Glossary of Terms

Active Management

A money-management approach that seeks to outperform the market through the application of informed, independent investment judgment. The opposite of passive management, or "indexing," which seeks to replicate market performance through the construction of a portfolio mirroring the composition of the market. Also, in bonds, as opposed to buying and holding to maturity.

Advisor

The individual or organization employed by a mutual fund or other investors to direct the investments and management of the fund's assets. See "Management Fee."

Aggressive Growth Fund

A mutual fund whose objective is maximum capital appreciation through investment techniques involving greater than ordinary risk, such as buying new or emerging growth companies; leveraging; selling short; using options and warrants; also specializing in one segment of the market such as sector portfolios, like gold, etc. Also called "capital appreciation" or "go-go" funds.

Alpha

A statistical measure representing the difference between the actual and expected performance of a fund given its characteristic volatility. A positive alpha is often considered a measure of management's ability.

Annual Report

A required yearly statement of the financial progress and status of a mutual fund or company.

Asked Price

In load funds, the NAV (net asset value or price per share) plus sales charge. This is the price paid to purchase shares. In noload funds, the bid and asked prices are identical. Also called "offering price."

Asset Allocation

The mix of stocks, bonds, cash equivalents and other assets in which your capital is invested.

Automatic Reinvestment

The agreed upon use of income dividends or capital gains distributions for the purchase of additional shares in a fund or company.

Call

The right that some bond issuers have to redeem a bond at stated times prior to maturity for a stated price, typically exercised when interest rates fall. Call represents a risk for bondholders, compensated by extra yield, which may or may not be adequate compensation. With the opposite of a call, a put, the bondholder has the option to sell the bond back to the issuer at a stated price if rates go up, so usually putable bonds yield less than the prevailing market rate.

Capital Gain

Profits realized from the sale of securities or appreciation in value of assets.

Capital Gains Distributions

Payments to mutual funds shareholders of their proportionate interests in realized gains from the sales of securities in the fund's underlying portfolio. Usually declared annually, capital gain distributions can be paid in cash or reinvested in additional shares of the fund, at the shareholder's option.

Capital Growth

An increase in the market value of securities held.

Cash Equivalent

Short term bonds, notes, and repurchase agreements, usually U.S. Government backed.

Certificates of Deposit

Negotiable certificates of indebtedness issued by a commercial bank to repay funds deposited with it for a definite period of time (usually from 14 days to one year) at a stated or variable interest rate. Money funds generally buy jumbo CDs ($100,000 or more) that are not FDIC insured. They are backed only by the credit-worthiness of the bank.

Closed-end Investment Company

An investment company issuing a limited number of shares. Once these shares are sold, the fund is closed and no more shares are issued, nor are outstanding shares redeemed. losed-end funds are traded in the securities markets, and prices are determined by supply and demand. They are not "mutual funds."

Closed-Up Fund

An open-end mutual fund that has (temporarily) suspended sale of shares to new accounts. Outstanding shares are still accepted for redemption by the fund. Existing shareholders usually may buy more shares.

Commercial Paper

Securities to finance short-term credit needs in the form of unsecured, short-term promissory notes issued by corporations.

Common Stock

A security representing (partial) ownership of a company's assets. Common stock shareholders are usually accorded voting rights. Payment of common stock dividends is subordinate to payment on bonds, debentures and preferred stock.

Common Stock Fund

A mutual fund whose portfolio consists primarily of common stocks. Also called "Growth Funds" or "Equity Funds."

Consumer Price Index (CPI)

Is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care.

Convertible Securities

Preferred stocks or bonds offering the right to exchange them for another security, usually common stock of the same company.

Custodian

The bank or trust company which takes custody of mutual fund assets and securities for safekeeping.

EBITDA

Earnings Before Interest, Taxes, Depreciation and Amortization.

Efficient Market

Theory that market prices reflect the knowledge and expectations of all investors. Believers of the theory hold that any new development is quickly reflected in a company's stock price, making it impossible for an investor to beat the market over the long run.

Equities (Stocks)

Securities representing shares of ownership in the issuing enterprise, as distinct from fixed-income investments (bonds), which represent loans to the issuer.

Equity Fund

One that invests primarily in common stocks.

Exchange Privilege

The right offered shareholders to exchange shares of one fund for shares of another in the same fund family. An exchange is considered a sale for tax purposes. (Also called "switching.")

Ex-Dividend (or Ex-Dividend Date)

In mutual funds, shares are "ex-dividend" on the day the value of the distribution is deducted from the price per share (NAV). The ex-dividend date may be the same day, or follow the record date by one or two business days. Distributions may be from income or capital gains. F*X is the only publication providing complete monthly coverage of all dividend and capital gain data for the funds monitored.

Expected Return

A measure of the value of an investment, taking account of its current price and the estimated future cash flow to the investor, including both change in price (capital gain or loss) and interest or dividends. The higher the current price in relation to future estimated cash flow, the lower the expected return; the lower the price in relation to future cash flow, the higher the expected return.

Expense Ratio

A fund's annual expenses expressed as a percentage of average net assets.

Glossary

Hedge

To offset. To safeguard oneself from loss on a risk by making compensatory arrangements on the other side. For example, to hedge one's long positions with short sales, so that if the market declines the loss on long positions will be offset by profit on the short positions.

Hedging (Currencies)

Eliminating some or all of one's exposure to a foreign currency by trading that currency for U.S. dollars.

Junk Bonds

Bonds of lower than investment grade quality (below the top four Moody or Standard & Poor bond ratings) which promise a better than average return along with higher risk.

Leverage

The use of borrowed money in investing.

Liquid

That which is easily convertible to cash.

Load

A sales charge assessed in the purchase of certain mutual funds. The load is included in the fund's "offering" or "ask" price. Loads can run as high as 8.5 percent. This is equivalent to a 9.3% commission. ("Commissions" are assessed against the net selling price of securities, while loads are a percentage of the gross price including the load.)

Load Fund

One purchased from a salesman that imposes a sales charge (load) to purchasers of fund shares. The load is divided between the salesperson, the brokerage firm for which the salesperson works, and the fund sponsor. The fund itself receives no part of this traditional load, typically 4% to 8.5%.

NASDAQ

(National Association of Securities Dealers Automated Quotations) - System set up to gather, store and display quotations of trading prices among domestic over-the-counter dealers.

Net Assets

The total assets of a fund, less current liabilities, such as operating expenses.

Net Asset Value (NAV)

The total assets of a mutual fund, less current liabilities of the fund, divided by the number of outstanding shares. Computed daily and published under "Mutual Funds" or "Investment Companies" in daily newspapers. The "price per share" before commissions or loads.

Net Investment Income per Share

Dividends and interest earned during an accounting period (such as a year) on a fund's portfolio, less operating expenses, divided by number of shares outstanding.

Net Realized Capital Gains per Share

The amount of capital gain realized on sale of a fund's portfolio holdings during an accounting period (such as a year), less losses realized on such transactions, divided by number of shares outstanding.

No-Load Fund

An open-end mutual fund that imposes no front-end sales charge (load). Purchased and sold at the NAV.

Non-Diversified Investment Company

A fund which, as to 50% of its assets, may invest up to 25% in the securities of one company. Considered to be more speculative than diversified funds.

Par Bonds

Bonds selling at face value.

Payment Date (Payable Date)

With mutual funds, the date on which the declared income dividend and/or capital gain distribution is paid; checks are mailed to shareholders (if distributions are taken in cash), or invested in additional shares (if distributions are automatically reinvested) at the option of shareholders.

Performance Fee

Paid to fund manager, usually in addition to management fee, on the basis of fund performance relative to an index such as the S&P 500. Must include penalty as well as bonus. Few funds use them. Also called "incentive fee."

Portfolio

The securities owned by a mutual fund or any investor.

Portfolio Turnover Rate

The percentage of total assets which change during a year.

Preferred Stock

An equity security of a company carrying a fixed rate of return which must be paid before common stock shareholders may participate in the company's earnings. Some funds specialize in these high-yielding stocks.

Premium Bonds

Bonds selling above face value because their interest payments are higher than prevailing interest rates.

Price-Earning Ratio (P/E)

Value derived by dividing a company's 12 month earnings per share into the current price of one share of its stock.

Price-Earning Ratio Capped (P/E Capped)

Value derived by dividing a company's 12 month earnings per share into the current price of one share of its stock.  The results are limited to a range between 0 and 60 to minimize the impact of outliers. 

Price/Book Value

The ratio of a stock's current price to the company's net worth (assets minus liabilities) per share. A lower price/book-value ratio than that of the average stock is often an indication of superior investment value, and vice versa.

Price/Book Value - Harmonic

The ratio of a stock's current price to the company's net worth (assets minus liabilities) per share. A lower price/book-value ratio than that of the average stock is often an indication of superior investment value, and vice versa. This function ignores NA and zero (0) data points. Negative values are included in the calculation.

Program Trading

Computer-driven buying and selling of index futures contracts and individual stocks using formulas designed to profit from price changes.

Prospectus

For funds, an official publication which describes objectives, policies, services, management, restrictions, charges, etc. The prospectus offers the shares for sale (and usually includes an application to purchase them). Distribution to prospective shareholders and existing shareholders annually is required.

Proxy Statement

Voting power given by a stockholder to someone else in the form of a proxy.

Publicly-Traded Fund

An investment company whose shares are traded among investors, rather than continuously issued and repurchased by the funds, as with mutual open-end funds. A closed-end fund.

Sales (Load) Charge

The front-end charge for purchasing shares of a load fund. This amount is added to the "net asset value" to determine the "asked" or the "offering price." While the maximum allowed load is 8.5%, the actual cost to the investor is 9.3% over the amount invested. The load may be reduced for larger purchases, known as "breakpoints."

Sector Fund

One that restricts its holdings to stocks of companies in one market area or geographical sector, such as precious metals, finance, health care, technology, international, etc. Usually included as multi portfolios of single funds.

Securities and Exchange Commission (SEC)

Commission responsible for the regulation and enforcement of the country's investment laws.

Series Fund

A mutual fund whose prospectus allows for more than one portfolio. These portfolios may be specialized (as in a sector fund) or broad (as in growth stock portfolios and bond portfolios). Management can create additional portfolios without additional SEC registration.

Sharpe Ratio

A measure that indicates the average return minus the risk-free return divided by the standard deviation of return on an investment.

Short Selling

The sale of a security which is not owned by the seller. The "short seller" borrows stock for delivery to the buyer, and must eventually purchase the security for return to the lender.

Signature Guarantee

A signature guarantee is a signature that receives a medallion stamp from an officer of a bank, savings and loan or a broker who is a member of the New York Stock Exchange. Although it is similar to a notary seal, it is a step greater, and it is required for the protection of your account.

Specialty Fund

A mutual fund specializing in the securities of a particular industry or group of industries, special types of securities, or regional investments. Sometimes solo funds not designed for "switching," since there is no "family."

Stability

The relatively low volatility of a security or fund compared to the "market."

Standard Deviation

The range around the mean value of a set of outcomes; the higher the standard deviation, the more uncertain the results and the less likely that any single outcome will fall at or near the mean.

Standard & Poor's 500 Composite Stock Price Index (S&P 500)

The weighted average of 500 stocks which include 400 industrial, 40 financial, 40 utility and 20 transportation stocks. The index considered to best represent "the market."

Statement of Additional Information

That publication of a fund constituting all legal "offering" data. Prospectuses are abbreviated forms of the SAI.

Stock Dividend

The payment made in the form of security shares as opposed to cash.

Stock Split

Additional shares which represent an unchanged proportionate ownership interest in a mutual fund or corporation, distributed to stockholders.

Swaps

Offspring of forwards, involving an exchange of streams of payments over time according to preset terms. The most common type is an interest-rate swap, in which one party agrees to pay a fixed interest rate in return for receiving a floating rate from another party.

Systematic Withdrawal Plans

Programs in which fund shareholders receive regular payments from their investments, usually drawn from principal monthly or quarterly, while dividends and capital gains are reinvested.

Uncertificated Shares

Those shares of a mutual fund which are maintained on the records of the Transfer Agent and the fund, but for which stock certificates have not been issued. Also called "unissued" or "book" shares. Shareholders can order share certificates, usually at no cost.

Underwriter

The organization that acts as the distributor of a mutual fund's shares to broker/dealers and the public.

U.S. Government Obligations

Debt securities (including bills, notes, and bonds) issued by the U.S. Treasury or issued by an agency or instrumentality of the U.S. government which is established under the authority of an act of Congress. Such agencies or instrumentalities include, but are not limited to, the Federal National Mortgage Association, the Federal Farm Credit Bank, and the Federal Home Loan Bank. Although all obligations of agencies and instrumentalities are not direct obligations of the U.S. Treasury, payment of the interest and principal on these obligations is generally backed directly or indirectly by the U.S. government. This support can range from the backing of the full faith and credit of the United States, to U.S. government guarantees, or to the backing solely of the issuing instrumentality itself. In the latter case of securities not backed by the full faith and credit of the United States, the investor must look principally to the agency issuing or guaranteeing the obligation for ultimate repayment, and may not be able to assert claim against the United States itself in the event the agency or instrumentality does not meet its commitments.

U.S. Government Money Market Funds

These funds invest only in money market instruments whose timely payment of principal and interest is guaranteed or backed by the U.S. Government, its agencies or instrumentalities.

U.S. Government Short-Term Fund

A mutual fund that invests only in U.S. Treasury and government-agency issues (of a short-term nature, such as Treasury bills with an original maturity of up to one year).

Weighted Average Market Cap

Weighted Average Market Cap is the average firm market capitalization weighted by security weight. Market Capitalization is the number of common shares outstanding multiplied by the current market price per common share.

Weighted Avg Option Adjusted Spread

The option-adjusted spread (OAS) is the measurement of the spread of a fixed-income security rate and the risk-free rate of return, which is adjusted to take into account an embedded option weighted by the asset size of the securities held in the Fund.

Weighted Median Market Cap

Weighted Median Market Cap is the median firm market capitalization weighted by the asset size of the securities held in the Fund. Market Capitalization is the number of common shares outstanding multiplied by the current market price per common share.

Withdrawal Plan

A mutual fund program in which shareholders elect to receive specified payments from their accounts at regular intervals. Dividends and gain distributions are usually reinvested and "withdrawals" paid monthly or quarterly.

Zero Coupon Bond

Bond sold at a fraction of its face value. It appreciates gradually, but no periodic interest payments are made. Earnings accumulate until maturity, when the bond is redeemable at fullface value. Interest is taxable as it accrues.

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