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Investing Terms

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Investing Terms A

American Stock Exchange(AMEX):The second-oldest U.S. stock exchange, located on Wall Street in New York City.

Analyst: Employee of a brokerage or fund management house who studies companies and makes buy and sell recommendations on their stocks. Most specialize in a specific industry.

Annual Report: A report that public companies are required to file annually which describes the preceding year's financial results and plans for the upcoming year. Annual reports include information about a company's assets, liabilities, earnings, profits, and other year-end statistics.

Annuity: A contract by which an insurance company agrees to make regular payments to someone for life or for a fixed period in exchange for a lump sum or periodic deposits.

Asset Allocation: The placement of a certain percentage of investment capital within different types of assets (e.g., 50% in stock, 30% in bonds, and 20% in cash).

Asset Allocation Fund: Mutual fund that holds varying percentages of stock, bonds, and cash within its portfolio.

Automatic Investment Plan: An arrangement where investors agree to have money automatically withdrawn from a bank account on a regular basis to purchase stock or mutual fund shares.

Automatic Reinvestment: An option available to stock and mutual fund investors where fund dividends and capital gains distributions are automatically reinvested to buy additional shares and thereby increase holdings.

Investing Terms B

Balanced Fund: Mutual fund that holds bonds and/or preferred stock in a certain proportion to common stock in order to obtain both current income and long-term growth of principal.

Bear Market: Term used to describe a prolonged period of declining stock prices.

Before (Pre)-Tax Dollars: Money contributed to a tax-deferred savings plan that you do not have to pay income tax on until withdrawal at a future date.

Blue-Chip Stock: Term, derived from the most expensive chips in a poker game, used to indicate the stock of companies with long records of growth and profitability.

Bond: A debt instrument or IOU issued by corporations or units of government.

Bond Fund: Mutual fund that holds mainly municipal, corporate, and/or government bonds.

Broker: A professional who transfers investors' orders to buy and sell securities to the market and generally provides some financial advice.


Bull Market: Term used to describe a prolonged period of rising stock prices.

Buy and Hold: A strategy of purchasing an investment and keeping it for a number of years.


Investing Terms C

Call Option
: An option contract that gives the holder of the option the right (but not the obligation) to purchase, and obligates the writer to sell, a specified number of shares of the underlying stock at the given strike price, on or before the expiration date of the contract

Capital Appreciation: An increase in market value of an investment (e.g., stock).
Capital Gains Distribution: Payment to investors of profits realized upon the sale of securities.

Capitalization: The market value of a company, calculated by multiplying the number of shares outstanding by the price per share. Capitalization is often called "cap" for short in the names of specific investments (e.g., ABC Small Cap Growth Fund).

Cash-Value Life Insurance: Type of life insurance contract that pays benefits upon the death of the insured and also has a savings element that provides cash payments prior to death.

Central Registration Depository (CRD): A computerized system, which includes the employment, qualification, and disciplinary histories of more than 400,000 securities professionals who deal with the public.

Certificate of Deposit (CD): An insured bank product that pays a fixed rate of interest (e.g., 5%) for a specified period of time.

Churning: When a broker excessively trades securities within an account for the purpose of increasing his or her commissions, rather than to further a client's investment goals.

Closed-End Fund: Investment company that issues a limited number of shares that can be bought and sold on market exchanges.

Cold Calling: A practice used by salespeople of making unsolicited phone calls to people they don't know in order to attract new business. Collectible: An investment in tangible items such as coins, stamps, art, antiques, and autographs.

Commission: Fee paid to a broker to trade securities, generally based on the number of shares traded (e.g., 100 shares) or the dollar amount of the trade.

Commodities: An investment in a contract to buy or sell products such as fuel oil, pork, grain, coffee, sugar, and other consumer staple items by a specified future date.

Common Stock: Securities that represent a unit of ownership in a corporation.

Composite Indices: Stock market indices comprised of stocks traded on major stock exchanges.

Compound Interest: Interest credited daily, monthly, quarterly, semiannually, or annually on both principal and previously credited interest.

Convertible Securities: Bonds or preferred stock that can be exchanged for a fixed number of shares of common stock in the same corporation.

Core Holding: The foundation of a portfolio (e.g., a stock index fund) to which an investor might add additional securities.

Corporate Bonds: Debt instruments issued by for-profit corporations.

Investing Terms D

Depreciation: A non-cash expense that provides a source of free cash flow.

Direct Purchase Plans (DPPs): "No load" stocks where every share, including the first, can be sold or purchased directly from a company without a broker.

Discount Broker: A broker that trades securities for a lower commission than a full-service broker.

Diversification: The policy of spreading assets among different investments to reduce the risk of a decline in the overall portfolio from a decline in any one investment.

Dividend: A distribution of income from investments to shareholders.

Dividend Reinvestment Plans (DRIPs): Plans that allow investors to automatically reinvest any dividends a stock pays into additional shares. Dollar-Cost Averaging: Investing equal amounts of money (e.g., $50) at a regular time interval (e.g., quarterly) regardless of whether securities markets are moving up or down. This practice reduces average share costs to investors, who acquire more shares in periods of lower securities prices and fewer shares in periods of higher prices. a number of years.


Investing Terms E

EDGAR (Electronic Data Gathering, Analysis, and Retrieval): An electronic system developed by the U.S. Securities and Exchange Commission (SEC) that is used by companies to file documents required by the SEC for securities offerings and ongoing disclosure. EDGAR information is available to consumers on the Internet at, usually within 24 hours after filing by a company. EDGAR information is also available in the SEC's public reference room by calling (202) 942-8090 or sending a fax to (202) 628-9001 or an e-mail to

Equity Investing: Becoming an owner or partial owner of a company or a piece of property through the purchase of investments such as stock, growth mutual funds, and real estate.

Investing terms F

Federal Deposit Insurance Corporation (FDIC): Federal agency that insures bank deposits up to $100,000. Investments purchased at banks are not FDIC-insured.

Fixed Annuity: An investment vehicle, often used for retirement accounts, that guarantees principal and a specified interest rate. Fixed annuity earnings grow tax-deferred until withdrawal.

401(k) Plan: A retirement savings plan sponsored by for-profit companies that allows an employee to contribute pretax dollars to a company investment vehicle until the employee retires or leaves the company.

403(b) Plan: Similar to a 401(k), a retirement savings plan for employees of a tax-exempt education or research organization or public school. Pretax dollars are contributed to an investment account until the employee retires or terminates employment.

Full-Service Broker: A broker that charges commissions based on the type and amount of securities traded. Full-service brokers typically charge more than discount brokers but also provide more extensive services (e.g., research and personalized advice).


Investing Terms G

GNMAs or Ginnie Maes: An investment in a pool of mortgage securities backed by Government National Mortgage Association (GNMA) Growth Fund: Mutual fund that invests in stocks exhibiting potential for capital appreciation.

Growth Stocks: Stock of companies that are expected to increase in value.

Guaranteed Investment Contract (GIC)
: Fixed-income investments, offered in many tax-deferred employer retirement plans, that guarantee a specific rate of return for a specific time period.

Investing Terms H

Investing Terms I

Income Fund: Mutual fund that invests in stocks or bonds with a high potential for current income, either interest or dividends.

Income Stocks: Stock of companies that expect to pay regular and relatively high (compared to growth stocks) dividends.

Index: An unmanaged collection of securities whose overall performance is used as an indication of stock market trends. An example of an index is the widely quoted Dow Jones Industrial Average, which tracks the performance of 30 large company U.S. stocks.

Index Fund: Mutual fund that attempts to match the performance of a specified stock or bond market index by purchasing some or all of the securities that comprise the index.

Individual Retirement Account (IRA): A retirement savings plan that allows individuals to save for retirement on a tax-deferred basis. Individuals may contribute up to $2,000 per year in an individual account. For spousal accounts, the limit is $4,000. The amount that is tax deductible varies according to an individual's access to pension coverage, income tax filing status, and adjusted gross income.

Interest Rate Risk: The risk that, as interest rates rise, the value of previously-issued bonds will fall, resulting in a loss if they are sold prior to maturity.

Investment Clubs: Organizations of investors who meet and contribute money regularly toward the purchase of securities.

Investment Grade Bond: Bond rated with one of the top four grades by a rating service like Moody's and Standard & Poor's, indicating a high level of creditworthiness.

Investment Objective: The goal (e.g., current income) of an investor or a mutual fund. Mutual fund objectives must be clearly stated in their prospectus.

Investment Focus: The main purpose, objective, and goal to focus on improving your investment knowledge.


Investing Terms K

Keogh Plan: A qualified retirement plan for self-employed individuals and their employees to which tax-deductible contributions up to a specified yearly limit can be made if the plan meets certain requirements of the Internal Revenue Code.

Investing Terms L

Limit Order: An order to buy or sell securities that specifies that a trade should be made only at a certain price or better.

: The quality of an asset that permits it to be converted quickly into cash without a significant loss of value.

: A commission charged by the sponsor of a mutual fund upon the purchase or sale of shares.


Investing Terms M

Management Fee: The amount paid by mutual funds to their investment advisers.
Marginal Tax Rate: The rate you pay on the last (highest) dollar of personal or household (if married) earnings. Current federal marginal tax rates range from 15% to 39.6%.

Market Order: An order to buy or sell a stated amount (e.g., 100 shares) of a security at the best possible price at the time the order is received in the marketplace.

Market Value: The current price of an asset, as indicated by the most recent price at which it traded on the open market. If the most recent trade in ABC stock was at $25 for example, the market value of the stock is $25.

Maturity: The date on which the principal amount of a bond, investment contract, or loan must be repaid.

Microcap Stock: Low priced stocks issued by the smallest of companies. Companies with low or "micro" capitalization typically have limited assets and a small total market value. Many microcap stocks trade in small volumes in the "over the counter" (OTC) market, with prices quoted on the OTC Bulletin Board or "Pink Sheets." For more information about microcap stocks, check the Web site Money Market Mutual Fund: A highly liquid mutual fund that invests in short-term obligations such as commercial paper, government securities and certificates of deposit. Moody's Investors Service: A rating agency that analyzes the credit quality of bonds and other securities.

Mutual Fund: An investment company that pools money from shareholders and invests in a variety of securities, including stocks, bonds and money market securities.

Investing Terms N

Net Asset Value: The market value of a mutual fund's total assets, after deducting liabilities, divided by the number of shares outstanding.

Net Worth
: The dollar value remaining when liabilities (what you owe) are subtracted from assets (what you own). Example: $200,000 of assets - $125,000 of debt = a $75,000 net worth.



Investing Terms O

Online Investing: The purchase of securities from brokerage firms via the Internet using a computer and modem.

Open-End Fund: An investment company that continually buys and sells shares to meet investor demand. It can have an unlimited number of investors or money in the fund.

Investing Terms O

Penny Stocks: Stocks that sell for $5 per share or less. Portfolio: The combined holding of stocks, bonds, cash equivalents, or other assets by an individual or household, investment club, or institutional investor (e.g., mutual fund).

Preferred Stock: A type of stock that offers no ownership or voting rights and generally pays a fixed dividend to investors.

Price/Earnings (P/E) Ratio: The price of a stock divided by its earnings per share (e.g., $40 stock price divided by $2 of earnings per share = a P/E ratio of 20).

Principal: The original amount of money invested or borrowed, excluding any interest or dividends.

Prospectus: An official booklet that describes a mutual fund. It contains information as required by the U.S. Securities and Exchange Commission on topics such as the fund's investment objectives, investment restrictions, purchase and redemption policies, fees, and performance history.


Investing Terms Q

Investing Terms R

Real Estate: Land, permanent structures on land, and accompanying rights and privileges, such as crop or mineral rights.

Real Estate Investment Trust (REIT): A portfolio of real estate- related securities in which investors can purchase shares that trade on major stock exchanges.

Real-Time Quotes: A requirement that trades in a NASDAQ (over the counter market) security be reported within 90 seconds of execution. Thus, information is current up to 90 seconds of the market, rather than typical quotes which have a 15 or 20-minute delay.

Reciprocal Immunity: A principle of taxation where state and local governments don't tax earnings on federal debt securities and the federal government doesn't tax earnings on state/local debt securities. Risk: Exposure to loss of investment capital (i.e., amount of money invested).

Risk Management: Actions taken (e.g., purchase of insurance) to provide protection against catastrophic financial losses (e.g., disability and liability). Risk management is an important investing prerequisite.


Investing Terms S

Sales Charge: The amount charged to purchase mutual fund shares. The charge is added to the net asset value per share to determine the per share offering price.

Savings Incentive Match Plan for Employees (SIMPLE Plans): A tax-deferred retirement plan for owners and employees of small businesses that provides matching funds by the employer.

Securities: A term used to refer to stocks and bonds in general.

Securities and Exchange Commission (SEC)
: Federal agency created to administer the Securities Act of 1933. Statues administered by the SEC are designed to promote full public disclosure about investments and protect the investing public against fraudulent and manipulative practices in the securities markets.

Securities Investor Protection Corporation (SIPC): A nonprofit corporation that insures investors against the failure of brokerage firms, similar to the way that the Federal Deposit Insurance Corporation (FDIC) insures bank deposits. Coverage is limited to a maximum of $500,000 per account, but only up to $100,000 in cash. SIPC does not insure against market risk, however.

Simplified Employee Pension (SEP): A tax-deferred retirement plan for owners of small businesses and the self-employed. Standard & Poor's Corporation: A rating agency that analyzes the credit quality of bonds and other securities.

Standard & Poor's 500 Index: An index that is widely replicated by stock index mutual funds. Also known as the S&P 500, it consists of 500 large U.S. companies.

Stock: Security that represents a unit of ownership in a corporation. Substandard Grade (a.k.a., "Junk") Bond: Bond rated below the top four grades by a rating service such as Moody's and Standard & Poor's. They generally provide a higher return than investment grade securities to compensate investors for an increased risk of default.

Investing Terms T

Tax Deferral: Investments where taxes due on the amount invested and/or its earnings are postponed until funds are withdrawn, usually at retirement.

Tax-Exempt: Investments (e.g., municipal bonds) where earnings are free from tax liability.

Total Return: The return on an investment including all current income (interest and dividends), plus any change (gain or loss) in the value of the asset.

12(b)1 Fee: A marketing fee levied on mutual fund shareholders to pay for advertising and distribution costs, as well as broker compensation.


Investing Terms U

Unit Investment Trust (UIT): An unmanaged portfolio of professionally selected securities that are held for a specified period of time.

U.S. Treasury Securities: Debt instruments issued by the federal government with varying maturities (bills, notes, and bonds).


Investing Terms V

Value Stock: A stock with a relatively low price compared to its historical earnings and the value of the issuing company's assets. Variable Annuity: An annuity where the value fluctuates based on the market performance of its underlying securities portfolio.

: The degree of price fluctuation associated with a given investment, interest rate, or market index. The more price fluctuation that is experienced, the greater the volatility.

Investing Terms W

Investing Terms Z

Zero-Coupon Bonds: Debt instruments issued by government or corporations at a steep discount from face value. Interest accrues each year but is not paid out until maturity.



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