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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a percentage of their compensation into the plan each year, and the contributions and earnings grow tax deferred until withdrawn.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contribute a portion of their salary to the plan each year, and the contributions and earnings grow tax-deferred until withdrawn.

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.

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.

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.

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 b�te 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.

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.

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.

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.

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.

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.

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.

Keogh plan
A retirement plan for self-employed individuals and their employees.

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.

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.

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.

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.

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.

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.

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 capita