I NVESTMENT G LOSSARY
Definitions to Commonly Used Investment and Finance Terms
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401(k): (from the IRS Code that established it in 1989) a retirement savings plan that is funded by employee contributions and, often, by matching contributions from the employer, on which taxes are deferred until withdrawal, and for which the employee selects the types of investments.
403(b): (from the IRS Code that established it) similar to a 401(k) but designed for non-profit tax- exempt organizations.
after-tax investment: a financial investment deposited into an account (usually retirement) after the tax has been paid on the deposit.
amortization:
1. a payment plan.
2. paying the principle and interest amounts over the duration of the loan in equal payments.
analyst: an individual who studies the financial markets and makes buy and sell recommendations on investment options.
annuity: a sum of money paid each year or at other regular intervals.
asset: the total value of everything you possess.
bear market: a prolonged period of falling stock prices.
before-tax investment: a financial investment deposited into an account (usually retirement) before the tax has been paid on the deposit; also known as a “tax-sheltered” or “tax-deferred” investment.
beneficiary: the person designated to receive proceeds or benefits (e.g. from a life insurance policy).
blue chip company: a large and creditworthy company.
bond: a long term interest-bearing loan issued by governments, corporations, and other institutions.
broker: an agent who negotiates contracts of purchase and sale (as of real estate, commodities, or securities).
brokerages (examples): Charles Schwab, Smith Barney, Ameritrade, etc.
bull market: a market which is on an upward trend.
capital gain: financial gains made on investments (subject to taxation, e.g. capital gains tax).
certificate of deposit (CD): an investment wherein the investor agrees to deposit a fixed sum of money for a fixed amount of time in return for a guaranteed interest rate.
COBRA (insurance): short for Consolidated Omnibus Budget Reconciliation Act of 1985; guarantees an individual the right to continue his or her group insurance for 18 months after leaving a job, and for 29 months if disabled; the general rule is that the individual can buy coverage for 102% of the
employer’s cost.
codicil: a legal instrument made to amend or modify an earlier will.
commission: the fee paid to a broker to execute a trade.
compound interest: interest computed on the sum of an original principal plus the previously accrued interest on that investment.
death tax: a tax arising on the transmission of property after the owner’s death (e.g. estate tax).
discretionary income: extra money available after one’s basic needs have been paid for.
dividend:
1. a return or reward.
2. a sum to be divided and distributed, usually in cash or stock.
diversification: to balance (e.g. an investment portfolio) defensively by dividing funds among securities of different industries or of different classes.
Dow Jones Industrial Average: a summary of industrial investment information established in 1889 by two newspaper reporters – Charles Dow and Eddie Jones; reflects the prices and movements of 30 major industrial stocks.
easement: the right given to someone to use your land for a specific purpose (e.g. to cross over the property, to construct utility lines, etc.).
equity: the difference between what your house (or property) is worth and what you owe on it.
escrow:
1. a company that acts as an impartial third party in a real estate transaction.
2. money paid monthly to a mortgage lender to pay property insurance premiums and property taxes as they fall due; also referred to as a reserve account.
estate:
1. possessions, property; especially a person’s property in land.
2. the assets and liabilities left by a person at death.
Federal Reserve: the central bank of the United States founded by Congress in 1913; oversees and influences monetary policy, including money supply and interest rates.
financial planner: an individual who offers financial services meant to increase one’s financial prosperity and stability; usually sells securities, insurance, etc. and often makes money through commissions.
flexible spending account: a benefit program that allows employees to set aside part of their earnings for medical expenses that will not be subject to federal income tax.
fund: money that is deposited in a specified area.
garnishment: a court order which requires an employer to withhold a designated amount from an employee’s paycheck for the benefit of a creditor.
graduated payment plan: a home financing plan that permits the borrower to make lower than usual payments in the first few years, with payments increasing in the later years.
gross domestic product (GDP): the total market value of all final goods and services produced in the U.S. for a particular year.
group insurance: insurance offered to members of a group, such as company employees.
growth stock: stock expected to increase in value as the business grows; dividends are usually reinvested.
holding company: a corporation that owns enough voting stock in another firm to control management and operations by influencing or electing its board of directors.
home equity line of credit: a line of credit secured by a borrower’s residence.
indemnity:
1. security against hurt, loss, or damage.
2. exemption from incurred penalties or liabilities.
index: a collection of companies or types of investment that are periodically valued and used as a yardstick to measure prices, activity, and performance of the market.
inflation rate: the percentage increases in the general price level in the economy; is closely connected to the interest rate.
interest rate: the percentage that is paid for the use of money borrowed from another; usually calculated on an annual basis.
Initial Public Offering (IPO): a company’s first sale of stock to the public.
Individual Retirement Account (IRA): a special account where an individual can invest money for
joint life policy: a life insurance policy that covers two people, usually spouses.
junk bond: a high-risk bond that offers a high yield and is often issued to finance a takeover of a company.
Keogh plan: an IRS approved retirement investment plan for the self-employed and owners of unincorporated businesses.
liability:
1. an obligation that needs to be paid; an amount that you owe to someone else.
2. potential for loss.
lien: a claim upon one’s property for the satisfaction of some debt.
liquidity: capable of ready conversion into cash (e.g. liquid assets, liquid accounts).
lump-sum distribution: distribution of the whole amount at a specified time.
managed care: a form of health care coverage imposing restrictions on the insured individual’s choice of providers.
Medicaid: a health insurance program (established in 1966) of medical aid designed for those unable to afford regular medical service and financed by the state and federal governments.
Medicare: a governmental health insurance program (established in 1955) for the aged administered by the Social Security Administration.
money market: a market for short-term low-risk investments.
municipal bond: a debt issued by a local governmental agency (state, county, or city); interest earned is exempt from federal income taxes.
mutual fund: an investment company that pools many investors’ money to buy a variety of stocks, bonds, or other investments.
net worth: the amount remaining when you subtract your liabilities from your assets.
pension: a fixed sum paid regularly to a person (or to surviving dependents) from a company following an individual’s retirement from service.
points: an additional interest charge most commonly added to mortgage loans; one point equals one percent of the principle amount borrowed.
portfolio: the securities (investments) held by an investor.
recession: two consecutive quarters (six months) of declining real gross domestic product (GDP).
restrictive covenant: a provision in a deed that can control certain things that an owner can or cannot do on the property.
revolving line of credit: a credit transaction in which the borrower can borrow money, repay part or all of it, and then borrow it again; a form of “open-end” credit.
rule of 72: a mathematical formula used to estimate the number of years it will take for an item to double in price at the current inflation rate (formula: number of years = 72 divided by the current inflation rate, e.g. if the current inflation rate is 3%, it will take 24 years for an item to double in price).
savings bond: a nontransferable registered U.S. bond issued in denominations of $50 to $10,000.
Securities and Exchange Commission (SEC): the primary federal regulatory agency of the securities industry.
security: a verification or proof of debt or of ownership (e.g. a stock certificate).
Standard and Poor’s 500 (S&P 500) Index: the name of a particular group of 500 stocks that are tracked together and for which a summary is reported.
stock: shares of ownership in a company.
stock exchange: a place where security trading is conducted on an organized system; the principal stock exchanges in the U.S. are:
• AMEX (American Stock Exchange)
• NASDAQ (National Association of Securities Dealers Automated Quotation system)
• NYSE (New York Stock Exchange)
tax-sheltered investment: see “before-tax investment.”
term insurance: life insurance for a limited amount of time (often one to 20 years); the cost of the premium increases as the age of the insured increases.
TIAA-CREF: TIAA is the Teachers Insurance and Annuity Association (one of only three U.S. firms to hold triple-A ratings from all four major independent analysts of the insurance industry); CREF is the College Retirement Equities Fund (an open-end, diversified management company).
tick indicator: a market indicator based on the number of stocks whose last trade was an uptick or downtick; used as an indicator of market sentiment to try to predict the market’s trend.
trade: a verbal or electronic transaction involving one party buying a security from another party;
Treasury bill: a short-term (matures in less than one year) discount debt instrument issued regularly by the federal government.
Treasury bond: a long-term (up to 30 years or more) federal government debt instrument.
Treasury note:
1. a medium-term (one to seven years) federal government debt instrument.
2. a currency note issued by the U.S. Treasury in payment for silver bullion purchased under the Sherman Silver Purchase Act of 1890.
trust:
1. an arrangement (often in legal order) whereby one person or institution has custody of someone else’s money for ultimate distribution to a named third party.
2. a closed-end fund regulated by the Investment Company Act of 1940; these funds have a fixed number of shares which are traded on the secondary markets similarly to corporate stocks.
trust fund: property (as money or securities) held in trust.
underwriter:
1. an individual who evaluates the risk involved in a particular situation and determines the nature and price of the coverage (e.g. insurance underwriters).
2. an investment banker.
3. a firm which buys an issue of securities from a company and resells it to investors.
universal life: cash value insurance that allows a policyholder to vary the amount of the periodic premiums; the death benefit is tied to investment performance generated by conservative, interest- paying securities.
variable life: a form of life insurance that allows a policyholder to tell the insurance company how to invest the insured’s money.
vesting: the process by which an employee earns permanent rights to a specific benefit (e.g. retirement benefits).
volatility: a measure of risk based on fund performance over three years; the scale is 1-9 where higher ratings indicate higher risk.
whole life: a life insurance policy that also builds a savings component; it includes fixed death benefits and fixed premiums; the death benefit is tied to investment performance generated by conservative, interest-generating investments.
worker’s compensation: a state provided disability insurance program allowing for compensation for accidental injuries on the job; it may cover medical bills, rehabilitation expenses, and lost income equal to two-thirds or less of the average weekly wage in the state.
ADDITIONAL RESOURCES Web Sites:
• American Savings Education Council: www.asec.org
• Business.com: www.business.com
• DMBA: www.dmba.com
• Social Security Administration: www.ssa.gov
• TIAA-CREF: www.tiaa-cref.org
• TIAA-CREF Institute: www.tiaa-crefinstitute.org
• TIAA-CREF Library: www.tiaa-cref.org/libra/index.html Books:
• The Dictionary of Finance and Investment Terms by John Downes.
• A Random Walk Down Wall Street by Burton Malkiel.
• The Wall Street Guide to Planning Your Financial Future by Kenneth Morris.
• The Wall Street Journal Guide to Understanding Money and Investing by Kenneth Morris.
REFERENCES
• Econofinance.com (2001). Finance and Investment Terms. Econofinance.com (http://members.tripod.com/pugahome/investterms.htm#C).
• Hallman, Victor, and Rosenbloom, Jerry (1987). Personal Financial Planning. NY:
McGraw-Hill.
• Merriam-Webster, Inc. (2001). The Merriam-Webster Collegiate Dictionary.
Springfield, MA: Merriam-Webster, Incorporated (www.merriam-webster.com).
• Morris, Kenneth, et al (1995). The Wall Street Guide to Planning Your Financial Future. NY: Lightbulb Press.
• Ramaglia, Judith, and Macdonald, Diane (1999). Personal Finance: Tools for Decision Making. Cincinnati: South-Western College Publishing.
• Rosefsky, Robert (1999). Personal Finance. NY: John Wiley and Sons.
• TIAA-CREF (2001). Research Dialogue Magazine (Summer 2001). NY: TIAA-CREF (www.tiaa-crefinstitute.org).
• Tyson, Eric (1996). Investing for Dummies. Chicago: IDG Books.
• Western Connecticut State University (2001). The Financial Dictionary. Danbuty, CT:
Western Connecticut State University
(www.wscu.ctstateu.edu/finance/research/dictionary.html).
Compiled by Patrick Powell
Email comments or suggestions to powellp@byui.edu
Special thanks to Rick Hirschi and Kirk Gifford for their editorial assistance
