Investment Glossary

B

Back-end Load

A sales charge investors pay when they redeem (or sell) mutual fund shares, insurance products, or other investments, generally used to compensate brokers. Also known as a deferred sales charge.

Balanced Fund

A mutual fund that invests in a combination of asset classes (usually stocks and bonds and, in some cases, cash equivalents). Balanced funds seek to provide growth and income.

Benchmark

A standard against which an investment’s performance can be compared, often an index of securities in the same asset class as the investment.

Bond

The debt instrument (or “IOU”) of a corporation or government entity that promises to pay the investor a specified amount of interest for a specified time period, with principal to be repaid when the bond matures.

Brokerage Window

An investment option giving plan participants and beneficiaries the ability to set up self-directed brokerage accounts to select investments beyond those designated by a retirement plan.

C

Capital Gain

Any gain realized from the sale of a capital asset.

Cash Equivalents

Short-term securities, such as Treasury bills, money market mutual funds, or short-term bank certificates of deposit that provide safety and liquidity but historically have only marginally outpaced inflation in terms of return.

Certificates of Deposit (CDs)

Money deposited in a financial institution for a set period of time at a specified interest rate. The risk of losing principal with CDs issued by federally insured institutions is very low.

Collective Investment Fund

A trust fund managed by a bank or trust company that pools investments of 401(k) plans and other similar investors. Like mutual funds, collective investment funds may have different investment objectives.

Closed-end Fund

A type of investment company that does not continuously offer new shares for sale but instead sells a fixed number of shares at one time in the initial public offering (IPO). After a fund’s IPO, its shares typically trade on a secondary market, such as the New York Stock Exchange. Legally known as a “closed-end company.”

Common Stock

Securities that represent an ownership interest and give the investor voting rights in the issuing corporation.

Compound Interest

Interest earned not only on the original investment, but on its accrued earnings as well.

Contingent Deferred Sales Load (Charge)

A sales charge that investors pay when they redeem (or sell) mutual fund shares. The amount of the charge depends on the length of time shares were held. After a specified holding period, the charge reaches zero.

D

Deferred Sales Charge

A sales charge that investors pay when they redeem (or sell) mutual fund shares, generally used by the fund to compensate brokers. Also known as a back-end load.

Depreciation

A decrease in the value of an investment.

Distribution Fees

Fees to compensate brokers and others who sell fund shares and to pay for advertising and the printing and mailing of prospectuses to new investors and the printing and mailing of sales literature. Part of 12b-1 fees.

Diversification

The practice of spreading money among different investments to reduce risk, such as investing in different companies in various industries or in several different types of investments. Diversification does not ensure a profit or protect against loss in a declining market.

Dividend

Payments made by a corporation to its shareholders from past and current earnings. The amount an investor receives is based on the number of shares owned.

Dollar-cost Averaging

Investing a fixed amount of money in a specific investment at regular intervals, regardless of market conditions or prices. More shares are purchased when prices are low and fewer shares are purchased when prices are high. In a fluctuating market, the average cost per share is generally lower than the average price per share.

E

Employer Securities

An investment option offered by some retirement plans that generally consists of stock in the corporation sponsoring the plan for its employees.

Equity

The ownership interest of shareholders in a corporation.

Exchange Fee

A fee that some funds impose on shareholders if they exchange (transfer) to another fund within the same fund group (or “family of funds”).

Exchange-traded Fund (ETF)

A type of investment company whose shares trade on stock exchanges at prices determined by the market. Compare to mutual fund.

Expense Ratio

A fund’s total annual operating expenses (including management fees, distribution (12b-1) fees, and other expenses) expressed as a percentage of average net assets.

F

Face Value

The amount a bond issuer is required to repay investors on the bond’s maturity date.

Fixed Annuity

An annuity that accumulates savings or distributes income at guaranteed rates and in guaranteed amounts. Fixed annuities are associated with less investment risk than variable annuities due to the guaranteed minimum rate of interest offered.

Fixed-income Contracts

Investments generally issued by insurance companies or banks which pay a set interest rate over a set time period, with a promise to repay the principal at maturity. The issuer of the contract bears any risk associated with the securities underlying the contract. Often called guaranteed investment contracts.

Fixed-income Securities

Investments with specified payment dates and amounts, primarily bonds that pay interest.

Front-end Load

An upfront sales charge investors pay when they purchase mutual fund shares, generally used by the fund to compensate brokers. A front-end load reduces the amount available to purchase fund shares.

G

Gross Expense Ratio

See expense ratio.

Guaranteed Investment Contracts

Investments generally issued by insurance companies or banks which pay a set interest rate over a set time period, with a promise to repay the principal at maturity. Risk is considered low if the contracts are issued by a financially sound organization. The issuer of the contract bears any risk associated with the securities underlying the contract. Also called fixed income contracts.

Global Fund

A fund that invests in stocks throughout the world, including the United States.

Growth Stock

The stock of a firm whose earnings are generally growing faster than the economy or market norm. Investment risk with growth stock tends to be high.

H

I

Income Stock

Common stock that pays out a relatively large portion of earnings as dividends, resulting in a high yield for investors.

Index Fund: Bond

A type of mutual fund or unit investment trust whose investment objective typically is to achieve approximately the same return as a particular bond index by investing in the bonds of issuers included in the index (or a representative sample). Because an index fund is “passively” managed, its fees and expenses are typically lower than those of an actively managed fund.

Index Fund: Stock

A type of mutual fund or unit investment trust whose investment objective typically is to achieve approximately the same return as a particular stock index by investing in the stocks of companies included in the index (or a representative sample). Because an index fund is “passively” managed, its fees and expenses are typically lower than those of an actively managed fund.

Inflation

The overall general upward price movement of goods and services in an economy. Usually, U.S. inflation is measured by the Consumer Price Index for All Urban Consumers, which is computed monthly by the U.S. Department of Labor.

Inflation Risk

The risk that an investment will not generate a higher rate of return than the rate of inflation, and that the investment will lose real purchasing power.

Interest

An amount charged or paid for borrowing or using money.

International Fund

A fund that invests in stocks of companies outside the United States.

Investment Adviser

Generally, a person or entity that receives compensation for giving individually tailored advice on investing in stocks, bonds, or mutual funds. Some investment advisers also manage portfolios of securities, including mutual funds.

Investment Company

A company that issues securities and is primarily engaged in the business of investing in securities. Mutual funds, closed-end funds, and unit investment trusts are the three basic types of investment companies.

J

K

L

Large-cap Fund

A fund that invests in the stocks of “large” companies (as measured by market capitalization, or the value of a company’s outstanding stock).

Life Expectancy

The estimated age at which an individual is statistically likely to die. This value is taken from a standard mortality table based on gender and year of birth.

Lifecycle Fund

A diversified mutual fund that automatically shifts towards a more conservative mix of investments as it approaches a particular year in the future, known as its “target date.” A lifecycle fund investor picks a fund with the right target date based on his or her particular investment goal. Often called target-date fund.

Liquidity

The ability to turn an asset into cash readily.

M

Managed Account

A portfolio of stocks or bonds owned by an individual and managed by (i.e., investment decisions are made by) a professional investment manager.

Management Fee

A fee paid out of fund assets to the fund’s investment adviser or its affiliates for managing the fund’s portfolio, any other management fees payable to the fund’s investment adviser or its affiliates, and any administrative fees payable to the investment adviser that are not included in the “other expenses” category.

Market Capitalization

The value of a company’s outstanding stock, calculated by multiplying the current share price by the number of shares of stock owned by investors.

Market Index

A measurement of the performance of a specific “basket” of  stocks, bonds, or other type of investment considered to represent a particular market or sector of the stock or bond markets, or the economy.

Market Volatility

The relative rate at which investment market prices move up and down.

Maturity

The date by which the issuer of a bond promises to repay the bond’s face value.

Mid-cap Fund

Invests in the stocks of “mid-size” companies (as measured by market capitalization, or the market value of a company’s outstanding stock).

Money Market

The market in which large amounts of short-term funds are loaned and borrowed. Money market instruments include such investments as commercial paper, negotiable certificates of deposit, and Treasury bills. Investment risk is generally low.

Mortality and Expense Risk Charge

A fee associated with an annuity contract, stated as a percentage of account value to cover the insurance company’s costs for insurance-feature risks it assumes under the contract.

Mutual Fund

An investment that combines money from shareholders and invests it in numerous securities, including stocks, bonds, and short-term money market instruments. As open-ended investments, most mutual funds continuously offer new shares to investors.

N

Net Asset Value (NAV)

A mutual fund’s per-share value, calculated by subtracting the fund’s liabilities from the value of its assets and dividing the result by the number of outstanding fund shares. Mutual funds calculate their NAVs at least once each business day.

O

Operating Expenses

The costs a fund incurs in connection with running the fund, including management fees, distribution (12b-1) fees, and other expenses. Operating expenses are paid from a fund’s assets before earnings are distributed to shareholders.

P

Preferred Stock

Corporate stock that gives stockholders a claim on the issuing company’s earnings and assets that takes precedence over the claims of common stockholders should the company be liquidated. Generally, preferred stock pays a regular dividend, which is also paid prior to any dividend payments to common stockholders. Unlike common stock, preferred stock usually does not carry voting rights.

Portfolio

A collection of securities, such as stocks, bonds, or mutual fund shares, owned by an individual or an organization.

Portfolio Turnover

A measure of a fund’s investment trading activity. Portfolio turnover is calculated as a percentage of a portfolio’s asset value that is bought or sold annually. Turnover represents the number of times portfolio assets are replaced. The higher the percentage, the more the manager has traded.

Principal

The original amount (capital sum) invested, as distinguished from interest or profit.

Prospectus

Printed material offering a security for sale which provides full disclosure of legally required information regarding the security.

Q

R

Rebalancing

Bringing a portfolio back to its original (or a desired) asset allocation mix.

Redeem

To cash in mutual fund shares by selling them back to the fund at their current share price (net asset value). A deferred sales charge or redemption fee may apply at the time of redemption.

Redemption Fee

A shareholder fee that some mutual funds charge when investors redeem (or sell) mutual fund shares. The fee is typically applicable to redemptions made soon after purchase.

Return

The profit (or loss) earned (incurred) through investing.

Risk

The possibility that an investment will not perform as anticipated. An acceptable degree of risk must be determined by the individual with the understanding that the higher the expected return, the greater the risk factor. There are many different kinds of risk, such as market, inflation, interest rate, liquidity, political, etc.

Risk Tolerance

An investor’s ability or willingness to endure declines in the value of investments in exchange for a greater potential investment return.

S

Shareholder

An investor who owns shares in a mutual fund or any other company.

Shareholder-type Expenses

Fees charged directly against a plan participant’s or beneficiary’s investment. These expenses are not included in the total annual operating expenses of the investment.

Surrender Charge

A sales charge incurred when an investor withdraws money from an annuity within a certain period after purchase.

S&P 500® Stock Index

A composite index of 500 large company stocks compiled by Standard & Poor’s Corporation that is used as a broad measure of U.S. stock market performance.

Securities

Assets such as stocks, bonds, etc., which allow the investor to participate in earnings, distribution of property, or other assets of the corporation issuing the security.

Shareholder Service Fees

A charge to shareholders of a mutual fund to cover the fund’s shareholder servicing, distribution and marketing costs. The fees may be paid to broker/dealers or other intermediaries who provide such services to the fund. Part of 12b-1 fees.

Small-cap Fund

Invests in the stocks of relatively “small” publicly traded companies (as measured by market capitalization, or the total market value of a company’s outstanding stock).

Stable Value Fund

A fund whose goal is to preserve the investor’s principal while earning interest income. Typical fund investments include guaranteed investment contracts, money market securities, and fixed-income securities. A stable value fund attempts to maintain a constant $1 unit price, but the fund makes no guarantee that the $1 price will be maintained, and the fund’s yield may vary.

Stocks

Shares of a corporation. Also known as equities, they give the investor an ownership interest in the company issuing the stock. Owners are usually entitled to receive dividends and vote on important company matters.

T

Target Date Fund

A diversified mutual fund that automatically shifts towards a more conservative mix of investments as it approaches a particular year in the future, known as its “target date.” A target fund investor picks a fund with the right target date based on his or her particular investment goal. Also called lifecycle fund.

Time Horizon

The expected number of months, years, or decades an individual will be investing to achieve a particular financial goal.

Total Return

A measure of investment performance that takes into account the unrealized increase/decrease in the investment’s value during a specific time period, as well as any income generated by the investment during that period. Expressed as a percentage of the initial investment.

Treasury Bills

Short-term U.S. government debt securities that have maturities of one year or less that are sold at weekly auctions at a discount and are redeemed at face value.

Treasury Bonds

Long-term U.S. government debt securities that have maturities of more than ten years.

Treasury Notes

Intermediate-term U.S. government debt securities that have maturities between one and ten years.

12b-1 Fees

Fees paid by a mutual fund out of fund assets to cover the costs of marketing and selling fund shares. See also distribution fees and shareholder service fees.

U

Unit Investment Trust (UIT)

A type of investment company that typically makes a one-time “public offering” of only a specific, fixed number of units. A UIT will terminate and dissolve on a date established when the UIT is created (may be more than 50 years after the UIT is created). UITs do not actively trade their investment portfolios.

U.S. Government Agency Securities

Securities issued by government agencies rather than issued directly by the U.S. Treasury. Agencies issuing these securities include: the Federal Home Loan Banks, the Federal National Mortgage Association (Fannie Mae), and the Government National Mortgage Association (Ginnie Mae), among others.

V

Value Fund

A mutual fund whose manager buys primarily undervalued stocks for the fund’s portfolio with the expectation that these stocks will increase in value.

Variable Annuity

A type of annuity that generally permits the investor to choose from a wide range of investment options such as equity and bond funds (subaccounts) during the contract’s accumulation phase. During the contract’s accumulation phase, the contract value varies based on the performance of the underlying subaccounts. At the start of the contract’s payout phase, the investor may have a choice of receiving fixed payments or variable payments that may fluctuate based on portfolio subaccount performance.

W

XYZ

Yield

The interest or dividend paid with respect to a security. Yield is usually expressed as a percentage of the security’s price. More broadly, some investment advisors include capital appreciation as part of the yield.