Select a letter to view the terms which begin with that letter. A B C D E F G H I J K L M N O P Q R S T U V W X Y Z 12(b)(1) plan A method of charging service- or distribution-related expenses directly against fund assets. "12(b)1" refers to the 1980 U.S. Securities & Exchange Commission rule that permits the use of these plans. A fund is required to include any 12b-1 fees in its stated expense ratio. 12(d)(1) limit Section 12(d)(1) of the Investment Company Act of 1940 limits the ability of registered investment companies to invest in other investment companies. Without specific exemptions from this section, no registered investment company may acquire more than 3% of the outstanding stock of another investment company, or acquire securities from a single investment company with an aggregate value of more than 5% of its total assets, or acquire securities from multiple investment companies with an aggregate value in excess of 10% of its total assets. For example, a fund could not hold more than 3% of all outstanding Qubes (QQQ). Certain funds-of-funds have obtained exemptions from these limits. $25 par preferred securities These securities generally have a term of 30 to 40 years, pay a fixed rate monthly or quarterly income, offer five years of call protection, and benefit from various protective covenants usually associated with subordinated debt. 40 Act See Investment Company Act of 1940. 401(k) plan A type of defined contribution plan (defined by section 401(k) of the Internal Revenue Code) that allows an employee to elect to defer income by making pretax contributions to a profit sharing plan, a target benefit plan, or a stock bonus plan. Employees may defer a percentage of their compensation into the plan each year, and the contributions and earnings grow tax deferred until withdrawn. 403(b) plan A retirement plan for employees of nonprofit organizations such as universities, churches, or public schools. The employee can contribute a portion of their salary to the plan each year, and the contributions and earnings grow tax-deferred until withdrawn. Back to Top A accrued interest Interest which accumulates on a fund's investments, but has not yet been paid to the shareholder. This interest is paid throughout the life of the fund as part of any interest and principal distributions. active management An investment process that attempts to outperform the average or benchmark return in an asset class at a specific level of risk through the use of superior information and judgment in portfolio construction. Active management may be based on some combination of traditional security analysis and research, technical analysis, macroeconomic forecasts and application of various fundamental quantitative tools. active manager A portfolio manager who takes an active role in any aspect of the investment process, including asset allocation, style exposures, security selection, and risk management in an attempt to improve a portfolio's risk-adjusted return. adjustable-rate instrument Any of a wide variety of fixed principal obligations whose periodic payout is set relative to a reference index rate (such as LIBOR) to create a longer-term fixed principal obligation with a floating-rate interim cost. advisor (1) An organization employed by a mutual fund's board to give professional advice on the fund's investments and asset management practices. (2) An individual or organization that provides advice and information to investors. advisory fee The amount a mutual fund pays to its investment advisor for the investment management associated with overseeing the fund's portfolio. Also referred to as Management Fee. aftermarket The market for a security after an initial public offering. The after-market or secondary market may be over-the-counter or on an exchange after-tax contribution Investment in a retirement plan from the taxed portion of an employee's pay. These contributions are treated differently from the more common pre-tax contribution when they are distributed. All contributions to Roth IRAs are after-tax contributions. after-tax return The return from an investment after all income taxes have been deducted. By comparing after-tax returns an investor can determine which investment makes the most sense based on his or her tax bracket. agency debt Obligations issued by an agency of the U.S. government and benefiting from government credit. In the U.S., debt of certain former agencies such as Fannie Mae and Freddie Mac is still referred to as agency debt because it retains implied government support. agency transaction A transaction in which the executing brokerage firm acts as an agent and usually charges a commission for its services. aggressive growth fund A mutual fund that seeks maximum long-term capital gains. Such funds often invest in stocks of small and mid-sized companies, though company size is not always a selection criterion. alpha A measure of the incremental return generated from active portfolio management. alternative minimum tax (AMT) A tax regulation requiring taxpayers who use certain methods of sheltering income to prepare a conventional tax return, then recompute the tax without the sheltering provisions. If the AMT computation results in a higher tax, the taxpayer owes that amount. AMT Bonds Certain types of municipal bonds whose income is subject to the alternative minimum tax (AMT). AMT bonds include those issued to finance such private purpose activities as industrial redevelopment and sports stadium construction. American depositary receipts (ADRs) Certificates traded in U.S. markets representing an interest in shares of a foreign company. ADRs were created to make it possible for foreign issuers to meet U.S. security registration requirements, and to facilitate dividend collection by dollar-based investors. Some ADRs sold in the U.S. under Section 144a exemptions are not readily resalable to all U.S. investors; but most ADRs are nearly as freely traded in the U.S. as domestic issues. American Stock Exchange (AMEX) A stock exchange located in downtown Manhattan. Companies that trade on the AMEX are generally smaller than those traded on the New York Stock Exchange. The AMEX is the principal listing exchange for ETFs. annual report A legally required document that every fund sends to its shareholders within 60 days after the end of the fund's fiscal year. The annual report describes the fund's financial condition and performance and includes a list of portfolio securities and an audited financial statement. annual yield The percentage of return that an investment yields each year, usually expressed in terms of dividends or interest. annualized rate of return The average return over a stated number of years, taking into account the effect of compounding. For example, a 100% return over five years is equivalent to an annualized rate of return of 18.2% per year. arbitrage 1) Technically, the action of purchasing a commodity or security in one market for immediate sale in another market (deterministic arbitrage). (2) Popular usage has expanded the meaning to include any attempt to buy a relatively underpriced item and sell a similar, relatively overpriced item, expecting to profit when the prices resume a more appropriate theoretical or historical relationship (statistical arbitrage). (3) In trading options, convertible securities, and futures, arbitrage techniques can be applied whenever a strategy involves buying and selling packages of related instruments. (4) Risk arbitrage applies the principles of risk offset to mergers and other major corporate developments. The risk-offsetting position(s) do not insulate the investor from certain event risks (such as termination of a merger agreement or the risk of delay in the completion of a transaction), so the arbitrage is incomplete. asked price Price at which an instrument is offered for sale. Often abbreviated as ask price. asset allocation (1) Dividing investment funds among markets to achieve diversification and/or a combination of expected return and risk consistent with the investor's objectives. (2) A value-oriented investment strategy that attempts to take long positions in markets or market sectors where prices appear to be low and to reduce positions, or take short positions in markets or market sectors where prices appear to be high. Tactical (TAA) or strategic (SAA) asset allocation advocates and value-seeking portfolio managers often use similar techniques and policies. In contrast to momentum investors who accentuate market trends, most asset allocators' trades tend to offset destabilizing market movements and counteract price and rate fluctuations. The asset allocator tends to buy when prices decline and sell when prices rise. asset allocation fund A fund that invests its assets in a wide variety of investments that may include domestic and foreign stocks and bonds, government securities, gold or other precious metals, and real estate. Some asset allocation funds keep the proportions allocated between different investments relatively constant, while others alter the mix as market conditions change. asset manager A portfolio manager, corporate treasurer, or other individual responsible for management of the risks and returns associated with a portfolio of securities or other instruments. auction rate preferred stock (ARPS) A floating-rate preferred with the dividend rate reset by Dutch auction, typically every forty-nine days. The interest rate is usually subject to a maximum, and the issue is puttable at each auction. auction/remarketed notes A note with essentially the same features as an Auction Rate Preferred Stock (ARPS). automatic reinvestment A mutual fund service giving shareholders the option to purchase additional shares with cash from dividend and capital gains distributions. average annual return (AAR) The most common basis for stating the historical return of a mutual fund, AAR is stated after expenses. average effective maturity For a bond fund, the average of the effective maturity dates of the fixed-income securities in the fund's holdings. A bond's effective maturity takes into account the possibility that it may be called by the issuer before its stated maturity date. In this case, the bond trades as though it had a shorter maturity than its stated maturity. average maturity For a bond fund, the average of the stated maturity dates of the fixed-income securities held. In general, the longer the average maturity, the greater the fund 's sensitivity to interest-rate changes, which means greater price fluctuation. A shorter average maturity usually means a less sensitive -- and consequently, less volatile -- portfolio. average maturity date The average length to maturity of all bonds held in a fixed-income fund. Back to Top B balanced fund A fund that seeks to provide current income and long-term growth of principal and income from a combination of stocks, bonds, and cash reserves. bank debt (or bank loans) Loans made by banks to corporations, partnerships, and other entities. Such loans may finance leveraged buyouts or merger and acquisition activity, as well as general corporate activities. basis point A measure used to quote bond yields. One one-hundredth of one percentage point, or 0.01%. For example, 25 basis points equals 0.25%. basket A set of related instruments whose prices or rates are used to create a synthetic composite instrument that trades as a unit or serves as the underlying for a derivative instrument. bear market A prolonged period of declining stock prices, typically defined as a decline of 20% or more from the market high. before-tax contribution The portion of an employee's salary contributed to a retirement plan before federal income taxes are deducted. This contribution reduces the taxpayer's gross income for federal tax purposes. benchmark A standard, often an unmanaged index, used for comparative purposes in assessing an investment's performance. beneficial owner The person or firm that will benefit from owning an asset even though they may not be registered as a shareholder. beneficiary A recipient of proceeds from a qualified retirement plan, also from a will or trust, or insurance policy upon the death of the registered owner. bequest Property left to an heir under the terms of a will. beta A measure of the variability of a fund's share price or unit investment trust's unit price in relation to the Standard & Poor's 500® Index. Securities with betas higher than 1.0 have been, and are expected to be, more volatile than the S&P; securities with betas lower than 1.0 have been, and are expected to be, less volatile than the S&P. bid price (1) The price at which a trader is willing to buy a security. (2) The price at which you can sell (redeem) a fund's shares, determined by deducting any applicable contingent deferred sales charge from the net asset value (NAV) per unit/share. Also known as the redemption price. blue-sky laws State securities laws that require conventional funds to register their shares and to provide details on each share class so that investors can base their investment judgments on relevant data. The purpose of the laws is to prevent securities fraud -- in other words, to protect investors from inadvertently buying a piece of "blue sky." bond A type of IOU issued by corporations, governments, or government agencies. The issuer makes regular interest payments on the bond and promises to pay back, or redeem, the face value of the bond at a specified point in the future, called the maturity date. bond fund A fund that invests in bonds; generally, corporate, municipal, or U.S. Government debt securities. Bond funds generally emphasize income rather than growth. bond insurance Insurance as to the timely payment of interest and principal of a bond issue. bond rating A rating assigned to a firm’s debt issue that assess their ability to pay debt and interest obligations. There are various agencies in the United States that assign ratings, such as Standard & Poors, Moody’s and Fitch. book value The net worth, or liquidation value, of a business. Calculated by subtracting from total assets all liabilities, including debt and preferred stocks, and dividing by the number of shares of common stock outstanding. bottom-up approach An investment strategy that emphasizes finding outstanding individual companies before considering broad economic trends. broad-based index An index designed to reflect the movement of the entire market or all stocks in a specific capitalization range. broker-dealer A securities firm that buys and sells investments for the public. bull market A prolonged period of rising security prices. While the general trend of prices is positive, prices on any given day will fluctuate and may decline. business cycle The regular ebb and flow of economic conditions over time, characterized by fluctuating employment levels, industrial productivity, and interest rates. Back to Top C callable bond A bond whose issuer reserves the right to redeem (or "call") it before it is due. This feature represents a risk to the investor in that bonds are generally called when interest rates fall, and thus usually can't be replaced with a similar yielding issue of the same quality. call feature A term in a bond indenture that gives the issuer the right to call the bond for redemption at certain prices and at certain times. call protection A provision in a bond's indenture setting a certain period during which the bond cannot be redeemed by the issuer. call risk The possibility that callable bonds held by a fund will be redeemed prior to maturity. The risk to the lender is that if bonds are redeemed early, it may be impossible to reinvest the funds in a similar instrument with a similar yield. capital appreciation See capital growth. capital appreciation fund A fund that seeks maximum capital appreciation by investing primarily in stocks with greater than average risk. capital gain/(loss) The difference between the sales price of a capital asset, such as an exchange-traded fund, mutual fund, stock, or bond, and the cost basis of the asset. If the sales price is higher than the cost basis, there is a capital gain. If the sales price is lower than the cost basis, there is a capital loss. Short-term capital gain refers to a gain on assets owned for one year or less. Long-term capital gain generally refers to a gain on assets owned for more than one year. Net capital gains generated by a fund from the sale of securities in its portfolio are distributed to shareholders, usually once a year in December. capital gain distribution A payment to fund shareholders of net capital gains realized on the sale of the fund's securities. The net asset value of the fund is reduced by the amount of the distribution. These amounts are usually paid out once a year, in December. capital growth A rise in the value of a fund's securities, reflected by the appreciation of its net asset value per share. capitalization The market value of a company's outstanding securities, excluding current liabilities. Under $250 million is generally considered small cap; $250 million to $10 billion is mid cap; and over $10 billion is large cap. cash equivalent A short-term money-market instrument, such as a Treasury bill or repurchase agreement, of such high liquidity and safety that it is virtually as good as cash. cash reserves Cash deposits as well as short-term bank deposits, money market instruments, and U.S. Treasury bills. certificate of deposit (CD) An insured, interest-bearing debt instrument issued by a bank, which requires the depositor to keep the money invested for a stated period of time. Certified Financial Planner (CFP) A person who is certified by the Institute of Financial Planners to give financial advice. CFPs take exams in financial planning, taxes, insurance, estate planning, and retirement. Continuing education credits are required each year to maintain the certification. Certified Investment Management Consultant (CIMC) CIMC's complete course work and pass NASD proctored examinations for Levels I and II of the Institute for Certified Investment Management Consultants' course. CIMCs must have industry experience, adhere to a code of ethics and satisfy continuing education requirements. Certified Investment Management Specialist (CIMS) CIMs pass an exam and meet financial services industry work-experience requirements. classes of shares (1) Mutual funds can have multiple classes of shares with claims on a single portfolio. Each class permits investors to purchase the portfolio in a different way. Class A shares might give investors the option of paying a front-end sales load while Class B shares give investors the option of paying a contingent deferred sales charge. In a few cases, a fund may have both conventional and exchange-traded share classes. (2) Corporations can have different classes of shares based upon voting rights (Class A shares might have one vote for each share and Class B shares might have one vote for each ten shares) or participate in different components of the company's earnings, as in the case of target stock. See also Target Stock. closed-end fund A fund that offers a fixed number of shares, which are traded on a stock exchange just like stocks. commercial paper Corporate promissory notes issued to provide short-term financing, sold at a discount and redeemed at face value. A principal component of money market fund portfolios because of its high yield. commission The fee an investor pays a broker to buy or sell a fund, typically assessed on a per-trade basis. No commission is charged for no-load, open-end mutual funds, giving them a cost advantage over exchange-traded funds for investors who trade frequently. common stock A security that represents ownership in a public corporation. compounding The growth that comes from investment income and gains on both the original principal and the previously reinvested income and capital gains of an investment. confirm A printed record of recent transactions sent to you when distributions are paid or other business is transacted. Consumer Price Index (CPI) The change in consumer prices determined monthly by the U.S. Bureau of Labor Statistics, often cited as a general measure of inflation. convertible Convertible securities are bonds, debentures, notes, preferred securities or other securities that may be converted or exchanged (by the holder or the issuer) into shares of the underlying common stock (or cash or securities of equivalent value) at a stated exchange ratio or predetermined price (the "conversion price"). Convertible securities have general characteristics similar to both debt securities and common stocks. The interest paid on convertible securities may be fixed or floating rate. Floating rate convertible securities may specify an interest rate or rates that are conditioned upon changes to the market price of the underlying common stock. convertible bond A bond, preferred stock or warrant that is convertible into the common shares of a corporation or into some other security under specific circumstances. convexity A measure of the change in a security’s duration with respect to changes in interest rates. The more convex a security is, the more its duration will change with interest rate changes. corporate action: An event or resolution approved by a corporation's board of directors that changes the corporate capital structure or financial condition. Examples include full or partial call of securities; maturation and repayment of debt or preferred stock; conversion of debt; exchange, tender or spin-off of securities; split or reverse split of shares; securities offerings; and liquidation or name change. corporate bond Corporate bonds generally are used by corporations to borrow money from investors. The issuer pays the investor a fixed or variable rate of interest and normally must repay the amount borrowed on or before maturity. Certain bonds are "perpetual" in that they have no maturity date. correction A relatively short-term drop in stock prices, usually defined as a decline of 10% or more from the market's high. cost basis The cost of an investment, used as the basis for calculating and reporting capital gains or losses. It is adjusted for stock splits, distributions, and return of capital. coupon (1) The nominal annual rate of interest on a bond or note, usually expressed as a percentage of the face value. (2) A piece of paper detached from a bearer bond and exchanged for a quarterly, semi-annual, or annual interest payment. creation unit The minimum module for issue or redemption of shares in an open exchange-traded fund (ETF), usually between 25,000 and 300,000 fund shares, depending on the fund's policy. Existing ETFs issue their shares in return for portfolio deposits of securities in multiples of the creation unit basket specified by the fund's advisor. With minor exceptions related primarily to accrued dividend payments and cash balancing amounts, creations and redemptions are in kind, not in cash. ETF trading on the secondary market on the exchange is in the individual fund shares issued in the creation, not in Creation Units. credit rating An evaluation of the creditworthiness of a debt security by an independent rating service. credit risk The potential for default by an issuer on its obligation to pay interest or principal on debt securities. Most U.S. government securities are considered to have very little credit risk. cumulative discount privilege A way for a fund shareholder to qualify for a reduced sales charge by combining investments in different funds made at the same time into a single transaction. current return The ratio of the coupon income of a bond to the market price. Current yield Annual dividend or interest divided by the current price of a stock or bond. Committee on Uniform Securities Identification Procedures (CUSIP) number A nine-digit identifier used to uniquely identify every security publicly traded in the United States. custodian The bank or trust that holds a fund's assets (stocks, bonds, cash, and other securities) and handles payments and receipts for the fund's securities transactions. cyclical stocks Stocks of companies whose main business experiences regular ebbs and flows in activity due to changes in the economy. The auto, chemical, paper, and steel industries, for example, are considered cyclical since their earnings tend to fall when the economy slows. Food and drug stocks are generally considered to be non-cyclical, since food and medical care needs continue no matter what economic conditions are. Back to Top D debt security See fixed income security. decimalization The process of changing the prices that securities trade at from fractions to decimals. Decimalization should be complete in the U.S. by the end of 2001, except in the bond market. declaration date The date the Board of Directors of closed-end funds, exchange-traded funds, and preferred shares announce the amount of the dividend and/or capital gains distribution to be paid to shareholders. defaulted securities Typically fixed income (or any dividend-paying securities such as preferred stock) that are unable to make their interest rate payments and/or unable to repay their principal. defined portfolio A portfolio of securities that remains fixed, except under certain circumstances, for the life of the trust. Shares of this portfolio are offered to individual investors and called "units." Also called unit investment trust. deflation A decline in the prices of goods and services. The opposite of inflation. Depository Trust Corporation (DTC) A corporation owned collectively by broker-dealers and banks responsible for holding securities owned by its shareholders and their clients and for arranging the receipt, delivery, and monetary settlement of securities transactions. Once securities are on deposit, further transfers within the system can be accomplished electronically at low cost. DTC has merged with the National Securities Clearing Corporation (NSCC) to form the Depository Trust and Clearing Corporation (DTCC). DTC still exists as an operating unit of DTCC. developing nations (or developing markets) Typically, these are countries that are in the early stages of economic development. General characteristics include a high demand for capital investment, a high dependence on export markets, a need to develop basic economic infrastructures and low political stability. developed nations These are countries that have mature economies. General characteristics include major industrial production and high political stability. developing nations Typically, these are countries that are in the early stages of economic development. General characteristics include a high demand for capital investment, a high dependence on export markets, a need to develop basic economic infrastructures and low political stability. derivative A financial security or arrangement whose value is based on, or "derived" from, a traditional security, asset, or market index. DIAMONDS An exchange-traded fund based on the Dow Jones Industrial Average. direct rollover A distribution from qualified plan or IRA account that is sent directly to the custodian of an IRA account and is reported to the IRS as a rollover. discount Amount (stated in dollars or a percent) by which the selling or purchase price of a bond is less than its face amount or which the market price of an exchange-traded fund is below its net asset value. discount bond A bond that currently is selling below par or face value; e.g., a $1,000 bond selling for $950. disclosure statement A document which described the terms of an IRA. All investors who open an IRA account receive a copy of the current disclosure statement. discount rate The interest rate charged by the Federal Reserve to member banks. Basically, the floor rate for interest rates in the economy. disinflation A slowing of the rate at which prices are increasing. Not the same as deflation, when prices actually drop. distribution A dividend income payment, principal payment or capital gain payment. Exchange-traded funds and mutual funds automatically reinvest distributions in additional fund shares or units unless a unit holder/shareholder elects to receive them in cash. distribution-in-kind The receipt of underlying stocks at redemption or termination of ownership in a fund, instead of receiving cash. distribution schedule The schedule describing when throughout the year when a closed-end fund, exchange-trade fund or preferred share makes income, principal, dividend and/or capital gains distributions. diversification A strategy of spreading investments among many different securities or sectors to reduce the risk of owning any single investment. diversified common stock fund A mutual fund that invests its assets in a wide range of common stocks. The fund's objectives can be growth, income or a combination. dividend A distribution of earnings to shareholders of a corporation or an investment company. Investment company dividends are usually paid out of investment income, including net short-term capital gains. Investment companies also make distributions of net realized long-term capital gains, typically once a year. dividend drag One major issuer of open exchange-traded funds has attempted to make a bęte noire of the evil sounding "dividend drag." Dividend drag is attributed primarily to several of the older, unit trust-based ETFs (SPDRs, MidCap SPDRs and DIAMONDS). Because of the passively invested nature of these unit trusts, the SEC initially required that cash dividends received by the trust could not be reinvested in portfolio stocks. Dividends were to be accumulated and paid out periodically to investors. During the accumulation period, dividend cash could be invested by the trustee. Any interest earned (at a short-term rate) would be deducted from the expenses of the trust. During a rising market, a dividend paying portfolio using the unit trust structure will lag behind a comparable fund based on a mutual fund structure which can equitize dividends (invest in stocks) until the fund is ready to pay the net dividends to shareholders. Furthermore, because the unit trusts are not permitted to lend securities, an additional opportunity to enhance portfolio returns is not available to them. The cost disadvantage of these unit trust features is debatable. The value of dividend equitization depends in large part on what the market does. Equitizing dividends will be undesirable during a period of declining markets. Of course, the period when exchange-traded funds have been growing most rapidly has been a period of generally rising markets. The value of dividend equitization ranges from a negative value in a declining market to as much as five or six basis points per year on an S&P 500 portfolio (the 500 SPDR) in the better years of the 1990's. Stock lending opportunities are rare in Dow Jones Industrial Average stocks and only slightly more common in stocks in the S&P 500. In the best of circumstances, stock lending might add a few basis points to an S&P MidCap or Nasdaq 100 portfolio. Regardless of the course of the markets in the period ahead, the issue of dividend drag should soon disappear. At least one of the trustee-custodians of the unit trust structure ETFs has applied to the SEC for permission to take the steps necessary to equitize dividends and engage in stock lending. We believe the SEC will approve these requests in time. We expect the other unit-trust trustee to make a similar application promptly upon publication of a notice that the Commission is preparing to grant the initial request. There is every reason to believe, therefore, that the phrase "dividend drag" will disappear from ETF vocabularies before it makes it into standard dictionaries. dividend rate The most recent rate at which a fund is distributing dividend and interest income earned on the fund's investment portfolio, expressed in cents per share. dividends received reduction A corporation may generally deduct from their income 70% of the dividend income they receive from certain securities offered by other corporations. However, this tax deduction is not available for individual investors. Certain preferred securities qualify for this reduction, and may pay smaller dividends than non-reduction eligible preferred securities. The dividends received reduction qualifying market is estimated to have $45 billion in issues outstanding. Taxable preferred securities do not quality for this reduction (under Section 243 of the Internal Revenue Code of 1986, as amended). They are often issued by trusts established by operating companies, and are not a direct obligation of the operating company. The trust is generally treated as transparent for federal income tax purposes such that the holders of the taxable preferred securities are treated as owning beneficial interests in the underlying debt of the operating company. Accordingly, payments of these securities are treated as interest rather than dividends for federal income tax purposes, and are not eligible for the dividends received deduction. The non dividends-received reduction qualifying market is estimated to have $180 billion in issues outstanding. dividend yield The most recent rate at which a fund is distributing dividend and interest income earned on the fund's investment portfolio, expressed as an annualized percentage of the fund's offering price per share. dollar-cost averaging An investment strategy of making investments of equal amounts at regular intervals in the same fund. Because the unit holder/shareholder buys more units/shares at lower prices and fewer units/shares at higher prices, the average cost of the units/shares purchased will generally be lower than the average price over the investment period. However, dollar-cost averaging does not ensure a profit or protect against a loss in a declining market. domestic company Refers to a corporation that is headquartered in the United States. Although many domestic corporations conduct a majority of their business and receive a majority of their revenues from operations in the United States, many of these same corporations have significant operations abroad and receive significant revenue from overseas. Dow Jones Industrial Average ("the Dow") The most commonly used indicator of stock market performance, based on the prices of 30 major industrial companies. duration A mathematical measure of the price sensitivity of a bond fund's portfolio to changes in interest rates. Duration is stated in years; the shorter the duration, the less price variability you can expect in the fund's price per share. Dutch auction An auction system where the price of the item being auctioned is gradually reduced until it elicits a responsive bid. Dutch auctions are used to sell U.S. Treasury bills and to set rates on some re-marketed floating-rate debt instruments and preferred stocks. Back to Top E earnings growth rate The average annual rate of growth in earnings per share over the past five years for the stocks in a fund's portfolio. earnings per share (EPS) A measure of a company's financial performance, calculated by dividing a company's earnings by the number of common shares outstanding. This is an important figure for investors who are looking for stocks they consider to be undervalued in price. education IRA Not actually a retirement account; rather, it is established to pay for a child's post-secondary education. A total of $500 in after-tax income can be contributed on a child's behalf each year. emerging market An "emerging market" country is any country determined to have an emerging markets economy, considering factors such as whether the country has a low-to-middle-income economy according to the World Bank or its related organizations, the country's credit rating, its political and economic stability and the development of its financial and capital markets. These countries generally include countries located in Latin America, the Caribbean, Asia, Africa, the Middle East and Eastern and Central Europe. emerging market fund A mutual fund investing a majority of its assets in the financial markets of one or more developing countries, typically small markets with a short operating history. Such funds usually take higher risks in exchange for higher potential returns. employer matching contribution A company's contribution to an employee's retirement account. eindexing A modified indexing strategy that attempts to exceed the total return of the benchmark index. equity fund A mutual fund that invests primarily in stocks. equity security A type of security representing ownership in a corporation. Common stock, preferred stock, and convertible securities are all equity securities. (Debt securities do not represent ownership.) equity unit investment trust A portfolio of professionally selected common stocks that provide either the potential for above-average capital appreciation or income. equity security A type of security representing ownership in a corporation. Common stock, preferred stock, and convertible securities are all equity securities. Non-convertible debt securities do not represent ownership. ERISA The Employee Retirement Income Security Act of 1974 that created rules covering qualified retirement savings plans. estimated current return (ECR) The estimated annual net interest income per unit divided by the current offering price. estimated long term return (ELTR) This return is calculated according to SEC mandated formulas for a unit investment trust. The estimated return is projected over the estimated life of the trust and is not guaranteed. The calculation is based on an average of the yields to maturity of the bonds held in the unit investment trust, which are adjusted to reflect the sales charge and estimated expenses. exchange-traded fund (ETF) (1)A closed end fund (i.e., with a fixed number of shares) with an active manager responsible for executing a defined investment strategy that is listed on an exchange and traded like a stock. (2) An open-end modified unit trust or investment company characterized by a dual trading process. Fund shares are created or redeemed in large blocks through the deposit of securities to, or delivery of securities from, the fund's portfolio. Secondary trading, in lots as small as a single fund share, takes place on a stock exchange. The dual trading process permits (and potential arbitrage requires) the fund shares to trade close to net asset value at all times. Open ETFs trade at prices very close to their current underlying value throughout the trading day and are usually more tax efficient than comparable conventional funds. HOLDRs and Folios, two alternative basket or portfolio products, are sometimes compared to ETFs (which are subject to investment company regulation and regulated investment company tax treatment) but the product structures are quite different. ex-dividend The status of shares during the time between the ex-dividend date and the payment date of a fund dividend or capital gains distribution. When a fund is trading ex-dividend, a purchaser is not entitled to the distribution. ex-dividend date The date on which a fund's net asset value (NAV) drops by an amount equal to the dividend and/or capital gains distribution (although market movements may alter somewhat the actual change in the fund's closing NAV). Most publications that list closing NAVs place an "X" or "XD" after a fund's name on its ex-dividend date. expense ratio For a mutual fund or other investment company, the charge to fund assets for investment management, marketing, custody, administration and other related costs but not for unusual outlays for law suits or for trading expenses like brokerage commissions. Usually expressed in basis points or as a percentage of net assets. Back to Top F face value A bond's stated redemption value at maturity. Most bonds have a face value, or par value, of $1,000. federal funds rate The interest rate charged by banks to lend to other banks needing overnight loans; this figure is the most sensitive indicator of the direction of interest rates. Federal Reserve System The central bank of the United States, which has regulated credit in the economy since its inception in 1913. Includes the Federal Reserve Bank, 14 district banks, and the member banks of the Federal Reserve. fiscal year An accounting period of 365 days (366 in leap years) for which a fund prepares financial statements and performance data. Not necessarily the same as the calendar year (January 1 through December 31). fixed-income fund A fund whose objective is to provide current income by investing in fixed-income securities. fixed-income security A security that pays an unchanging or periodically reset rate of interest or dividends. Fixed-income securities include bonds, money market instruments, and preferred stock. float In equity markets, the number of shares of a corporation that are available for trading by the public. Float estimates usually exclude large insider positions and corporate control or strategic holdings. floating rate securities Bonds whose coupon rates adjust periodically based on a specified reset mechanism floating rate securities Bonds whose coupon rates adjust periodically based on a specified reset mechanism. folio A collection of stocks that may reflect some degree of standardization against a benchmark but which is assembled primarily to provide its holder with a degree of diversification or exposure to an investment theme. foreign company A corporation that is headquartered outside of the United States. Although many foreign corporations conduct a majority of their business and receive a majority of their revenues from operations outside the United States, many of these same corporations have significant operations in the United States and receive significant revenue from the United States. forward commitment A purchase or sale of a security at a specified price with delivery and cash settlement at a specified future date. front-end load See up-front sales charge. full faith and credit An unconditional commitment to pay interest and principal on debt securities, usually securities issued or guaranteed by the U. S. Treasury and tax-exempt general obligation bonds. fund abbreviation An abbreviation of a fund's name, commonly used in newspaper listings. fund of funds A financial intermediary organized as a corporation, business trust, or partnership that accepts equity investments and buys shares of other funds that, in turn, hold securities or commodities. fund net assets The total value of a fund's securities, cash, and other holdings, minus any outstanding debts. Funds from Operations (FFO) FFO—Funds from operations is equal to a REIT’s net operating income plus depreciation and debt amortization, minus gains or losses from the sales of property or debt restructuring. FFO is an industry term. It is not recognized by generally accepted accounting principles (GAAP). fundamental analysis The study of a company's business and financial condition to help forecast future movements in its stock price. Analysts consider the company's past record of earnings and sales as well as company assets, management, and markets to predict trends that could affect a company's stock. futures Agreements to buy or sell specific amounts of financial instruments or physical commodities for an agreed upon price at a certain time in the future. Back to Top G general obligation (GO) bond A municipal bond backed by the general credit of the issuing organization. General obligation bonds usually are more secure than revenue bonds and thus trade with a slightly lower yield. government bond A type of IOU issued by governments. The issuer makes regular interest payments on the bond and promises to pay back, or redeem, the face value of the bond at a specified point in the future, called the maturity date. grantor trust A legal structure that is a security, although not issued by a company that has been registered with the SEC under the Investment Company Act of 1940. Holding a grantor trust is substantially similar to holding a basket of securities. The trust passes along all the voting rights and dividends associated with the underlying securities. growth and income fund A fund that seeks a combination of long-term growth of capital and current dividend income. growth fund A fund that holds stocks of companies with above-average prospects for growth and, usually, low-dividend yields. growth investing A style of equity investing that emphasizes stocks with above-average price-to-book ratios and sales and earnings growth, but below-average dividend yields. Back to Top H harvesting losses A euphemism for tax-loss-motivated sales of securities to offset gains realized on other positions. hedge A strategy used to manage investment risk. In investing, hedging involves the purchase of an offsetting position, such as a put option or futures contract, to guard against the risk of a market decline. highest in, first out (HIFO) Accounting: A principle of tax efficiency in a conventional mutual fund that defers taxes as much as possible by selling the highest cost lot of a particular stock first and then others in sequence until the lowest cost lot is sold last. high yield Securities of below investment grade quality are regarded as having predominately speculative characteristics with respect to capacity to pay interest and repay principal, and are commonly referred to as junk bonds. Issuers of high yield securities may be highly leveraged and may not have available to them more traditional methods of financing. The prices of these lower grade securities are typically more sensitive to negative developments, such as a decline in the issuer's revenues or a general economic downturn, than are the prices of higher grade securities. The secondary market for high yield securities may not be as liquid as the secondary market for more highly rated securities. high yield bonds Bonds that are rated below Baa, the lowest investment grade bond rating. HOLDRS Shares in a grantor trust which represent an undivided interest in a specific portfolio of stocks, usually in a particular industry, sector or group. HOLDRs were developed by Merrill Lynch to allow an investor to own a moderately diversified group of stocks in a single investment that is transparent and liquid. HOLDRs are characterized by low ongoing expenses, a high degree of tax flexibility which leads to tax-efficiency as long as the investor does not sell a highly appreciated component shares. The holder of HOLDRs can separate the portfolio into its component securities at modest cost to realize losses. The principal disadvantage of HOLDRs is that any investor who breaks them up will find that keeping track of the tax basis and tax consequences associated with subsequent transactions in the component securities may be relatively complex. hybrid A security that has mixed risk and return characteristics. For example, a convertible bond generally has a coupon that pays interest, so it behaves somewhat like a credit market instrument. However, its imbedded conversion feature also makes it behave like an equity instrument. hybrid preferred securities A synonym for taxable preferred securities. Back to Top I income An investment strategy that seeks to provides over time attractive after-tax returns with moderated risk from a balanced portfolio of government, corporate, or municipal bonds, stocks and cash equivalents. Income funds invest primarily in quality bonds, with a secondary emphasis on stocks of established well-known companies. income dividend Payments to fund shareholders of dividends and interest earned by securities held by a fund. Income dividends are paid after deducting operating expenses. income fund A fund that seeks current income rather than growth of capital. Income funds typically invest in bonds and/or high-yielding stocks. income risk The possibility that the income provided by a fund will fluctuate due to changing interest rates. Money market funds and short-term bond funds are most subject to income risk. indenture The formal contract governing a corporate bond that explains the bond's maturity, coupon rate, call privileges, and other rights. index Usually, a number calculated by weighting a number of prices or rates according to a set of predetermined rules. A financial market index is a statistical construct that measures relative or absolute price changes and/or returns in stock, fixed income, currencies, or futures markets. The purpose of the index calculation is usually to provide a single number whose behavior is representative of the movements of a variety of prices or rates and indicative of behavior in a market. Indexes serve as the underlyings for a number of products, particularly in equity and fixed-income markets. index fund A fund designed to track the performance of a market index. Most common among stock funds, but used in fixed-income markets as well. index shares A subset of exchange-traded funds (ETFs) based on an index and implemented by holding an index portfolio. index tracking A reference to the correlation between a portfolio's return and the return on a benchmark index, or, alternately, to the portfolio's tracking error relative to the index. Many equity index funds and enhanced index portfolios are managed with close attention to index tracking. See also Tracking Error indexation (1) A relatively passive investment strategy that attempts to replicate the return of a benchmark index in a fund. (2) The practice of linking the coupon on a debt security to an index of inflation. index plus See Enhanced Indexing. individual retirement account (IRA) A retirement plan that allows individuals to contribute money on a tax-deferred basis to a retirement account each year. inflation A rise in the prices of goods and services, often equated with loss of purchasing power. initial offering date The date a portfolio is first available for sale. initial public offering (IPO) A company's first public offering of common stock. initial sales charge The sales charge paid by the investor at the time of purchase. in-kind See distribution-in-kind. institutional investor An organization that trades large volumes of securities. Examples are mutual funds, insurance companies, pension funds. interest rate risk The risk that a security or fund will decline in price because of changes in market interest rates. interest-only obligation (or IO obligations) A tranche of mortgage-backed securities whose owner receives only the interest (or a portion of the interest) on the underlying mortgages. During a period of falling interest rates, rapid repayments of principal by mortgage holders reduces the value of the interest-only obligations. investment advisor An individual or organization that manages a portfolio and makes day-to-day investment decisions regarding the purchase or sale of securities. investment club A group of investors who pool their money and knowledge to make investments, learn about investing and diversify their portfolios. investment company shares The technical name for many closed-end fund, open exchange-traded fund and preferred fund shares which are governed by rules established in the Investment Company Act of 1940. Investment Company Act of 1940 ( 40 Act) The legislation and associated regulations which govern the regulation of the fund (mutual, closed-end, exchange-traded, preferred) and investment advisory industries. This act stipulates the conditions that funds and investment advisors have to meet in order to distribute their products and services to the general public. investment grade Bonds whose issuers are judged by an independent rating service such as Standard & Poor's or Moody's Investors Service to very able to pay interest and repay principal. Standard & Poor's and Moody's Investors Service designate bonds in their top four categories (AAA/Aaa, AA/Aa, A, and BBB/Baa) as investment grade. investment horizon The length of time an investor expects to keep a sum of money invested. investment objective Formally, a provision in the prospectus of a fund that states the principal requirements and limitations that constrain the investment advisor's range of action in management of the fund portfolio. Investment objectives are generally stated in broad terms such as growth of capital or investment income, but they are occasionally highly specific, particularly when they pertain to restrictions on investment flexibility. investment style A broad indicator of a fund's investment emphasis. For stock funds, the investment style indicates whether a fund emphasizes stocks of large-, medium, or small-capitalization companies and whether it emphasizes stocks with growth or value characteristics or a blend of these characteristics. Back to Top J joint account An account registered to two or more adult shareholders. A minor may not be a joint tenant. joint tenants with rights of survivorship (JTWROS) A form of account registration in which two or more individuals share an undivided interest in an account. In the event of one tenant's death, the surviving tenant(s) automatically inherits the property without the necessity of court proceedings. jumbo CD A certificate of deposit issued by banks in amounts of $1 million to $5 million paying higher rates of interest than smaller-denomination certificates. The ability to participate in jumbo purchases is one of the advantages of investing in a money market fund. junk bonds Lower-rated, higher-yielding bonds with a credit rating of BB or lower. Back to Top K Keogh plan A retirement plan for self-employed individuals and their employees. Back to Top L large capitalization stocks The stocks of companies whose market value is more than $10 billion. letter of intent (LOI) A way for a shareholder to qualify for a reduced sales charge by promising to invest a certain amount within a specified time. leverage An investment or operating position subject to a multiplied effect on profit or position value from a small change in sales quantity or price. Leverage can come from high fixed costs relative to revenues in an operating situation, or from debt or an option structure in a financial context. level load See Load Fund. liquidity The ability to easily turn assets into cash. An investor should be able to sell a liquid asset quickly with little effect on the price. load See sales charge. load fund A fund that assesses a sales charge. London InterBank Offered Rate (LIBOR) London Interbank Offered Rate. LIBOR is the rate that the largest international banks charge each other for loans. long-term capital gain (LTCG) A profit on the sale of a security or fund share that has been held for more than one year. Generally LTCGs are taxed at 20% in the United States. long-term investment strategy A strategy that looks past the day-to day fluctuations of the stock and bond markets and responds to fundamental changes in the financial markets or the economy. loss harvesting Selling enough loss positions from a fund portfolio to eliminate the need to distribute taxable gains. In a separate account portfolio, the investor's total gain and loss position will be considered in deciding what losses to harvest. See also harvesting losses. Back to Top M management company The firm that organizes, manages, and administers a fund. management fee The amount a mutual fund pays to its investment advisor for the investment management associated with overseeing the fund's portfolio. market risk The possibility that stock or bond prices will fluctuate. market timing An investment strategy based on predicting market trends. The goal is to anticipate trends, buying before the market goes up and selling before the market goes down. maturity date (or maturity) The date on which the face value of a bond must be repaid. median market cap The middle stock in a stock fund's portfolio in terms of market capitalization. minimum investment The smallest investment permitted when opening a new fund account or making an additional purchase. momentum fund A fund that attempts to achieve above-average results by following what its manager discerns as an established trend in securities process. money market fund A fund designed to provide safety of principal and current income by investing in securities that mature in one year or less, such as bank certificates of deposit, commercial paper, and U.S. Treasury bills. The price per share is fixed at $1.00. mortgage-backed security Debt instruments that are guaranteed (or collateralized) by residential, commercial, or industrial real-estate mortgages. municipal bond An IOU issued by a state, city, or other municipality to finance public works such as the construction of roads or schools. The interest is usually free from federal income tax and may be free from state and local taxes as well. municipal bond fund A fund that seeks to provide income exempt from federal income tax, consistent with preservation of capital and the fund's risk characteristics, by investing in a portfolio of municipal bonds. mutual fund A diversified, professionally managed portfolio of securities that pools the assets of individuals and organizations to invest toward a common objective such as current income or long-term growth. Back to Top N NASD The National Association of Securities Dealers, an industry organization charged by Congress with standardizing investment practices and establishing high ethical standards in the financial industry. NASDAQ A nationwide electronic automated quotation system established by the NASD for up-to-the-minute price quotations and trading on over 5,000 OTC stocks. net asset value (NAV) per share for a fund The market value of one share of a closed-end, exchange-traded, or preferred fund. The NAV is calculated daily by taking the fund's total assets (securities, cash, and accrued earnings), subtracting the fund's liabilities, and dividing by the number of shares outstanding. The NAV does not include the sales charge. The official NAV is calculated once a day by most U.S. funds at 4:00pm Eastern Time. Partly in response to the growth of open-end exchange-traded funds, some conventional funds have begun calculating an NAV several times a day or, in a few cases, hourly. The more frequent values calculated for exchange-traded funds are not "official" NAVs. New York Stock Exchange (NYSE) The oldest (est. 1792) stock exchange in the U.S. non-investment grade (or high yield) bonds Bonds whose issuers are low-rated by an independent rating service. Standard & Poor's and Moody's Investors Service designate bonds rated below BBB/Baa as non-investment grade. Back to Top O offering price See asked price. offer to bid The rate of return for a unit investment trust which shows total return to date. This return assumes payment of all sales charges at the time units are purchased and excludes any unpaid deferred sales charges. open-end investment company Technically, a mutual fund that constantly offers new shares for sale and undertakes to redeem outstanding shares on any business day at their NAV. Participants can buy and sell shares on any business day and the size of the fund is not limited. Most open-end exchange-traded funds are a variant of the traditional open-end company, but their shares are not individually redeemable. option The right to buy or sell a given security within a particular time at a specified price. The right to buy is a call; the right to sell is a put. Unlike a futures contract, an option does not obligate the investor to perform the transaction; the obligation is only on the part of the seller. over the counter (OTC) A market, regulated by the NASD, for securities that are not traded on a national stock exchange, as well as some listed securities traded off those exchanges. Most government, municipal, and corporate bonds are also traded over the counter. The trades take place by telephone or by computer network. Back to Top P par value The face value of a bond or stock as printed on the certificate. Bonds generally have a par value of $1,000. passive investing Investing in a fund or other pooled investment vehicle that attempts to match the risk/return pattern of a market index. The term passive investing is, perhaps, somewhat misleading in describing the activities of the manager of an index portfolio. While the manager may not engage in active management in the sense of picking stocks or determining wide-ranging investment policy, the method in which some index changes are handled places a premium on an aggressive, active response by the index fund manager. passive structured portfolio management Use of quantitative tools to track an index closely while maximizing the tax efficiency of a fund. If a trade-off is necessary, the choice usually will be to stress tax efficiency. payable date The day on which a fund pays its distributions to shareholders. payment default risk (or default risk) Although bond issuers promise to make regular interest payments on the bond and promise to pay back, or redeem, the face value of the bond at the maturity date, some issuers may fail to meet its obligations. Payment default risk refers to the risk that a specific issuer may not be able to meet these obligations. physical assets Agricultural, industrial or natural resources that underlie commodity futures portfolio A collection of securities and/or other financial instruments under common ownership and management. portfolio allocation The proportion of a fund's assets invested in stocks, bonds and cash equivalents, respectively. portfolio diversification See diversification. portfolio turnover A measure of the trading activity in a fund's portfolio of investments -- that is, how often securities are bought and sold by the fund. preferred Preferred securities generally pay fixed or adjustable rate dividends to investors, and have a "preference" over common stock in the payment of dividends and the liquidation of a company's assets. This means that a company must pay dividends on preferred stock before paying any dividends on its common stock. Preferred stockholders usually have no right to vote for corporate directors or on other matters. preferred stock (or preferred shares) A class of stock with a fixed dividend that has preference over a company's common stock in the payment of dividends and the liquidation of assets. There are several kinds of preferred stock, among them adjustable-rate preferred and convertible preferred. premium (1) The amount by which a bond's market price exceeds its par value. (2) The amount by which an exchange-traded fund's market price exceeds its net asset value. pre-refunding A procedure used by state and local governments to refinance municipal bonds to lower interest expenses. The issuer sells new bonds with a lower yield and uses the proceeds to buy U.S. Treasury securities, the interest from which is used to make payments on the higher-yielding bonds. Because of this collateral, pre-refunding generally raises a bond's credit rating and thus its value because of this collateral. price/book ratio The price per share of a stock divided by its book value (i.e., net worth) per share. For a fund, the ratio is the weighted average price/book ratio of the stocks in the fund's portfolio. price/earnings ratio (P/E ratio) The ratio of a stock's current price to its per-share earnings (P/E) over the past year. For a fund, the ratio is the weighted average P/E of the stocks in the fund's portfolio. P/E is an indicator of market expectations about corporate prospects; the higher the P/E, the greater the expectations for a company's future growth in earnings. primary market The primary market is the market for new issues of securities. Primary is distinguished from the secondary market where previously issued securities are bought and sold. prime rate The interest rate a bank charges on loans to its most creditworthy customers. Frequently cited as a standard for general interest-rate levels in the economy. Sometimes confused with a bank's prime rate on consumer loans. principal only obligation (or PO obligation) A tranche of mortgage-backed securities whose owner receives only the principal payments made by the underlying mortgages. During a period of falling interest rates, rapid repayments of principal by mortgage holders increases the value of the principal-only obligations. During periods of rising interest rates, principal payments may slow down and the value of the principal only obligations will decline. private placement The sale of securities to a limited number of investors at the initial stages of a company's operations, a private placement may allow investors to invest in attractive companies before the company sells stock to the public. prospectus The official legal document that describes a fund and offers its shares for sale. Under certain circumstances, a prospectus must be given to all investors before they invest, or in connection with their purchase confirmation. proxy (1) Document providing shareholders with background information on management and large shareholders and on matters to be voted on by stockholders. (2) A written authorization that allows one person to act for another. For example, shareholders who are unable to attend a fund's annual meeting may mail in their ballots and vote by proxy. (1) and (2) are often combined in the solicitation of shareholder votes. public offering price (POP) The purchase price of one fund share, including any up-front sales charge. Back to Top Q Q's, QQQ or Qubes Nicknames for the Nasdaq 100 Index Tracking Stock Index Shares. Their stock symbol is QQQ. qualified retirement plan A retirement plan established by employers for their employees meeting the requirements of Internal Revenue Code Section 401(a) or 403(a). Plan assets and earnings are not taxed until they are paid out as benefits. Back to Top R R2 (pronounced R-squared) A measurement of investment risk that shows how closely the portfolio's performance correlates with the performance of a benchmark index such as the Standard and Poor's® 500 Index -- and thus indicates how closely that performance is linked to the broad market. A high R2 signifies that the portfolio's fluctuations generally reflect market moves, while a low R2 indicates that other factors tend to drive fund performance. real estate company A real estate company generally derives at least 50% of its revenue from the ownership, construction, financing, management or sale of commercial, industrial or residential real estate (or that has at least 50% of its assets invested in such real estate). REIT (Real Estate Investment Trust) Real estate investment trusts were authorized by the Real Estate Investment Trust Act of 1960. This is a common type of real estate company that pools investors’ funds for investment primarily in income producing real estate or in real estate related loans (i.e. mortgages). A REIT normally derives its income from rents or from interest payments, and may realize capital gains by selling properties that have appreciated in value. A REIT is not taxed on income distributed to shareholders if it complies with several requirements relating to its organization, ownership, assets and income and distributes at least 90% of its taxable income (other than net capital gains) for each taxable year and otherwise complies with the Internal Revenue Code of 1986, as amended. Unlike a limited partnership, a REIT cannot pass on tax losses to investors. One major distinction between REITs and other real estate companies is that a REIT must acquire and develop its properties primarily to operate them as part of its own portfolio rather than to resell them once they are developed. REITS can generally be characterized as Equity REITs, Mortgage REITs and Hybrid REITs. Equity REITs own and operate income-producing real estate such as retail, hotel, multifamily, healthcare and industrial properties, among others. Most of their primary income is derived from rents (and to a lesser extent, from selling properties that have appreciated in value). Mortgage REITs, which invest the majority of their assets in real estate mortgages, derive their income primarily from interest payments. They lend money directly to real estate owners and operators or extend credit indirectly through the acquisition of loans or mortgage-backed securities. Today's mortgage REITs generally extend mortgage credit only on existing properties. Hybrid REITs combine the characteristics of both Equity REITs and Mortgage REITs. Some REITs invest in a variety of property types: shopping centers, multifamily, warehouses, healthcare, self-storage, office buildings, hotels, etc. Other REITs specialize in one property type only, such as shopping centers or factory outlet stores. Even within property types, there may be sub-specialization. For example, health care REITs specialize in hospitals, including acute care, rehabilitation and psychiatric, medical office buildings, nursing homes, and congregate and assisted living centers. Recent REIT changes made possible after the 1999 REIT Modernization Act allowed, among other things, REITs to add operating company revenues (usually from service income) to their lease income. This includes such services as building management, landscaping, bankruptcy workouts, and real-estate development. REOC (Real Estate Operating Companies) Real estate operating companies are publicly traded real estate companies that have chosen not to be taxed as REITs. One reasons is the availability of tax-loss carryforwards, which are not allowed in REITs. Another reason is the operation of a non-REIT line of business, such as the actual operation of hotels. Finally, a REOC may choose to retain and reinvest its earnings rather than paying out dividends. Real Estate Investment Trust Act of 1960 Congress passed this federal law in 1960, which officially authorized REITs. Its purpose was to allow small investors to pool their investments in real estate in order to get the same benefits as might be obtained by direct ownership, while also diversifying their risks and obtaining professional management. real rate of return The return on an investment after it is adjusted for the effects of inflation. record date The date that determines which unitholders or shareholders will be paid the dividend, capital gain or other distribution. Only unitholders or shareholders who are invested in the fund on the record date will receive the distribution on the payment date. redemption 1) Mutual fund shares are redeemed at Net Asset Value when a shareholder's holdings are liquidated. (2) Repayment of a debt security or preferred stock issue, at or before maturity, at Par or at a premium price. redemption price The price at which a holder can sell (redeem) a fund's shares, determined by deducting any applicable sales charge from the net asset value (NAV) per unit/share. regulated investment company A reference to income pass-through provisions in the Internal Revenue Code. Apart from SEC registration, an investment company must meet IRS code diversification and income distribution requirements to avoid taxation at the fund level. reinvestment privilege The right of shareholders to use income and/or capital gain distributions to purchase additional shares of a fund without paying a sales charge. REIT Modernization Act of 1999 This was the federal tax law change whose provisions allow a REIT to own up to 100% of stock of a taxable REIT subsidiary that can provide services to REIT tenants and others. The law also changed the minimum distribution requirement from 95 percent to 90 percent of a REIT's taxable income -- consistent with the rules for REITs from 1960 to 1980. replicating portfolio A portfolio constructed to match the performance of an index or benchmark almost exactly. An exchange-traded fund with a replicating portfolio will usually track its index more closely and trade at a tighter bid-asked spread than a fund with a representative sampling portfolio. Contrast with Representative Sampling. representative sampling A technique used to create a benchmark tracking portfolio when the benchmark is not naturally compliant with rules governing portfolio structure such as the regulated investment company diversification requirements for a U.S.-based investment company. Representative sampling is also used when certain securities are not readily available to match the benchmark. repurchase agreement (repo) A purchase of U.S. government securities from a bank or broker made under the stipulation that the seller agrees to buy back or repurchase the securities at a fixed price on a future date. Repos usually mature in a week or less. retail investor Private investors that typically purchase and sell securities in smaller quantities than institutional investors. revenue bond A municipal bond that is backed by the revenue from the project being financed. Revenue bonds are less securely backed than general obligation bonds, and thus may trade with higher yields. reverse repurchase agreement (reverse-repo) A sale of U.S. government securities by a bank or broker made under the stipulation that the buyer agrees to sell the securities at a fixed price on a future date. Reverse-repos usually mature in a week or less. rights of accumulation (ROA) A way for a shareholder to qualify for a reduced sales charge by adding the value of shares already owned to the amount of a new purchase. rights offering Primarily used for closed-end funds. Fund management can raise additional capital by issuing shareholders rights to buy new common shares at predetermined prices. These offerings often involve substantial discounts to net asset value to encourage participation, which dilutes common shareholder ownership in the fund. rollover A tax-free transfer of cash or other assets from one retirement plan to another. An IRA holder may shift assets from his or her present IRA to another. Distributions from a qualified retirement plan may also be rolled over to an IRA or to another employer's plan. rollover IRA An individual retirement account that is established for the sole purpose of receiving a distribution from a qualified plan so that the assets can subsequently be rolled over into another qualified plan. Roth IRA A retirement plan created by the Taxpayer Relief Act of 1997. Contributions to a Roth IRA are made from after-tax income. Distributions are tax-free if they meet certain requirements (income, time since the Roth IRA was established, age of the owner, etc). Back to Top S sales charge A fee that investors may pay when purchasing mutual funds. Fund management companies typically use this fee to cover their selling and distribution costs. Closed-end funds, exchange-traded funds and preferred shares traded in the secondary market do not have a sales charge, although investors must pay the normal brokerage fee associated with the purchase and sale of these funds. secondary market stocks and fund shares previously sold on the primary market may be purchased on the secondary market such as the New York Stock Exchange or the Amex. sector diversification Indicates the percentage of a portfolio's total net assets invested in major industry classifications that comprise the market in which the fund invests. sector fund A specialized fund that invests exclusively in a related group of industries, seeking better opportunities for capital appreciation. Sector funds are often more volatile than funds which invest in a more diversified range of industries. Securities and Exchange Commission (SEC) The federal agency created by the Securities and Exchange Act of 1934 that administers the laws governing the securities markets. The SEC also regulates the registration and distribution of unit investment trusts, exchange-traded fund shares and mutual fund shares. SEC yield A standardized measure of the current net market yield on a fund's investment portfolio. securities lending A carefully collateralized process of loaning portfolio positions in securities to custodians, dealers, and short sellers who must make physical delivery of fungible positions. Securities lending can reduce custodial costs or enhance annual returns by a full percentage point or more in some markets at some times, although revenue from this source is usually much smaller. Improvements in securities settlement procedures and systems to facilitate securities lending have tended to reduce lending premiums over time. securitization (or securitized) A security is a transferable ownership interest in some underlying asset. This includes investments such as stocks and bonds. Securitization is a process by which pooled assets or obligations (such as a mortgage or credit card debt) are converted into securities that can be traded by various retail and institutional investors. This process allows for the transference of risks and cash flows from the obligation originator to a new set of investors. This generally increases the liquidity and ownership interests of these securities, while distributing risk among a larger set of investors. senior loan Senior loans hold the most senior position in the capital structure of the borrower, are usually secured with specific collateral, and have a claim on the assets of the borrower that comes before other lenders to and holders of securities of the borrower, such as holders of subordinated debt, preferred stock or common stock. However, senior loans typically are below investment grade quality and have speculative characteristics. The secondary market for senior loan securities may not be as liquid as the secondary market for more highly rated securities. series fund A group of different mutual funds, each a series with its own investment objective and policies, structured as a single corporation or business trust settlement date (1)The date on which the exchange of cash, securities, and paperwork involved in a transaction is completed. Usually one day after the trade date (T+1) in conventional funds and fixed-income markets and three days after the trade date (T+3) in exchange-traded funds and equity markets. (2) The date when payment for a wire-order purchase or a wire-order redemption is received. Funds purchased through a dealer firm are normally settled three business days after the trade date. Funds purchased directly by an investor settle on the day payment is due. short sale The sale of a security or other financial instrument not previously owned by the seller in the expectation that it will be possible to repurchase that instrument at a lower price some time in the future. The term "short sale" is ordinarily applied only to the sale of securities, but an equivalent synthetic short position can be attained through the sale of an uncovered call option and the purchase of a put or by selling a forward or a futures contract short sale rule A mildly controversial requirement imposed by the SEC requiring that short sales can only be made on a plus tick or zero plus tick (a price higher than the last sale at a different price). Supporters of this rule argue that it prevents bear raiders from selling short to drive a stock down. short-term capital gain A profit on the sale of a security or fund share held for one year or less. short term tax-free income Short-term tax free funds invest in diversified portfolios of quality municipal bonds with a weighted-average maturity between 1-7 years. signature guarantee A stamp or seal by a bank or member of a domestic stock exchange (or other acceptable guarantor) on correspondence that authenticates a signature. A notary public cannot provide a signature guarantee. small-capitalization stocks The stocks of companies whose market value is less than $250 million. Small-cap companies tend to grow faster than large-cap companies and typically use any profits for expansion rather than for paying dividends. They also are more volatile than large-cap companies and have a higher failure rate. specialist A floor member of an exchange who accepts primary responsibility for making a fair market in securities at all times that the exchange is open for business. In general, a specialist will make a two-sided market and provide limited liquidity to other market participants. The specialist may take positions in securities for his own account. SPDRs (or Spiders) Standard & Poor's 500 Depositary Receipts. A warehouse receipt unit investment trust structure that provides the investor with an interest in the holdings of a trust designed to track the return of the S&P 500 index. SPDRs were introduced by the American Stock Exchange in 1993. They became one of the fastest growing "fund" products in history and launched the open exchange-traded fund (ETF) market. The acronym is also part of the name of other ETFs, the MidCap SPDRs and nine Sector SPDRs. Standard & Poor's 500 Index A daily measure of stock market performance, based on the performance of 500 major companies. Though it does not include transaction or management costs, the S&P 500 is often used as a yardstick for equity fund performance. standard deviation A measure of the degree to which a fund's return varied from its average return over a certain period. The smaller the difference, the lower the standard deviation will be -- and the greater the degree of stability the fund provided over the period. state municipal bond fund Municipal bond funds whose objective is to provide current income that is exempt from regular federal, state and, in some cases, local income taxes by investing in a portfolio of municipal bonds from a single state. street name A reference to securities registered in the name of a broker or a nominee such as a clearing house instead of in the name of the beneficial owner. Street name registration facilitates securities transfers and has grown in popularity since the move to three-business day settlement for stocks. STRIPS An acronym for Separately Traded Registered Interest and Principal Securities. These zero-coupon notes and bonds are created by trading note and bond coupon and principal payments stripped from Treasury securities. swap An agreement between two parties to exchange a stream of periodic payments. A currency swap is an agreement to exchange the cash flow from one currency to another at a specified forward exchange rate. An interest rate swap is an agreement to exchange a series of fixed interest rate cash flows for a series of floating interest rate cash flows (which can be tied to a specific index rate). Investors may enter into swap agreements to minimize the risk associated with fluctuating currency or interest rates, although swaps can be customized between counterparties. syndicated Often used to refer to investments that are underwritten, sold or distributed by multiple securities dealers, where a group of firms (i.e. a syndicate) guarantees the sale of an issue/loan by purchasing it for subsequent resale to investors at a higher price. synthetic A financial instrument that is composed from other financial instruments. A synthetic instrument may be composed of a single security or a variety of instruments whose combined features are comparable to the instrument it replicates. Back to Top T target stock A special class of common or preferred shares with dividends and/or earnings participation linked to a specific segment of the issuer's business. tax aware portfolio management A commitment to exercise a reasonable effort to achieve fund tax efficiency by a portfolio's advisor. Less commitment than an investor would expect in a tax managed fund. tax efficiency A characteristic of a financial instrument that permits a dealer or an end user to establish or modify a position in a way that requires lower tax payments than an alternate similar position or instrument. Mutual funds are frequently evaluated on the basis of their ability to defer tax for their shareholders. tax deferred Income whose taxes can be postponed until a later date. Contributions to a 401(k) plan, for example, are not taxed until they are withdrawn from the account, but when withdrawn, they are fully taxed at the applicable tax rate. tax managed fund An open-end mutual fund managed with the objective of minimizing taxes even at the expense of benchmark tracking, diversification or pre-tax return. taxable equivalent yield The return an investor would have to realize on a fully taxable investment to equal the stated yield on a tax-exempt investment. taxable fixed income fund A portfolio of corporate or U.S. Treasury debt securities that provide monthly, quarterly or semi-annual income. tax year The 12-month period used by an individual to report income for income tax purposes. For most individuals, their tax year is the calendar year. tax-exempt bond See municipal bond. tax-free fixed income fund A portfolio of federally tax-exempt (and for some state specific portfolios state and local tax-exempt) municipal bonds that provide monthly, quarterly or semi-annual income. tax loss carry-forward A tax benefit that allows an individual or a fund to offset past losses against future profits. taxable preferred securities Unlike the tax treatment of typical preferred securities, taxable preferred securities do not qualify for the dividends-received deduction for corporations (under Section 243 of the Internal Revenue Code of 1986, as amended). This is a relatively new asset class as most new issues have debuted since 1995. These types of securities often offer an additional yield spread versus other types of preferred securities due to the lack of this tax treatment. They are usually junior liabilities of an issuer that pay fixed or adjustable dividends. The market consists of both fixed and adjustable coupon rate securities that are either perpetual in nature or have stated maturity dates. Like other preferred securities, this class of stock has preference over a company's common stock in the payment of dividends and the liquidation of assets. Taxable preferred securities are generally divided into $25 par and institutional segments. The $25 par segment is typified by securities that are listed on the New York Stock Exchange and are quoted without accrued dividend income. The institutional segment is typified by $1000 par value securities that are traded over-the-counter an on accrued income basis. There are various branded taxable preferred securities that have been offered, such as TOPRS, MIPS, QUIBS, QUIDS, QUIPS, CORTS, PINES and others. TOPRS are trust originated preferred securities, offered by Merrill Lynch & Co, Inc. MIPS are monthly income preferred shares, QUIDS are quarterly income debt securities, QUIPS are quarterly income preferred securities, all offered by Goldman, Sachs & Co. QUIBS are quarterly income bond securities, offered by Morgan Stanley Dean Witter & Co. CORTS are corporate-backed trust securities, and PINES are public income notes, both offered by Salomon Smith Barney Inc. technical analysis Analysis of the supply and demand for securities using charts and graphs to identify price trends that may forecast future price movements. ticker (or ticker symbol) The ticker is a fund's trading symbol, such as QQQ. top-down approach An approach to investing in which the investor first looks at general trends in the economy and then chooses specific industries and particular companies that will benefit from these broad trends. total return The return on your investment which takes into account the change in price plus dividends or interest you receive. The total return for a fund reflects changes in net asset value and reinvestment of all distributions in additional shares of the fund. tracking error Used to describe the volatility of returns of a portfolio relative to the returns of its benchmark portfolio, typically expressed in terms of the standard deviation of the differences between the portfolio and index returns over a specific horizon (such as a year). Net-asset-value tracking error is the difference between the net-asset-value of the fund or trust and the returns of the index or strategy on which the fund is based. Price-to-index tracking error is the difference between the returns based on the closing market prices for a fund or trust and the returns based on the closing market prices of the underlying index. trade date The actual date on which an investor's shares are purchased or sold. traditional IRA A personal, tax-deferred retirement account that allows an investor to make contributions from current income. Contributions may be tax-deductible subject to certain earned-income limitations and age restrictions. tranche One of a related series of security issues (typically dividend-paying fixed income securities) that are created from the underlying cash flows to meet the risk/return demands of differing investors. Each tranche may have a different cash flow, strike price and expiration date. transfer agent An institution, usually a bank, used by an issuer of shares to maintain its shareholder records and perform all account transactions. transfer of assets Refers to an IRA being transferred directly from one custodian or trustee to another. The IRA holder does not have actual receipt of the funds. All IRA transfers are non-reportable transactions to the IRA holder and the IRS. Treasury bill, bond, note Negotiable debt obligations issued by the U.S. government and backed by its full faith and credit. Treasury bills are short-term securities with maturities of one year or less. Treasury notes are intermediate-term securities with maturities of 2 to 10 years. Treasury bonds are long-term securities with maturities of 10 years longer. triple tax-exempt fund A municipal bond fund whose dividends and interest are exempt from regular Federal, state and local income taxes within a particular state. turnover rate See Portfolio Turnover Back to Top U umbrella fund See Fund of Funds. uniform gift to minors act (UGMA) State laws that allow any adult to contribute to a custodian account in a minor child's name without having to name a legal guardian or establish a trust. unit investment trust (UIT) A portfolio of securities that remains fixed, except under certain circumstances, for the life of the trust. Shares of this portfolio are offered to individual investors and called "units." Also called Defined Portfolio. Other UITs serve as the structure for some early exchange-traded funds (ETFs). underwriter (1) An investment banker who purchases securities for his own account with the express intention of reselling them in the open market. (2) An insurer who undertakes to furnish an insurance contract in exchange for a premium. (3) The organization that sells a mutual fund's shares to broker/dealers. undistributed net investment income (UNII) Represents the life-to-date balance of a fund's net investment income less distributions of net investment income. UNII appears as a line item on a fund's statement of changes in net assets. unrated securities Typically, fixed income securities are rated for credit worthiness and repayment risk by independent ratings services such as Standard & Poor's or Moody's Investor Services. However, not all securities are rated by these services, perhaps due to the size of the security issue, or perhaps because the issuing company is not able to provide the prerequisite information to the ratings services. Back to Top V value investing A strategy for equity investing that emphasizes stocks with below-average price-to-book ratios, but above-average dividend yields. value stocks Stocks that have relatively high dividend yields and that sell at relatively low prices in relation to their earnings or book value. volatility The fluctuations in market value of a fund or other security. The greater a fund's volatility, the wider the fluctuations between its high and low prices. Back to Top W warrants An option to purchase or sell the underlying at a given price and time or at a series of prices and times outlined in the warrant agreement. A warrant differs from a put or call option in that it is ordinarily issued for a period in excess of one year. Ordinarily, exercise of a common stock warrant sold by the issuer of the underlying increases the number of shares of stock outstanding, whereas a call or a covered warrant is an option on shares already outstanding. wash sale The sale and repurchase of the same asset within 30 days. The IRS does not allow an investor to claim a tax loss on a wash sale. when-issued securities Refers to a transaction made conditionally because a security, although authorized to be issued, has not yet been issued. New issues of stocks and bonds, stocks that have split, and Treasury securities are traded on a when-issued basis. Back to Top X x Appears next to a fund's listing in the newspaper to indicate that the fund recently paid a capital gain or income dividend. This amount was previously included in the fund's net asset value and is deducted from the net asset value when it is paid out. The "x" stands for "ex-dividend." Back to Top Y yield See dividend yield and SEC yield. yield curve A graph or "curve" that depicts the yields of bonds of varying maturities, from short-term to long-term. The graph shows the relationship between short- and long-term interest rates. yield spread The variation between yields on different types of debt securities; generally a function of supply and demand, credit quality, and expected interest-rate fluctuations. Treasury bonds, for example, because they are so safe, will normally yield less than corporate bonds. Yields may also differ on similar securities with different maturities. Long-term debt, for example, carries more risk of market changes and issuer defaults than shorter-term debt and thus usually yields more. yield to maturity The annual return on a bond, assuming the bond is held until its maturity date. Unlike current yield, this takes into consideration the purchase price, redemption value, time to maturity, coupon yield, and time between interest payments. Back to Top Z z Appears after a fund's name in the daily newspaper if the price isn't available in time to meet the NASDAQ reporting deadline, usually due to an extremely tight reporting schedule. zero coupon bond A security that pays no interest but is instead sold at a deep discount from face value. The holder receives the rate of return through the gradual appreciation of the security, which is redeemed at maturity for the full face value. Back to Top