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Financial Terms to Know

Alternative minimum tax (AMT)
A federal tax system created to ensure that wealthy individuals pay a minimal level income tax. The AMT is often triggered when an individual has numerous personal exemptions, such as for state and local taxes; large miscellaneous itemized deductions or medical expenses; or Incentive Stock Option (ISO) plans.

Asset allocation

The strategic process of dividing investment dollars among various asset classes, typically among cash investments, bonds, and stocks, and subsets of these asset classes, to optimize the trade-off between risk and return.

Asset classes
Categories of assets that are fundamentally different in structure,  such as stocks, bonds, cash and real estate.
 
Automatic investment plan
An investment program in which a fixed amount can be invested regularly and automatically, by check or electronic transfer.

Backup withholding
If a fund has not received a shareholder’s certified taxpayer identification number (TIN), or if an investor is subject to backup withholding for other reasons, the IRS requires that withholding tax be applied to federally taxable dividends, capital gain distributions, and the proceeds of redemptions and exchanges (except from money market funds).

Benchmark
A performance standard, for the purpose of comparison. A benchmark is usually an index that is composed of securities that line up with an asset class or investment strategy. The S&P 500 is a common benchmark for U.S. stock market performance. The Lehman Aggregate Index is a common benchmark for U.S. bond market performance.

Beneficiary
An individual that receives, or may become eligible to receive, benefits under a will, insurance policy, retirement plan or other contract.

Capital gain distribution
A distribution to shareholders of net long-term capital gains realized by a fund on the sale of its securities.

Call features
Features that indicate the conditions under which an issuer may redeem a bond prior to its maturity date. In most cases, a bond will be "called" or redeemed at a price slightly above par value. A company will often call a bond if it can reissue the same bonds at a lower interest rate, saving them money. If a bond is called, the bondholder will be notified by mail and have no choice in the matter. Not all bonds are callable.

Capital appreciation
An increase in the market price of an asset. One of the two components of total return Dividend yield is the other component of total return.

Capital gain
The difference between the price at which an asset is sold and its purchase price.

Capital markets
The network for trading debt and equity securities.

Cash equivalents
Assets that can easily be converted into cash, such as bank accounts, banker's acceptances, Treasury bills, money market mutual funds and other securities that mature within 90 days or less.

Closed-end fund
A publicly traded investment company-a mutual fund-sold on a public stock exchange or over the counter. A closed end fund has a fixed number of shares that may trade above or below net asset value.

Compounding
A process whereby the value of an investment increases exponentially over time due to compound interest.

Core fund
A substantial long-term holding in a portfolio. A core holding is bought with the express purpose of being held for a very long time, and is often of high-quality with a history of fairly steady performance.

Coverdell College Savings Account
An investment vehicle, formerly called Education IRA, designed to help parents save for a child's education. Earnings and withdrawals are tax free if used to pay qualified education expenses. The account is transferable among family members. However, the entire account must be disbursed before the beneficiary's 30th birthday. Any withdrawals after this date or for expenses that do not qualify will be subject to income taxes and a penalty.

Credit Default Swap
A credit default swap is similar to an insurance contract, providing the buyer with protection against specific risks. Most often, corporate bond investors buy credit default swaps for protection against a default by the issuer of the corporate bond, but these flexible instruments can be used in many ways to customize exposure to corporate credit.


Currency Future

Contracts in the futures markets for delivery in a major currency, such as the U.S. dollar, the Japanese yen or the British pound. The buyer of a currency futures contract acquires the right to purchase a particular amount of that currency by a specific date at a fixed exchange rate. These contracts are traded on exchanges throughout the world. Often used as a hedging mechanism to offset currency or interest rate risk.

Diversification
The process of dividing investments among a variety of asset categories with different risk, reward, and correlation statistics in order to minimize overall investment risk.

Dividend
A portion of a company's profit paid to common and preferred shareholders. Typically, dividends are paid on a quarterly basis and are determined by the company's board of directors. Companies are not required to pay dividends.

Durable power of attorney
A legal document that enables an individual to designate another person to act on his/her behalf in the event the individual becomes disabled or incapacitated.

Emerging markets
The financial markets of developing economies, such as those in Latin America, Asia (excluding Japan) and Eastern Europe.

Equities
Another term for stock and the stock market, so called because they signify an ownership position in the company's assets and profits.

Equity markets
Also called the stock market, the market for trading equities.

Executor
A distribution to shareholders from tax-exempt interest earned by a fund.

Exempt interest dividend
An individual or institution named in a will and appointed by a court to settle the estate of a deceased.

Financial professional
An individual who helps others set and achieve their long-term financial goals, through investments, tax planning, asset allocation, risk management, retirement planning and estate planning.

Forward
A swap agreement created through the synthesis of two swaps differing in duration for the purpose of fulfilling the specific time-frame needs of an investor. Also referred to as a "forward start swap," "delayed start swap," and a "deferred start swap."

529 plan
A 529 college savings plan is a state-sponsored program designed to help parents finance education expenses. Section 529 plans are administered by certain investment companies and subject to contribution requirements and investment guidelines. Earnings and withdrawals are tax free as long as they are used for higher education purposes. There are no income eligibility requirements to open a 529 plan.

Floating rates
Any interest rate that changes on a periodic basis. The change is usually tied to movement of an outside indicator, such as the prime interest rate.

Global or worldwide fund
A mutual fund that can invest anywhere in the world, including the U.S.

Growth fund<

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