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It is very hard to understand a new subject unless you know
the basic vocabulary used to talk about that subject. Here
we have provided a glossary of words and terms used in the
mutual fund industry.
====================
12b-1 Fee - Named after the Securities and Exchange
Commission ruling that permits mutual funds to pay certain
expenses, such as advertising and distribution costs, out of
fund assets. The fund's prospectus details 12b-1 charges,
if applicable.
401(k) - A qualified employee benefit plan in which employee
contributions are made on a pre-tax basis. Both employer
and employee contributions compound tax-free until
withdrawn.
Adviser - The organization employed by a mutual fund to give
professional advice on the fund's investments and to
administer its assets.
Asked Price - The price at which a mutual fund's shares can
be purchased. It is the current net asset value per share
plus sales charge, if any. For no-load funds, bid and asked
prices are the same. (See Bid Price)
Automatic Reinvestment - A big advantage of mutual funds is
the ability to reinvest dividends and capital gains
distributions. These reinvested dividends are used to buy
more shares of the fund and increase your holdings.
Balanced Funds - Generally have a three-part investment
objective: 1) to conserve the investors' principal, 2) to
pay current income, and 3) to promote long-term growth of
both principal and income. Balanced funds have a portfolio
mix of bonds, preferred stocks, and common stocks.
Bankers'Acceptances(BAs) - Short-term,non-interest-bearing
notes sold at a discount and redeemed at maturity for full
face value. Primarily used to finance foreign trade. BAs
represent a future claim on a U.S. bank that provides lines
of credit to U.S. importers. BAs are collateralized by the
goods to be sold and are guaranteed by the importer's U.S.
bank.
Basis Point - Term used to described the movement of
interest rates, expressed in hundredths of a percent. One
hundred basis points equals one percent. An increase from 7
percent to 8 percent would be a change of 100 basis points.
Bear Market - A sustained period in which prices of stocks
or bonds drop. Usually indicates a period of poor economic
activity. The opposite of a bull market.
Bid Price - The price at which a fund's shares are redeemed
(bought back) by the fund, generally the net asset value per
share. Also known as the sell price or redemption price.
Blue Chip - The common stock of a well-known national
company with a history of earnings growth and dividend
increases, e.g., IBM, General Motors, AT&T, ect.
Blue Sky Laws - Laws of the various states governing the
sale of securities including mutual fund shares.
Bond - A security that represents debt of an issuing
corporation (or government). Usually, the issuer is
required to pay the bondholder a specified rate of interest
for a specified time and then repay the principal amount, or
face value, of the bond at maturity.
Bond Fund - A mutual fund whose portfolio consists primarily
of bonds. The emphasis is generally on income rather than
growth.
Broker - A person in the business of effecting securities
transactions for others. Generally paid by commission.
Bull Market - A sustained period in which prices of stocks
or bonds are advancing (going up). Usually indicates a
period of economic growth. The opposite of a bear market.
Call Option - A contract that gives the holder the right to
purchase a specified security at a specified price by a
specified date.
Capital Gains - Profits realized from the sale of an
investment.
Capital Gains Distribution - When a mutual fund sells an
investment for a profit, it realizes a capital gain. Most
mutual funds distribute these capital gains once a year.
Capital Growth - An increase in the market value of a mutual
fund's securities, as reflected in the net asset value of
the fund shares.
Cash Equivalent - A term used for assorted short-term
instruments such as U.S. government securities, CDs, and
short-term municipal and corporate bonds and notes.
Certificates of Deposit (CDs) - Usually issued by banks and
other financial institutions, certificates of deposit pay a
fixed rate of interest for a specific period of time. Also
known as "time certificates of deposit".
Closed-End Fund - Investment company that issues a fixed
number of shares which are then bought and sold on a stock
exchange or over the counter. The price of a closed-end
share is determined by supply and demand - it may be more or
less than the fund's net asset value.
Commercial Paper - Short-term, unsecured promissory note
issued by corporations and financial institutions to finance
short-term credit needs.
Compound Interest - When you deposit money in the bank, it
earns interest. When that interest also begins to earn
interest, the result is compound interest. Compounding also
occurs if income or dividends from mutual funds are
reinvested. Because of compounding, money is able to grow
much faster if an investment's earnings are left in the
account.
Consumer Price Index (CPI) - Index that notes the change in
prices for consumer goods and services.
Custodian - The organization (usually a bank or trust
company) that keeps custody of the securities and other
assets of a mutual fund.
Debenture - A bond secured only by the credit worthiness of
the corporation.
Distributions - Dividends paid from investment income and
payments made from realized capital gains.
Diversification - The spreading of one's investment risk by
putting assets in a wide-ranging portfolio of securities.
Most mutual funds are highly diversified; most containing
dozens, even hundreds or thousands of individual stocks.
Dividend - When companies pay part of their profits to
shareholders, those profits are called dividends.
Dollar Cost Averaging - Investing a fixed amount of money in
mutual fund shares at regular intervals, such as monthly or
quarterly, rather than all at once. This reduces the
average share costs to the investor, who acquires more
shares during periods of lower prices and fewer shares
during periods of higher prices.
Dow Jones Industrial Average (DJIA) - Stock market index of
30 blue chip industrial stocks issued by Dow Jones & Co. to
indicate changes in the overall market.
Equity - When you own part of something, your home or car,
for example, you have equity in it. Stock is also an equity
investment because each share you own represents part of the
company that issued it.
Exchange Privilege - Mutual fund families generally allow
shareholders to transfer funds from one fund in the family
to another. There are usually restrictions on how often the
privilege can be exercised. (This is generally considered a
sale and new purchase for tax purposes.)
Expense Ratio - The amount, expressed as a percentage of
total investment, that shareholders pay for mutual fund
operating expenses and management fees. This money, which
may be as high as 1% or more of shareholders assets, is
taken out of the funds current income and is disclosed in
the annual report to shareholders.
FDIC (Federal Deposit Insurance Corporation) - The agency of
the U.S. government whose basic purpose is to insure bank
deposits. Currently, depositors are covered up to $100,000
at an insured bank (this is subject to change).
IRA (Individual Retirement Account) - Personal retirement
account that an individual with employment income can fund
with tax-deductible contributions of up to $2,000 per year.
All earnings within the account accumulate tax-deferred
until the funds are withdrawn - generally at retirement.
Early withdrawals - generally those made before age 59 1/2 -
may be subject to a 10% penalty tax as well as ordinary
income taxes.
IRA Rollover - The transfer of IRA money from one investment
and the placement (or roll-over) of that money into another
investment. There are restrictions on this and heavy tax
consequences may occur if not done properly.
Investment Company - A corporation, trust, or partnership
which invests the pooled funds of its shareholders in
securities appropriate to the fund's investment objective.
Mutual funds are the most popular type of investment
company.
Investment Objective - The goal, such as current income,
long-term growth, growth and income, ect., which a mutual
fund pursues. This is always listed in the prospectus of
the fund.
Leverage - The use of borrowed money for investment
purposes. Can increase profits or losses and increase risk.
Liquidity - The ability of an asset or security to be
converted quickly and easily into cash. Bank deposits and
mutual fund shares are examples of a liquid investment.
Real estate is not considered liquid because it may take a
long time to sell.
Load Fund - Load funds are simply funds with a sales charge.
They are generally offered through brokers, financial
planners, or insurance agents. A load is a sales commission
that goes to the person selling the fund shares. (See
No-Load Fund)
Management Fee - The amount paid by mutual funds to their
investment advisers. The average annual fee is about
one-half of one percent of fund assets.
Margin Account - A brokerage account that allows an investor
to buy or sell securities on credit. An investor can
purchase additional securities against the value of the
securities in the account.
Maturity - The length of time before a bond is due to be
repaid in full.
Money Market Instruments - Short-term credit instruments
such as Treasury bills, bankers' acceptances, certificates
of deposit, and bank repurchase agreements.
Municipal Bonds - Debt obligations of state and local
entities. Generally, the interest earned is free from
federal taxation and often from state and local taxes as
well.
Mutual Fund - A professionally managed investment company
that combines the money of many people and invests this
money in a wide variety of different securities. Most
mutual funds are open-ended - meaning that they continuously
sell new shares to investors as well as redeem, or buy back
shares.
National Association of Securities Dealers (NASD) - A
self-regulatory organization of brokers and dealers which
administers rules and regulations to prevent fraudulent acts
against the investing public.
Net Asset Value Per Share (NAV) - This is the market value
of a mutual fund's total net assets, divided by the number
of shares outstanding.
No-Load Fund - A mutual fund that does not charge a sales
commission, or load, when you buy shares. Generally,
no-load mutual fund shares are purchased directly from the
fund. (See Load-Fund)
Open-End Mutual Fund - The more technical description of a
mutual fund. The term open-end refers to the fact that this
type of mutual fund is continuously offering new shares to
investors as well as redeeming, or buying, them back.
P/E (Price/Earnings) Ratio - The relationship between a
stock's price and the amount of earnings per share.
Prospectus - The official booklet that describes a mutual
fund. The prospectus contains information as required by
the Securities and Exchange Commission on such subjects as
the fund's investment objectives and policies, services,
fees, restrictions, officers and directors, how shares are
bought and redeemed, and the fund's financial statements.
Proxy - The written transfer of voting rights to someone who
will then vote according to the wishes of the shareholder.
Usually done if the shareholder cannot be present at a
stockholders' meeting.
Put Option - A contract that gives the holder the right to
sell a specified number of shares by a specified date at a
specified price.
Redemption Price - The price at which a fund's shares are
redeemed (bought back) by the fund, generally the net asset
value per share. Also known as the sell price or bid price.
Reinvestment Privilege - A service provided by most mutual
funds for the automatic reinvestment of shareholder
dividends and capital gain distributions into additional
shares.
Sales Charge - A commission paid to a broker or other sales
professional when purchasing shares of a mutual fund. The
charge is added to the net asset value per share when
determining the asked price.
Securities & Exchange Commission (SEC) - An agency of the
federal government with the power to enforce federal laws
pertaining to the sale of securities. Regulates and governs
stock exchanges, stockbrokers, investment advisers and
mutual funds.
SIPC (Securities Investor Protection Corporation) - An
agency established by Congress to provide customers of most
brokerage firms with protection similar to that provided by
the FDIC for bank depositors, in the event that a firm is
unable to meet its financial obligations.
Speculative - A high degree of risk.
Stock, Common - A security that represents ownership in a
corporation.
Stock, Preferred - A security that pays a fixed dividend and
has first claim on profits over common stocks for the
payment of that dividend.
Total Return - A calculation that includes the fund's change
in net asset value plus the value of capital gains and
dividends distributed and presumed reinvested.
Transfer Agent - An organization, usually a bank, that is
employed by a mutual fund to prepare and maintain
shareholder account records.
Treasury Bill (T-Bill) - Short-term debt (maturities of one
year or less) issued by the U.S. government at a discount
from face value.
Treasury Bond - Debt obligation issued by the U.S.
government with a maturity ranging from 10 to 30 years.
Treasury Note - Debt obligation issued by the U.S.
government with a maturity ranging from 1 to 10 years.
Turnover Rate - Indicates how active the fund traded
securities in the past one year period. The higher the
turnover, the greater the fund's brokerage costs. These
costs can lower your return because they reduce the profits
(or increase the losses) on securities trades.
Wire Transfer - Use of a bank to send money to a fund or
receive money from a fund.
Withdrawal Plan - A service many mutual funds offer to their
shareholders who wish to receive payments at regular
intervals - usually monthly or quarterly. The payments are
drawn from the fund's dividends and capital gain
distributions, if any, and from principal, as needed.
Yield - The dividend or interest income that a mutual fund
pays out in one year, expressed as a percentage of the
fund's net asset value.
Zero-Coupon Bond - A bond that is sold at a discount (less
than its face value) and pays no interest until it is
redeemed at face value on a specific date.
*** End of Chapter ***
