the finance charge you pay for borrowing is calculated. Taxes are the real estate taxes for which you are responsible, and insurance is the homeowners insurance that your lender requires you to have. If your lender also requires private mortgage insurance (PMI), this amount may be included in the monthly payment or paid separately. Lenders use PITI to calculate your monthly mortgage obligation and how much you can afford to borrow. Most lenders prefer that you spend no more than 28% of your gross monthly income on PITI.

Plan participant

A plan participant is someone who is enrolled in an employee retirement plan, such as a 401(k) or pension plan. The plan in which you participate may be subject to administration and investment rules set by the Employee Retirement Income Security Act (ERISA). The Act guarantee certain rights and provides certain protections for participants. For example, ERISA gives you the right to certain information about your plan, such as a summary plan description, which outlines how it works. You also have the right to see copies of the tax reporting form that your plan must file with the IRS (Form 5500), as well as statements showing your estimated retirement benefits. If you have problems with your plan, you also have the right to bring claims against it.

PLUS loan

PLUS loans are available from the US Department of Education's Direct Loan program to parents of undergraduate students and graduate students to help cover the cost of higher education. PLUS is the acronym for Parent Loan for Undergraduate Students. Repayment of these fixed-rate loans must begin within 60 days after the money is disbursed, and the borrower is responsible for both principal and interest. Unlike the student loans available through the Direct Loan program, applicants for a PLUS must demonstrate creditworthiness to be eligible to borrow but need not demonstrate financial need. A PLUS loan may be eligible for deferment or forbearance.

Policyholder

A policyholder owns an insurance policy. In some cases, a policyholder is also known as the policy owner. As a policyholder, you may also be the person covered by the policy -- referred to as the insured -- although you may own a policy that names someone else as the insured. Policyholders have certain rights. For instance, if you're the policyholder for a life insurance policy, you can change the beneficiary or transfer ownership of the policy to someone else. In contrast, if you're covered by a group policy, such as a group life insurance policy offered by an employer, the policyholder is the organization that offers you a chance to participate in the coverage. You may have certain coverage options and the right to change your beneficiary, but you do not own the policy.

Portable benefits

Portable benefits are accumulated assets that you can take with you when you leave your employer or switch jobs. For instance, if you contribute to a 401(k), 403(b), 457, or other defined contribution plan at your current job, you can roll over your assets to an individual retirement account (IRA) or to a new employer's plan if the plan accepts rollovers. In contrast, credits accumulated toward pension benefits -- otherwise known as a defined benefit plan -- usually aren't portable. Insurance benefits under an employer sponsored group health plan may also be portable as the result of The Health Insurance Portability and Accountability Act (HIPAA). If you have had group coverage and move to a new employer who offers health insurance, your new group health plan can't impose exclusions for preexisting conditions. HIPAA may also give you a right to purchase individual coverage if you are not eligible for group health plan coverage or are no longer eligible to extend your previous coverage under the Consolidated Omnibus Budget Reconciliation Act (COBRA) or similar coverage. Other job benefits, such as health savings accounts (HSAs), are also be portable, but flexible spending accounts (FSAs) are not.

Portfolio

An investment portfolio contains the investments you own. You build your metaphorical portfolio by buying additional stock, bonds, mutual funds, ETFs, derivative investments, or other investment products. Your goal is to increase the portfolio's value by selecting investments that you believe will increase in price, provide income, or do both. According to modern portfolio theory, you can reduce your investment risk by creating a diversified portfolio that includes different asset classes, asset subclasses, and individual securities or pooled investments chosen from different subclasses. This diversification is designed to take advantage of the potential for strong returns from at least some of the portfolio's investments in any economic climate. Ideally those gains will at least offset losses in other investments in the portfolio that respond differently to that climate. However, there is no guarantee that diversification will provide the return you seek or protect you from losses in a falling market.

Power of attorney

A power of attorney is a written document that gives someone the legal authority to act for you as your agent or on your behalf. To be legal, it must be signed and notarized. You may choose to give someone a limited, or ordinary, power of attorney. This authority is revoked if you are no longer able to make your own decisions. In contrast, if you give an attorney, family member, or friend a durable power of attorney, he or she will be able to continue to make decisions for you if you're unable to make them. Not all states allow a durable power of attorney, however. A springing power of attorney takes effect only at the point that you are unable to act for yourself. It's a good idea have an attorney draft or review a power of attorney to be sure the document you sign will give the person you're designating the necessary authority to act for you but not more authority than you wish to assign. You always have the right to revoke the document as long as you are able to act on your own behalf.

Preexisting condition

A preexisting condition is a health problem that you already have when you apply for insurance. If you have a preexisting condition, an insurer can refuse to cover treatment connected to that problem for a period of time. That period is often the first six months, but may be for the entire term of your policy. Insurers can also deny you coverage entirely because of a preexisting condition. And they can end a policy if they discover a preexisting condition that you did not report, provided you knew it existed when you applied for your policy. Beginning January 1, 2014, provisions of the Affordable Care Act of 2010 make this treatment of preexisting conditions illegal and insurers will be required to cover you. That is already for the case for children covered on a family policy. Currently, if you're insured through your employer's plan and switch to a job that also provides health insurance, the new plan must cover you regardless of a preexisting condition.

Preferred provider organization (PPO)

A preferred provider organization (PPO) is a network of doctors and other healthcare providers that offers discounted care to policyholders. Participation in a PPO may be provided by a sponsoring organization, such as an employer or union, or purchased individually. If you're insured through a PPO, you make a copayment for each visit to a healthcare provider within the network, though annual physicals and certain diagnostic tests may not require copayment. You typically have the option to go to a doctor or other provider outside the network. You pay a percentage of the cost of the service, which is likely to be higher, sometimes substantially higher, than your copayment for the same service in network.

Preferred stock

Preferred stock is an equity investment that's issued by a corporation and trades in the secondary market. It's listed separately from common stock issued by the same corporation and trades at a different price. Preferred stock is sometimes described as a hybrid investment because it shares some characteristics with common stock and some with fixed-income securities. For example, a preferred stock typically pays a fixed dividend on a regular schedule, but its price tends to move with changing interest rates in the same way that bond prices do. Convertible preferred shares can be exchanged for a specific number of common shares of the issuing company at an agreed-upon price. The process is similar to the way that a convertible bond can be exchanged for common stock. Preferred stock generally doesn't carry the right to vote on corporate matters or the opportunity to share in the corporation's potential for increased profits in the form of increased share prices and dividend payments.

Premium

A premium is the purchase price of an insurance policy or an annuity contract. You may pay the premium as a single lump sum, in regular monthly or quarterly installments, or in some cases on a flexible schedule over the term of the policy or contract. When you pay over time, the premium may be fixed for the life of the policy, assuming the coverage remains the same. That's the case with many permanent life insurance policies. With other types of coverage, the premium changes as you grow older or as costs for the issuing company increase. Used in another sense, the term premium refers to the amount above face value that you pay to buy, or you receive from selling, an investment. For example, a corporate bond with a par value of $1,000 with a market price of $1,050 is selling at a $50 premium.

Prepayment penalty

A prepayment penalty may apply if you repay an outstanding loan balance before the due date and your loan agreement doesn't have a prepayment clause that excludes a fee for early termination. The penalty is often about 2% of the amount you borrowed. Many states prohibit prepayment fees, and they're not allowed on any mortgage loans purchased by Fannie Mae or Freddie Mac. But they are allowed in other states, and lenders may offer a lower rate on loans with prepayment penalties because they are locking in their long-term profit. Similarly lenders who offer to waive closing costs and points when you refinance may impose a penalty if you pay off the loan within the first few years. But if you're not planning to move, this refinancing deal could save you money.

Pretax contribution

A pretax contribution is money that you agree to have subtracted from your gross income and put into a retirement savings plan or other employer-sponsored benefit plan. Your taxable earnings are reduced by the amount of your contribution, which reduces the income tax you owe in the year you make the contribution. Some pretax contributions, including those you put into your 401(k), 403(b), or 457, are taxed when you withdraw the amount from your plan. Other contributions, such as money you put into a flexible spending plan, are never taxed provided you use it for qualified expenses.

Pretax income

Pretax income, sometimes described as pretax dollars, is your gross income before income taxes are withheld. Any contributions you make to a tax-deferred salary reduction retirement plan, such as a traditional 401(k), 403(b), 457, or tax savings plan (TSP) or to a flexible spending account (FSA) comes out of your pretax income. The contribution reduces your current income and the amount you owe in current income taxes.

Price-to-earnings ratio (P/E)

The price-to-earnings ratio (P/E) is the relationship between a company's share price and its earnings. It is calculated by dividing the current price per share by the earnings per share. A stock's P/E, also known as its multiple, gives you a sense of what you are paying for a stock in relation to its earning power. For example, a stock with a P/E of 30 is trading at a price 30 times higher than its earnings, while one with a P/E of 15 is trading at 15 times its earnings. There is no ideal P/E, but the average P/E at any point in time reflects investor confidence -- or lack of it -- in future returns. Higher P/Es are typical of companies that are expected to grow rapidly in value. Their prices are often more volatile than stocks with lower P/Es because it can be more difficult for the company's earnings to satisfy investor expectations. A high P/E is sometimes an indication that the stock is overvalued, or not worth the amount investors are paying. A low P/E may be the sign of an undervalued company whose price hasn't caught up with its earnings potential. Conversely, a low P/E can be a clue that the company may be a poor risk. P/E can be calculated two ways. A trailing P/E uses earnings for the last four quarters. A forward P/E generally uses earnings for the past two quarters and an analyst's projection for the coming two.

Primary dealer

A primary dealer is a bank or securities brokerage that is authorized to trade US government securities directly with the Federal Reserve Bank of New York. Primary dealers are also expected to bid at Treasury auctions for bills, notes, and bonds, as well as participate in open market operations, which the Fed uses to carry out monetary policy and regulate the money supply. Banks apply to the Federal Reserve to become primary dealers and are accepted if they meet specific capital requirements, among other qualifications. The primary dealer system was formally enacted in 1960. The number of primary dealers has fluctuated over time, as some firms have consolidated while others have filed for bankruptcy. The number of primary dealers peaked at 46 in 1988 and is currently 21.

Primary market

The primary market is where stocks or bonds are initially offered for sale, with the money investors pay to purchase going to the issuer. In contrast, if you buy a security at some point after issue, and the amount you pay goes to an investor who is selling the security, you're buying in the secondary market. The term primary market also applies the leading or main markets for trading various products. For example, the New York Stock Exchange (NYSE) is a primary market for stocks while the Chicago Mercantile Exchange (CME) is a primary market for certain commodities.

Prime rate

The prime rate is a benchmark for interest rates on business and consumer loans. For example, a bank may charge you the prime rate -- whatever it happens to be -- plus two percentage points on a car loan or home equity loan. The prime rate is determined by the federal funds rate, which is the rate banks charge each other to borrow money overnight. The difference between the two rates is three percentage points, with the prime rate always the higher number. The federal funds rate itself is determined by supply and demand, prompted by the actions of the Open Market Committee of the Federal Reserve to increase or decrease the money supply. So if the federal funds rate goes up, the prime rate goes up, and consumer loans cost more. If the federal rate drops, the prime rate drops, and consumer loans cost less.

Principal

Principal can refer to an amount of money you invest, the face amount of a bond, or the balance you owe on a debt, distinct from the finance charges you pay to borrow. A principal is also a person for whom a broker carries out a trade, or a person who executes a trade on his or her own behalf.

Private mortgage insurance (PMI)

Private mortgage insurance (PMI) protects the lender against the risk that you may default on your mortgage loan. The lender may require you to buy PMI if your down payment is less than 20% of the property's purchase price. The premiums you can expect to pay will vary, but typically come to about 0.5% of the total amount you borrow. For instance, on a $150,000 mortgage, a typical annual PMI premium would be $750, or 0.5% of $150,000. Divided into monthly payments, this premium would come out to $62.50 a month. You can usually cancel your PMI when you meet certain criteria. Generally, this is when the balance of the mortgage is paid down to 80% of either your home's original purchase price or its appraised value at the time you took the loan. If you forget to cancel your PMI, your lender is required by federal law to end the insurance once your outstanding balance reaches 78% of the original purchase price or appraised value at the time you took the loan, or if you have reached the mid-point of the loan term, provided you meet certain requirements. The lender must give you information about the termination requirement at closing. There are some exceptions to the termination rule, including high-risk mortgages, VA and FHA mortgages, and those negotiated before July 29, 1999.

Probate

Probate is the process of authenticating, or verifying, your will. After probate, your executor can carry out the wishes you expressed in the document for settling your estate and appointing a guardian for your minor children. While the probate process can run smoothly if everything is in order, it can also take a long time and cost a great deal of money if your will isn't legally acceptable or it's contested by potential beneficiaries who object to its terms. If you die without a will, the same court that handles probate resolves what happens to your assets, based on the laws of the state where you live, through a process known as administration. The larger or more complex your estate is, the greater the potential for delay and expense.

Profit

Profit, which is also called net income or earnings, is the money a business has left after it pays its operating expenses, taxes, and other current bills. When you invest, profit is the amount you make when you sell an asset for a higher price than you paid for it. For example, if you buy a stock at $20 a share and sell it at $30 a share, your profit is $10 a share minus sales commission and capital gains tax if any.

Profit sharing

A profit-sharing plan is a type of defined contribution retirement plan that employers may establish for their workers. The employer may add up to the annual limit to each employee's profit-sharing account in any year the company has a profit to share, though there is no obligation to make a contribution in any year. The annual limit is stated as a dollar amount and as a percentage of salary, and the one which applies to each employee is the lower of the two alternatives. Employers get a tax deduction for their contribution. Employees owe no income tax on the contributions or on any of the earnings in their accounts until they withdraw money. In some cases, employees in the plan may be able to borrow from their accounts to pay for expenses such as buying a home or paying for college. Profit-sharing plans offer employers certain flexibility. For example, in a year without profits, they don't have to contribute at all. And they can vary the amount of each year's contribution to reflect the company's profitability for that year. However, each employee in the plan must be treated equally. This means that if an employer contributes 10% of one employee's salary to the plan, the employer must also contribute 10% of the salaries of all other employees in the plan.

Prospectus

A prospectus is a formal written offer to sell stock to the public. It is created by an investment bank that agrees to underwrite the stock offering. The prospectus sets forth the business strategies, financial background, products, services, and management of the issuing company, and information about how the proceeds from the sale of the securities will be used. The prospectus must be filed with the Securities and Exchange Commission (SEC) and is designed to help investors make informed investment decisions. Each mutual fund and variable annuity provides a prospectus to potential investors, explaining its objectives, management team and policies, investment strategy, and performance. The prospectus also summarizes the fees and analyzes the risks you take in investing. Mutual fund and annuity prospectuses are updated annually as new shares continue to be issued and the terms and conditions of the investment products are updated.

Proxy

A proxy is a vote that you are entitled to cast on certain corporate policies and candidates for the board of directors if you own common stock in a US corporation. You may vote in person at the annual meeting, by phone, or online, or you may authorize your investment adviser or broker to vote on your behalf, following your instructions.

Proxy statement

A proxy statement that presents the candidates who have been nominated to the board of directors and any proposed changes in corporate management that require shareholder approval must be provided by all publicly traded companies to their shareholders prior to the annual meeting. The statement must include the position the board of directors takes on the nominations and proposals. By law, the proxy statement must also present shareholder proposals even if they are at odds with the board's position. Securities and Exchange Commission (SEC) rules also require that the proxy statement shows, in chart form, the total compensation of the company's five highest paid executives and compares the stock's performance to the performance of similar companies and the appropriate benchmark.

Public company

A public company is one whose stock can be owned by any individual or institutional investor with the means to purchase it. In contrast, in a privately held company, the stock is owned by company founders, management, employees, and sometimes venture capitalists. Many privately held companies eventually go public to help raise capital to finance growth. Conversely, public companies can be taken private for a variety of reasons.

Qualified Domestic Relations Order (QDRO)

A qualified domestic relations order (QDRO) is a judgment or order that creates the right for an alternative payee to receive some or all of the retirement benefits that would otherwise be payable to a specific participant of an employer-sponsored plan. Since a large percentage of marital assets are often tied up in a pension or retirement savings plan, a QDRO can be an important tool in ensuring an equitable division of that property in a divorce. When approved, it requires the plan administrator to divide the assets in compliance with the terms of the order. To be binding, a state agency or authority, such as a court, must issue the QDRO before a divorce or property settlement is finalized. In addition, the order must comply with the QDRO requirements of the Internal Revenue Code (IRC), the Employee Retirement Income Security Act (ERISA), and the retirement plan that’s involved.

Qualified retirement plan

A qualified retirement plan is an employer-sponsored plan that meets the requirements established by the Internal Revenue Service (IRS) and the US Congress. Pensions, profit-sharing plans, money purchase plans, cash balance plans, SEP-IRAs, SIMPLEs, and 401(k)s are all examples of qualified plans, though each type works a little differently. In some cases, such as SIMPLEs and 401(k)s, contribution levels and withdrawals requirements are set by law, though they may be modified from time to time. Employers may take a tax deduction for contributions to qualified plans, and in some plans employees may make tax-deferred contributions. Among the other requirements, a qualified plan must provide for all eligible employees equivalently. That means the plan can't treat highly paid employees more generously than it does less-well paid employees, though one group of employees, such as those within five years of the official retirement age, may receive different treatment than another group. In contrast, a nonqualified plan may be available to some employees and not others. In some plans, nonqualified contributions are made with after-tax dollars, either by the employer or the employee, although any earnings in the plan are tax deferred. In other plans, future benefits are promised but contributions are not actually deposited in an account established for the employee. Mandatory federal withdrawal rules that apply to qualified plans do not apply in the same way to nonqualified plans, though nonqualified plans are subject to stringent regulation as well.

Quant fund

A quant fund is a mutual fund whose managers assemble its portfolio based on quantitative research. The goal is to beat the return on the index fund on which the quant fund is based by using statistical analysis to identify the securities that will outperform the others in the index and the overall benchmark. For example, instead of buying all the stocks in the S &P 500, a quant fund manager would buy selected stocks identified by the research as strong performers in the current economic environment. The portfolio of a quant fund is likely to change more often than the portfolio of a traditional index fund that seeks to mirror the performance of the index it tracks.

Rally

A rally is a significant short-term recovery in the price of a stock or commodity, or of a market in general, after a period of decline or sluggishness. Stocks that make a particularly strong recovery in a particular sector or in the market as a whole are often said to be leading the rally, a reference to the term's origins in combat, where an officer would lead his rallying troops back into battle. While a rally may signal the beginning of a bull market, it doesn't necessarily do so.

Rate of return

Rate of return is your gain or loss on an investment expressed as a percentage of the investment's purchase price. With a common stock, the rate of return includes any change, plus or minus, in the market value of a stock plus any dividend income the stock paid. Rate of return is used interchangeably with the term percentage return. With a bond, rate of return is any change, plus or minus, in the market price of the bond plus the current yield, or your annual interest income divided by the price you paid for the bond. However, rate of return is sometimes used to refer simply to the current yield, or the dividend or interest a security pays as a percentage of its current price.

Rating

Rating is the process of evaluating a company, security, or investment product to determine how well it meets a specific set of objective criteria. A rating is the result of that process. For example, a bond issue may be rated along a spectrum from highest quality investment grade to speculative, or from AAA to D. Rating typically affects the interest rate a fixed-income security must pay to attract investors, forcing lower-rated bond issuers to pay higher rates. Some investors buy low-rated bonds for their higher yield. Other investors may shun low-rated investments entirely, unwilling to take the risk that the issuer might default. Ratings are not infallible, and should never be the only criterion you use to choose an investment or select an insurer. In fact, ratings can be downgraded at any time in response to new information about the issuer or the issue. Rating differs from ranking, which assigns the relative standing of two or more similar items in relation to each other.

Real estate investment trust (REIT)

A real estate investment trust (REIT) pools investors' capital to invest in a variety of real estate ventures. There are three types of REIT: Equity REITs buy properties that produce income. Mortgage REITs invest in real estate loans. Hybrid REITs usually make both types of investments. REITs may be publicly traded corporations. In that case, after the REIT has raised its investment capital, it trades on a stock market just as a closed-end mutual fund does. Other REITs are private, nonlisted investments available to qualified investors who wish to be limited partners. All REITs are designed to be income-producing investments, and by law 90% of a REIT's taxable income must be distributed to investors. This means the yields on REITs may be higher than on other equity investments although the income is not guaranteed. REIT income distributions are taxed as ordinary income.

Real interest rate

The real interest rate is the interest rate you earn on an investment minus the rate of inflation. For example, if you're earning 4.25% on a bond when the inflation rate is 1%, your real interest rate is 3.25%. That's enough higher than current inflation to maintain your buying power and build your investment base. But if inflation rate rose to 5% when your bond return was 4.25%, your real interest rate would be a negative 0.75%. That would undermine your buying power.

Real property

Real property is what's more commonly known as real estate, or realty. A piece of real property includes the actual land as well as any buildings or other structures built on the land, the plant life, and anything that's permanently in the ground below it or the air above it. In that sense, real property is different from personal property, which you can move from place to place with you.

Real property tax

A real property tax is a local tax on the value of real estate. The property may be assessed at full value, which is presumably the price that the owner could sell it for in the current market, or using some other valuation method. The taxing agency, such as a county, city, town, or village, sets a tax rate, which is multiplied by the assessed value of each property to determine the tax due on that property. You may be able to deduct real property taxes on your federal income tax return, but large deductions for real estate taxes are one of the factors that may result in your owing the alternative minimum tax (AMT).

Real rate of return

The real rate of return is the rate of return minus the current rate of inflation. For example, if you have a return of 4% on a bond in a period when inflation is averaging 2%, your real rate of return is 2%. But if inflation were 4%, your real rate of return would be 0%. Finding real rate of return is generally a calculation you have to do on your own. It isn't provided in annual reports, prospectuses, or other publications that report investment performance. The rate of return before it is adjusted for inflation may be known as the nominal or named rate.

Realized gain

A realized gain occurs you sell an investment for more than your basis, which is either what you paid to buy it, or, in the case of an inherited or gifted asset, the value at the time you received it. For example, if you buy a stock for $20 a share and sell it for $35 a share, you have a realized gain of $15 a share, minus trading costs. In contrast, if the price of the stock increases, and you don't sell, your gain is unrealized, or a paper profit. Realizing your gains means you lock in any increase in value, which could potentially disappear if you continued to hold the investment. It also means you may owe tax on that profit when you sell unless the investment is tax exempt or you hold it in a tax-deferred or tax-free account. In a tax-deferred account, you can postpone paying the tax until you begin withdrawing from the account. However, if taxes are due, and you have owned the investment for more than a year when you sell, you pay tax at the long-term capital gains rate, which, for most types of investments, is lower than the rate at which you pay federal income tax on ordinary income.

Recession

Broadly defined, a recession is a downturn in a nation's economic activity. The consequences typically include increased unemployment, decreased consumer and business spending, and declining stock prices. Recessions are typically shorter than the periods of economic expansion they follow, but they can be quite severe even if brief. Recovery is slower from some recessions than from others. The National Bureau of Economic Research (NBER), which tracks recessions, describes the low point of a recession as a trough between two peaks. The points at which a recession begins and ends can be identified only in retrospect. The Conference Board, a business research group, considers three consecutive monthly drops in its Index of Leading Economic Indicators a sign of decline and potential recession up to 18 months in the future. The Board's record in predicting recessions is uneven, having correctly anticipated some but expected others that never materialized.

Redemption

Redemption is the repayment of a bond's principal at maturity. Bonds are usually redeemed at par, or face value, traditionally $1,000 per bond, though $100 in the case of a US Treasury issue. However, if a bond issuer calls the bond, or pays it off before maturity, you may be paid a premium, or a certain dollar amount over par, to compensate you for lost interest. You can redeem a certificate of deposit at maturity, which means you withdraw your principal plus interest. You can also redeem, or liquidate, open-end mutual fund shares at any time. The fund buys them back at their net asset value (NAV), which is the dollar value of one share in the fund.

Redemption fee

A redemption fee is a charge that some open-end mutual funds impose when you sell shares in certain funds, often during a specific, and sometimes brief, period after you purchase those shares. The fee is usually a percentage of the value of the shares you sell, but it may also be a flat fee, or fixed amount. The purpose of the fee is to prevent large-scale withdrawals from the fund in response to changes in the financial markets, which might require the fund manager to sell holdings at a loss in order to meet the fund's obligation to buy back your shares. A variety of other investments may also charge a redemption fee for taking money out, typically to discourage such transactions.

Registered investment adviser (RIA)

A registered investment adviser (RIA) is a firm that is paid for providing investment advice, registers with the Securities and Exchange Commission (SEC), and is generally subject to regulated by states or the SEC, depending on how much money the firm manages. Firms registered with the SEC have more than $100 million under management. Firms with assets up $100 million register with the state securities board in the state or states where they operate. An RIA's employees, called investment adviser representatives (IARs), are bound by a fiduciary standard in recommending securities to their clients. They may manage clients’ investment portfolios and earn a fee, or sometimes a fee plus commission, for their advice. An RIA must file a two-part Form ADV. Part 1 provides basic information about the firm. Part 2 is a detailed narrative explanation, in Plain English, about how the firm operates, how it does its analysis, what it charges, and any material disciplinary actions.

Registered owner

A security's registered owner is the person or institution in whose name the security is held on the books of the issuer or the issuer's agent. The registered owner is not always the beneficial, or actual, owner. When you buy stock through your brokerage firm, your name is recorded on the firm's books as the owner, but the stock is usually held in street name rather than issued to you in certificate form. The shares are registered electronically in the name Cede & Co., the nominee name of The Depository Trust Company (DTC). Holding securities in nominee name makes it easier to sell, since the transfer is handled electronically. You don't have to deliver the certificates within the required timeframe. It also eliminates the problem of lost or stolen certificates. However, you may own stock through an electronic direct registration system (DRS). In that case you are both the registered and beneficial owner.

Registered representative

Registered representatives are licensed to act on investors' orders to buy and sell securities and to provide advice relevant to portfolio transactions. They may be paid a salary, a commission -- usually a percentage of the market price of the investments their clients buy and sell -- or in some cases by fees figured as a percentage of the value of a client's account. Registered reps, more commonly known as stockbrokers, work for a broker-dealer that belongs to the exchange or operates in the market where the trades are handled. The reps must pass a series of exams administered by FINRA to qualify for their licenses and are subject to FINRA oversight.

Required minimum distribution (RMD)

A required minimum distribution (RMD) is the smallest amount you must take each year from your tax-deferred retirement savings plan once you've reached the mandatory withdrawal age, usually 70 1/2. RMDs are required from 401(k) plans, 403(b) plans, 457 plans, and SIMPLEs as well as traditional IRAs. If you take less than the required minimum in any year, you owe a 50% penalty on the amount you should have taken but did not. You calculate your RMD by dividing your account balance at the end of your plan's fiscal year -- often December 31 -- by a distribution period based on your age. You find that number in IRS Publication 590, Table 3. If your spouse is your beneficiary and more than ten years younger than you are, you can use a longer distribution period, found in Table 2.

Retail investor

Retail investor refers to an individual who buys and sells securities for his or her own account through a traditional or online brokerage firm. While some retail investors hold portfolios worth millions of dollars and others own just a few securities, they are different from institutional investors, such as pension funds, money managers, or financial services companies, who have discretionary control over at least $100 million in securities.

Return

Your return is the profit or loss you have on your investments, including income and change in value. Return can be expressed as a percentage and is calculated by adding the income and the change in value and then dividing by the initial principal or investment amount. You can find the average annual return by dividing the percentage return by the number of years you have held the investment. For example, if you bought a stock that paid no dividends at $25 a share and sold it for $30 a share, your return would be $5. If you bought on January 3, and sold it the following January 4, that would be a 20% annual percentage return, or the $5 return divided by your $25 investment. But if you held the stock for five years before selling for $30 a share, your average annual return would be 4%, because the 20% gain is divided by five years rather than one year. In contrast, an annualized return accounts for the changes in value from year to year, so that losses early in a five-year holding period, for example, would mean that the annualized return on an investment was lower than its average annual return for the same period. Percentage return and annual percentage return allow you to compare the return provided by different investments or investments you have held for different periods of time.

Return on investment (ROI)

Your return on investment (ROI) is your profit or loss on the sale of a security or other asset divided by the amount you invested, expressed as an annual percentage rate. For example, if you invested $5,000 and sold two years later for $5,500, your average annual return on investment would be 5%. To get that result, you divide the $500 gain by your $5,000 investment, and then divide the 10% gain by 2. ROI includes all the investment income you earn as well as any profit or loss that results from selling the investment. The result can be negative as well as positive if the sale price plus any income is less than the purchase price.

Revenue

Revenue is the money you collect for providing a product or service. Revenue is different from earnings, which is what's left of your revenue after subtracting the costs of producing or delivering the product or service and any taxes you paid on the amount you took in. When corporations release their financial statements, those that provide services, such as power or telecommunications companies, describe their income as revenues, while those that manufacture products, such as lightbulbs or books, describe their income as sales. The money a government collects in taxes is also called revenue. The US body that collects those taxes is called the Internal Revenue Service (IRS). In the United Kingdom, it's Inland Revenue.

Revolving credit

A revolving credit arrangement allows you to borrow up to your credit limit without having to reapply each time you need cash. As you repay the money you have borrowed, it is available to be borrowed again. For example, if you have a credit card with a credit limit of $1,500 and you make a purchase of $400, the amount of credit you have available is $1,100. But when you repay the $400, your credit limit goes back to $1,500 -- assuming you haven't charged anything else on the card. At any given time, your balance due may fluctuate from zero to the maximum credit limit. If you don't use the credit line in any billing cycle, no fees apply in most cases. But if you have a balance due and don't repay the full amount, finance charges are added to your next bill. Some revolving credit arrangements, such as a home equity line of credit, may have a predetermined end date, but the majority are open-ended as long as you make at least the minimum required payment on time.

Risk

Risk is the possibility you'll lose money or make less than you anticipate based on the performance of the investments you make. All investments carry a certain level of risk and investment return is not guaranteed. Among the risks you face are those described as systemic, which are characteristic of investment markets at large, and those described as nonsystemic, which occur at the individual investment level. Interest rate risk is an example of the former and poor management decisions are an example of the latter. Volatility, or the size and frequency with which an investment increases and decreases in value, is a risk that's characteristic of equity investments, where the size and frequency of changes in an investment's value can be striking. In general, the greater the risk of loss you face in making an investment, the greater your return has the potential to be if the investment provides a strong return. For example, investing in a start-up company carries substantial risk, since there is no guarantee that it will be profitable. But if it is, you're in a position to realize a greater gain than if you had invested a similar amount in an already established company. As a rule of thumb, if you are unwilling to take at least some investment risk, you are likely to limit your return to what's provided by insured products such as bank certificates of deposit (CDs).

Risk management

Risk management is a set of strategies for analyzing potential risks and instituting policies and procedures to avoid losses and realize gains. The work of assessing the possibilities, setting priorities, and finding cost-effective solutions is also described as business continuity planning. In a business environment, some risks, such as economic pressures or technology meltdowns, are universal while others are unique to a particular venture or physical location. Large companies may use a combination of strategies to manage risk, including buying insurance, creating redundant systems, diversifying physical locations or core businesses, and establishing other hedges. For an individual investor, risk can be managed in several ways: insuring at least a portion of your portfolio, allocating your assets across classes, diversifying your holdings, and hedging with derivative products.

Risk-adjusted performance

Risk-adjusted performance evaluates gain or loss in investment return in relation to the amount of risk you took (or would have taken) to get the return the investment produced. One variable is the investment's price volatility over various periods of time, including different market environments. For example, you might consider how far the price fell in the most recent bear market against its high in a bull market, or how it performed in a recent sharp but brief market correction. In general, the greater the volatility, the greater the risk. Some research firms report risk-adjusted return as part of their assessment of investment quality. However, looking exclusively at past performance can be deceptive in evaluating the risk you are taking in making a certain investment, since the past can't predict what will happen in the future.

Rollover

A rollover results when you move your assets from one investment account to another investment account with similar characteristics. For example, if you authorize a transfer from a tax-deferred qualified retirement plan, such as a 401(k), 403(b), or 457 plan, to a tax-deferred IRA, that transaction creates a rollover IRA. No taxes are due as a result of the transaction, and the principal and future earnings continue to compound tax deferred. While you can also move a tax-deferred IRA with one custodian to an IRA with a different custodian, maintaining the tax-deferred status of the assets, the new IRA is rarely described as a rollover IRA.

Rollover IRA

A rollover IRA is an individual retirement account or annuity you create with tax-deferred assets you move from an employer-sponsored retirement savings plan or other qualified plan to an individual investment account. If you arrange for a direct rollover, the trustee of your employer's plan transfers the assets to the custodian you select for your IRA. In that case the total value of the account moves from one to the other. If you handle the rollover yourself, by getting a check from your employer's plan and depositing it in your IRA, your employer must withhold 20% of the total to prepay taxes that will be due if you fail to deposit the full amount of the money you're moving into a tax-deferred account within 60 days. The required withholding forces you to supply the missing 20% from another source to meet the deposit deadline if you want to maintain the tax-deferred status of the full amount and avoid taxes and a potential early withdrawal tax penalty on the amount you don't deposit in the IRA.

Roth 401(k)

A Roth 401(k) allows you to make after-tax contributions to an account in your employer's retirement savings plan. Your earnings may be withdrawn tax free, provided that you have left your job, are at least 59 1/2, and your account has been open five years or more. The Roth 401(k), which is available only if the employer offers a traditional tax-deferred 401(k), has the same annual contribution limits and distribution requirements as the tax-deferred 401(k) and offers the same menu of investments. You can add up to the annual federal limit each year, plus the catch-up contribution if you are 50 or older. You must begin taking required minimum distributions (RMD) by April 1 of the year following the year you turn 70 1/2. You are eligible to postpone RMDs if you are still working for the employer unless you own 5% or more of the company sponsoring the plan. If your employer makes matching contributions to your Roth 401(k), the contributions go into a paired tax-deferred account and are allocated the way your own contributions are allocated. If you rollover your 401(k) to an IRA, you have the option of converting the assets your employer contributed to the IRA as well. Your plan administrator may withhold 20% of the amount you convert to prepay the tax that will be due, but you can use money from other sources to deposit the full account value in the Roth IRA. You may not move assets between traditional and Roth 401(k) accounts, though you may be able to split your annual contribution between the two. If you leave your job or retire, you can roll Roth 401(k) assets into a Roth IRA, just as you can rollover traditional 401(k) assets. Employers who offer traditional 403(b) and 457 plans may also ofter the Roth alternative.

Roth IRA

A Roth IRA is an individual retirement arrangement (IRA) to which you make after-tax contributions and may withdraw earnings tax free any time after you turn 59 1/2, provided your account has been open at least five years. You may withdraw your contributions at any time and may be able to withdraw earnings before 59 1/2 if you qualify for certain exceptions, such as using up to $10,000 toward the purchase of a first home. Tax will be due on the earnings you withdraw, but not the 10% early withdrawal penalty. Since Roth IRAs have no required withdrawals during your lifetime, you can continue to accumulate tax-free earnings as long as you like. You can make a nondeductible annual contribution, up to the annual federal limit, any year you have earned income, even after age 70 1/2, though you can never contribute more than you earn. If you are 50 or older, you may also make annual catch-up contributions. To make a full contribution to a Roth IRA, your modified adjusted gross income (MAGI) must be less than the annual limit set by Congress. You may make partial contributions on a sliding scale if your MAGI is between the amounts that Congress sets for your filing status. These annual limits are lower if you file as a single than if you're married and file a joint return. You may also convert a traditional IRA or 401(k) to a Roth IRA. In the case of the 401(k), you must either retire or leave your job before the conversion. You owe income tax at the same rate you pay on ordinary income on the earnings and on any tax-deferred or deductible contributions you convert.

Rule of 72

The rule of 72 is a quick way to approximate the number of years it will take to double your money, given a fixed annual rate of return. You can also use the rule to estimate how long it will take for your living expenses to double, given a fixed annual inflation rate. In either case, you divide 72 by the rate in question. For example, if you have money in a savings account earning 3% interest annually, you can expect it to double in value in 24 years, since 72 ÷ 3 = 24. You can also apply the rule of 72 to investment returns, but your projections are only as accurate as your best guess about the market’s future annualized returns. Similarly, with an average annual 3% inflation rate, your expenses will double in 24 years. Such an estimate can be useful rule of thumb when planning for the amount of income you will need in retirement to maintain your current life style.

Rule of 78

Using the Rule of 78, lenders front-load the interest they charge on a short-term loan to guarantee their profit if you pay off your loan before the end of its term. As a result, you pay most of the interest before you begin to make substantial repayment of principal. For example, on a one-year loan, you'd pay 15% of the interest in the first month, 14% in the second month, and only 1% in the last month. The practice is called the Rule of 78 because 78 is the sum of the twelve payments in a one-year loan (1+2+3+...+12 = 78). It's illegal to calculate loans with terms longer than 61 months using the Rule of 78, and a number of states outlaw the practice for all loans. But where the Rule of 78 is used, the loans may be described as precomputed or precalculated loans.

Safe harbor

A safe harbor protects an organization from liability or penalty for specific actions that occur in particular circumstances or when the organization has followed defined rules. A safe harbor 401(k) allows small businesses to avoid nondiscrimination testing by either matching employee contributions to the plan under a prescribed formula or making a 3% across-the-board contribution to retirement accounts established for each eligible employee. By avoiding nondiscrimination testing, the owners or principals may make maximum annual contributions regardless of the percentage of pay that other employees contribute. A different type of safe harbor allows a corporation, in good faith, to make Securities and Exchange Commission (SEC) filings or discuss its expectations for the future with analysts and others without being liable to investors who may use that information but end up losing money on the company’s securities.

Salary reduction plan

A salary reduction plan allows an employee to contribute a percentage of current income to an account in his or her name in an employer-sponsored retirement plan. Any earnings on those contributions accumulate tax-deferred. Employers may match some of or all of an employee's contribution according to a formula that applies on an equal basis to all participating employees. All salary reduction plans have an annual contribution cap that's set by Congress and allow annual catch-up contributions for participants 50 and older. In traditional tax-deferred 401(k)s, 403(b)s, 457, or SIMPLE, you contribute pretax income, which reduces your current income tax, and you pay tax at withdrawal at the same rate you pay on ordinary income. With Roth 401(k)s, 403(b)s, and 457s, you contribute after-tax income but qualify for tax-free withdrawals if you are older than 59 1/2 and your account has been open at least five years.

Sales charge

A sales charge is the fee you pay to buy mutual fund shares or other investments through a financial professional. In some cases, it may be called a commission. The charge is typically figured as a percentage of the amount you invest. As the size of your investment increases, the rate at which you pay the sales charge may decrease. In the case of mutual funds available from some investment companies, there are set dollar amounts at which there is a corresponding reduction in the sales charge. This is known as a breakpoint. For example, the rate may drop from 4.5% to 4.25% with an investment of $25,000. The sales charge on a mutual fund may be imposed as a front-end load when you buy (also known as Class A shares), as a back-end load when you sell (also known as Class B shares), or as a level load each year you own the fund (also known as Class C shares). Other classes of shares may also be offered.

Sales tax

A sales tax is a tax imposed by state and local governments on transactions that occur within their jurisdictions. The taxing authority determines which transactions are subject to tax and the flat rate at which the tax is calculated. Some countries, though not the United States, impose a national sales tax often called a value added tax (VAT).

Sarbanes-Oxley Act

The Sarbanes-Oxley Act introduced new financial practices and reporting requirements, including executive certification of financial reports, plus more stringent corporate governance procedures for publicly traded US companies. The law created the Public Company Accounting Oversight Board (PCAOB), a private-sector, nonprofit corporation that regulates and oversees public accounting firms. It also added protections for whistleblowers. The law has seen its share of controversy, with opponents arguing that the expense and effort involved in complying with the law reduce shareholder value, and proponents arguing that increased corporate responsibility and transparency far outweigh the costs of compliance. Officially the Corporate and Auditing Accountability, Responsibility, and Transparency Act, the Sarbanes-Oxley Act, is named for its main Congressional sponsors, Senator Paul Sarbanes and Representative Michael Oxley. It is known more colloquially as SarbOx or SOX. It was passed in 2002 in response to several high-profile corporate scandals involving accounting fraud and corruption in major US corporations.

Savings account

A savings account is a deposit account in a bank or credit union that pays interest on your balance -- typically at a lower rate than you earn on other bank products. Some institutions require that you have at least a minimum balance to qualify for interest earnings. You can deposit and withdraw from savings accounts, but you can't transfer money from the account directly to other people or organizations. Savings accounts are insured by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Share Insurance Fund (NCUIF) up to $250,000 for each depositor in a single bank. Different branches of the same bank count as one bank. But differently registered accounts, such as individual accounts, joint accounts, and retirement accounts, are insured separately.

Savings bonds

US savings bonds are issued by the federal government as either Series EE bonds or Series I bonds. You buy electronic Series EE bonds through a TreasuryDirect account for face value and earn a fixed rate of interest for a 30-year term. The bonds are guaranteed to double in value in 20 years. Series EE bonds issued before May 2005 earn interest at a variable rate set twice a year. Series I bonds are sold at face value and earn a real rate of return that's guaranteed to exceed the rate of inflation during the term of the bond. Existing Series HH bonds earn interest to maturity, but no new Series HH bonds are being issued. The biggest difference between savings bonds and US Treasury issues is that there's no secondary market for savings bonds since they cannot be traded among investors. You buy them in your own name or as a gift for someone else and redeem them by turning them back to the government, either electronically through your TreasuryDirect account or through a bank or other financial intermediary if you have existing paper bonds. The interest on US savings bonds is exempt from state and local taxes and is federally tax deferred until the bonds are cashed in. At that point, the interest may be tax exempt if you use the bond proceeds to pay qualified higher education expenses, provided that your modified adjusted gross income (MAGI) falls in the range set by federal guidelines for your tax filing status, and you meet the other criteria to qualify.

Screen

A screen is a set of criteria against which you measure stocks or other investments to find those that meet your standards. For example, you might screen for stocks that meet a certain environmentally or socially responsible standard, or for those with current price-to-earnings ratios (P/E) less than the current market average. A socially responsible mutual fund describes the screens it uses to select investments in its prospectus.

Second mortgage

A second mortgage is a loan agreement secured by real property that already serves as security for a first, or primary, mortgage. If the borrower defaults, the secondary lender’s claim is junior to the claim of the primary lender. As with a first mortgage, the amount of the loan, minus certain fees, is paid to the borrower as a lump sum and repaid in regular installments over the loan’s term. A second mortgage may also be known as a home equity loan. In contrast, a home equity line of credit allows homeowners to borrow against their equity on a revolving basis, usually accessing money from the line using a check or debit card. Amounts that are repaid may be borrowed again. That’s not the case with an installment loan.

Secondary market

A secondary market is the environment in which investors buy and sell securities through a brokerage account. While the secondary market isn't a place, it includes all of the exchanges, trading rooms, and electronic networks where these transactions take place. The issuer -- company or government -- that sold the security initially receives no proceeds from these trades, as it does when the securities are issued for the first time in what is known as the primary market.

Sector fund

Sector mutual funds concentrate their investments in a single segment of an industry, such as biotechnology, natural resources, utilities, or regional banks, for example. Sector funds tend to be more volatile and erratic than more broadly diversified funds, and often dominate both the top and bottom of annual mutual fund performance charts. That's often the case because a sector that thrives in one economic climate may wither in another one. Sector funds appeal to investors who want to diversify their portfolios and potentially prosper by investing in a section of the economy that seems poised for growth. Using a fund may be preferable to trying to identify the specific companies within a sector that will outperform. Sector funds tend to play a prominent role in a core and satellite investment strategy or for those investors using a strategic allocation approach to portfolio design.

Secured bond

A secured bond is one whose issuer guarantees, or secures, the bond by pledging, or assigning, collateral to investors. If the issuer defaults, the investors may take possession of the collateral. Holders of secured bonds have priority if an issuer misses an interest payment or defaults on repayment of principal.

Secured credit card

A secured credit card is linked to a savings account you open with the bank or other financial institution offering the card. You deposit a sum of money in the account, and you can borrow up to that amount using your card. If you don't repay what you borrowed, the creditor can access your account to cover your debt. The creditor may also change substantial fees for a secured card, which has the effect of limiting actual access to credit. Secured credit cards look the same as other credit cards, so no merchant can identify a card as secured. But if you have trouble qualifying for credit, perhaps because you've just started working, you can use a secured card as a first step toward establishing a record of using credit responsibly. This works, however, only if you use the card responsibly and the issuer reports your use of the card to the national credit reporting agencies.

Secured loan

A secured loan is a loan that's guaranteed with collateral, such as a home or car. If you default and fail to make payments on time, the lender can take possession of your collateral and sell it to recover the loan amount. In most cases, lenders charge a lower interest rate on a secured loan than on an unsecured loan of comparable size. An unsecured loan is guaranteed only by your promise to pay, not by collateral.

Securities Act of 1933

The Securities Act of 1933 requires public companies to register a security with the Securities and Exchange Commission (SEC) and issue a prospectus that discloses all relevant financial information before offering the security for sale to potential investors. The Act also forbids false or misleading claims about the security, deceit, or other fraud. Some small offerings, securities sold only in a single state, US government securities, and private offerings to a limited number of investors are exempt from SEC registration. This act, sometimes described as the truth in securities law, was the first in a series of financial reforms that followed the stock market crash of 1929. It has been amended and expanded from time to time but remains a linchpin of government regulation of securities markets.

Securities and Exchange Commission (SEC)

The Securities and Exchange Commission (SEC) is an independent federal agency that oversees and regulates the securities industry in the United States and enforces securities laws. It defines its mission as protecting investors, maintaining fair and orderly markets, and facilitating the raising of capital. The SEC requires registration of all securities that meet the criteria it sets, and of all individuals and firms who sell those securities. It's also a rule-making body, with a mandate to turn the law into rules that the investment industry can follow. The SEC is led by five commissioners, appointed by the US president, who serve five-year terms. One commissioner is designated by the president and confirmed by Congress as the chairperson. Established by Congress in 1934, the SEC sets standards for disclosure by publicly traded corporations, and works to protect investors from misleading or fraudulent practices, including insider trading. It has five divisions: Corporate Finance, Trading and Markets, Investment Management, Enforcement, and Risk, Strategy, and Financial Innovation.

Securities Exchange Act of 1934

The Securities Exchange Act of 1934 created the Securities and Exchange Commission (SEC) and gave it authority over all areas of the securities industry. The act requires public companies with assets of $10 million or more and 500 or more shareholders to file quarterly and annual 10-K reports. They must also file the proxy materials they must provide to shareholders about issues that will be raised and voted on at annual or special meetings. SEC regulations also govern tender offers, insider trading, and the registration of securities exchanges, broker-dealers, transfer agents, and clearing firms. The SEC also oversees the self-regulatory organizations, such as the Financial Industry Regulatory Authority (FINRA), by reviewing their proposed rules before approving them. This act was expanded by the Securities Act Amendments of 1975.

Securities Investor Protection Corporation (SIPC)

The Securities Investor Protection Corporation (SIPC) is a nonprofit membership corporation created by Congress to insure investors against losses caused by the failure of a brokerage firm. Through SIPC, assets in your brokerage account are insured up to $500,000, including up to $250,000 in cash, but only against losses that result from the brokerage firm going bankrupt, not against losses caused by trading decisions or market declines. Losses greater than those amounts may be covered by funds recovered from the bankrupt firm. All broker-dealers must register with the Securities and Exchange Commission (SEC) and are required to be SIPC members though they can lose their affiliation under certain circumstances. Clients of nonmember firms are not insured. Though SIPC was created by Congress, it is not a government agency.

Securitization

Securitization is the process of pooling various types of debt -- mortgages, car loans, or credit card debt, for example -- and packaging that debt as pass-through securities or collateralized debt obligations (CDOs), for sale to investors. The principal and interest on the debt underlying a security is paid to the investors on a regular basis, though the method varies based on the type of security. Debts backed by mortgages are known as mortgage-backed securities (MBS), while those backed by other types of loans are known generically as asset-backed securities. The loans underlying an MBS may be either retail or commercial.

Security

A security, in traditional usage, was a physical document, such as stock or bond certificate, that represented your investment and gave you an ownership share, a creditor position, or rights to ownership. With the advent of electronic recordkeeping, paper certificates have increasingly been replaced by electronic documentation. In current general usage, the term security refers to the stock, bond, or other investment product itself rather than to evidence of ownership.

Self-directed retirement plan

In a self-directed retirement plan, plan participants select investments for their portfolios from a menu of choices available through the plan. Contributions to the plan go into those investments. Most 401(k), 403(b), 457, and Thrift Savings plans are self-directed. Individual retirement accounts are self-directed, as you choose the way that the assets in the account are invested. Individual retirement annuities are also self-directed if you choose a variable annuity contract. In contrast, if you're part of a defined benefit pension plan, your employer is responsible for making the investment decisions. If you own a fixed annuity, the insurance company makes the investment decisions.

Settlement date

The settlement date is the date by which a securities transaction must be finalized. By that date, the buyer must pay for the securities purchased in the transaction, and the seller must deliver those securities. For stocks, the settlement date is three business days after the trade date, or what's referred to as T+3. For options and government securities, the settlement date is one day, or T+1, after the trade date. In figuring long- and short-term capital gains on your tax return, you use the trade date -- the date you buy or sell a security -- rather than the settlement date as the date of record.

Share

A share is a unit of ownership in a corporation or mutual fund, or an interest in a general or limited partnership. Though the word is sometimes used interchangeably with the word stock, you actually own shares of stock.

Shareholder

A shareholder is an individual or institutional investor who owns stock in a corporation. Shareholders are also known as stockholders. You're considered a majority shareholder if you alone or in combination with other shareholders own more than half the company's outstanding shares, which allows you to control the outcome of a corporate vote. Otherwise, you are considered a minority shareholder. In practice, however, it is possible to control a corporation by owning less than 51% of the shares, especially if there is a large shareholder base or you own shares that carry extra voting power, perhaps because you are a founder.

Shareholder of record

A stock’s shareholder of record is the registered owner of the stock. If you own stock through the direct registration system (DRS) or in certificate form, you are the shareholder of record. When you buy shares that are registered in street name, your name is recorded on your brokerage firm’s books as the beneficial, or actual, owner. However, the shareholder of record is generally Cede & Co., the nominee name of The Depository Trust Company (DTC). Holding securities in street name eases the process of changing ownership since the transfer is handled electronically. You don’t need to sign and deliver certificates to complete a sale. Dividends and other payments are distributed to the shareholder of record, which disburses payment to the beneficial owners of the payee through the brokerage firms where their ownership is registered. If the beneficial owner is the shareholder of record, dividends are paid directly to the owner.

Simple interest

Simple interest is a percentage of principal paid on the principal deposited in a bank or credit union account or lent to another borrower. For example, if you had $1,000 in a bank savings account or certificate of deposit that paid 2% simple interest annually for five years, you'd earn $50 a year ($1,000 x .05 = $50) and have $1,250 at the end of five years. In contrast, if you had been earning compound interest, you'd have $1,276.29 at the end of five years, compounded annually, since the interest you earned each year would have been added your principal to form a new base on which the next year's interest was paid. If the interest compounded more frequency, such as monthly or daily, the difference would be even larger.

Slump

In a slump, investment prices fall. The slump may affect an individual investment as the result of company-specific problems, or it may affect an entire investment market. Often a slump is short-term, but it may also signal a the start of long-term decline.

Small-capitalization stock

Small-capitalization stock, also known as small-cap stock, is issued by relatively small publicly traded corporations with total market capitalization of less than $1.5 billion. That number is not used uniformly, however, and you may find small-cap defined as having assets worth more or less during an extended bull or bear market. Market capitalization is calculated by multiplying the market price per share by the number of outstanding shares. Small-cap stocks, which are tracked by the Russell 2000 Index, tend to be issued by young, potentially fast-growing companies. Over the long term -- though not in every period -- small-cap stocks as a group have produced stronger returns than any other investment category. They tend not to pay dividends. However, small cap prices tend to be more volatile than the prices of larger companies, and small companies may have more difficulty weathering financial downturns because they tend to have fewer reserves, Mutual funds that invest in this type of stock are known as small-cap funds.

Social Security

Social Security is a federal government program designed to provide income for qualifying retired people, their dependents, and disabled people who meet the Social Security test for disability. You qualify for retirement benefits if you have had at least the minimum required payroll tax withheld from your wages for 40 quarters, the equivalent of 10 years. The minimum for each quarter is set by Congress and increases slightly each year. You earn credits toward disability coverage in the same way. The amount you receive in Social Security retirement benefits, up to the annual cap, is determined by the payroll taxes you paid during your working life, which were matched by an equal tax paid by your employers. Some of your benefit may be subject to income tax if your income plus half your benefit is higher than the ceiling Congress sets.

Socially responsible fund

A socially responsible mutual fund, which may also known as a green fund or conscience fund, selects securities that meet its ethical, environmental, religious, or social principles. These principles are spelled out in the fund's prospectus. For example, a socially responsible fund might not buy shares of a manufacturing company that operates factories that fund managers consider sweatshops or it might require any company it invests in to have a strong environmental record. Each of the funds also has an investment objective, such as long-term growth or growth and income, which narrows the universe of investments that it screens for acceptability. The priorities of these funds vary, representing a wide range of positions and beliefs across political and religious spectra.

Speculator

A speculator invests to realize a profit in situations where the outcome is uncertain but the gain could be substantial. For example, you might you might purchase a wheat futures contracts or buy or sell options on that contract because you speculate that volatile weather in wheat-producing regions will drive the price up. In contrast, hedgers buy futures and options to protect their financial interests. For example, a baker who buys a wheat futures contract in order to protect the cost of producing bread is hedging the risk that wheat prices will rise. She's willing to spend a certain amount to protect against a potentially larger loss. Speculators are essential in futures markets because they provide liquidity, which makes it possible for hedgers to hedge. Speculators operate in a variety of markets, including real estate, energy, currencies, and securities, although the role they play elsewhere is not necessarily the same as their role in futures markets.

Spending plan

A spending plan can help you manage your money more effectively, live within your income limits, reduce your reliance on consumer credit, and save for the things you want. You create a spending plan, or budget, by totaling your income and dividing it into categories so that it covers your regular expenses, focusing on essential expenses first. It's important to allocate some income for your emergency fund -- typically about three to six months of living expenses -- and ideally some for your savings and investment accounts. As a starting point, some people use what they spent the previous year to figure out their spending plan for the next year. Whatever method you use, the goal is to spend less than you have coming in, creating a positive cash flow. You may want to check the Bureau of Labor Statistics website (www.bls.gov) for the average nationwide expenditures for housing, food, and other costs. But you may have to modify that information to reflect local costs and your own situation.

Stafford loan

Stafford loans are low-cost federal loans that are available to undergraduate and graduate students while they are enrolled at least half-time in an accredited program. Stafford loans are available directly from the federal government through the Direct Loan Program. Stafford loans may be either subsidized or unsubsidized. If you have a subsidized loan, for which you qualify by demonstrating financial need on the Free Application for Federal Student Aid (FAFSA), the federal government pays the interest that accumulates while you are enrolled at least half-time and for six months following graduation or withdrawal. You do not need to demonstrate financial need to be eligible for an unsubsidized Stafford loan, but you are responsible for all interest that's due on the money you borrow. There are annual and lifetime caps on the amount you can borrow through the Stafford loan program.

Standard & Poor’s 500 Index (S &P 500)

The Standard & Poor's 500 Index, widely referred to as the S &P 500, tracks the performance of 500 widely held large-cap US stocks in the industrial, transportation, utility, and financial sectors. The S &P 500 is the benchmark for large-cap stocks and mutual funds, the underlying index of a variety of widely traded index funds, options and futures contracts, and the original Standard & Poor's Depositary Receipt. In calculating the changing value of this capitalization-weighted index, also called a market value index, stocks with the greatest number of floating shares trading at the highest share prices exert more weight than stocks with lower market value. This can mean that a relatively few stocks have a major impact on the movement of the index at any point in time. The stocks included in the index, their relative weightings, and the number of stocks from each of the sectors vary from time to time, at S &P's discretion.

Start-up

A start-up is a young company. Aggressive start-ups actively court private financing from venture capitalists, including wealthy individuals and private equity partnerships. Some use the cash infusion to prepare for an initial public offering (IPO) while others may be purchased by larger companies seeking to expand their capabilities or reach new markets.

Stock

Stock is an equity investment that represents part ownership in a corporation and may entitle you to voting rights, part of the corporation's earnings, or standing as a creditor in the case of bankruptcy. Common stock gives shareholders voting rights but no guarantee of dividend payments. Preferred stock provides no voting rights but usually guarantees a dividend payment. Preferred stockholders may receive some assets in a bankruptcy but their claim is subordinate to the claims of bondholders. In the past, shareholders received a paper stock certificate -- called a security -- verifying the number of shares they owned. Today, share ownership is usually recorded electronically, and most shares are held in street name on the books of your brokerage firm.

Stock certificate

A stock certificate is a paper document that represents ownership shares in a corporation. In the past, when you bought stock, you got a certificate that listed your name as owner, and showed the number of shares and other relevant information. When you sold the stock, you endorsed the certificate and sent it to your broker. Stock certificates have been phased out, however, and replaced by electronic records. That means you don't have to safeguard the certificates, and can sell shares by giving an order over the phone or online. The chief objection that's been raised to the new system is largely nostalgic and aesthetic, since the certificates, with their finely engraved borders and images, are distinctive and often beautiful.

Stock exchange

A stock exchange is an organized secondary market where publicly traded stocks and other investments are bought and sold. Because an exchange provides liquidity, transactions can be handled quickly, although not necessarily at the price the buyer or seller seeks. Stock exchanges have listing requirements, which companies must meet to list their securities. The requirements vary by exchange. In the United States, stock exchanges must be registered with the Securities and Exchange Commission (SEC) and are regulated by a self-regulatory organization (SRO). Most countries with a developed or developing market-based economy have a stock exchange, most of them totally electronic. They vary in size, liquidity, and efficiency. Sophisticated exchanges keep detailed records of transactions, so that buyers and sellers can be confident of receiving either the securities they bought or the payment to which they are entitled. The New York Stock Exchange (NYSE), which is owned by NYSE Euronext, is the world’s largest stock exchange as measured by the market capitalization of its listed companies. It is well known for its trading floor, where floorbrokers execute orders using a double auction system. However, most trades on the NYSE are now conducted electronically. The Nasdaq, the world’s first totally electronic exchange, is the other major US stock exchange.

Stock market

A stock market is an organized environment where brokers and traders buy and sell stocks. The market may be a physical place, sometimes known as a stock exchange, but also includes the computer and mobile phone networks where electronic trading takes place. In fact, in most stock markets around the world, all stock trading is handled electronically.

Stock option

A stock option, or equity option, is a contract that gives its buyer the right to buy or sell a specific stock at a preset price during a certain time period. The exact terms are spelled out in the contract. The same contract obligates the seller, also known as the writer, to meet its terms to buy or sell the stock if the option is exercised. If an option isn't exercised within the set period, it expires. The buyer pays the seller a premium for the privilege of having the right to exercise, and the seller keeps that premium whether or not the option is exercised. The buyer has the right to sell the contract at any point before expiration, and might choose to sell if the sale provides a profit. The seller has the right to buy an offsetting contract at any time before expiration, ending the obligation to meet the contract's terms. Stock options are also a form of employee compensation that gives employees -- often corporate executives -- the right to buy shares in the company at a specific price known as the strike price. If the stock price rises, and an employee has a substantial number of options, the rewards can be extremely handsome. However, if the stock price falls, the options can be worthless. Often, there are time limits governing when employees can exercise their options and when they can sell the stock. These options, unlike equity options, can't be traded among investors.

Straight life

A straight life insurance policy is a type of permanent insurance that provides a guaranteed death benefit and has fixed premiums. This traditional life insurance is sometimes also known as whole life insurance or cash value insurance. With a straight life policy, a portion of your premium pays for the insurance and the rest accumulates tax deferred in a cash value account. You may be able to borrow against the cash value, but any amount that you haven't repaid when you die reduces the death benefit. If you end the policy, you get the cash surrender value back, which is the cash value minus fees and expenses. However, ending the policy means you no longer have life insurance and no death benefit will be paid at your death.

Street name

Stock held street name is held by The Depository Trust Company (DTC) and registered in its nominee name, Cede & Co., rather than in the name of the actual, or beneficial, owner. The beneficial owner still receives dividends that the stock issuer pays and proxy materials to vote on corporate matters. The advantage of having stocks registered in street name is that the shares are secure and can be traded easily though DTC’s electronic book-entry system. When stock is held in street name, you don't have to sign and deliver the stock certificates before a sale can be completed. Neither must you have stock that's registered in your name on the books of the issuer or the issuer's agent transferred to a broker for sale. There's an advantage from your broker-dealer's perspective as well, since stocks held in street name can be used to complete a trade or in other transactions, subject to regulatory limits.

Subprime loan

Subprime loans are made to borrowers who would not ordinarily qualify for credit if customary underwriting standards were applied. To offset the increased risk that these borrowers might default, lenders charge higher interest rates than they offer to creditworthy borrowers and assess additional fees. While subprime rates vary from lender to lender, the Federal Reserve defines a subprime loan as one that carries an interest rate at least three percentage points higher than the rate on a US Treasury bond that has the same term as the loan. Subprime loans may provide credit to responsible people who may not have a strong credit history. However, subprime lending practices can be abusive or predatory, trapping unsophisticated borrowers in a cycle of debt while providing initially large profits for the lender. Subprime loans can be securitized and sold to investors as pass-through securities or in more complex packages such as collateralized debt obligations (CDOs). Institutional buyers purchase these products for the promise of higher than average returns despite the greater risk of default. The consequences of granting and securitizing subprime loans were a primary factor in the financial crisis and recession that began in 2007.

Subsidized Stafford loan

Subsidized Stafford loans are available to undergraduate and graduate students who demonstrate financial need by completing the Free Application for Federal Student Aid (FAFSA). The loans are made directly by the federal government through the Direct Loan program. The federal government pays the interest that accumulates on these loans while you are enrolled in an accredited program at least half-time and when repayment has been deferred. The government also covers the interest that accrues during the six-month grace period after graduation for loans issued before July 1, 2012. You are responsible for the interest if you are no longer enrolled at least half-time, during the grace period for loans issued after July 1, 2012, and after the repayment period begins.

Synthetic put

You create a synthetic put by purchasing a call option on a stock you have sold short. The call protects you in case the price of the stock rises instead of falls. If the price falls as you expect, you let the option expire, repurchase the stock at its lower price, and return it to your broker. Your cost is the price of the premium, any short interest, and transaction costs. But if the price rises, you exercise the put and use those shares to close out your short position. The goal is to break even despite the premium and any short interest. Buying a call on a shorted stock provides the same price protection as buying a put, which gives you the right to sell stock at a strike price that's higher than its market price if it should decline in value. That's why this tactic is described as synthetic.

Systemic risk

Systemic risk, also called market risk, is risk that's characteristic of an entire market, a specific asset class, or a portfolio invested in that asset class. It's the opposite of the risk posed by individual securities in a class or portfolio, also known as nonsystemic risk. The predictable impact that rising interest rates have on the prices of previously issued bonds is one example of systemic risk. Systemic risk also describes a situation in which the failure of one or more major institutions threatens the stability of the system as a whole. Actions the federal government took in response to the credit crisis of 2008 were described as efforts to avert a collapse of the financial system.

Target date fund

A target date fund is a fund of funds that allows you to invest in a portfolio with a particular time horizon, typically your expected retirement date. In fact, each target date fund characteristically has a date in its name, such as Fund 2015, Fund 2020, Fund 2025, or Fund 20030, and so on. You choose one whose date is closest to the date you plan to retire. However, the investing option known as a age-based track in a 529 college savings plan is essentially a target date fund with a different name. A target date fund aiming at a date in the somewhat distant future tends to have a fairly aggressive asset allocation, with a focus on equity funds. As the target date approaches, the fund is reallocated to become more conservative to preserve the assets that have accumulated and provide income. The pace of that reallocation is known as the fund's glide path. Each fund company's glide path, which is based in part on its approach to risk, differs somewhat from the glide paths of similar funds, so that the allocation of one Fund 2025 may be noticeably different from the allocation of a Fund 2025 from a different company. For example, some funds remain more heavily invested in equities at maturity than others. No fund promises you will accumulate the assets you need by the date in the fund's name. You can find model portfolios and statements of investment strategy in a target date fund's prospectus. Each mutual fund company that offers target date funds tends to offer a series, with dates five or ten years apart. Most companies populate their funds of funds with individual funds from their fund family, though some companies add mutual funds or exchange traded funds from other investment companies. Like other funds of funds, the fees you pay for a target date fund may be higher than you would pay to own each of the individual funds separately. However, these fees pay for an additional level of professional oversight.

Tax avoidance

Tax avoidance is the strategy whose goal is to allow you to pay the least amount of tax you are legally required to pay. It’s perfectly legal and totally legitimate. You avoid taxes by taking advantage of all of the tax-saving aspects of the Internal Revenue Code (IRC) and comparable state codes. These include, but aren’t limited to, claiming all the adjustments to income, deductions, and credits to which you are entitled, making tax-deferred or tax-exempt investments or investments whose earnings are taxed at a lower rate, making nontaxable gifts, including those to individuals and charities, creating trusts, and planning your estate.

Tax basis

Your tax basis in a security is the amount you paid for the asset plus any commission. You use the basis to calculate capital gain or loss when you sell. Your tax basis in a real estate investment is the purchase price plus commission, plus the cost of improvements -- though not routine maintenance -- over the period you own the property. In this case, too, the basis is used to calculate capital gain or loss.

Tax bracket

A tax bracket is a range of income, with an lower and upper dollar amount, that is taxed at a specific rate. In the United States there are six brackets, and the income that falls into each higher bracket is taxed at a higher rate, ranging from 10% to 35%, although single filers with an adjusted gross income (AGI) of $400,000 and married couples filing a joint return who have an AGI of $450,000 will pay a 39.6% rate on some income. For example, if your taxable income was high enough to cross three brackets, you'd pay tax at the 10% rate on income in the lowest bracket, at the 15% rate on income in the next bracket, and at the 25% rate on the rest. The rate that applies to each bracket remains fixed until Congress changes it, but the dollar amounts in each bracket typically increase slightly each year to reflect the impact of inflation. In addition, the income that falls into each bracket varies by filing status, so that if you file as a single taxpayer you may fall into more brackets than a married couple with the same taxable income filing a joint return.

Tax credit

A tax credit is an amount you can subtract from the income tax you would otherwise owe. Unlike a deduction or exemption, a credit is a dollar-for-dollar reduction of your tax bill. For example, if you pay someone to care for your young children or for elderly or disabled relatives, you may qualify, based on your adjusted gross income (AGI), for a credit that allows to to subtract some of those expenses, up to a set limit. Among the other tax credits for which you may qualify are two education-related credits, the American Opportunity Credit (AOC), which replaces the Hope scholarship credit, and Lifetime Learning credit. Both have AGI eligibility limits and dollar limits. There are also credits for purchasing a hybrid car, adopting a child, and a range of others. The list changes from time to time, as do the eligibility requirements and dollar amounts. The earned income tax credit is available only to people whose income is less than the ceilings Congress sets and who meet other criteria. Some credits are available only to the extent that they reduce the tax you owe. Other credits are refundable, which means if the tax you owe is wiped out by the credit any remaining credit will be paid to you as if you were receiving a tax refund.

Tax deferred

Tax deferred means that any tax that may be due is postponed until a later date. For example, a tax-deferred retirement savings account, such as a traditional 401(k) or 403(b), allows you to postpone income tax that would otherwise be due on employment income you contribute to the account and any earnings on those contributions until some point in the future. Then tax is due on amounts you withdraw, at the same rate you pay on your regular income. The balance remaining in the account continues to be tax deferred. A big advantage of tax deferral is that earnings may compound more quickly, since no money is being taken out of the account to pay taxes. But in return for postponing taxes, you agree to limited access to your money before you reach 59 1/2.

Tax evasion

Tax evasion is the deliberate and illegal act of not paying the taxes you owe. The term is used most often in conjunction with federal or state income taxes, though other taxes may be involved. If income tax evasion is discovered, you face both criminal and civil charges in addition to the back taxes plus penalties that you owe. Conviction can mean serving prison time. There are a number of ways to evade taxes, from very sophisticated tax shelters to simply understating what you earned or overstating your deductions.

Tax exempt

Some investments are tax exempt, which means you don't have to pay income tax on the earnings they produce. For example, the interest you receive on a municipal bond is generally exempt from federal income tax, and also exempt from state and local income tax if you live in the state where the bond was issued. However, if you sell the bond before maturity, any capital gain is taxable. Similarly, distributions from bond mutual funds that invest in municipal bonds are exempt from federal income tax. And for residents of the issuing state for single-state funds, the distributions are also exempt from state and local taxes. Capital gains distributions on these funds are taxable. Earnings in a Roth IRA and a Roth 401(k), 403(b) and 457 plan are tax exempt when you withdraw them, provided your account has been open for five years or more and you're at least 59 1/2. And earnings in 529 college savings plans and Coverdell education savings accounts (ESAs) are also tax exempt if the money is used to pay qualified education expenses. When an organization such as a religious, educational, or charitable institution, or other nonprofit group, is tax exempt, it does not owe tax of any kind to federal, state, and local governments. In addition, you can take an income tax deduction for gifts you make to such organizations.

Tax refund

A tax refund is the amount you are repaid if more income tax has been withheld than the amount you actually owe after calculating all the deductions and credits to which you are entitled. Tax refunds may occur inadvertently, but are sometimes planned for, by deliberately increasing withholding to ensure a refund. This strategy can be self-defeating because you earn no interest on the amounts that are refunded.

Tax return

Tax return is a document you file with the Internal Revenue Service (IRS) to report your federal income taxes. You also file a tax return with your state if the state imposes income taxes. The IRS provides standard forms which you can send by mail or you can file your return electronically, which the IRS prefers. Federal individual tax returns are due April 15 or the first business day after that date if it falls on a Saturday or Sunday. You can arrange an automatic six-month extension if you are unable to complete your return on time. But any tax you owe is due on April 15.

Tax-efficient fund

A tax-efficient mutual fund minimizes its income earnings and capital gains to reduce the distributions it makes to its shareholders. In general, the smaller a fund's turnover, or the less buying and selling it does, the more tax efficient it has the potential to be. That's one reason why index funds, which buy and sell investments only when the composition of the index they track changes, are generally tax efficient. In addition to reducing turnover, actively managed funds may increase tax efficiency by emphasizing investments expected to grow in value over those that produce current taxable income. Some funds may postpone the sale of certain investments until they qualify as long-term capital gains, making them subject to a lower tax rate. Funds that emphasize tax efficiency generally include that goal in their statement of investment objectives.

Teaser rate

A teaser rate is a promotional interest rate on a credit card or an adjustable rate mortgage (ARM) that's lower than the current market rate. The lender must tell you how long the teaser rate will last and what the real cost of borrowing will be at the end of the introductory period. The Credit CARD Act of 2009 requires that any credit card promotional rate lasts at six months.

Term

A term is the length of time between when a fixed-income security, such as a bond or note, is offered for sale and its maturity date. When the term ends, the issuer repays the par value of the security, often along with the final interest payment. In general, the longer the term, the higher the rate of interest the investment pays, to offset the increased risk of tying up your money for a longer period of time. Term is also the lifespan of a certificate of deposit (CD), called a time deposit. If you hold a bank CD for its entire term, which may run from six months to five years, you collect the full amount of interest the CD has paid during the term and are free to roll the principal into a new CD or use the money for something else.

Term insurance

A term life insurance policy provides a guaranteed death benefit for a set period of time, such as five, ten, or 20 years, provided you continue to pay the premiums as they are due. At the end of the term, the coverage ends unless you renew the policy or switch to another one. Term life insurance policies have either a level term, which means that the annual premium remains the same for the life of the policy, or a graduated term, which means that the premium is smaller in the early years and grows larger each year. In most cases, level term policies cost less if you keep the policy in force for the entire term. Term policies don't accumulate a cash value, so you get nothing back if you end your coverage before the end of the term. However, term insurance may be less expensive than a permanent policy providing the same coverage, although the cost of renewal policies to extend coverage for an additional term increases as you get older.

Thrift savings plan (TSP)

The thrift savings plan (TSP) is a tax-deferred retirement savings plan for federal government employees. Employees choose whether or not to participate and how much to contribute, up to the annual limit. That amount is the same as the limit for 401(k)s and similar plans. If you're 50 or older, you can also make annual catch-up contributions. The retirement income an account provides depends on how much was contributed and how those contributions were invested. The TSP offers several investment choices -- five index funds, a target date fund that invests in those five funds, and a 401(k) alternative. There are actually three components of the plan, two for civilians and one for members of the military. The differences among them are primarily the role the TSP plays in the employee's total retirement package and the matching contributions that are made.

Ticker symbol

A ticker symbol is a unique string of letters that identifies a particular stock on one of two electronic tapes that report market transactions. The consolidated tape includes companies that trade on the New York Stock Exchange (NYSE), NYSE Amex, regional exchanges, and other markets. A second tape includes companies that trade on the Nasdaq Stock Market. Most corporations have a say in what their symbol will be, and many choose one that's clearly linked to their name, such as IBM or AMZN for Amazon.com. However, the ticker symbol may not be identical with the trading symbol used to identify the stock in buy and sell transactions. Various letters may be added to a ticker symbol to indicate where the trade took place or that there was something atypical about the transaction. For example, IBM.Pr would indicate that the trade involved preferred stock.

Time deposit

A time deposit is a bank or credit union account, such as a certificate of deposit (CD), that matures at the end of a fixed term. Time deposits may pay interest at a higher rate than transaction accounts, such as checking accounts or demand deposit accounts such as money market accounts. If you withdraw from a time deposit account before the term ends, there may be a penalty -- typically lost interest, and sometimes all the interest that has been credited to your account.

Time value of money

The time value of money is money's potential to grow in value over time. Because of this potential, money that's available to invest in the present is considered more valuable than the same amount in the future. For example, if you invested $100 at an annual rate of just 1%, it could be worth $101 at the end of one year, which is more than you'd have if you received $100 at that point. Because of money's potential to increase in value over time, you can calculate how much you need to invest now to meet a certain future goal. Many financial websites and personal investment handbooks help you identify the required amounts, assuming different average annualized rates of return. Inflation has the reverse effect on the value of money. Because inflation reduces purchasing power, an uninvested dollar is worth more in the present than that dollar will be worth in the future.

Title

A title is a legal document proving ownership of a piece of property. If you are buying real estate you authorize a title search, or examination of property records, to insure that the seller holds the title and has the right to transfer it. In most cases, if you're taking a mortgage to buy the property, the lender will require you to arrange title insurance to protect its interest until the full amount of the loan has been repaid. You may also arrange for your own title insurance to protect you from losing your property if your ownership is successfully contested.

Total return

Total return is the annual gain or loss on an equity or debt investment, including dividends or interest, plus any change in its market value. When total return is expressed as a percentage, it's figured by dividing the increase or decrease in value, plus dividends or interest, by the original purchase price. It may be either positive or negative. On bonds you hold to maturity, however, your total return is the same as your yield to maturity (YTM). Calculating total return is more complex if your earnings have been reinvested, as they often are in a mutual fund, to buy more shares. Fund companies do calculate total return on a regular basis, although your individual total return on the fund may differ from the official tally depending, among other things, on when you bought and sold shares.

Trade

In investing, a trade is a transaction in which you buy or sell a security or other investment product. You may pay a commission for each trade, an asset-based fee that includes the cost of your trades, or some other sales charge based on the way the trade is handled. The trade is finalized, or settled, if the information on price and size provided by each side of the trade match, or agree. The settlement schedule is determined by the type of security being traded.

Trade date

The trade date is the day on which you buy or sell a security, option, or futures contract. The settlement date, on which cash and securities are delivered, occurs one or more days after the trade date, depending on the type of security that you're trading. Options, futures contracts, and US government securities settle on T+1, or one business day after the trade date. Stocks and corporate and municipal bonds settle on T+3, or three business days after the trade.

Trader

Traders who are dealers or market makers select the securities in which they will specialize and provide quotes on those securities in the marketplace. They commit their firm's capital by taking positions in those securities and are ready to buy and sell at the prices they quote. Traders known as competitive or floor traders buy and sell securities for their own accounts. They don't pay commissions, so they can profit on small differences in price, but they must abide by the rules established by the exchange or market on which they trade. The term trader also describes people who execute transactions at brokerage firms, asset management firms, and mutual fund companies.

Transparency

Transparency is a measure of how much information you have about the markets where you invest, the corporations whose stocks or bonds you buy, or the mutual funds or other investments you select. For example, in order to achieve maximum transparency in US markets, the Securities and Exchange Commission (SEC) requires corporations to disclose all information that might have an impact on their financial status so that investors can make informed decisions. However, evidence suggests that certain now-bankrupt corporations did not fully comply with that mandate. Real-time trading information, increasingly available to individuals as well as institutional investors, and linked pricing systems are other steps toward complete transparency.

Treasury Direct

Treasury Direct is a online investment system, offered through the US Department of the Treasury, that enables competitive or noncompetitive bids for new US Treasury issues and purchases of US savings bonds. Once you open a Treasury Direct account, you can buy, sell, or roll over your investments electronically. Interest paid on your investments, and the value of any securities you redeem at maturity or by sale, are deposited directly into the bank account you designate.

Trust

A trust is a legal entity through which a trustee holds title to assets on behalf of a beneficiary or beneficiaries. The trustee has a fiduciary obligation to manage the assets in the best interests of the beneficiary and distribute those assets according to the instructions provided in the trust document, or agreement, that established the trust. When you establish a trust, you are the grantor or donor, and you name the people or institutions who are its beneficiaries. You also designate the trustee or trustees. In some cases the grantor may also be a trustee. There are many types of trusts. You must choose one that's appropriate for achieving your specific financial goal or goals. Those goals may include protecting assets from estate taxes, simplifying the transfer of property, or making provision for a minor or other dependents. Trusts you establish while you are still alive are called living or inter vivos trusts, and those that are established in your will are called testamentary trusts. Trusts that can be modified by the grantor are revocable trusts, while those that can't be modified are irrevocable trusts.

Trustee

A trustee is a person or institution appointed to hold and manage assets for someone else's benefit. For example, a trustee may be responsible for money you have transferred to a trust, or money in certain retirement accounts. Trustees are entitled to collect a fee for their work, often a percentage of the value of the amount in trust. In turn, they are responsible for managing the assets in the best interests of the beneficiary of the trust. That's known as fiduciary responsibility.

Truth-in-Lending Act

The Truth-in-Lending Act requires every lender to provide a complete and clear disclosure of the key terms of any lending or leasing arrangement, plus a statement of all costs, before the agreement is finalized. The statement must include the finance charges stated in dollars and as an annual percentage rate (APR). For most loans, it must also include the total of the principal amount being financed, all the interest, fees, service charges, points, credit-related insurance premiums, payment due date and terms, and any other charges. The consumer lending section of the Act, which was first passed in 1968 and then simplified and reformed in 1980, is also known as Regulation Z. The consumer leasing section is known as Regulation M.

Underlying investments

Underlying investments are the investments that a mutual fund, a variable annuity's separate account fund, or other fund makes holds in its portfolio. The value of a single share or unit of the fund is based on the combined value of all its underlying investments, minus fees and expenses, divided by the number of outstanding shares or units. The fund selects its underlying investments to help it meet its financial objective. Actively managed funds may turnover their portfolio regularly, but an index fund changes its underlying investments only when the components of the index it tracks are updated. In some cases, when the item underlying a derivative investment is a security, such as the individual stock underlying an equity options contract, it is also called an underlying investment.

Underwater

The term underwater is used to describe a number of financial situations created when an asset has lost value. You are underwater if you owe more on a loan secured by a home or other real estate than the current market value of the property. A stock option is underwater when it is out-of-the-money and has no intrinsic value. If your employee stock options are out-of-the-money and so currently worthless, you are underwater on the options. For example, if you have options to buy your company stock at a strike price of $50, and the stock is currently trading at $30, you're $20 underwater on each option. The term underwater is also used to describe situations where the principals are unable to meet their financial obligations. For example, if an investor is unable to meet margin calls on a margin account that has lost a considerable amount of money, the account is said to be underwater. Similarly a firm that is having financial difficulty is described as underwater.

Unrealized gain

Unrealized gain is an increase in the investment value of an asset that you still own to a price that's higher than the price at which you acquired it. The gain remains unrealized unless you sell. In most cases, the value continues to change as long as you own the asset, either increasing your unrealized gain or creating an unrealized loss. You owe no income or capital gains tax on unrealized gains, sometimes known as paper profits, though you typically compute the value of your investment portfolio based on current -- and unrealized -- values.

Unrealized loss

Unrealized loss is a decrease in the investment value of an asset you still own to a price that's below the price at which you acquired it. The loss remains unrealized as long as you don't sell the security while the price is down. In a volatile market, an unrealized loss can become an unrealized gain, and the other way around, at any time. One reason you might choose to sell at a loss, other than needing cash at that moment, is to prevent further losses in a security that seems headed for a still-lower price. You might also sell to create a capital loss, which you could use to offset capital gains.

Unsubsidized Stafford loan

Unsubsidized Stafford loans are education loans backed by the US government that are available to undergraduate and graduate students who complete the Free Application for Federal Student Aid (FAFSA). To qualify for an unsubsidized loan, which is available through the federal Direct Loan Program, you do not need to demonstrate financial need. As the borrower, you are responsible for the interest that accumulates on these loans while you are enrolled in an accredited program, during the six-month grace period before repayment begins, or any time repayment has been deferred. You can pay the interest as it is due or have it capitalized and included in the total you repay after you graduate or are no longer enrolled at least half-time.

US savings bond

The US government issues two types of savings bonds: Series EE and Series I. You buy electronic Series EE bonds through a Treasury Direct account for face value and earn a fixed rate of interest for a 30-year term. They are guaranteed to double in value in 20 years. Series I bonds are sold at face value and earn a real rate of return that's guaranteed to exceed the rate of inflation during the term of the bond. Series EE bonds issued before May 2005 earn interest at variable rates set twice a year. Existing Series HH bonds earn interest to maturity, but no new Series HH bonds are being issued. The biggest difference between savings bonds and US Treasury issues is that there's no secondary market for savings bonds since they cannot be traded among investors. You buy them in your own name or as a gift for someone else and redeem them at maturity. The interest on US savings bonds is exempt from state and local taxes and is federally tax deferred until the bonds are cashed in. At that point, the interest may be tax exempt if you use the bond proceeds to pay qualified higher education expenses, provided that your adjusted gross income (AGI) falls in the range set by federal guidelines and you meet the other conditions to qualify.

US Treasury bill (T-bill)

US Treasury bills are the shortest-term government debt securities. They are issued with a maturity date of 4, 13, 26, or 52 weeks. The par value is $100, which is also the minimum purchase. The interest a T-bill pays is the difference between the purchase price and par value, which is repaid at maturity. The bills are sold weekly by competitive auction to institutional investors, and to noncompetitive bidders through TreasuryDirect for the same price paid by the competitive bidders. Noncompetitive bidders can purchase up to $5 million in bills in a single auction. T-bills are described as risk-free investments. Because they are backed by the full faith and credit of the US government, they pose virtually no credit risk. And, because their terms are so short, they pose little or no inflation risk. However, if you sell before a T-bill's term expires you might realize less than you paid to purchase the bill. You would also pay fees on the transaction. T-bill interest is federally taxable but exempt from state and local taxes.

US Treasury bond

US Treasury bonds are long-term government debt securities with 30-year terms. These bonds are considered among the world's most secure investments since they are backed by the full faith and credit of the US government New bonds, with a par value of $100, are sold periodically at auction. Institutional investors make competitive bids and individual buyers may invest up to $5 million per issue. They pay the price determined by the auction. Existing bonds trade in the secondary market at prices that fluctuate to reflect changing demand. These bonds, sometimes referred to as long bonds, are considered a benchmark for market interest rates. While interest on US Treasury bonds is federally taxable, it is exempt from state and local taxes.

US Treasury note

US Treasury notes are intermediate-term debt securities issued at par value of $100 with terms of two, three, five, seven, or ten years. The notes are available at issue by competitive auction for institutional investors and through TreasuryDirect for individuals, who pay the same price as competitive bidders. Individuals can purchase up to $5 million in notes at a single auction. After issue, the notes trade in the secondary market, where their market value fluctuates to reflect demand. Vulnerability to Inflation risk is somewhat greater than with US Treasury bills, but not as great as with long-term bonds. Like other US Treasury issues, the notes are backed by the full faith and credit of the US government. The interest is exempt from state and local, but not federal, taxes.

Venture capital (VC)

Venture capital is financing provided by wealthy independent investors, banks, and partnerships to help new businesses get started, reach the next level of growth, or go public. In return for the money they put up, also called risk capital, the investors may play a role in the company's management as well as receive some combination of equity, profits, or royalties. Some venture capital also goes into bankrupt companies to help them turn around, or to companies that the management wants to take private by buying up all the outstanding shares.

Vesting

Vesting gives you the right to contributions your employer made on your behalf to an employer pension plan or an employer-sponsored retirement plan, such as a 401(k). You become fully vested -- or entitled to the contributions your employer has made to the plan, including matching and discretionary contributions -- after a certain period of service with the employer. Qualified plans must use one of the standards set by the federal government to determine that period, a maximum of seven years in a defined benefit plan and six years in a defined contribution plan. If you become entitled to full benefits gradually over several years, the process is called graded vesting. But if you have are entitled only when the full waiting period is up, the process is called cliff vesting. If you leave your job before becoming fully vested, you forfeit all or part of your employer-paid benefits. However, you are always entitled to all the contributions you make to a retirement plan yourself through salary reduction or after-tax payments.

Volatility

Volatility indicates how much and how quickly the value of an investment, market, or market sector changes. For example, because the stock prices of small, newer companies tend to rise and fall more sharply over short periods of time than stock of established, blue-chip companies, small caps are described as more volatile. The volatility of a stock relative to the overall market is known as its beta, and the volatility triggered by internal factors, regardless of the market, is known as a stock's alpha. The standard deviation of a stock's return, or the percentage by which it varies from its average, or mean, return, is also a measure of volatility.

Whole life insurance

A whole life insurance policy is a type of permanent insurance that provides a guaranteed death benefit and has fixed premiums. This traditional life insurance is sometimes also known as straight life insurance or cash value insurance. With a whole life policy, a portion of your premium pays for the insurance and the rest accumulates tax deferred in a cash value account. You may be able to borrow against the cash value, but any amount that you haven't repaid when you die reduces the death benefit. If you end the policy, you get the cash surrender value back, which is the cash value minus fees and expenses. However, ending the policy means you no longer have life insurance and no death benefit will be paid at your death.

Will

A will is a legal document you use to transfer assets you have accumulated during your lifetime to the people and institutions you want to have them after your death. The will also names an executor -- the person or people who will carry out your wishes. You can leave your assets directly to your heirs, or you can use your will to establish one or more trusts to receive the assets and distribute them at some point in the future. The danger of dying without a will is that a court in the state where you live will decide what happens to your assets. Its decision may not be what you would have chosen, and its deliberations can be costly and delay settling your estate.

Withdrawal

A withdrawal is money you take out of your banking, brokerage firm, or other accounts. If you withdraw from tax-deferred retirement accounts before you turn 59 1/2, you may owe a 10% early withdrawal penalty plus any income tax that's due on the amount you've taken out. In everyday usage, the term withdrawal is used interchangeably with distribution to describe money you take from your tax-deferred accounts, though distribution is actually the correct term.

Withholding

Withholding is the amount that employers subtract from their employees' gross pay for a variety of taxes and benefits, including Social Security and Medicare taxes, federal and state income taxes, health insurance premiums, retirement savings, education savings, or flexible spending plan contributions, union dues, or prepaid transportation. Contributions to tax-deferred savings plans are withheld from your pretax income, as are amounts you put into tax-free flexible spending and prepaid transportation accounts. Those amounts reduce the taxable salary that your employer reports to the IRS.

Workers' compensation

Workers’ compensation is insurance to cover employees who are injured or disabled as the result of doing their jobs or who contract a work-related illness. It replaces wages and provides healthcare coverage and rehabilitation services for qualifying applicants. Dependents of disabled workers and those who die on the job are also eligible for benefits. Each state administers its own workers' compensation insurance program, and some state programs are more comprehensive than others. In most states, for example, all employers are required to have workers compensation coverage or be approved to self-insure. In some states, employers can’t require employees to contribute to the cost of this insurance. Some state laws require that, in return for the compensation, a worker gives up the right to sue for negligence of the employer or fellow workers in most cases. There is also a federal workers’ compensation system, administered by the US Department of Labor, for federal employees and workers in certain specific occupations.

World Bank

The World Bank, formally known as the International Bank for Reconstruction and Development (IBRD), was established in 1944 to aid Europe and Asia after the devastation of World War II. To fulfill its current roles of providing financing for developing countries and making interest-free and low-interest long-term loans to developing nations and those with financial difficulties, the World Bank raises money by issuing bonds to individuals, institutions, and governments in more than 100 countries.

World fund

US-based mutual funds that invest in securities from a number of countries, including the United States, are known as world funds or global funds. Unlike international funds that buy only in overseas markets, world funds may keep as much as 75% of their investment portfolio in US stocks or bonds. Because world fund managers can choose from many markets, they are often able to invest in those companies providing the strongest performance in any given period.

Year-to-date (YTD)

Year-to-date (YTD) describes the period beginning January 1 of the current year and ending with the current date. YTD figures are used to evaluate the returns an investment has generated during the current year.

Yield

Yield is the rate of return on an investment expressed as a percent. Yield is usually calculated by dividing the amount you receive annually in dividends or interest by the amount you spent to buy the investment. In the case of stocks, yield is the dividend you receive per share divided by the stock's price per share. With bonds, it is the interest divided by the price you paid. Current yield, in contrast, is the interest or dividends divided by the current market price. In the case of bonds, the yield on your investment and the interest rate your investment pays are sometimes, but by no means always, the same. If the price you pay for a bond is higher or lower than par, the yield will be different from the interest rate. For example, if you pay $950 for a bond with a par value of $1,000 that pays 6% interest, or $60 a year, your yield is 6.3% ($60 ÷ $950 = 0.0631). But if you paid $1,100 for the same bond, your yield would be only 5.5% ($60 ÷ $1,100 = 0.0545).

Yield to maturity (YTM)

Yield to maturity is the most precise measure of a bond's anticipated return and determines its current market price. YTM takes into account the coupon rate and the current interest rate in relation to the price, the purchase or discount price in relation to the par value, and the years remaining until the bond matures.