A
Active management: Ongoing supervision of a portfolio and its holdings to achieve maximum results. Active management is one of the main benefits of investing in a mutual fund.
Advisor (Adviser): 1. Person or company responsible for making mutual fund investments. 2. Organization employed by a mutual fund to give professional advice on the fund's investments and asset management practices. Also known as investment advisor.
Aggressive growth funds: Mutual funds that strive for maximum growth as the primary objective. Aggressive growth funds usually include funds that invest in smaller companies, funds that invest heavily in a single industry, and funds that employ riskier investment techniques such as leveraging and short selling.
Alpha: A calculation of the theoretical return achieved by a fund. Alpha is a risk-adjusted measure of return. It is calculated by measuring the growth of a fund with its beta (volatility).
American Depository Receipt (ADR): Receipt held on deposit in the US for shares of foreign-based corporations. ADRs are traded on various US-based exchanges.
Annual report: The yearly record of a mutual fund's performance which is distributed to share holders. The report contains information about the fund's earnings and operations. Reports may also come semi-annually or quarterly.
Annual return: The percentage of change in a mutual fund's net asset value over a year's time, factoring in income dividend payments, capital gains, and reinvestment of these distributions.
Annualization: A method by which different annual rates or short term returns may be compared.
Application form: The form that must be completed and sent through the mail when purchasing shares of a mutual fund. The application is usually within the prospectus. It is essential to complete all the information.
Appreciation: The increased value of one asset held by the mutual fund, or by the total assets held by the mutual fund over a period of time.
Asian funds: A fund that invests primarily in the stocks of companies located in Asia. These funds appeal to investors who believe that Asia potentially represents a growth area, and want to capitalize on that growth.
Ask price: Also known as the offering price, the ask price is the amount at which a mutual fund's shares can be purchased. To calculate the ask price, add a fund's current net asset value per share to its sales charge, if any.
Asset allocation: A system or method of investing that distributes assets to a broad array of investments.
Asset allocation fund: A fund that invests in a variety of asset classes, including domestic and foreign stocks and bonds, money market instruments, precious metals, and real estate. Some asset allocation funds maintain a relatively fixed allocation between asset classes, while others actively alter the mix as market conditions change.
Assets: A fund's investment holdings and cash. Holdings can include stocks, rights, warrants, options, bonds, CDs, RANs TANs and BANs.
Automatic investment: A service that allows the periodic withdrawal of a specified amount from the investor's bank account to be invested in his or her mutual fund account. Some mutual fund groups also offer this service as a payroll deduction plan. (See also "dollar cost averaging.")
Average annual total return: A standard measurement of fund performance that includes dividends, gains, and changes in share price.
B
Back end load: One of three possible sales charge schedules imposed by funds that charge fees. A back end load, or "deferred sales charge," is a fee charged when fund's shares are sold. The amount of the fee usually varies depending on how long the investment is held--generally the longer the time period, the smaller the fee. Funds sold under several sales charge options usually refer to the shares sold with a back end load as class B shares.
Balanced fund: A fund with an investment objective of both long-term growth and income, through investment in both stocks and bonds. Typically, the stock/bond ratio ranges around 60%/40%. This broader diversification across asset classes makes balanced funds lower risk than equity-only funds, but will not perform as well as equity-only funds in a bull market.
Basis point (BP): The smallest measure used in quoting yields and interest rate movements on fixed income securities. One basis point equals one percent of one percent, or 0.01%.
Bear market: A period of time in which the market, or securities in general lose money.
Benchmark: A reference point that is chosen for the purposes of comparing other related values.
Benchmark index: Indicators used to provide a point of reference for evaluating a fund's performance. For example, the most common benchmark for equity-oriented funds is the S&P 500 Index. For fixed-income funds it is the Lehman Brothers Aggregate Bond Index.
Beta: A measure of a fund's risk, or volatility, compared to the market which is represented as 1.0. A fund with a beta of 1.20 is 20% more volatile than the market, while a fund with a beta of 0.80 would be 20% less volatile than the market.
Bid price: Also known as the "sell" price, the bid price is the price at which a fund's shares are bought back by the fund. The bid price of a fund share is usually its net asset value.
Blue chip stock fund: A mutual fund that consists of a portfolio of large or well known companies for the purposes of achieving growth.
Blue-chip stocks: Stocks issued by well-established companies that pay dividends.
Bond: A debt instrument issued by a company, city, or state, or the U.S. government or its agencies, with a promise to pay regular interest and return the principal on a specified date.
Bond fund: A fund that invests primarily in bonds, whether they are issued by corporations, municipalities, or the U.S. government and related agencies. Bond funds generally emphasize income over growth, and can generate either taxable or tax-free income.
Bottom-up: An investment strategy that is more concerned with the performance of individual companies rather than overall market conditions.
Brady bonds: Emerging market bonds - mainly Latin American, named after US Treasury secretary Nicholas Brady. Brady bonds are US dollar-denominated and collateralized by US Treasury zero-coupon bonds.
Broker: Intermediary between seller and buyer of funds. (Brokers are sometimes referred to as intermediaries.) Brokers normally are paid by commission on their fund sales.
Brokerage firm: A firm that sells securities. Brokerage firms are most known for the sale of stock.
Bull market: A good market in which prices of securities increase greatly over a specific period time.
C
Call risk: The possibility that bonds will be re-paid (or "called") prior to maturity. This possibility increases during periods of falling interest rates.
Callable: Debt that may be redeemed before it matures.
Capital appreciation: The profit made on an investment, measured by the increase in a fund share's value from the time of purchase to the time of sale.
Capital appreciation funds: funds that invest primarily in common stocks the managers believe will provide maximum capital appreciation. Capital appreciation funds often resort to aggressive investment techniques, such as rapid portfolio turnover, leveraging, and investing in unregistered securities in order to achieve their objectives. Also known as aggressive growth funds.
Capital gains: Profits on the sale of securities.
Capital growth: Also called capital appreciation, capital growth is an investment objective of many stock funds. Capital growth is achieved when the market values of a fund's holdings increase, causing the fund's net asset value per share to increase.
Capitalization: The value of a mutual fund derived by the multiplication of the fund's share price by the number of outstanding shares. Most often, this is applied in order to determine the value of specific companies.
Certificates of Deposit (CD): A vehicle of savings which provide a fixed interest rate to the CD owner. Early withdrawals before the time of maturity are financially penalized.
Contingent deferred sales charge (CDSC): A type of back end load sales charge, a contingent deferred sales charge is a fee charged when shares are redeemed within a specific period following their purchase. These charges are usually assessed on a sliding scale, with the fee reduced each year the shares are held.
Certificate: A physical document representing the mutual fund shares owned. Certificates are rarely issued, in the interest of economy and convenience. Shares are now recorded by the Transfer Agent, or in a brokerage account (known as "street name.")
Certified financial planner (CFP): Financial planner that obtains a license issued by the College of Financial Planning. The designation shows that the financial planner has had training in budgeting, taxes, savings, and insurance.
Chartered financial consultant (ChFC): Designation issued indicating completion of a program in financial, estate, and tax planning, in addition to investment management.
Chartered life underwriter (CLU): Designation issued indicating training in life insurance and personal insurance planning.
Clone fund: A fund launched to mirror a closed fund. For example, fund managers may decide to close a fund that has grown so large it is no longer able to establish positions in smaller securities. They could then launch a new fund in the closed fund's image. While both funds would have the same investment objective, they would generally be run by different managers and would invest in different securities.
Closed-end fund: A fund that offers a limited number of shares. The shares of closed-end funds, which are typically listed on one of the major stock exchanges, are bought and sold through brokers. The price of the shares is determined by the pressures of supply and demand rather than by the value of underlying assets. These funds frequently sell at a discount to net asset value. They are frequently used as a method for investing in the emerging markets.
Closing price: The price of a stock or other security at the end of the day, after the final trade.
Commercial paper: Debt instruments that are issued by established corporations to meet short term financing needs. Such instruments are unsecured and have maturities ranging from 2 to 270 days.
Commission: A fee imposed when funds are bought or sold to compensate the broker for his or her role in the transaction.
Common stock: The shares offered by a corporation enabling a shareholder partial ownership of the company, in addition to privileges such as voting rights, and receiving dividends.
Common stock fund: A fund that invests primarily in common stocks. The investment objectives of common stock funds may vary greatly.
Compounding: Interest earned on interest previously earned and reinvested. For example, if a security paid a fixed interest rate of 10% annually and an investor invested $500, by the end of the first year the investor would have earned $50 in interest. If that interest was reinvested, the investor would enter the second year with $550 invested. At the end of the second year, the investor would have earned $55 in interest - earning an extra $5 in interest thanks to the reinvestment of the first year's interest.
Confirmation notice: A notice sent to the investor that his payment has been received. This notice provides information concerning the value of the shares and the amount of shares purchased. It also contains other information such as the account number.
Constant dollar investing: Investment strategy that preserves profits by periodic evaluation and adjustment of a portfolio. You maintain the same amount in your stock fund each year by channeling funds from and to a money market fund.
Consumer price index (CPI): The index compiled by the U.S. Bureau of Labor, a governmental agency, which follows the cost of living by following the changes in price of basic goods and services over time. This index measures inflation.
Contingent deferred sales charge (CDSC): A type of back end load sales charge, a contingent deferred sales charge is a fee charged when shares are redeemed within a specific period following their purchase. These charges are usually assessed on a sliding scale, with the fee reduced each year the shares are held.
Contra fund: A fund with an investing strategy that seeks the stock of out of favor companies, with good fundamentals such as low debt or good potential earnings, with the belief that the stock will increase in value.
Contractual plan: A program in which a legal vehicle (plan company or participating unit investment trust) agrees to invest a fixed amount in a fund at regular intervals for 10 or 15 years.
Contrarian: Investor who takes the reverse position from the majority. Term is often applied to those who do not believe a bull market will last.
Convertible bond funds: Mutual funds that invest primarily in convertible bonds and/or convertible preferred stocks.
Convertible security: Corporate securities (usually preferred shares or stock or bonds) that are exchangeable for a set number of another form of security (usually common stock) at a prestated price.
Corporate bond funds: A fund that invests primarily in corporate bonds. In general, corporate bond funds seek income over capital growth.
Corporate bonds: Debt instruments issued by corporations.
Correlation: Measure of the degree of relationship between variables, such as two equity markets. If, say, Wall Street and the London Stock Exchange were highly correlated it would mean that their prices tended to move in tandem.
Country funds: A fund that invests primarily in the securities of a single country. In some cases, country funds also invest in securities outside the single country if those securities are expected to benefit by growth in that country.
Country risk: The potential for price fluctuations in stocks sold in foreign countries due to events (political, financial, etc.) in these countries.
Credit rating: A measure of a bond issuer's creditworthiness as rated by an independent agency, such as Standard & Poor's or Moody's Investor Services. Ratings are set as a reflection of the perceived financial stability of the issuer, from AAA to D. Bonds rated Baa or higher by Moody's, or BBB or higher by S&P, are considered "investment grade." Conservative investors tend to select funds composed of all AAA rated bonds, or "investment grade" bonds. More aggressive investors, looking for high yields, are more interested in funds that invest in lower rated bonds.
Credit risk: The possibility that a bond issuer will default, failing to repay principal or interest as promised. "Credit risk" is also known as "default risk." Bonds are rated From a scale of A to C according to the risk of default of the company that has issued them.
Currency risk: The potential for price fluctuations in the dollar value of international stocks due to changing currency exchange rates.
Current yield: Annual interest or dividend payments expressed as a percentage of a bond's current price.
Custodian: The organization (usually a bank) that keeps custody of securities and other assets of a fund. The custodian is a third party, independent from the fund promoter's organization. The custodian holds the fund's cash accounts, settles its trades and ensures that the fund is fulfilling its investment objectives.
D
Deferred sales charge: A type of back end load sales charge, a deferred sales charge is a fee charged when shares are redeemed within a specific period following their purchase.
Depreciation: A decline in an investment's value.
Derivative: A financial security whose value is based on, or "derived" from, a traditional security, asset, or market index.
Discount broker: Broker who buys and sells securities at lower commission rates than those charged by a broker that offers the full range of broker services, such as research.
Distribution: The payment of dividends and capital gains to shareholders/unitholders.
Distributor: The organization arranging for the sale of fund shares either directly to the public or through intermediaries, such as financial advisers.
Diversification: The practice of spreading investments among different securities to reduce risk. Diversification works best when the returns of the securities are varied, so that losses incurred by securities falling in price are offset by gains of those rising in price. By nature, mutual funds are a diversified investment.
Dividend yield: Annual percentage of return earned by investor on a stock. Dividend yield is calculated by dividing the amount of dividends per share by the current market price per share of the stock.
Dividends: Income distibuted to share holders. Dividends can be received from the ownership of stock or from mutual funds. Mutual fund share holders have the option to reinvest dividends automatically in order to purchase more shares.
Dollar cost averaging: A method of investing that calls for the investment of a set dollar amount at regular intervals, regardless of the fund's share price. As a result, more fund shares are bought when prices are low than at high prices, usually bringing down an investor's average cost per share over time. Dollar cost averaging does not, however, guarantee a profit or protect against a loss.
Domicile: Refers to the legal base of the fund. Location where fund is registered, but not necessarily where it is administered.
E
Emerging markets funds: Fund that invest primarily in the stocks of companies in, or doing business in, developing countries and emerging markets. Emerging market funds usually have an investment objective of long-term growth and are generally considered aggressive stock funds.
Emerging markets: Normally refers to newly industrialized markets of the developing world. The Asia-Pacific region, Eastern Europe and Latin America are commonly referred to as emerging markets.
Equity income funds: Mutual funds that favor investments in stocks that generate income over growth. As a result, they can be less risky than other types of stock funds.
Equity: Shares held in private or public company.
Ethical fund: A fund that only invests in the securities of firms meeting certain social standards. For example, an ethical fund might exclude securities of companies that are known to practice discrimination, that operate in certain countries, or that produce specific products such as alcohol, tobacco, or nuclear weapons.
Eurodollar CDs: CDs issued by U.S. banks that have branches in other countries. These tend to have higher yields than domestic CDs.
European stock fund: A fund that invests primarily in the stock of Western European companies.
Ex-dividend date: The date on which a fund's net asset value will fall by an amount equal to a dividend or capital gains distribution.
Execution: The term used to describe the completion of a transaction in which a stock is sold by a broker and purchased by a shareholder.
Expense ratio: A fund's operating expenses, expressed as a percentage of its average net assets. Funds with lower expense ratios are able to distribute a higher percentage of gross income returns to shareholders.
Expenses: Fund shareholders pay expenses that go towards the operation and management of the fund. Expenses are often less than 1% of the investor's holdings in the value. In comparison, mutual funds are much less than that of a broker. Many investors choose to compare expenses as a factor in choosing which fund to invest in.
Explanatory memorandum: See prospectus
F
401(k) plan: Applicable in US only. It is an employer-sponsored retirement plan that enables employees to defer taxes on a portion of their salaries by earmarking that portion for the retirement plan. Several investment options, including a range of funds, are generally offered.
Face value: Value of a bond or note as given on the certificate. Corporate bonds are usually issued with $1,000 face values, municipal bonds with $5,000 face values, and government bonds, $1,000 to $10,000 face values. Also known as the principal.
Family of funds: A mutual fund company which offers investors a choice of two or more mutual funds; with different objectives or investment strategies. Often shareholders have the option to easily exchange shares between different funds in the same family over the phone with no fee.
Financial adviser: Offers financial advice, either for fee or for commission. Financial advisers are regulated in some countries and unregulated in others; their level of professionalism can vary widely. In some countries advisers can charge a fee and earn commissions on the products they recommend.
Financial planner: Individual who helps establish a financial game plan. Although a financial planner may have certain licenses or designations indicating the extent of his or her training, there is no requirement that a financial planner have a license. Financial planners carry professional designations, such as CFP and ChFC.
Fixed income security: A security that pays a fixed rate of return. This term is usually used in reference to government, corporate or municipal bonds, which pay a fixed rate of interest until the bonds mature, and to preferred stock, which pay a fixed dividend. Fixed income securities offer the guarantee of a fixed return, but do not offer an investor much, if any, potential for growth.
Fixed-income fund: Another term for a bond fund.
Flexible portfolio fund: A fund that can invest in stocks, bonds and cash in whatever proportion the manager deems appropriate, providing the manager total flexibility to achieve maximum returns. Flexible portfolio funds are sometimes called asset allocation funds.
Front-end load: One of three possible sales charge schedules imposed by funds that charge fees. A front end load, or "up front charge" is a fee charged on the initial purchase of fund shares, and can range from 3% to 8% of the purchase amount. In US, funds sold under several sales charge options usually refer to the shares sold with a front end load as "Class A shares."
Fully invested: The investment of nearly all available assets in securities other than short-term securities (such as savings and money market accounts). When a fund is said to be "fully invested", it usually implies that the fund's manager is confident that the securities markets will be improving.
Fund administrator (administrative agent): Performs fund's administrative functions. The administrator calculates the value of the fund. This calculation is based upon the value of the assets in the fund's portfolio. The calculation produces a price known as the Net Asset Value (NAV). The NAV becomes the fund's dealing price. (See Net Asset Value.)
Fund manager: Investor of pooled money. Typically, these managers fall into one of the following categories: hedge fund, insurance fund, mutual fund or pension fund. Also, there are fund of fund managers. Fund managers are sometimes referred to as money managers, portfolio managers or investment advisors.
Fund of funds (multi-funds, multi-advisor funds): A fund that invests in other funds. Fund-of-funds managers seek to reduce risk by investing in other funds thus avoiding the highs and lows of any single fund. These funds offer a single entry fee into the funds they are investing in which is usually far lower than the combined entry fees of each fund. Fund of funds usually offer great diversification and have access to managers most private investors would not be able to contact. The disadvantage of funds of funds is that they add another layer of management expenses on to shareholders who are effectively paying for two fund managers.
Futures: A contract in which a stock, or commodity is purchased with the intention of reselling it, yet not received at time of purchase, with the hope that the price will increase once it is received; so that it can be sold at a profit. This is a practice commonly used by fund managers of aggressive growth mutual funds.
Futures fund: See managed futures fund.
G
Global depository receipt (GDR): Receipt for shares in mainly emerging-market-based companies. GDRs are traded on numerous exchanges around the world, enabling investors access to emerging market companies without having to face custodian and other administrative delays that are often associated with the exchanges in emerging markets.
Global mutual fund: Mutual funds that invest in both the U.S. and foreign countries. Also known as world funds.
Government National Mortgage Association (GNMA): Nicknamed Ginnie Mae, the Government National Mortgage Association is a government owned corporation with the authority to fully guarantee the full and timely payment of all monthly principal and interest payments on the mortgage backed securities collateralized by registered holders.
Going long: Buying a security in the normal manner. (This is a term most often used in derivative investing).
Going short: Selling a security that the seller does not have. This is done by borrowing security at a certain price that is expected to have dropped by the time the security has to be paid for.
Growth and income fund: A fund that seeks earnings growth and income. These funds invest mainly in the stock of companies with a history of capital gains and pay regular dividends.
Growth fund: A fund that invests for growth by seeking out smaller companies with good earnings growth. These funds tend to be more volatile than most other equity mutual funds.
Guaranteed fund: A fixed life fund which provides a guaranteed return at the end of the term (maturity date) as outlined in the fund prospectus. A guarantee can include the initial capital investment plus a fixed return or combinations thereof.
H
Hedge fund: A private investment partnership in which the fund manager is able to take both long and short positions. These funds typically use leverage and employ a large number of derivative instruments in their investments.
Hedging: A strategy that seeks to reduce, or even eliminate, the extraneous risk in investment, such as currency risk in an international equity investment. In this situation, a fund manager would buy the currency forward at an agreed price. (Hedging is not to be confused with hedge funds, which are very different.)
High-yield (or junk) bond: Security that pays higher yield to compensate for the greater risk of holding a non-investment grade bond. (An investment-grade bond is one that rating agencies will give BB or higher.)
High-yield bond fund: A fund that invests primarily in high yield bonds, also referred to as junk bonds. High yield bond funds generally seek high returns and tend to be one of the riskier bond fund investments.
I
Inception date: The date a fund was first made available to investors.
Income: Periodic interest or dividend distributions obtained from a fund.
Income fund: A fund that invests primarily in fixed income securities and/or high-yielding utility, telephone, and blue-chip stocks. Capital appreciation is not a consideration for these funds.
Index: Indicators used to provide a point of reference for evaluating a fund's performance. The most common indices for stock funds are the Dow Jones Industrial Average and the S&P 500 Index. For fixed-income funds it is the Lehman Brothers Aggregate Bond Index.
Index fund: A fund that invests in a collection of securities intended to match that of a broad-based index (NOTE: It is not possible for investors to actually invest in the actual index, such as the S&P 500). In general, index funds seek the same or a slightly better return that the index they mirror. Index funds tend to charge low administrative expenses.
Inflation: Rise in prices of goods and services.
Inflation risk: The possibility that the value of assets or income will be eroded by inflation (the rising cost of goods and services). Inflation risk is often mentioned in relation to conservative fixed income funds. While these types of fixed income funds may minimize the possibility of losing principal, they expose an investor to inflation risk.
Installment investment strategy: Investment strategy in which you divide your investment among several mutual funds and make any new investments into the fund that performs the worst.
Interest income: Earnings received, often from bonds.
Intermediate investment grade bond fund: A fund that invests primarily in investment grade fixed income securities with dollar-weighted average maturities of five to ten years.
Intermediate-term bond funds: Mutual funds that invest in bonds that mature in about 5 to 10 years.
International bonds: Debt instruments issued by foreign governments or corporations.
International fund: A fund that invests primarily in the securities of companies located outside of the United States. In general, international investing not only offers diversification and the potential for high returns, but also involves special risks, such as currency concerns, and rapidly changing political scenarios.
Inverted yield curve: When short-term interest rates are higher than long-term ones. Also called a negative yield curve because inverted yield curves are an indication that there is a lack of confidence in the long-term situation.
Investment adviser: 1. The investment adviser is responsible for the fund's investment performance. The investment adviser frequently, but not always, works for the fund promoter's organization. Investment advisers are also referred to as fund managers. 2. The investment adviser is also called advisor, intermediary, financial consultant who provides financial planning, investment advisory and portfolio management service to individual investors.
Investment banker: Firm that sells stocks or bonds to brokerages which, in turn, sell them to investors on a securities exchange.
Investment company: Firm that, for a management fee, invests pooled funds of small investors in securities appropriate for its stated investment objectives. Mutual funds, known as open-end investment companies, have portfolios that can grow or be reduced, based upon market conditions and investor investment/redemption patterns. Closed-end funds, also called unit investment trusts, have a fixed portfolio, and a pre-set number of shares outstanding.
Investment grade: High quality bonds that are rated Baa or higher by Moody's, or BBB or higher by Standard & Poor's. Investment grade bonds are considered safe, because the rating reflects the perceived financial stability of the issuer. Usually, however, the higher the bond's rating, the lower the interest it must pay to attract buyers.
Investment objective: A fund's investment goal. For example, a growth fund typically has an investment objective of providing long-term growth of capital.
Investment style: A description of a fund's investment strategy. For example, a growth fund might have a growth oriented style, a value-oriented style, or a blend of the two. Fixed-income funds tend to be managed with either an interest-rate sensitive style or a credit-sensitive style.
Investment trust: See Closed-end fund.
J
Junk bonds: Bonds rated BB or below by Standard & Poor's Corporation and Ba or below by Moody's Investor Service. Junk bonds tend to be more volatile and higher yielding than bonds with higher quality ratings.
L
Large-caps: Stocks of companies with market capitalizations of more than $1 billion. Large-caps tend to be well established companies, so that their stocks entail less risk than smaller-caps, but which also offer less potential for dramatic growth.
Leverage: Borrowing of money to maximize return on an investment. Means of enhancing return or value without increasing investment.
Liquidity: The ease with which an investment can be converted into cash. Shares in a fund are generally considered highly liquid investments because they can be sold on any business day for their then current value.
Load: Sales charge paid by investor who invests in a mutual fund. Loads can be front end or back end.
Loaded fund: A mutual fund that charges a sales fee on top of other fees. Loads do not mean a fund is managed better.
Long run (long term): A period of time in which short term volatility or risk of the market does not play a significant role. Over the long term, the stock market historically has increased. Long term can be considered a time period of five years or more.
Long-term bond funds: Mutual funds that invest in bonds that mature in more than 10 years.
M
Managed futures fund: A fund investing in futures and derivatives of commodities, indices, interest rates, currencies and related products.
Management fee: The amount a fund pays to its investment adviser for its services. The average annual fee industry wide is about one half of one percent of fund assets. A fund's management fee must be listed in its prospectus.
Manager: The Firm that provides the fund with investment research and portfolio management services.
Market: Refers to the exchanges, traders and investors involved in the transfer of goods and services and securities, as in the stock market. Or, the term may refer to goods and services in general, and the producers who produce them, and the consumers who buy them.
Market capitalization: Also referred to as "market cap." Market capitalization is a measure of a corporation's value, calculated by multiplying the number of outstanding shares of common stock by the current market price per share. Market capitalization is usually grouped into four main categories: large-cap, mid-cap, small-cap, and micro-cap.
Market risk: Refers to the potential of loss that is possible, as a result of the short term volatility of the stock market. Owning mutual funds, due to their diversification, shield an investor to some market risk that a stock holder may be vulnerable to.
Market timing: Attempting to time the purchase and sale of securities to coincide with ideal market conditions. Mutual fund investors may switch from stock funds to bond funds to money market funds as the strength of the economy and interest rate directions change.
Maturity date: The date on which the principal amount of a bond is to be paid in full.
Micro caps: Stocks that are capitalized at under $50 million. Micro-caps tend to be new, relatively untested corporations that can offer greater growth potential than larger caps, but also entail greater risk.
Mid caps: Stocks which are capitalized at between approximately $500 million and $1 billion. Mid-caps are often considered to offer more growth potential than larger-caps (but less than small caps) and less risk than small-caps (but more than large-caps).
Mid-cap fund: A fund that invests primarily in the stocks of companies with a medium market capitalization (mid caps).
Minimum investment: The smallest investment amount a fund will accept to establish a new account. Most funds have an initial minimum investment that may range from $1,000- $2,500. If at any time, the balance fall below the minimum due to withdrawal or loss in market value, the investor may be forced to redeem the fund.
Money market instruments: Include short term investments such as CDs, T-bills, and short term comercial bonds. Money market mutual funds invest in these types of short term investments; as a result, there is little to no risk of losing any portion of the principle investment. A money market mutual fund should not be confused with a money market deposit account, which is FDIC insured.
Money market mutual fund: Mutual fund that invests typically in short-term government and company loans and CDs. These tend to be lower-yielding, but less risky than most other types of funds. Also known as money market funds or money funds.
Mortgage-backed security: A security that returns principal and interest monthly as payments are received on the underlying mortgages. They are made up of individual home mortgages guaranteed by the government agencies. The mortgages are packaged into pools by agencies such as: Government National Mortgage Assn. (GNMA), Federal National Mortgage Assn. (FNMA), and Federal Home Loan Mortgage Corp. (FHLMC) . Unscheduled repayment of principal can shorten the maturity of the bonds. (See "Prepayment Risk.")
Multi-adviser fund: See Fund of funds.
Multi-fund: See Fund of funds.
Municipal bond: A bond issued by a municipality to finance schools, highways, hospitals, airports, bridges, water and sewer works, and other public projects.
Municipal bond funds: Mutual funds that invest in tax-exempt bonds is sued by states and local governments.
Mutual fund (or unit trust): An investment company that pools money from shareholders and invests in a variety of securities, including stocks, bonds, and money market instruments. They offer growth, income, or both, and the opportunity to invest in everything from a country or industry to the movements of the markets themselves. A mutual fund does not have a fixed number of shares A mutual fund continually sells new shares to investors and redeems those that are tendered by shareholders.
N
Negative yield curve: See Inverted yield curve.
Net asset value (NAV): The current market worth of a mutual fund's share. A fund's net asset value is calculated daily by taking the funds total assets, securities, cash and any accrued earnings, deducting liabilities, and dividing the remainder by the number of shares outstanding.
Net assets: The total amount of money that comprises the mutual fund's holdings.
No load fund: A fund that does not charge a sales fee.
Note: Another word for short-term bond.
O
Objective: A fund's investment objective states the financial goals it is aiming for, such as "growth," or "income."
Offer price: Also known as the ask price or offering price. It is the price to buy one share of a specific mutual fund. To calculate the offering price, add a fund's current net asset value per share to its sales charge, if any.
Offshore center: Used to signify financial centres which offered a more tolerant tax regime than those 'onshore'. Today, offshore centres are the legal domiciles for most internationally marketed funds. The administrative functions of internationally marketed funds are performed in the offshore centres.
Open-ended fund: (Also known as mutual fund or unit trust) An investment company that pools money from shareholders and invests in a variety of securities, including stocks, bonds, and money market instruments. They offer growth, income, or both, and the opportunity to invest in everything from a country or industry to the movements of the markets themselves. A mutual fund does not have a fixed number of shares A mutual fund continually sells new shares to investors and redeems those that are tendered by shareholders.
Operating expenses: The normal costs a mutual fund incurs in conducting business, such as the expenses associated with maintaining offices, staff, and equipment. There are also expenses related to maintaining the fund's portfolio of securities. These expenses are paid from the fund's assets before any earnings are distributed.
Option: The right to buy, or sell, a security an agreed price at a specified time.
Over-the-counter market: Market that uses a network of brokers to buy and sell securities rather than an exchange.
P
Price earning (P/E) ratio: Ratio of the price of a stock to the total earnings of the company. To a growth investor, a high P/E ratio is an indication of a popular stock with strong earnings forecasts. To a value investor, companies with very high ratios of greater than 30 are considered to be overpriced; and company stock with a low ratio are considered to be undervalued, and potentially good investments. Mutual funds with a value type of investment strategy seeks a portfolio consisting of stocks with low ratios with the expectation that they will increase in price.
Payment date: The day on which a mutual fund pays income dividend or capital gains distributions to its shareholders.
Penny stock: An inexpensive stock, also known as micro-cap stock. This term usually refers to stocks costing less than $1 per share, but it may also refer to stocks under $5.00 too. Many aggressive growth mutual funds have portfolios consisting of many cheap stocks, with the belief that cheap stocks have greater growth potential.
Pension fund: Fund investing on behalf of an organization to provide income for the fund's members upon retirement.
Performance: A measure of how well a fund is doing over time. Two commonly used mutual fund performance measures are yield (which measures dividends) and total return (which measures dividends plus changes in net asset value). Please be reminded that past performance is not a guaranteed indicator of future performance.
Pooling: Pooling is the basic concept behind mutual funds. A fund pools the money of thousands of individual and institutional investors who share common financial goals. The fund uses this pool to buy a diversified portfolio of investments.
Portfolio: A collection of securities owned by an individual or an institution (like a mutual fund). A fund's portfolio may include a combination of stocks, bonds, and money market securities.
Portfolio manager: The individual who is responsible for managing a mutual fund's assets.
Portfolio turnover: A measure of the trading activity in the fund's portfolio of investments. In other words, how often securities are bought and sold.
Positive yield curve: When short-term interest rates are lower than long-term rates. This is the usual situation where investors would expect to gain a higher rate of return for holding on to a bond for a longer period of time.
Preferred stock: Type of stock that takes priority over common stock in the payment of dividends or if the company is liquidated.
Prepayment risk: The possibility that, as interest rates fall, homeowners will refinance their home mortgages, resulting in the prepayment of GNMA securities, and possible decline in net asset values of GNMA Funds.
Principal: Original investment.
Prospectus (or explanatory memorandum for unit trusts): The official document that describes a mutual fund. It contains information on such subjects as the fund's investment objectives, policies, services and fees. The prospectus, according to law, must always be accompanied with the application. Prospective investors should always read the mutual fund's prospectus before sending money.
Q
Quartile: A term often used in fund performance. For example, funds are referred to as being in the top or bottom quartile, meaning that this is where they have been ranked in relation to the other funds in their category.
R
Real return: The actual return earned on an investment after factoring in the rate of inflation.
Rebalancing: Investment strategy in which you adjust your mix of investments periodically to keep the proper percentages of money in each fund, based on your tolerance for risk.
Record date: The date on which a shareholder must officially own a stock's shares in order to receive a company's declared dividend or to vote on company issues.
Redemption: Liquidation of shareholding in a mutual fund by selling back to the mutual fund.
Redemption fee: A fee charged by some funds when shares are sold (redeemed).
Redemption price: The price at which a mutual fund's shares are redeemed (bought back) by the fund. The value of the shares depends on the market value of the fund's portfolio of securities at the time. This value is the same as "net asset value per share." In the newspaper, this amount is shown as the "bid" price.
Regional funds: Mutual funds that invest in one specific region of the globe.
Registrar and transfer agent: Responsible for keeping records of, and for communicating with, a fund's shareholders. Typically this involves canceling and issuing the fund's shares.
Repurchase agreement (REPO): A contract under which an investor sells a United States security to a bank or Corporation, and agrees to repurchase the security later at a specified time and price. Purchaser earns interest competitive with money market rates.
Return on equity: Calculated by dividing common stock equity at the beginning of the accounting period into net income for the period after preferred stock dividends, but before common stock dividends. Return on equity indicates to shareholders how effectively their money is being employed.
Risk: In relation to a mutual fund, chances of losing money.
Risk tolerance: The willingness of an investor to tolerate the risk of losing money for the potential to make money.
Russell 2000: A commonly cited index of small-cap stocks.
S
S&P 500: An unmanaged group of stocks often considered representative of the stock market in general. This index is composed of 400 industrial, 20 transportation, 40 utility, and 40 financial companies.
S&P 500 index fund: A fund that invests primarily in the stocks included in the S&P 500 Index. Sometimes referred to as "blue-chip" stocks, they tend to be of large, well-established companies.
Securities & Futures Commission (SFC): The securities and futures commision, a regulatory agency of the Hong Kong government which regulate the sale of stocks, funds and other financial products. They do not however guarantee that an investor will not lose money from an investment.
Secondary market: Market wherein bonds, stocks, or other securities are bought and sold after they're already issued.
Sector fund: A type of mutual fund that invests in the stocks of companies representing a specific industry, such as technology, utilities or health care. Also known as theme fund. Sector funds entail more risk, but may offer greater potential returns than funds that diversify their portfolios.
Securities: Stocks, bonds, or rights to ownership, such as options, typically sold by a broker.
Securities exchange: Tightly regulated marketplace where stocks, bonds, and cash are traded.
Settlement date: The date agreed upon by the parties to a transaction for the payment of funds and the delivery of securities.
Share: Unit of ownership.
Shareholder: One who owns shares. In a mutual fund, this person has voting rights.
Sharpe ratio: A ratio of fund performance to standard deviation. The Sharpe ratio is a risk-adjusted method for measuring a fund's performance. The higher the number the better. It is calculated by subtracting the risk-free rate (for example the return from a US Treasury bill) from the portfolio's total return and then dividing this by its standard deviation.
Short term (short run): The period of time in which market volatility may subject an investment to market risk of loss. The short term may be considered to be a period of two years or less.
SICAV: SICAV stands for Societe d'Investissement a Capital Variable (investment company with variable capital). SICAVs are common fund structures in Luxembourg.
Single-country funds: Mutual funds or closed-end funds that invest in one country.
Small caps: Stocks that are capitalized at under $500 million. In general, small caps tend to be less established companies that offer more growth potential than larger capitalized companies, but which also entail greater risk.
Small company growth fund: A fund that seeks aggressive growth of capital by investing primarily in stocks of relatively small companies with the potential for rapid growth.Many small cap funds come under the heading of an aggresive growth mutual fund.
Socially responsible funds: Mutual funds that invest in companies that don't pollute the environment or sell arms. They will not own tobacco or alcohol stocks, nor invest in companies with poor employee relations.
Specialty funds: Funds that invest in one specific industry or industry sector.
Speculation: Gambling on a risky investment in hopes of a high payoff down the road.
Standard deviation: A measure of the degree to which a fund's return varies from the average of all similar funds.
Stock: Investment that buys ownership in a corporation, in exchange for a portion of that company's earnings and assets.
Stock fund: A fund that invests primarily in stocks.
Stockbroker: Person licensed to sell stocks and other types of securities. Also known as a registered representative.
Switching: The movement of assets from one fund to another. Also know as "exchanging." An investor will switch mutual funds when their investment objectives change or because of market conditions. This is usually done within a family of funds, but can be done between different fund families. There usually is no charge for a certain number of transactions per year, after which a transaction fee may apply.
T
Tax-deferred investment: An investment that is not taxed until money is withdrawn, usually at retirement.
Technology fund: A fund that invests primarily in the stocks of companies engaged in the technology industry.
Top down: An investment approach that first seeks to define major economic and industry trends, and then proceeds to identify specific companies that are likely to benefit from those trends. (See also "bottom-up.")
Total expense ratio: Amount shareholders pay as costs for an investment in a mutual fund. TERs are calculated as a percentage of total investment. They include all operating expenses of the fund and the funds annual management fee.
Total return: A measure of a fund's performance that takes these factors into account: income dividends, capital gains distributions, reinvestment of distributions and share price appreciation/depreciation.
Trade date: The date on which a purchase or redemption of mutual fund shares is conducted.
Transfer: The process of changing ownership of an account within the same fund.
Transfer agent: The organization employed by a mutual fund to prepare and maintain records relating to the accounts of its shareholders. Some funds serve as their own transfer agents.
Treasuries: Fixed income securities issued by the U.S. government. Treasuries include: Treasury Bills (T-Bills), Treasury Notes and Treasury Bonds.
Treasury Bill: A fixed-income security issued by the U.S. Government.
Trust: Legal document that does not have to be approved by probate court before your loved ones can inherit your wealth.
Turnover rate: The rate at which the fund buys and sells securities each year. For example, if a fund's assets total $100 million and the fund bought and sold $100 million of securities that year, its portfolio turnover rate would be 100%.
U
U.S. treasury fund: A fund that invests primarily in financial instruments issued or guaranteed by the U.S. Treasury or its agencies.
UCITS fund: UCITS stands for Undertaking for Collective Investment in Transferable Securities. The UCITS directive was agreed by the European Union member states in the 1980s in order to create a single passport for the sale of funds throughout Europe. A UCITS fund is a mutual fund or an open-ended investment company that is domiciled in Europe, and conforms to the various UCITS regulations.
Umbrella fund: Fund structure containing sub-funds (or compartments) with different investment objectives, focusing on different markets. Umbrella funds enable investors to switch between sub-funds for a low fee - compared to switching funds - and to pursue different investment strategies within the same fund.
Underwriter: The organization that acts as the distributor of a mutual fund's shares to broker/dealers and investors.
Unit trust: See mutual fund.
Unrealized gain or loss: Increases or decreases in the prices of securities held by the fund.
V
Value investing: The investment style of attempting to buy underpriced stocks that have the potential to perform well and increase in price.
Volatility: The amount by which the price of a security fluctuates as market conditions change. Funds whose price moves sharply are said to have high volatility. Those with stable prices have low volatility.
Vulture fund: Invests in a depressed (and therefore cheap) area of the market. Once this area of the market is rising, the fund's value should grow rapidly.
W
Withdrawal - To redeem shares of a mutual fund or stock. In a mutual fund, partial or full redemptions may be made over the phone. Some funds may impose an extra redemption fee to discourage market timers from pulling their money immediately after investing. If this is a fund's policy, it will be stated in the prospectus.
World funds: Mutual funds that invest in both the U.S. and foreign countries. Also known as global funds.
Y
Yield: Return on investment. Stock yields are expressed in dividends. Bond yields are divided between current and maturity yields.
Yield curve: A graph depicting yield as it relates to maturity. If short-term rates are lower than long-term rates, it is called a positive yield curve. If short-term rates are higher, it is called a negative, or inverted, yield curve. If there is little difference, it is called a flat yield curve.
Yield to maturity: The effective annual rate of return earned by a bond if held to maturity. This rate takes into account the amount paid for the bond, the length of time to maturity, and assumes coupon payments can be reinvested at the yield to maturity.
Z
Zero coupon bond: Bond issued at a discount which accrues interest that is paid in full at maturity.
