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Glossary
 

A

Account Balance
Your  account balance is the amount of money you have in one of your financial  accounts. For example, your bank account balance refers to the amount of money  in your bank accounts.
Your  account balance can also be the amount of money outstanding on one of your  financial accounts. Your credit card balance, for example, refers to the amount  of money you owe a credit card company.

Actively Managed Fund
Managers of  actively managed mutual funds buy and sell investments to achieve a particular  goal, such as providing a certain level of return or beating a relevant  benchmark.
As a  result, they generally trade much more frequently than managers of passively  managed funds whose goal is to mirror the performance of the index the fund  tracks.
While  actively managed funds may provide stronger returns than index funds, they  often have higher management fees and provide more taxable income.

Adjustable Rate Mortgage (ARM)
An  adjustable rate mortgage is a long-term loan you use to finance a real estate  purchase, typically a home.
Unlike a  fixed-rate mortgage, where the interest rate remains the same for the term of  the loan, the interest rate on an ARM is adjusted, or changed, during its term.
The initial  rate on an ARM is usually lower than the rate on a fixed-rate mortgage for the  same term, which means it may be easier to qualify for an ARM. You take the  risk, however, that interest rates may rise, increasing the cost of your  mortgage. Of course, it's also possible that the rates may drop, decreasing  your payments.
The rate  adjustments, which are based on changes in one of the publicly reported indexes  that reflect market rates, occur at preset times, usually once a year but  sometimes less often. Typically, rate changes on ARMs are capped both annually  and over the term of the loan, which helps protect you in the case of a rapid  or sustained increase in market rates.
However,  certain ARMs allow negative amortization, which means additional interest could  accumulate on the outstanding balance if market rates rose higher than the cap.  That interest would be due when the loan matured or if you want to prepay.

After-Hours Market
Securities,  such as stocks and bonds, may change hands on organized markets and exchanges  after regular business hours, in what is known as the after-hours market.
These  electronic transactions explain why a security may open for trading at a  different price from the one it closed at the day before.
There's  also trading in benchmark indexes such as Standard & Poor's 500-stock Index  (S&P 500) and the Dow Jones Industrial Average (DJIA) before US stock  markets open. The level of activity and the direction the trading — up or down  — is widely interpreted as an early indicator of what's likely to happen in the  market during the day.

Aggressive-Growth Fund
Aggressive-growth  mutual funds buy stock in companies that show rapid growth potential, including  start-up companies and those in hot sectors.
While these  funds and the companies they invest in can increase significantly in value, they  are also among the most volatile. Their values may rise much higher — and fall  much lower — than the overall stock market or the mutual funds that invest in  the broader market.

Amortization
Amortization  is the gradual repayment of a debt over a period of time, such as monthly  payments on a mortgage loan or credit card balance.
To amortize  a loan, your payments must be large enough to pay not only the interest that  has accrued but also to reduce the principal you owe. The word amortize itself  tells the story, since it means "to bring to death."

Annual Percentage Rate (APR)
A loan's  annual percentage rate, or APR, is what credit costs you each year, expressed  as a percentage of the loan amount.
The APR,  which is usually higher than the nominal, or named, rate you're quoted for a  loan, includes most of a loan's up-front fees as well as the annual interest  rate.
You should  use APR, which is a more accurate picture of the cost of borrowing than the  interest rate alone, to compare various loans you’re considering.

Asset
Assets are  everything you own that has any monetary value, plus any money you are owed.
They  include money in bank accounts, stocks, bonds, mutual funds, equity in real  estate, the value of your life insurance policy, and any personal property that  people would pay to own.
When you  figure your net worth, you subtract the amount you owe, or your liabilities,  from your assets. Similarly, a company's assets include the value of its  physical plant, its inventory, and less tangible elements, such as its  reputation.

Asset Allocation
Asset  allocation is a strategy, advocated by modern portfolio theory, for reducing  risk in your investment portfolio in order to maximize return.
Specifically,  asset allocation means dividing your assets among different broad categories of  investments, called asset classes. Stock, bonds, and cash are examples of asset  classes, as are real estate and derivatives such as options and futures  contracts.
Most  financial services firms suggest particular asset allocations for specific  groups of clients and fine-tune those allocations for individual investors.
The asset  allocation model — specifically the percentages of your investment principal  allocated to each investment category you’re using — that’s appropriate for you  at any given time depends on many factors, such as the goals you’re investing  to achieve, how much time you have to invest, your tolerance for risk, the  direction of interest rates, and the market outlook.
Ideally,  you adjust or rebalance your portfolio from time to time to bring the  allocation back in line with the model you’ve selected. Or, you might realign  your model as your financial goals, your time frame, or the market situation  changes.

Asset Class
Different  categories of investments are described as asset classes. Stock, bonds, and  cash — including cash equivalents — are major asset classes. So are real  estate, derivative investments, such as options and futures contracts, and  precious metals.
When you  allocate the assets in your investment portfolio, you decide what proportion of  its total value will be invested in each of the different asset classes you’re  including.

B

Balance Sheet
A balance  sheet is a statement of a company’s financial position at a particular moment  in time. This financial report shows the two sides of a company’s financial  situation — what it owns and what it owes.
What the  company owns, called its assets, is always equal to the combined value of what  the company owes, called its liabilities, and the value of its shareholders’  equity. Expressed as an equation, a company’s balance sheets shows assets =  liabilities + shareholder value.
If the  company were to dissolve, then its debts would be paid, and any assets that  remained would be distributed to the shareholders as their equity. Bankruptcy  occurs in situations where there is nothing left to distribute to the  shareholders, and the company balance sheet is in fact unbalanced because the  company owes more than it owns.

Balanced Fund
Balanced  funds are mutual funds that invest in a portfolio of common stocks, preferred  stocks, and bonds to meet their investment goal of seeking a strong return  while moderating risk.
Balanced  funds generally produce more income than stock funds, though their total return  may be less than stock fund returns in a strong stock market.
In a flat  or falling stock market, however, disappointing returns on equity investments  may be offset by a stronger performance from a balanced fund's fixed-income  investments.
Balanced  funds are sometimes described as a type of asset allocation fund, which  provides the opportunity to spread your money among asset classes with one  investment.

Balloon Mortgage
With a  balloon mortgage, you make monthly payments over the mortgage term, which is  typically five, seven, or ten years, and a final installment, or balloon  payment, that is significantly larger than the usual monthly payments.
In some  cases, you pay only interest on the loan during the mortgage term, and the  entire principal is due in the balloon payment.
Many  balloon mortgages offer a conversion feature that lets you extend the loan at a  new interest rate. For instance, some balloon mortgages convert to a 30-year  fixed-rate mortgage at the end of their original term.
You might  choose a balloon mortgage if you anticipate being able to refinance at a  favorable rate at the end of the term or if you’re confident you’ll have enough  money to pay off the loan in a lump sum. But you may risk losing your home when  the balloon payment is due if you can afford to buy the home only because of  the comparatively smaller monthly payments that may be available with a balloon  mortgage.

Bear Market
A bear  market is sometimes described as a period of falling securities prices and  sometimes, more specifically, as a market where prices have fallen 20% or more  from the most recent high.
A bear  market in stocks is triggered when investors sell off shares, generally because  they anticipate worsening economic conditions and falling corporate profits.
A bear  market in bonds is usually the result of rising interest rates, which prompts  investors to sell off older bonds paying lower rates.

Bid And Ask
Bid and ask  is better known as a quotation or quote.
Bid is the  price a market maker or broker offers to pay for a security, and ask is the  price at which a market maker or dealer offers to sell. The difference between  the two prices is called the spread.

Bond
Bonds are  debt securities issued by corporations and governments.
Bonds are,  in fact, loans that you and other investors make to the issuers in return for  the promise of being paid interest, usually but not always at a fixed rate,  over the loan term.
The issuer  also promises to repay the loan principal at maturity, on time and in full.
Because  most bonds pay interest on a regular basis, they are also described as  fixed-income investments. While the term bond is used generically to describe  all debt securities, bonds are specifically long-term investments, with  maturities longer than ten years.

Bond Fund
A bond  mutual fund sells shares in the fund to investors and uses the money it raises  to invest in a portfolio of bonds to meet its investment objective — typically  to provide regular income.
The appeal  of bond funds is that you can usually invest a much smaller amount of money  than you would need to buy a portfolio of bonds, making it easier to diversify  your fixed-income investments.
Unlike  individual bonds, however, bond funds have no maturity date and no guaranteed  interest rate because their portfolios aren't fixed. Also unlike individual  bonds, they don't promise to return your principal.
You can  choose among a variety of bond funds with different investment strategies and  levels of risk. Some funds invest in long-term and others in short-term, bonds.  Some buy government bonds, while others buy corporate bonds or municipal bonds.  Finally, some buy investment-grade bonds, while others focus on high-yield  bonds.

Bond Rating
Independent  agencies, such as Standard & Poor's (S&P) and Moody's Investors  Service, assess the likelihood that bond issuers are likely to default on their  loans or interest payments.
Ratings  systems differ from one agency to another but usually have at least 10  categories, ranging from a high of AAA (or Aaa) to a low of D. Bonds ranked BBB  (or Baa) or higher are considered investment-grade bonds.

Broker
A broker  acts as an agent or intermediary for a buyer and a seller. The buyer, seller,  and broker may all be individuals, or one or more may be a business or other  institution.
For example,  a stockbroker works for a brokerage firm, and handles client orders to buy or  sell stocks, bonds, commodities, and options in return for a commission or  asset-based fee.
Stockbrokers  must pass a uniform examination administered by the NASD and must register with  the Securities and Exchange Commission (SEC).
A floor  broker handles buy and sell orders on the floor of a securities or commodities  exchange. A real estate broker represents the seller in a real estate  transaction and receives a commission on the sale.
If as a  real estate buyer you hire someone to represent your interests, that person is  known as a buyer’s agent. A mortgage or insurance broker acts as an  intermediary in finding a mortgage or insurance policy for his or her client  and also receives a commission.

Broker-Dealer
A  broker-dealer (B/D) is a license granted by the Securities and Exchange  Commission (SEC) that entitles the licensee to buy and sell securities for its  clients’ accounts. The firm may also act as principal, or dealer, trading  securities for the firm's own inventory.
Some  broker-dealers act in both capacities, depending on the circumstances of the  trade or the type of security being traded. For example, your order to purchase  a particular security might be filled from the firm’s inventory.
That’s  perfectly legal, though you must be notified that it has occurred. B/Ds range  in size from independent one-person offices to large brokerage firms.

Brokerage Account
To buy and  sell securities through a broker-dealer or other financial services firm, you  establish an account, generally known as a brokerage account, with that firm.
In a  full-service brokerage firm, a registered representative or account executive  handles your buy and sell instructions and often provides investment advice.
If your  account is with a discount firm, you are more likely to give your orders to the  person who answers the telephone when you call.
And if your  account is with an online firm, you give orders and get confirmations  electronically.
In all  three cases, the firm provides updated information on your investment activity  and portfolio value, and handles the required paperwork. And in some cases,  your brokerage account may be part of a larger package of financial services  known as an asset management account.

Brokerage Firm
Brokerage  firms, also known as broker-dealers, are licensed by the Securities and  Exchange Commission (SEC) to buy and sell securities for clients and for their  own accounts.
When a  brokerage firm sells securities it owns, it is said to be acting as a principal  in that transaction.
Firms  frequently maintain research departments for their own and their clients'  benefit. They may also provide a range of financial products and services,  including financial planning, asset management, and educational programs.
Brokerage  firms come in all sizes, from one- or two-person offices to huge firms with  offices around the world. They are sometimes differentiated as full-service or  discount firms, based on pricing structure and client relationships.
Some brokerage  firms exist entirely online, and nearly all firms offer you the option of  placing orders electronically rather than over the telephone. In most cases,  trading electronically is substantially less expensive than giving buy and sell  orders by phone.

Budget
A budget is  a written record of income and expenses during a specific time frame, typically  a year.
You use a  budget as a spending plan to allocate your income to cover your expenses and to  track how closely your actual expenditures line up with what you had planned to  spend.
An  essential part of personal budgeting is creating an emergency fund, which you  can use to cover unexpected expenses. You also want to budget a percentage of  your income for saving and investing, just as you budget for food, housing, and  clothing.
Businesses  and governments also create budgets to govern their expenditures for a fiscal  year — though like individuals they make regular adjustments to reflect  financial reality. And like individuals, businesses and governments can find  themselves in trouble if their spending outpaces their income.

Bull Market
A prolonged  period when stock prices as a whole are moving upward is called a bull market,  although the rate at which those gains occur can vary widely from bull market  to bull market.
The  duration of a bull market, the severity of the falling market that follows, and  the time that elapses until the next upturn are also different each time.  Well-known bull markets began in 1923, 1949, 1982, and 1990.

Buy-And-Hold
Buy-and-hold  investors take a long-term view of investing, generally keeping a bond from  date of issue to date of maturity and holding onto shares of a stock through  bull and bear markets.
Among the  advantages of following a buy-and-hold strategy are increased opportunity for  your assets to compound and reduced trading costs. Among the risks are  continuing to hold investments that are no longer living up to reasonable  expectations.

C

Capital Gain
When you  sell an asset at a higher price than you paid for it, the difference is your  capital gain. For example, if you buy 100 shares of stock for $20 a share and  sell them for $30 a share, you realize a capital gain of $10 a share, or $1,000  in total.
If you own  the stock for more than a year before selling it, you have a long-term capital  gain. If you hold the stock for less than a year, you have a short-term capital  gain.
Most  long-term capital gains are taxed at a lower rate than your other income while  short-term gains are taxed at your regular rate. There are some exceptions, such  as gains on collectibles, which are taxed at 28%. The long-term capital tax  rates are 15% for anyone whose marginal federal tax rate is 25% or higher and  5% for anyone whose marginal rate is 10% or 15%.
You are  exempt from paying capital gains tax on profits of up to $250,000 on the sale  of your primary home if you're single and up to $500,000 if you're married and  file a joint return, provided you meet the requirements for this exemption.

Car Insurance
Car  insurance covers theft of and damage to your car or damage that your car  causes, plus liability protection in case you are sued as a result of an  accident. Your state may require proof of insurance before you can register  your car.
As a car  owner, you pay premiums set by the insurance company based on the value of your  car and the risk the company believes you pose. The insurance company agrees to  cover your losses, subject to a deductible and the limits specified in the  contract.
Some states  have insurance pools that allow car owners who have been turned down elsewhere  to obtain coverage.

Central Bank
Most  countries have a central bank, which issues the country's currency and holds  the reserve deposits of other banks in that country. It also either initiates  or carries out the country's monetary policy, including keeping tabs on the  money supply.
In the  United States, the 12 regional banks that make up the Federal Reserve System  act as the central bank. This multibank structure was deliberately developed to  ensure that no single region of the country could control economic decision  making.

Checking Account
Checking  accounts are transaction accounts that allow you to authorize the transfer  money to another person or organization either by writing a check that includes  the words “Pay to the order of” or by making an electronic transfer.
Banks and  credit unions provide transaction accounts, as do brokerage firms and other  financial services companies that offering banking services.
Money in  transaction accounts is insured by the Federal Deposit Insurance Corporation  (FDIC) up to $100,000 per depositor in each banking institution. However, the  FDIC doesn’t insure money market mutual funds that offer check-writing  privileges.

Churning
If a broker  intentionally mishandles buying and selling securities in your investment  account, it's known as churning.
The broker  might buy and sell securities at an excessive rate, or at a rate that’s  inconsistent with your investment goals or the amount of money you have  invested.
One  indication of potential churning is that you're paying more in commissions than  you are earning on your investments. Churning is illegal but is often hard to  prove.

Collateral
Assets with  monetary value, such as stock, bonds, or real estate, which are used to  guarantee a loan, are considered collateral.
If the  borrower defaults and fails to fulfill the terms of the loan agreement, the  collateral, or some portion of it, may become the property of the lender.
For  example, if you borrow money to buy a car, the car is the collateral. If you  default, the lender can repossess the car and sell it to recover the amount you  borrowed.
Loans  guaranteed by collateral are also known as secured loans.

Commercial Bank
Commercial  banks offer a full range of retail banking products and services, such as  checking and savings accounts, loans, credit cards, and lines of credit to  individuals and businesses.
Most commercial  banks also sell certain investments and many offer full brokerage and financial  planning services.

Commercial Paper
To help  meet their immediate needs for cash, banks and corporations sometimes issue  unsecured, short-term debt instruments known as commercial paper.
Commercial  paper usually matures within a year and is an important part of what’s known as  the money market.
It can be a  good place for investors — institutional investors in particular — to put their  cash temporarily. That's because these investments are liquid and essentially  risk-free, since they are typically issued by profitable, long-established, and  highly regarded corporations.

Commission
Securities  brokers and other sales agents typically charge a commission, or sales charge,  on each transaction.
With  traditional, full-service brokers, the charge is usually a percentage of the  total cost of the trade, though some brokers may offer favorable rates to  frequent traders.
Online  brokerage firms, on the other hand, usually charge a flat fee for each  transaction, regardless of the value of the trade. The flat fee may have  certain limits, however, such as the number of shares being traded at one time.
The  commissions on some transactions, such as stock trades, are reported on your  confirmation slip. But commissions on other transactions are not reported  separately.
In the case  of cash value life insurance, for example, the commission may be as large as a

Common Stock
When you  own common stock, your shares represent ownership in the corporation and give  you the right to vote for the company's board of directors and benefit from its  financial success.
You may  receive a portion of the company’s profits as dividend payments if the board of  directors declares a dividend. You also have the right to sell your stock and  realize a capital gain if the share value increases.
But if the  company falters and the price falls, your investment could lose some or all of  its value.

Compound Interest
When the  interest you earn on an investment is added to form the new base on which  future interest accumulates, it is compound interest.
For  example, say you earn 5% compound interest on $100 every year for five years.  You'll have $105 after one year, $110.25 after two years, $115.76 after three  years, and $127.63 after five years.
Without  compounding, you earn simple interest, and your investment doesn't grow as  quickly. For example, if you earned 5% simple interest on $100 for five years,  you would have $125. A larger base or a higher rate provide even more  pronounced differences.
Compound  interest earnings are reported as annual percentage yield (APY), though the  compounding can occur annually, monthly, or daily.

Compounding
Compounding  occurs when your investment earnings or savings account interest is added to  your principal, forming a larger base on which future earnings may accumulate.
As your  investment base gets larger, it has the potential to grow faster. And the  longer your money is invested, the more you stand to gain from compounding.
For  example, if you invested $10,000 earning 8% annually and reinvested all your  earnings, you’d have $21,589 in your account after 10 years.
If instead  of reinvesting you withdrew the earnings each year, you would have collected  $800 a year, or $8,000 over the 10 years. The $3,589 difference is the benefit  of 10 years of compound growth.

Corporate Bond
Corporate  bonds are debt securities issued by publicly held corporations to raise money  for expansion or other business needs.
Corporate  bonds typically pay a higher rate of interest than federal or municipal  government bonds but the interest you earn is generally fully taxable.
You may be  able to buy corporate bonds at issue through your brokerage firm, usually at  the offering price of $1,000 per bond, though you may have to buy several bonds  of the same issue rather than just one.
You can buy  bonds on the secondary market at their current market price, which may be  higher or lower than par. However, most individual investors buy corporate  bonds though a mutual fund that specializes in those issues.

Coupon
Originally,  bonds were issued with coupons, which you clipped and presented to the issuer  or the issuer's agent — typically a bank or brokerage firm — to receive  interest payments.
Bonds with  coupons are also known as bearer bonds because the bearer of the coupon is  entitled to the interest.
Although  most new bonds are electronically registered rather than issued in certificate  form, the term coupon has stuck as a synonym for interest in phrases like the  coupon rate.
When  interest accumulates rather than being paid during the bond's term, the bond is  known as a zero coupon.

Coupon Rate
The coupon  rate is the interest rate that the issuer of a bond or other debt security  promises to pay during the term of a loan. For example, a bond that is paying  6% annual interest has a coupon rate of 6%.
The term is  derived from the practice, now discontinued, of issuing bonds with detachable  coupons.
To collect  a scheduled interest payment, you presented a coupon to the issuer or the  issuer's agent. Today, coupon bonds are no longer issued. Most bonds are  registered, and interest is paid by check or, increasingly, by electronic  transfer.

Crash
A crash is  a sudden, steep drop in stock prices. The downward spiral is intensified as  more and more investors, seeing the bottom falling out of the market, try to  sell their holdings before these investments lose all their value.
The two  great US crashes of the 20th century, in 1929 and 1987, had very different  consequences. The first was followed by a period of economic stagnation and  severe depression. The second had a much briefer impact. While some investors  suffered huge losses in 1987, recovery was well underway within three months.
In the  aftermath of each of these crashes, the federal government instituted a number  of changes designed to reduce the impact of future crashes.

Credit
Credit  generally refers to the ability of a person or organization to borrow money, as  well as the arrangements that are made for repaying the loan and the terms of  the repayment schedule.
If you are  well qualified to obtain a loan, you are said to be credit-worthy.
Credit is  also used to mean positive cash entries in an account. For example, your bank  account may be credited with interest. In this sense, a credit is the opposite  of a debit, which means money is taken from your account.

Credit Bureau
The three  major credit bureaus — Equifax, Experian, and TransUnion — collect information  about the way you use credit and make it available to anyone with a legitimate  business need to see it, including potential lenders, landlords, and current or  prospective employers.
The bureaus  keep records of the credit accounts you have, how much you owe, your payment  habits, and the lenders and other businesses that have accessed your credit  report.
Credit  bureaus, also known as credit reporting agencies, store other information about  you as well, such as your present and past addresses, Social Security number,  employment history, and information in the public record, including  bankruptcies, liens, and any judgments against you.
However,  there are certain things, by law, your credit report can’t include, including  your age, race, religion, political affiliation, or health records.
You are  entitled to a free copy of your credit report from each of the three major  credit bureaus once a year, but you have to request them through the Annual  Credit Report Request Service (www.annualcreditreport.com or 877-322-8228).
If you've  recently been denied credit, are unemployed, on public assistance, or have a  reason to suspect identity theft or credit fraud, you’re also entitled to a  free report. In those cases, you should contact the credit bureaus directly.

Credit Limit
A credit  limit, also known as a credit line, is the maximum amount of money you can  borrow under a revolving credit agreement.
For  instance, if you have a credit card with a credit limit of $3,000, and you  charge $1,000, you can spend $2,000 more before you reach your credit limit.  And if you repay the $1,000 before the end of the month without making  additional purchases, your credit limit is back up to $3,000 again.
Most credit  issuers charge additional fees or penalties if you exceed your credit limit.

Credit Line
A credit  line, or line of credit, is a revolving credit agreement that allows you to  write checks or make cash withdrawals of amounts up to your credit limit.
When you  use the credit — sometimes called accessing the line — you owe interest on the  amount you borrow. But when that amount has been repaid you can borrow it  again.
A home  equity line of credit (HELOC) is secured by your home, but other credit lines,  such as an overdraft arrangement linked to your checking account, are unsecured.  In general, the interest rate on a secured credit line is less than the rate on  an unsecured line.

Credit Rating
Your credit  rating is an independent statistical evaluation of your ability to repay debt  based on your borrowing and repayment history.
If you  always pay your bills on time, you are more likely to have good credit and  therefore may receive favorable terms on a loan or credit card, such as  relatively low finance charges.
If your  credit rating is poor because you have paid bills late or have defaulted on a  loan, you are likely to get less favorable terms or may be denied credit  altogether.
A  corporation's credit rating is an assessment of whether it will be able to meet  its obligations to bond holders and other investors. Credit rating systems for  corporations generally range from AAA or Aaa at the high end to D (for default)  at the low end.

Credit Report
A credit  report is a summary of your financial history. Potential lenders will use your  credit report to help them evaluate whether you are a good credit risk.
The three  major credit-reporting agencies are Experian, Equifax, and Transunion. These  agencies collect certain types of information about you, primarily your use of  credit and information in the public record, and sell that information to  qualified recipients.
As a  provision of the Fair and Accurate Credit Transaction Act (FACT Act), you are  entitled to a free copy of your credit report each year from each of the credit  reporting agencies.
You also  have a right to see your credit report at any time if you have been turned down  for a loan, an apartment, or a job because of poor credit. You may also  question any information the credit reporting agency has about you and ask that  errors be corrected.
If the  information isn't changed following your request, you have the right to attach  a comment or explanation, which must be sent out with future reports.

Credit Score
Your credit  score is a number, calculated based on information in your credit report, that  lenders use to assess the credit risk you pose and the interest rate they will  offer you if they agree to lend you money.
Most  lenders use credit scores rather than credit reports since the scores reduce  extensive, detailed information about your financial history to a single number.
There are  actually two competing credit scoring systems, FICO, which has been the  standard, and Vantage Score, which was developed by the three major credit  bureaus.
Their  formulas give different weights to particular types of credit-related behavior,  though both put the most emphasis on paying your bills on time. They also have  different scoring systems, ranging from 300 to 850 for FICO to 501 to 999 for Advantage  Score. The best — or lowest — interest rates go to applicants with the highest  scores.
Because  your credit score and credit report are based on the same information, it’s  very unlikely that they will tell a different story. It’s smart to check your  credit report at least once a year, which you can do for free at  www.annualcreditreport.com or by calling 877-322-8228.
It may be a  good idea to review your score if you anticipate applying for a major loan,  such as a mortgage, in the next six months to a year. That allows time to bring  your score up if you fear it’s too low.

Currency Fluctuation
A currency  has value, or worth, in relation to other currencies and those values change  constantly.
For  example, if demand for a particular currency is high because investors want to  invest in that country's stock market or buy exports, the price of its currency  will increase. Just the opposite will happen if that country suffers an  economic slowdown, or investors lose confidence in its markets.
While some  currencies fluctuate freely against each other, such as the Japanese yen and  the US dollar, others are pegged, or linked. They may be pegged to the value of  another currency, such as the US dollar or the euro, or to a basket, or  weighted average of currencies.

D

Day Trader
When you  continuously buy and sell investments within a very short time, perhaps a few minutes  or hours, and rarely hold them overnight, you're considered a day trader.
The  strategy is to take advantage of rapid price changes to make money quickly.
The risk is  that as a day trader you can lose substantial amounts of money since no one can  predict how or when prices will change. That risk is compounded by the fact  that technology does not always keep pace with investors' orders, so if you  authorize a sell at one price the price it's executed at may be higher or  lower, wiping out potential profit.
In  addition, you pay transaction costs on each buy and sell order. Your gains must  be large enough to offset those costs if you’re going to come out ahead.

Dealer
Dealers, or  principals, buy and sell securities for their own accounts, adding liquidity to  the marketplace and seeking to profit from the spread between the prices at  which they buy and sell.
In the  over-the-counter market, in most cases, it is dealers — also called market  makers — who provide the bid and ask quotes you see when you look up the price  of a security.
Those  dealers are willing to commit their capital to specific securities and are  ready to trade the securities at the quoted prices.

Debenture
A debenture  is an unsecured bond. Most bonds issued by corporations are debentures, which are  backed by its reputation rather than by any collateral, such as the company's  buildings or its inventory.
Although  debentures sound riskier than secured bonds, they aren't when they're issued by  well-established companies with good credit ratings.

Debit
A debit is  the opposite of a credit. A debit may be an account entry representing money  you owe a lender or money that has been taken from your account.
For  example, your bank debits your checking account for the amount of a check  you've written, and your broker debits your investment account for the cost of  a security you've purchased.
Similarly,  a debit card authorizes the bank to take money out of your bank account  electronically, either as cash or as an on-the-spot payment to a merchant.  That's different from a credit card, which authorizes you to borrow the money  from the card issuer.

Debit Card
A debit  card — sometimes called a cash plus card — allows you to make point-of-sale  (POS) purchases by swiping the card through the same type of machine you use to  make credit card purchases.
Sometimes  you authorize a debit card transaction with your personal identification number  (PIN). Other times, you sign a receipt just as you would if you were charging  the purchase to your credit card. You can also use the card to make ATM  withdrawals.
When you  use a debit card, the amount of your purchase is debited, or subtracted, from  your account at the time of the transaction and transferred electronically to  the seller’s account.
You have  some of the same protections against loss with a debit card as you do with a  credit card, but there is one important difference. While $50 is the most you  can ever be responsible for if your credit card is lost or stolen, you could  lose much more with a lost or stolen debit card if you don’t report that has  happened within two days of discovering it.
If you  delay reporting a missing card, you could lose up to $500. And if you wait more  than 60 days after receiving a bank statement that includes a fraudulent use of  your card, you could lose everything in your account including your overdraft  line of credit. You can find the specific rules on the Federal Trade Commission  website at www.ftc.gov.
In  addition, if you purchase defective merchandise with a debit card there are no  refunds. Most credit card issuers do not, generally speaking, make you pay for  defective products.

Debt
A debt is  an obligation to repay an amount you owe. Debt securities, such as bonds or  commercial paper, are forms of debt that bind the issuer, such as a corporation,  bank, or government, to repay the security holder. Debts are also known as  liabilities.

Debt Security
Debt  securities are interest-paying bonds, notes, bills, or money market instruments  that are issued by governments or corporations.
Some debt  securities pay a fixed rate of interest over a fixed time period in exchange  for the use of the principal. In that case, that principal, or par value, is  repaid at maturity.
Some are  pass-through securities, with principal and interest repaid over the term of  the loan. Still other issues are sold at discount, with interest included in  the amount paid at maturity.
US Treasury  bills, corporate bonds, commercial paper, and mortgage-backed bonds are all  examples of debt securities.

Debt-To-Equity Ratio
A company's  debt-to-equity ratio indicates the extent to which the company is leveraged, or  financed by credit. A higher ratio is a sign of greater leverage.
You find a  company's debt-to-equity ratio by dividing its total long-term debt by its  total assets minus its total debt. You can find these figures in the company's  income statement, provided in its annual report.
Average  ratios vary significantly from one industry to another, so what is high for one  company may be normal for another company in a different industry.
From an  investor's perspective, the higher the ratio, the greater the risk you take in  investing in the company. But your potential return may be greater as w

Deductible
A  deductible is the dollar amount you must pay for healthcare, damage to your  property, or any other insurable claim before your insurance company begins to  cover the cost of the bill.
For  example, if you have a health insurance policy with an annual $300 deductible,  you have to spend $300 of your own money before your insurer will pay whatever  portion of the rest of the year’s bills it has agreed to cover.
However, in some types of policies, the  deductible is per event, not per year. Generally speaking, the higher the  deductible you agree to pay, the lower your insurance premiums tend to be. However,  the deductible for certain coverage is fixed by the insurance provider. That’s  the case with Original Medicare.

Deduction
A deduction is an amount you can subtract from  your gross income or adjusted gross income to lower your taxable income when you  file your income tax return
Certain deductions, such as money contributed  to a traditional IRA or interest payments on a college loan, are available only  to taxpayers who qualify for these deductions based on specific expenditures or  income limits, or both.
Other deductions are more widely available.  For example, you can take a standard deduction, an amount that’s fixed each  year. And if your expenses for certain things, such as home mortgage interest,  real estate taxes, and state and local income taxes, total more than the  standard deduction, it may pay for you to itemize deductions instead.
However, if your adjusted gross income is  above the amount Congress sets for the year, you may lose some or all of these  deductions.

Deed
A deed is a written document that transfers  ownership of land or other real estate from the owner, also known as the  grantor, to the buyer, or grantee.
The form a deed takes varies from place to  place, but the overall structure and the provisions it contains are the same.  The description of the property being transferred is always included.
When you use a mortgage to purchase the  property that's being transferred by deed, you may receive the deed at the time  of purchase, with the lender holding a lien on the property. Or the deed may  belong to the lender until you have paid off the mortgage.
In either case, a deed's creation must be  witnessed and should be recorded with the appropriate local authority to ensure  its validity.

Dividend
Corporations may pay part of their earnings as  dividends to you and other shareholders as a return on your investment. These  dividends, which are often declared quarterly, are usually in the form of cash,  but may be paid as additional shares or scrip.
You may be able to reinvest cash dividends  automatically to buy additional shares if the corporation offers a dividend  reinvestment program (DRIP).
Dividends are taxable unless you own the  investment through a tax-deferred account, such as an employer sponsored  retirement plan or individual retirement annuity (IRA). That applies whether  you reinvest them or not.
However, dividends on most US and many  international stocks are considered qualifying dividends. That means you owe  tax at your long-term capital gains rate provided you have owned the stocks the  required length of time.
Dividends on real estate investment trusts  (REITs), mutual savings banks, and certain other investments aren’t considered  qualifying and are taxed at your regular rate.

Dividend Payout Ratio
You can calculate a dividend payout ratio by  dividing the dividend a company pays per share by the company's earnings per  share. The normal range is 25% to 50% of earnings, though the average is higher  in some sectors of the economy than in others.
Some analysts think that an unusually high ratio  may indicate that a company is in financial trouble but doesn't want to alarm  shareholders by reducing its dividend.

Dividend Reinvestment  Plan (DRIP)
Many publicly held companies allow  shareholders to reinvest dividends in company stock or buy additional shares  through dividend reinvestment plans, or DRIPs.
Enrolling in a DRIP enables you to build your  investment gradually, taking advantage of dollar cost averaging and usually  paying only a minimal transaction fee for each purchase.
Many DRIPs will also buy back shares at any  time you want to sell, in most cases for a minimal sales charge.
One potential drawback of purchasing through a  DRIP is that you accumulate shares at different prices over time, making it  more difficult to determine your cost basis — especially if you want to sell  some but not all of your holding.

Dividend Yield
If you own dividend-paying stocks, you figure  the current dividend yield on your investment by dividing the dividend being  paid on each share by the share's current market price.
For example, if a stock whose market price is  $35 pays a dividend of 75 cents per share, the dividend yield is 2.14% ($0.75 ÷  $35 = .0214, or 2.14%).
Yields for all dividend-paying stocks are  reported regularly in newspaper stock tables and on financial websites.
Dividend yield increases as the price per  share drops and drops as the share price increases. But it does not tell you  what you're earning based on your original investment or the income you can  expect to earn in the future. However, some investors seeking current income or  following a particular investment strategy look for high-yielding stocks.

Dollar Cost Averaging
Dollar cost averaging means adding a fixed  amount of money on a regular schedule to an investment account, such as a  mutual fund or a dividend reinvestment plan (DRIP).
Since the share price of the investment  fluctuates, you buy fewer shares when the share price is higher and more shares  when the price is lower.
The advantage of this type of formula  investing, which may also be called a constant dollar plan, is that, over time,  the average price you pay per share is lower than the actual average price per  share.
But to get the most from this approach, you  have to invest regularly, including during prolonged downturns when the prices  of the investment drop. Otherwise you are buying only at the higher prices.
Despite its advantages, dollar cost averaging  does not guarantee a profit and doesn't protect you from losses in a falling  market.

Dow Jones Industrial  Average (DJIA)
The Dow Jones Industrial Average (DJIA),  sometimes referred to as the Dow, is the best-known and most widely followed  market indicator in the world. It tracks the performance of 30 blue chip US  stocks.
Though it is called an average, it is actually  a price-weighted index. That means the gains and losses of the highest priced  stocks are counted more heavily than gains and losses of lower priced stocks.
The DJIA is quoted in points, not dollars.  It's computed by totaling the weighted prices of the 30 stocks and dividing by  a number that is regularly adjusted for stock splits, spin-offs, and other  changes in the stocks being tracked.
The companies that make up the DJIA are  changed from time to time. For example, in 1999 Microsoft, Intel, SBC  Communications, and Home Depot were added and four other companies were  dropped. The changes were widely interpreted as a reflection of the emerging or  declining impact of a specific company or type of company on the economy as a  whole.

Down Payment
A down payment is the amount, usually stated  as a percentage, of the total cost of a property that you pay in cash as part  of a real estate transaction.
The down payment is the difference between the  selling price and the amount of money you borrow to buy the property. For  example, you might make a 10% down payment of $20,000 to buy a home selling for  $200,000 and take a $180,000 mortgage.
With a conventional mortgage, you're usually  expected to make a down payment of 10% to 20%. But you may qualify for a  mortgage that requires a smaller down payment, perhaps as little as 3%.
The upside of needing to put down less money  is that you may be able to buy sooner. But the downside is that your mortgage  payments will be larger and you'll pay more interest, increasing the cost of  buying.

E

Early Withdrawal
If you withdraw assets from a fixed-term  investment, such as a certificate of deposit (CD), before it matures, it is  considered an early withdrawal.
If you withdraw from an individual retirement  account (IRA) or tax-deferred retirement savings plan before you turn 59 1/2,  it is also considered early.
If you withdraw early, you usually have to pay  a penalty imposed by the issuer (in the case of a CD) or the government (if  it's an IRA or other tax-deferred or tax-free savings plan).
However, you may be able to use the money in  your account without penalty under certain circumstances. For example, if you  withdraw IRA assets to pay for higher education, to buy a first home, or for  other qualified reasons, the penalty is waived. But taxes will still be due on  the tax-deferred portion of the withdrawal.

Earnings
In the case of an individual, earnings include  salary and other compensation for work you do, as well as interest, dividends,  and increases in the value of your investments.
From a corporate perspective, earnings are  profits, or net income, after the company has paid income taxes and bond  interest.

Earnings Estimate
Professional stock analysts use mathematical  models that weigh companies' financial data to predict their future earnings  per share on a quarterly, annual, and long-term basis.
Investment research companies, such as Thomson  Financial and Zacks, publish averages of analysts' estimates for stock market  professionals follow closely. These averages are called consensus estimates.

Economic Cycle
An economic cycle is a period during which a  country’s economy moves from strength to weakness and back to strength.
This pattern repeats itself regularly, though  not on a fixed schedule. The length of the cycle isn’t predictable either, and  may be measured in months or in years.
The cycle is driven by many forces — including  inflation, the money supply, domestic and international politics, and natural  events.
In developed countries, the central bank uses  its power to influence interest rates and the money supply to prevent dramatic  peaks and deep troughs, smoothing the cycle’s highs and lows.
This up and down pattern influences all  aspects of economic life, including the financial markets. Certain investments  or categories of investment that thrive in one phase of the cycle may lose  value in another. As a result, in evaluating an investment, you may want to  look at how it has fared through a full economic cycle.

Economic Indicator
Economic indicators are statistical  measurements of current business conditions.
Changes in leading indicators, including those  that track factory orders, stock prices, the money supply, and consumer  confidence, forecast short-term economic strength or weakness.
In contrast, lagging indicators, such as  business spending, bank interest rates, and unemployment figures, move up or  down in the wake of changes in the economy.
The Conference Board, a nonprofit business  research firm, releases its weighted indexes of leading, lagging, and  coincident indicators every month.
Though the individual components are also  reported sep

Efficient Market
When the information that investors need to  make investment decisions is widely available, thoroughly analyzed, and  regularly used, the result is an efficient market.
This is the case with securities traded on the  major US stock markets. That means the price of a security is a clear  indication of its value at the time it is traded.
Conversely, an inefficient market is one in  which there is limited information available for making rational investment  decisions and limited trading volume.

Efficient Market Theory
Proponents of the efficient market theory  believe that a stock's current price accurately reflects what investors know  about the stock.
They also maintain that you can't predict a  stock's future price based on its past performance. Their conclusion, which is  contested by other experts, is that it's not possible for an individual or  institutional investor to outperform the market as a whole.
Index funds, which are designed to match,  rather than beat, the performance of a particular market segment, are in part  an outgrowth of efficient market theory

Electronic Bill Payment
If you have an electronic bill payment  arrangement with your bank, your bills are sent to an account you designate and  the bank pays them automatically each month by deducting the money from that  account and transferring it to your payees, either electronically or by check.
The advantage of using electronic payment is  that your bills will be paid on time, though it is your responsibility to  ensure that there is enough money on deposit to cover what’s due.
When the payments are made to credit accounts  with the same bank, you may be offered a slightly reduced interest rate for  using the service.
However, you’ll want to investigate whether  there’s an added fee for automatic payment and how much flexibility you have in  determining how much of a bill’s balance due is paid each month on credit  accounts where you have the option to pay less than the full amount owed.

Emerging Market
Countries in the process of building  market-based economies are broadly referred to as emerging markets. However,  there are major differences among the countries included in this category.
Some emerging-market countries, including  Russia, have only recently relaxed restrictions on a free-market economy.  Others, including Indonesia, have opened their markets more widely to overseas  investors, and still others, including Mexico, are expanding industrial  production.
Their combined stock market capitalization is  less than 3% of the worldwide total.

Emerging Markets Fund
Emerging markets mutual funds invest primarily  in the securities of countries in the process of building a market-based  economy.
Some funds specialize in the markets of a  certain region, such as Latin America or Southeast Asia. Others invest in a  global cross-section of countries and region

Equity
In the broadest sense, equity means ownership.  If you own stock, you have equity in, or own a portion — however small — of the  company that issued the stock.
Having equity is the opposite of owning a bond  or commercial paper, which is a debt the company must repay to you.
Equity also means the difference between an  asset's current market value — the amount it could be sold for — and any debt  or claim against it. For example, if you own a home currently valued at  $300,000 but still owe $200,000 on your mortgage, your equity in the home is  $100,000.
The same is true if you own stock in a margin  account. The stock may be worth $50,000 in the marketplace, but if you have a  loan balance of $20,000 in your margin account because you financed the  purchase, your equity in the stock is $30,000

Exchange
Traditionally, an exchange has been a physical  location for trading securities. Trading is handled, at least in part, by an  open outcry or dual auction system.
Two examples in the United States are the New  York Stock Exchange (NYSE), which has the largest trading floor in the world,  and the Chicago Board Options Exchange (CBOE).
However, the definition is evolving. Traditional  exchanges handle an increasing number of trades electronically, off the floor.  NASDAQ and other totally electronic securities markets, without trading floors,  have exchange status.
As a result, the terms exchange and market are  being used interchangeably to mean any environment in which listed products are  traded.
The term exchange also refers to the act of  moving assets from one fund to another in the same fund family or from one  variable annuity subaccount to another offered through the same contract.

Exchange Rate
The exchange rate is the price at which the  currency of one country can be converted to the currency of another. Although  some exchange rates are fixed by agreement, most fluctuate or float from day to  day.
Daily exchange rates are listed in the  financial sections of newspapers and can also be found on financial websites.

Exchange-Traded Fund (ETF)
Exchange-traded funds (ETFs) are listed on a  stock exchange and trade like stock. You can use traditional stock trading  techniques, such as stop orders, limit orders, margin purchases, and short  sales when you buy or sell ETFs.
But ETFs also resemble mutual funds in some  ways. For example, you buy shares of the fund, which in turn owns a portfolio  of stocks.
Each ETF has a net asset value (NAV), which is  determined by the total market capitalization of the stocks in the portfolio,  plus dividends but minus expenses, divided by the number of shares issued by  the fund.
ETF prices change throughout the trading day,  in response to supply and demand, rather than just at the end of the trading  day as open-end mutual fund prices do.
The market price and the NAV are rarely the  same, but the differences are typically small. That's due to a unique process  that allows institutional investors to buy or redeem large blocks of shares at  the NAV with in-kind baskets of the fund's stocks.

F

Financial plan
A financial plan is a document that describes  your current financial status, your financial goals and when you want to  achieve them, and strategies to meet those goals.
You can use your plan as a benchmark to  measure the progress you’re making and update your plan as your goals and time  frame change.
Financial planners and other investment  professionals can help you create a plan, identify appropriate investments and  insurance, and monitor your portfolio. You may pay a one-time fee to have a  plan created, or it may be included as part of a fee-based account with a  stockbroker or investment adviser.

Financial planner
A financial planner evaluates your personal  finances and helps you develop a financial plan to meet both your immediate  needs and your long-term goals. Some, but not all, planners have credentials  from professional organizations.
Some well-known credentials are Certified  Financial Planner (CFP), Chartered Financial Consultant (ChFC), Certified  Investment Management Analyst (CIMA), and Personal Financial Specialist (PFS).
A PFS is a Certified Public Accountant (CPA)  who has passed an exam on financial planning. Some planners are also licensed  to sell certain investment or insurance products.
Fee-only financial planners charge by the hour  or collect a flat fee for a specific service, but don't sell products or earn  sales commissions. Other planners don't charge a fee but earn commissions on  the products they sell to you. Still others both charge fees and earn  commissions but may offset their fees by the amount of commission they earn.

Fixed-income investment
Fixed-income investments typically pay  interest or dividends on a regular schedule and may promise to return your  principal at maturity, though that promise is not guaranteed in most cases.
Among the examples are government, corporate,  and municipal bonds, preferred stock, and guaranteed investment contracts  (GICs).
The advantage of holding fixed-income securities  in an investment portfolio is that they provide regular, predictable income.
But a potential disadvantage of holding them  over an extended period, or to maturity in the case of bonds, is that they may  not increase in value the way equity investments may. As a result, a portfolio overweighed  with fixed-income investments may make you more vulnerable to inflation risk.

Fixed-rate mortgage
A fixed-rate mortgage is a long-term loan that  you use to finance a real estate purchase, typically a home.
Your borrowing costs and monthly payments  remain the same for the term of the loan, no matter what happens to market  interest rates.
This predetermined expense is one of a  fixed-rate loan’s most attractive features, since you always know exactly what  your mortgage will cost you.
If interest rates rise, a fixed-rate mortgage  works in your favor. But if market rates drop, you have to refinance to get a  lower rate and reduce your mortgage costs.
Typical terms for a fixed-rate mortgage are  15, 20, or 30 years, though you may be able to arrange a different length. With  a hybrid mortgage, which begins as a fixed-rate loan and converts to an  adjustable rate, the fixed-term portion is often seven or ten years.

Foreign exchange (FOREX)
Any type of financial instrument that is used  to make payments between countries is considered foreign exchange. The list of  instruments includes electronic transactions, paper currency, checks, and  signed, written orders called bills of exchange.
Large-scale currency trading, with minimums of  $1 million, is also considered foreign exchange and can be handled as spot  price transactions, forward contract transactions, or swap contracts.
Spot transactions close at the market price  within two days, and the others are set to close at an agreed-upon price and an  agreed-upon date in the future.

Front-end load
The load, or sales charge, that you pay when  you purchase shares of a mutual fund or annuity is called a front-end load.  Some mutual funds identify shares purchased with a front-end load as Class A  shares.
The drawback of a front-end load is that a  portion of your investment pays the sales charge rather than being invested.  However, the annual asset-based fees on Class A shares tend to be lower than on  shares with back-end or level loads.
In addition, if you pay a front-end load, you  may qualify for breakpoints, or reduced sales charges, if the assets in your  account reach a certain milestone, such as $25,000.

Futures contract
Futures contracts, when they trade on  regulated futures exchanges, obligate you to buy or sell a specified quantity  of the underlying product for a specific price on a specific date.
The underlying product could be a commodity,  stock index, security, or currency.
Because all the terms of a listed futures  contract are structured by the exchange, you can offset your contract and get  out of your obligation by buying or selling an opposing contract before the  settlement date.
Futures contracts provide some investors,  called hedgers, a measure of protection from price volatility on the open  market.
For example, wine manufacturers are protected  when a bad crop pushes grape prices up on the spot market if they hold a  futures contract to buy the grapes at a lower price. Grape growers are also  protected if prices drop dramatically — if, for example, there's a surplus  caused by a bumper crop — provided they have a contract to sell at a higher  price.
Unlike hedgers, speculators use futures  contracts to seek profits on price changes. For example, speculators can make  (or lose) money, no matter what happens to the grapes, depending on what they  paid for the futures contract and what they must pay to offset it.

Futures exchange
Traditionally, futures contracts and options  on those contracts have been bought and sold on a futures exchange, or trading  floor, in a defined physical space.
In the US, for example, there are futures  exchanges in Chicago, Kansas City, Minneapolis, and New York.
As electronic trading of these products  expands, however, buying and selling doesn't always occur on the floor of an  exchange. So the term is also used to describe the activity of trading futures contracts.

G

Gilt-edged security
When the term gilt-edged is applied to bonds,  it's the equivalent of describing a stock as a blue chip.
Both terms mean that the issuing corporation  has a long, strong record for meeting its financial obligations to its  investors. That includes making interest and dividend payments on time and redeeming  bonds on schedule.

Global depositary  receipt (GDR)
To raise money in more than one market, some  corporations use global depositary receipts (GDRs) to sell their stock on  markets in countries other than the one where they have their headquarters.
The GDRs are issued in the currency of the  country where the stock is trading. For example, a Mexican company might offer  GDRs priced in pounds in London and in yen in Tokyo.
Individual investors in the countries where  the GDRs are issued buy them to diversify into international markets. GDRs let  you do this without having to deal with currency conversion and other  complications of overseas investing.
However, since GDRs are frequently offered by  newer or less-known companies, the prices are often volatile and the stocks may  be thinly traded. That makes buying GDRs riskier than buying domestic stocks.

Global fund
Global, or world, mutual funds invest in US  securities as well as those of other countries. In that way, they differ from  international funds, which invest only in non-US markets.
Although global funds may keep as much as 75%  of their assets invested in the US, fund managers are able to take advantage of  opportunities they see in various overseas markets.

Go long
When you go long, you buy a security or other  financial product that you intend to hold for a period of time or one that you  expect to increase in value so that you can sell it at a profit.
Going long is the opposite of going short,  which means you sell an investment, usually because you expect it to decline in  value in the near future.
If you're buying and selling options or  futures contracts, you go long when you enter a contract to buy and you go  short when you enter a contract to sell.

Go public
A corporation goes public when it issues shares  of its stock in the open market for the first time, in what is known as an  initial public offering (IPO).
That means that at least some of the shares  will be held by members of the public rather than exclusively by the investors  who founded and funded the corporation initially or the current owners or  management.

Go short
When you enter a futures contract that commits  you to sell or deliver the underlying product, you go short or have a short  position.
You're also going short when you write an  options contract, giving the buyer the right to exercise the contract. With  stocks, you go short when you borrow shares of stock through your broker and  sell them at their current market price.
In contrast, you go long when you enter a  futures contract to buy, when you purchase an options contract, or buy a stock  either to hold in your portfolio or sell at some point in the future.

Gold standard
The gold standard is a monetary system that  measures the relative value of a currency against a specific amount of gold.
It was developed in England in the early 18th  century when the scientist Sir Isaac Newton was Master of the English Mint. By  the late 19th century, the gold standard was used throughout the world.
The US was on the gold standard until 1971,  when it stopped redeeming its paper currency for gold.

Good 'til canceled (GTC)
If you want to buy or sell a security at a  specific price, you can ask your broker to issue a good 'til canceled (GTC)  order. When the security reaches the price you've indicated, the trade will be  executed.
This order stays in effect until it is filled,  you cancel it, or the brokerage firm's time limit on GTC orders expires.
A GTC, also called an open order, is the  opposite of a day order, which is automatically canceled at the end of the trading  day if it isn't filled.
In addition, some firms offer good through  month (GTM) or good through week (GTW) orders.

Good faith deposit
A good faith deposit is a sum of money  provided by a buyer to a seller, which demonstrates the buyer’s intention to purchase.
For instance, if you’ve decided on a home you  want to buy, you generally make a good faith deposit to support your bid.
A good faith deposit, also called a binder or  earnest money, is usually a fixed amount that’s standard in the community where  you’re buying. It's different from a down payment. That’s a larger cash  payment, figured as a percentage of the purchase price, which you make when you  sign the contract to purchase the property.
If you and the seller can’t agree on the terms  of the sale, you generally get your good faith deposit back.

Good faith estimate
A good faith estimate is a written summary  provided by your mortgage lender. It shows the amount you can expect to pay at  your real estate closing to cover all the fees and expenses that are part of  arranging your mortgage loan.
It includes, among other things, the title  search and title insurance, lawyers’ fees, transfer taxes, and filing fees. The  total amount of a good faith estimate is in addition to the down payment you  will make.

Good will
When the term good will is used in connection  with evaluating a company, it covers the intangible value of its reputation,  its satisfied clients, and its productive work force. Those factors are all  considered evidence of the corporation's potential to produce strong earnings.

Government bond
The term government bond is used to describe  the debt securities issued by the federal government, such as US Treasury  bills, notes, and bonds. They're also known as government obligations.
You can buy and sell these issues directly  using a Treasury Direct account or through a broker.
Treasurys are backed by the full faith and  credit of the US government, and the interest they pay is exempt from state and  local, though not federal, income taxes. The cash raised by the sale of  Treasurys is used to finance a variety of government activities.
Debt instruments issued by government agencies  are also described as government bonds or government securities, though they  are not backed by the government’s ability to collect taxes to pay them off.
For example, bonds issued by the Government  National Mortgage Association (Ginnie Mae) and the Tennessee Valley Authority  (TVA) are government bonds.

Gross spread
In an initial public offering (IPO), the gross  spread is the difference between what the underwriters pay the issuing company  per share and the per share price that investors pay. It's usually about 7%.
For example, if a stock is to be offered to  the public at $10 a share, the underwriters may pay the issuing company around  $9.30 per share. With millions of shares being sold, the 70 cents per share  adds up to millions of dollars for the investment bank.

Growth
Growth is an increase in the value of an  investment over time. Unlike investments that produce income, those that are designed  for growth don't necessarily provide you with a regular source of cash.
A growth company is more likely to reinvest  its profits to build its business. If the company prospers, however, its stock  typically increases in value.
Stocks, stock mutual funds, and real estate  may all be classified as growth investments, but some stocks and mutual funds  emphasize growth more than others.

Growth and income fund
Growth and income mutual funds invest in  securities that provide, as their name suggests, a combination of growth and  income.
This type of fund generally funnels assets  into common stocks of well-established companies that pay regular dividends and  increase in value at a regular, if modest, rate. The balance of the fund's  portfolio is in high-rated bonds and preferred stock.

Growth rate
A growth rate measures the percentage increase  in the value of a variety of markets, companies, or operations.
For example, a stock research firm typically  tracks the rate at which a company’s sales and earnings have grown as one of  the factors in evaluating whether to recommend that investors purchase, hold,  or sell its shares.
Similarly, the rate at which the gross  domestic product grows is a measure of the strength of the US economy.
If you want to compare the vigor of entities  or elements of different sizes, it’s more accurate to look at growth rate than  it is to look at the actual numerical change in value. For example, an emerging  market might be growing at a much faster rate than a developed one even though  the size of those economies is vastly different.

H

Home equity loan
A home equity loan, sometimes called a second  mortgage, is secured by the equity in your home.
You receive the loan principal, minus fees for  arranging the loan, in a lump sum. You then make monthly repayments over the  term of the agreement, just as you do with your first, or primary, mortgage.
The interest rates on home equity loans are  generally lower than the rates on unsecured loans. However, when you borrow  against your equity you run the risk of foreclosure if you default on the loan,  even if you have continued to make the required payments on your first  mortgage.

Homeowner's insurance
Homeowners insurance is a contract between an  insurance company and a homeowner to cover certain types of damage to the  property and its contents, theft of personal possessions, and liability in case  of lawsuits based on incidents or events that occur on the property.
To obtain the insurance, which is based on the  value of the home and what is covered in the policy, you pay a premium set by  the insurance company.
For each claim there’s generally a deductible  — a dollar amount — that you must pay before the insurer is responsible for its  share. If you have a mortgage loan, your lender will require you to have enough  homeowner’s insurance to cover the amount you owe on the loan.
Homeowner insurance policies vary  substantially from contract to contract and from insurer to insurer as well as  from region to region. Almost all policies have exclusions, which are causes of  loss that are not covered. All of the coverage and exclusions of a particular  policy are spelled out in the terms and conditions.

I

Identity theft
Identity theft is the unauthorized use of your  personal information, such as your name, address, Social Security number, or  credit account information.
People usually steal your identity to make  purchases or obtain credit, though they may also use the data to apply for a  driver’s license or other form of official identification.

Incorporation
When a business incorporates, it receives a  state or federal charter to operate as a corporation. A corporation has a  separate and distinct legal and tax identity from its owners.
In fact, in legal terms, a corporation is  considered an individual — it can own property, earn income, pay taxes, incur  liabilities, and be sued.
Incorporating can offer many advantages to a  business, among them limiting the liability of the company’s owners. This means  that shareholders are not personally responsible for the company’s debts.  Another advantage is the ability to issue shares of stock and sell bonds, both  ways to raise additional capital.
You know that a business is a corporation if  it includes the word “Incorporated” — or the short form, “Inc.” — in its  official name.

Indemnity insurance
An indemnity insurance policy pays up to a  fixed amount when you make a claim, often on a per day basis.
The premiums on health insurance indemnity  plans may be lower than on other healthcare plans, but the fixed payments may  cover only a portion of your medical bills.
Some people use indemnity plans as supplements  to, rather than substitutes for, more comprehensive health insurance. Others  use low-cost indemnity plans for short-term coverage.

Indenture
An indenture is a written contract between a  bond issuer and bond holder that is proof of the bond issuer’s indebtedness and  specifies the terms of the arrangement, including the maturity date, the  interest rate, whether the bond is convertible to common stock, and, if so, the  price or ratio of the conversion.
The indenture, which may be called a deed of  trust, also includes whether the bond is callable — or can be redeemed by the  issuer before it matures — what property, if any, is pledged as security, and  any other terms.

Index fund
An index fund is designed to mirror the  performance of a stock or bond index, such as Standard & Poor's 500 Index  (S&P 500) or the Russell 2000 Index.
To achieve that goal, the fund purchases all  of the securities in the index, or a representative sample of them, and adds or  sells investments only when the securities in the index change. Each index fund  aims to keep pace with its underlying index, not outperform it.
This strategy can produce strong returns  during a bull market, when the index reflects increasing prices. But it may  produce disappointing returns during economic downturns, when an actively  managed fund might take advantage of investment opportunities if they arise to  outperform the index.
Because the typical index fund's portfolio is  not actively managed, most index funds have lower-than-average management costs  and smaller expense ratios. However, not all index funds tracking the same  index provide the same level of performance, in large part because of different  fee structures.

Index of Leading  Economic Indicators
This monthly composite of ten economic  measurements was developed to track and help forecast changing patterns in the  economy. It is compiled by The Conference Board, a business research group.
The components are adjusted from time to time  to help improve the accuracy of the index. In the past, it has successfully  predicted major downturns, although it has also warned of some that did not  materialize.
Consumer-related components include the number  of building permits issued, manufacturers' new orders for consumer goods, and  the index of consumer expectations.
Financial components include stock prices of  500 common stocks, the real money supply, and the interest rate spread.
Business-related components include the  average work week in the manufacturing sector, average initial claims for  unemployment benefits, nondefense plant and equipment orders, and vendor performance,  which reflects how quickly companies receive deliveries from suppliers.

Inflation
Inflation is a persistent increase in prices,  often triggered when demand for goods is greater than the available supply or  when unemployment is low and workers can command higher salaries.
Moderate inflation typically accompanies  economic growth. But the US Federal Reserve Bank and central banks in other nations  try to keep inflation in check by decreasing the money supply, making it more  difficult to borrow and thus slowing expansion.
Hyperinflation, when prices rise by 100% or  more annually, can destroy economic, and sometimes political, stability by driving  the price of necessities higher than people can afford.
Deflation, in contrast, is a widespread  decline in prices that also has the potential to undermine the economy by  stifling production and increasing unemployment.

Inflation rate
The inflation rate is a measure of changing  prices, typically calculated on a month-to-month and year-to-year basis and  expressed as a percentage.
For example, each month the Bureau of Labor  Statistics calculates the inflation rate that affects average urban US  consumers, based on the prices for about 80,000 widely used goods and services.  That figure is reported as the Consumer Price Index (CPI).

Inflation-adjusted  return
Inflation-adjusted return is what you earn on  an investment after accounting for the impact of inflation.
For example, if you earn 7% on a bond during a  period when the inflation rate averages 3%, your inflation-adjusted return is  4%.
Inflation-adjusted return is also known as  real return.
Since inflation diminishes the buying power of  your money, it's important that the rate of return on your overall investment  portfolio be greater than the rate of inflation. That way, your money grows  rather than shrinks in value over time.

Inflation-protected  security (TIPS)
US Treasury inflation-protected securities  (TIPS) adjust the principal twice a year to reflect inflation or deflation  measured by the Consumer Price Index (CPI).
The interest rate is fixed and is paid twice a  year on the adjusted principal. So if your principal is larger because of  inflation you earn more interest. If it's lower because of deflation, you earn  less.
You can buy TIPS with terms of 5, 10, or 20  year at issue using a Treasury Direct account or in the secondary market. At  maturity you receive either the adjusted principal or par value, whichever is  greater.
You owe federal income tax on the interest you  earn and on inflation adjustments in each year they're added even though you  don't receive the increases until the security matures. However, TIPS earnings  are exempt from state and local income taxes.
These securities provide a safeguard against  deflation as well as against inflation since they guarantee that you'll get  back no less than par, or face value, at maturity.

Initial public offering  (IPO)
When a company reaches a certain stage in its  growth, it may decide to issue stock, or go public, with an initial public  offering (IPO). The goal may be to raise capital, to provide liquidity for the  existing shareholders, or a number of other reasons.
Any company planning an IPO must register its  offering with the Securities and Exchange Commission (SEC).
In most cases, the company works with an  investment bank, which underwrites the offering. That means buying all the  shares at a set price and reselling them to the public with the expectation of  making a profit.

Insider trading
If management of a publicly held company,  members of its board of directors, or anyone who holds more than 10% of the  company trades its shares, it's considered insider trading.
This type of trading is perfectly legal,  provided it's based on information available to the public.
It's only illegal if the decision is based on  knowledge of corporate developments, such as executive changes, earnings  reports, or acquisitions or takeovers that haven't yet been made public.
It is also illegal for people who are not part  of the company, but who gain access to private corporate information, to trade  the company's stock based on this inside information. The list includes  lawyers, investment bankers, journalists, or relatives of company officials.

Interest
Interest is what you pay to borrow money using  a loan, credit card, or line of credit. It is calculated at either a fixed or  variable rate that’s expressed as a percentage of the amount you borrow, pegged  to a specific time period.
For example, you may pay 1.2% interest monthly  on the unpaid balance of your credit card.
Interest also refers to the income, figured as  a percentage of principal that you're paid for purchasing a bond, keeping money  in a bank account, or making other interest-paying investments.
If it is simple interest, earnings are figured  on the principal. If it is compound interest, the earnings are added to the  principal to form a new base on which future income is calculated.
Interest is also a share or right in a  property or asset. For example, if you are half-owner of a vacation home, you  have a 50% interest.

Interest rate
Interest rate is the percentage of the face  value of a bond or the balance in a deposit account that you receive as income  on your investment.
If you multiply the interest rate by the face  value or balance, you find the annual amount you receive.
For example, if you buy a bond with a face  value of $1,000 with a 6% interest rate, you'll receive $60 a year. Similarly,  the percentage of principal you pay for the use of borrowed money is the loan's  interest rate.
If there are no other costs associated with  borrowing the money, the interest rate is the same as the annual percentage  rate (APR).

Interest-only mortgage
With an interest-only mortgage loan, you pay  only the interest portion of each scheduled payment for a fixed term, often  five to seven years.
After that, your payments increase, often  substantially, to cover the accumulated unpaid principal plus the balance of  the loan and the interest.
Before the higher payments begin, you may  renegotiate your loan at the current interest rate or pay off the outstanding  balance. However, it’s possible that interest rates may have risen, in which  case you will end up paying a higher rate on the entire unpaid principal.
If you have regularly invested the principal  you weren’t repaying and realized a return higher than the loan’s interest  rate, you could come out ahead. However, many borrowers don’t invest the  savings.
One risk with interest-only loans is that you  may not be able to meet the higher payments once full repayment begins,  especially if the interest-only payments themselves were a stretch.

Interest-rate risk
Interest-rate risk describes the impact that a  change in current interest rates is likely to have on the value of your  investment portfolio.
You face interest-rate risk when you own  long-term bonds or bond mutual funds because their market value will drop if  interest rates increase.
That loss of value occurs because investors  will be able to buy bonds with a new, higher interest rate, so they won't pay  full price for an older bond paying a lower interest rate.

Investment bank
An investment bank is a financial institution  that helps companies take new bond or stock issues to market, usually acting as  the intermediary between the issuer and investors.
Investment banks may underwrite the securities  by buying all the available shares at a set price and then reselling them to  the public. Or the banks may act as agents for the issuer and take a commission  on the securities they sell.
Investment banks are also responsible for  preparing the company prospectus, which presents important data about the  company to potential investors.
In addition, investment banks handle the sales  of large blocks of previously issued securities, including sales to  institutional investors, such as mutual fund companies.
Unlike a commercial bank or a savings and loan  company, an investment bank doesn't provide retail banking services to individuals.

Investment club
If you're part of an investment club, you and  the other members jointly choose the investments the club makes and decide on  the amount each of you will contribute to the club's account.
Among the reasons that clubs are popular is  that they allow investors to commit only modest amounts, share in a diversified  portfolio, and benefit from each other's research.
Clubs may also pay lower commissions, as a  result of arrangements they make with a brokerage firm or through the National  Association of Investors Corporation (NAIC).
NAIC provides information on how to start an  investment club and provides support services to existing clubs.

J

Junk bond
Junk bonds carry a higher-than-average risk of  default, which means that the bond issuer may not be able to meet interest  payments or repay the loan when it matures.
Except for bonds that are already in default,  junk bonds have the lowest ratings, usually Caa or CCC, assigned by rating  services such as Moody's Investors Service and Standard & Poor's (S&P).
Issuers offset the higher risk of default on  junk bonds by offering substantially higher interest rates than are being paid  on investment-grade bonds. That's why junk bonds are also known, more  positively, as high-yield bonds.

L

Laddering
Laddering is an investment strategy that calls  for establishing a pattern of rolling maturity dates for a portfolio of  fixed-income investments. Your portfolio might include intermediate-term bonds  or certificates of deposit (CDs).
For example, instead of buying one $15,000 CD  with a three-year term, you buy three $5,000 CDs maturing one year apart. As  each CD comes due, you can reinvest the principal to extend the pattern.
Or, you could use the money for a preplanned  purchase, have it available to take advantage of a new investment opportunity,  or use it to cover unexpected expenses.
You can use laddering to pay for college  expenses, with a series of zero coupon bonds coming due over four years, in  time to pay tuition each year.
And if you ladder, you can avoid having to  liquidate a large bond investment if you need just some of the money or  reinvest your entire principal at a time when interest rates may be low.

Lapse
A lapse causes a policy, right, or privilege  to end because the person or institution that would benefit fails to live up to  its terms or meet its conditions.
For example, if you have a subscription right  to buy additional shares of a stock at a price below the public offering price,  you must generally act before a certain date. If that date passes, your right  is said to lapse.
Similarly, if you have a life insurance policy  that requires you to pay annual premiums, the policy will lapse and you’ll no  longer be covered if you fail to pay.

Large-capitalization  (large-cap) stock
The stock of companies with market  capitalizations of $10 billion or more is known as large-cap stock. Market  capitalization is figured by multiplying the number of either the outstanding  or the floating shares by the current share price.
Large-cap stock is generally considered less  volatile than stock in smaller companies, in part because the bigger companies  may have larger reserves to carry them through economic downturns.
However, market capitalization is always in  flux. Today's large-cap stock can drop out of that category if the share price  plunges either in a general market downturn or as a result of internal  problems.
And the opposite is true as well. Many of the  country's largest companies began life as start-ups.

Last trading day
The last trading day is the final day on which  an order to buy or sell an options contract or futures contract can be  executed.
In the case of an options contract, for  example, the last trading day is usually the Friday before the third Saturday  of the month in which the option expires, though a brokerage firm may set an  earlier deadline for receiving orders.
If you don’t act on an option you own before  the final trading day, the option may simply expire, or if it is in-the-money  it may be automatically executed on your behalf by your brokerage firm or the  Options Clearing Corporation (OCC) unless you request that it not be.
But if a futures contract isn’t offset, the  contract seller is obligated to deliver the physical commodity or cash  settlement to the contract buyer.

Lead underwriter
When a company wants to raise capital by  selling securities to investors, it partners with an investment bank, known as  the lead underwriter.
That bank has the primary responsibility for  organizing and managing an initial public offering (IPO), a secondary stock  offering, or a bond offering.
In the case of an IPO, the lead underwriter  agrees to buy all the shares from the company and helps it determine an initial  offering price for the security, create a prospectus, and organize a syndicate  of other investment banks to help sell the securities to investors.
In return for assuming the financial risk of  the IPO, the lead underwriter receives a fee, which is usually a percentage of  each share price of the IPO.

Lease
A lease is a legal agreement that provides for  the use of something — typically real estate or equipment — in exchange for  payment.
Once a lease is signed, its terms, such as the  rent, cannot be changed unless both parties agree. A lease is