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B
Back-end load
A back-end load is a sales charge or fee charged when funds
are withdrawn from an investment, particularly mutual funds
and annuities. In many cases, the fee is reduced over the
years of investment, or holding period, and eventually is
reduced to zero.
Balanced Fund
Mutual fund that holds bonds and/or preferred stock in a
certain proportion to common stock in order to obtain both
current income and long-term growth of principal.
Bear
Someone who believes or speculates that a particular security
or the securities in a market will decline in value is
referred to as a bear.
Bear Market
A bear market is a market in which a group of securities falls
in price or loses value over a period of time. A prolonged
bear market may result in a decrease in market prices by 20%
or more. A bear market in stocks may be due to investor's
expectations of economic trends; in bonds a bear market
results from rising interest rates.
Before (Pre)-Tax Dollars
Money contributed to a tax-deferred savings plan that you do
not have to pay income tax on until withdrawal at a future
date.
Beta
A measure of a stock’s volatility; the average beta for all
stocks is +1.
Blue Chip
Blue Chip refers to companies that have become well
established and reliable over time, demonstrating sound
management and quality products and services. Such companies
have shown ability to function throughout both good and bad
economic times, usually paying dividends to investors even
during lean years.
Bond
A debt instrument or IOU issued by corporations or units of
government.
Bond Fund
Mutual fund that holds mainly municipal, corporate, and/or
government bonds.
Broker
A professional who transfers investors’ orders to buy and sell
securities to the market and generally provides some financial
advice.
Bull
Someone who believes that a particular security or the
securities in a market will increase in value is known as a
bull.
Bull Market
A bull market is a long period of rising prices of securities,
usually by 20% or more. Bull markets generally involve heavy
trading and are marked by a general upward trend in the
market, independent of daily fluctuations.
Buy and Hold
A strategy of purchasing an investment and keeping it for a
number of years.
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C
Capital Appreciation
An increase in market value of an investment (e.g., stock).
Capital Gains
A capital gain is the appreciation in value of an asset, that
is, when the selling price is greater than the original price
at which the security was bought. The tax rate on capital gain
depends on how long the security was held.
Capitalization
The market value of a company, calculated by multiplying the
number of shares outstanding by the price per share.
Capitalization is often called "cap" for short in the names of
specific investments (e.g., ABC Small Cap Growth Fund).
Cash-Value Life Insurance
Type of life insurance contract that pays benefits upon the
death of the insured and also has a savings element that
provides cash payments prior to death.
Central Registration Depository (CRD)
A computerized system, which includes the employment,
qualification, and disciplinary histories of more than 400,000
securities professionals who deal with the public. Consumers
can get CRD information about a sales representative by
calling (800)-289-9999 or visiting the Web site www.nasdr.com/2000.htm.
Certificate of Deposit
An insured bank product that pays a fixed rate of interest
(e.g., 5%) for a specified period of time.
Churning
When a broker excessively trades securities within an account
for the purpose of increasing his or her commissions, rather
than to further a client’s investment goals.
Class A Shares
Mutual fund shares that incur a front-end sales charge upon
purchase.
Class B Shares
Mutual fund shares that incur a back-end sales charge (also
known as a contingent deferred sales charge or CDSC) if sold
within five to six years of purchase.
Class C Shares
Mutual fund shares that incur higher management and marketing
fees than Classes A and B, but no sales or redemption charges
upon purchase or sale.
Closed-End Fund
An investment company that issues a limited number of shares
that can be bought and sold on market exchanges.
Cold Calling
A practice used by salespeople of making unsolicited phone
calls to people they don’t know in order to attract new
business.
Collectible
An investment in tangible items such as coins, stamps, art,
antiques, and autographs.
Commission
Commission is a fee charged by an agent making transactions of
buying or selling securities for another individual. This fee
is generally a percentage based on either the number of stocks
bought or sold or the value of the stocks bought or sold.
Commodities
An investment in a contract to buy or sell products such as
fuel oil, pork, grain, coffee, sugar, and other consumer
staple items by a specified future date.
Common Stock
Securities that represent a unit of ownership in a
corporation.
Composite Indices
Stock market indices comprised of stocks traded on major stock
exchanges: * New York Stock Exchange Composite (index of
stocks traded on New York Stock Exchange), * American Stock
Exchange Composite (index of stocks traded on American Stock
Exchange), * NASDAQ Composite (index of stocks traded over the
counter in the quotation system of the National Association of
Securities Dealers).
Compound Interest
Interest credited daily, monthly, quarterly, semiannually, or
annually on both principal and previously credited interest.
Convertible Securities
Bonds or preferred stock that can be exchanged for a fixed
number of shares of common stock in the same corporation.
Core Holding
The foundation of a portfolio (e.g., a stock index fund) to
which an investor might add additional securities.
Corporate Bonds
Debt instruments issued by for-profit corporations.
Credit Risk
Credit risk refers primarily to the risk involved with debt
investments, such as bonds. Credit risk is essentially the
risk that the principal will not be repaid by the issuer. If
the issuer fails to repay the principal, the issuer is said to
default.
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D
Default
To default is to fail to repay the principal or make timely
payments on a bond or other debt investment security issued.
Also, a default is a breach of or failure to fulfill the terms
of a note or contract.
Direct Purchase Plans (DPPs)
"No load" stocks where every share, including the first, can
be sold or purchased directly from a company without a broker.
Discount Broker
A broker that trades securities for a lower commission than a
full-service broker.
Diversification
The policy of spreading assets among different investments to
reduce the risk of a decline in the overall portfolio from a
decline in any one investment.
Dividend
A distribution of income from investments to shareholders.
Dividend Reinvestment Plans (DRIPs)
Plans that allow investors to automatically reinvest any
dividends a stock pays into additional shares.
Dollar-Cost Averaging
Investing equal amounts of money (e.g., $50) at a regular time
interval (e.g., quarterly) regardless of whether securities
markets are moving up or down. This practice reduces average
share costs to investors, who acquire more shares in periods
of lower securities prices and fewer shares in periods of
higher prices.
Dow Jones Industrial Average
The most widely used gauge of stock market performance. Also
know as "The Dow," it tracks 30 stocks in large
well-established U.S. companies.
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E
EDGAR (Electronic Data Gathering, Analysis, and
Retrieval)
An electronic system developed by the U.S. Securities and
Exchange Commission (SEC) that is used by companies to file
documents required by the SEC for securities offerings and
ongoing disclosure. EDGAR information is available to
consumers on the Internet at www.sec.gov, usually within 24
hours after filing by a company. EDGAR information is also
available in the SEC’s public reference room by calling (202)
942-8090 or sending a fax to (202) 628-9001 or an e-mail to
publicreference@sec.gov.
Equity
Equity is the total ownership or partial ownership an
individual possesses minus any debts that are owed. Equity is
the amount of interest shareholders hold in a company as a
part of their rights of partial ownership. Equity is
considered synonymous with ownership, a share of ownership, or
the rights of ownership.
Equity Investing
Becoming an owner or partial owner of a company or a piece of
property through the purchase of investments such as stock,
growth mutual funds, and real estate.
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F
Federal Deposit Insurance Corporation (FDIC)
Federal agency that insures bank deposits up to $100,000.
Investments purchased at banks are not FDIC-insured.
Fixed Annuity
An investment vehicle, often used for retirement accounts,
which guarantees principal and a specified interest rate.
Fixed annuity earnings grow tax-deferred until withdrawal.
401k plan
A 401k plan is a retirement plan sponsored by employers.
Employees may choose to have a portion of their salary
deferred to any of the 401k investment choices selected by the
employer. The employer may also contribute to the employee's
401k by matching a portion of the investment (for example,
$.50 for every $1.00 the employee invests). The investments to
which money is deferred may include stocks, bonds, money
market funds, and company stocks. Monies deferred into the
401k are allowed to grow tax-free, and these monies are
subtracted from the employee's taxable income. The maximum
amount allowed to be contributed to a 401k changes annually.
If money is withdrawn from the 401k before the employee turns
59 , the individual may have to pay penalties. If the
individual changes jobs, the monies in the 401k may be rolled
over to a 401k of the new employer or to an Individual
Retirement Account (IRA).
403(b) Plan
Similar to a 401(k), a retirement savings plan for employees
of a tax-exempt education or research organization or public
school. Pretax dollars are contributed to an investment
account until the employee retires or terminates employment.
Front-end load
A front-end load is a commission or fee that is charged when
an investment is initially purchased. Investments that require
a front-end load include mutual funds, annuities, and life
insurance policies. Typically, the fee amount is a percentage
of the net asset value of the investment.
Full-Service Broker
A broker that charges commissions based on the type and amount
of securities traded. Full-service brokers typically charge
more than discount brokers but also provide more extensive
services (e.g., research and personalized advice).
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G
GNMAs or Ginnie Maes
An investment in a pool of mortgage securities backed by
Government National Mortgage Association (GNMA).
Growth Fund
Mutual fund that invests in stocks exhibiting potential for
capital appreciation.
Growth Stocks
Stock of companies that are expected to increase in value.
Guaranteed Investment Contract (GIC)
Fixed-income investments, offered in many tax-deferred
employer retirement plans, which guarantee a specific rate of
return for a specific time period.
Going Public
A company that has previously been privately owned is said to
be 'going public' the first time the company's stock is
offered up for public sale.
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H
Hedge
Hedging is a strategy of reducing risk by offsetting
investments with investments of opposite risk. Risks must be
negatively correlated in order to hedge each other; for
example, an investment with high inflation risk and low
immediate returns with investments with low inflation risk and
high immediate returns. Long hedges protect against a
short-term position and short hedges protect against a
long-term position. Hedging is not the same as
diversification, as it aims to protect against risk by
counterbalancing a specific area of risk.
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I
Income Fund
Mutual fund that invests in stocks or bonds with a high
potential for current income, either interest or dividends.
Income Stocks
Stock of companies that expect to pay regular and relatively
high (compared to growth stocks) dividends.
Index
An unmanaged collection of securities whose overall
performance is used as an indication of stock market trends.
An example of an index is the widely quoted Dow Jones
Industrial Average, which tracks the performance of 30 large
company U.S. stocks.
Index Fund
Mutual fund that attempts to match the performance of a
specified stock or bond market index by purchasing some or all
of the securities that comprise the index.
Individual Retirement Account (IRA)
A retirement savings plan that allows individuals to save for
retirement on a tax-deferred basis. Individuals may contribute
up to $2,000 per year in an individual account. For spousal
accounts, the limit is $4,000. The amount that is tax
deductible varies according to an individual’s access to
pension coverage, income tax filing status, and adjusted gross
income.
Inflation Risk
Inflation risk is the risk that rising prices of goods and
services over time, or, generally the cost of living, will
decrease the value of the return on investments. Inflation
risk is also known as 'purchasing-power risk' since it refers
to increased prices of goods and services and a decreased
value of cash.
Interest Rate Risk
The risk that, as interest rates rise, the value of
previously-issued bonds will fall, resulting in a loss if they
are sold prior to maturity.
Investment Clubs
Organizations of investors who meet and contribute money
regularly toward the purchase of securities.
Investment Grade Bond
Bond rated with one of the top four grades by a rating service
like Moody’s and Standard & Poor’s, indicating a high level of
creditworthiness.
Investment Objective
The goal (e.g., current income) of an investor or a mutual
fund. Mutual fund objectives must be clearly stated in their
prospectus.
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J
Junk Bond
Junk bonds are bonds that are considered high yield but also
have a high credit risk. They are generally low rated bonds
and are usually bought on speculation, with the investor
hoping for the yield, rather than the default. An investor
with high risk tolerance may choose to invest in junk bonds.
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K
Keogh Plan
The Keogh Plan is a type of tax-deductible retirement plan,
similar to Individual Retirement Accounts, for self-employed
individuals. It is also known as a self-employed pension plan.
The individual may contribute up to $30,000 or 15% of total
earned income per year, whichever is less.
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L
Limit Order
An order to buy or sell securities that specifies that a trade
should be made only at a certain price or better.
Liquidity
Liquidity refers to the ease with which investments can be
converted to cash at their present market value. Additionally,
liquidity is a condition of an investment that shows how
greatly the investment price is affected by trading. An
investment that is highly liquid is composed of enough units
(such as shares) that many transactions can take place without
greatly affecting the market price. High liquidity is
associated with a high number of buyers and sellers trading
investments at a high volume.
Load
A commission charged by the sponsor of a mutual fund upon the
purchase or sale of shares.
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M
Management Fee
The amount paid by mutual funds to their investment advisers.
Marginal Tax Rate
The rate you pay on the last (highest) dollar of personal or
household (if married) earnings. Current federal marginal tax
rates range from 15% to 39.6%.
Market Risk
Market risk is the risk that investments will lose money based
on the daily fluctuations of the market. Bond market risk
results from fluctuations in interest. Stock prices, on the
other hand, are influenced by factors ranging from company
performance to economic factors to political news and events
of national importance. Time is a stabilizing element in the
stock market, as returns tend to outweigh risks over long
periods of time. Market risk cannot be systematically
diversified away.
Market Value
Market value is the value of an investment if it were to be
resold, or the current price of a security being sold on the
market.
Maturity
The date on which the principal amount of a bond, investment
contract, or loan must be repaid.
Microcap Stock
Low priced stocks issued by the smallest of companies.
Companies with low or "micro" capitalization typically have
limited assets and a small total market value. Many microcap
stocks trade in small volumes in the "over the counter" (OTC)
market, with prices quoted on the OTC Bulletin Board or "Pink
Sheets." For more information about microcap stocks, check the
Web site www.sec.gov/consumer/microbro.htm.
Modern Portfolio Theory
Aims to minimize the risks of investing while maximizing
returns through the diversification of a portfolio.
Diversification is the process of allocating funds among a
number of different asset classes. Modern portfolio theory
looks at three main factors in determining appropriate
investments for an investor's portfolio: the investor's goals
and objectives for investing, the time frame of investment,
and the investor's risk tolerance, or how comfortable the
investor is with taking certain risks. Optimizing a portfolio
according to modern portfolio theory involves matching the
statistics of expected risk and return for a number of
different assets with the individual's terms of investment.
Money Market Mutual Fund
A highly liquid mutual fund that invests in short-term
obligations such as commercial paper, government securities
and certificates of deposit.
Moody’s Investors Service
A rating agency that analyzes the credit quality of bonds and
other securities.
Mutual Fund
Mutual funds are investment companies whose job it is to
handle their investors' money by reinvesting it into stocks,
bonds, or a combination of both. Mutual funds are divided into
shares and can be bought much like stocks, allowing mutual
funds to have a high liquidity. Mutual funds are convenient,
particularly for small investors, because they diversify an
individual's monies among a number of investments. Investors
share in the profits of a mutual fund, and mutual fund shares
can be sold back to the company on any business day at the net
asset value price. Mutual funds may or may not have a load, or
fee; however, funds with a load will provide advice from a
specialist, which may help the investor in choosing a mutual
fund.
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N
NASDAQ (National Association of Securities Dealers
Automated Quotation)
The National Association of Securities Dealers Automated
Quotation is a global automated computer system that provides
up-to-the-minute information on approximately 5,500
over-the-counter stocks. Whereas on the New York Stock
Exchange (NYSE) securities are bought and sold on the trading
floor, securities on the NASDAQ are traded via computer.
NASD (National Association of Securities Dealers)
The National Association of Securities Dealers is an
organization of broker/dealers who trade over-the-counter
securities. The NASD is self-regulated. The largest
self-regulated securities organization. This organization
operates and regulates both the NASDAQ and over-the-counter
markets, ensuring that securities are traded fairly and
ethically.
NAV (Net Asset Value)
Net Asset Value is the price of a share in a mutual fund or
investment company. This price is calculated once or twice
daily. Net asset value is the amount by which the assets'
value exceeds the company's liabilities. It is calculated by
adding up the market value of all securities owned by the
company, subtracting the company's liabilities, and dividing
this value by the number of shares of the company outstanding.
Thus, the NAV indicates the current buying or selling price of
a share in an investment company.
Net Worth
The dollar value remaining when liabilities (what you owe) are
subtracted from assets (what you own). Example: $200,000 of
assets - $125,000 of debt = a $75,000 net worth.
NYSE (New York Stock Exchange)
Established in 1792, the New York Stock Exchange in the
largest securities exchange in the United States. Securities
are traded by brokers and dealers for customers on the trading
floor at 11 Wall Street in New York City. The exchange is
headed by a board of directors that includes a chairman and 20
representatives who represent both the public and the members
of the exchange. This board approves applicants as new NYSE
dealers, sets policies for exchange, oversees the exchange,
regulates member activities, and lists securities.
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O
Online Investing
The purchase of securities from brokerage firms via the
Internet using a computer and modem.
Open-End Fund
An investment company that continually buys and sells shares
to meet investor demand. It can have an unlimited number of
investors or money in the fund.
Option
An option is a security that can be bought as a contract to
fix the price on another, underlying security. The buyer can
pay the issuer of the option a premium that fixes the price on
an investment, including stocks, bonds, real estate, and
others, for a specified period of time. The holder of the
option can then choose to buy or sell the underlying security
at the fixed price during this time period; however, the
holder is under no obligation to buy. For example, if the
holder purchases an option to buy a stock at $30, the
individual may not wish to buy the stock during the time
period of the option if the shares are being sold for $27.
However, if the shares are being sold for $33, the holder will
save $3 per share with the option. Thus, options may or may
not prove advantageous to the holder.
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P
Penny Stocks
Stocks that sell for $5 per share or less.
Portfolio
The combined holding of stocks, bonds, cash equivalents, or
other assets by an individual or household, investment club,
or institutional investor (e.g., mutual fund).
Preferred Stock: A type of stock that offers no ownership or
voting rights and generally pays a fixed dividend to
investors.
Price-Earnings Ratio
The price-earnings ratio is a measure of how much buyers are
willing to pay for shares in a company, based on that
company's earnings. Price earnings ratio is calculated by
dividing the current price of a share in a company by the most
recent year's earnings per share of the company. This ratio is
a useful way of comparing the value of stocks and helps to
indicate expectations for the company's growth in earnings. It
is important, however, to compare the P/E ratios of companies
in similar industries. Price-earnings ratio is sometimes also
called the 'multiple'.
Principal
The original amount of money invested or borrowed, excluding
any interest or dividends.
Prospectus
An official booklet that describes a mutual fund. It contains
information as required by the U.S. Securities and Exchange
Commission on topics such as the fund’s investment objectives,
investment restrictions, purchase and redemption policies,
fees, and performance history.
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Q
Quotation
A quotation, or quote, refers to the current price of a
security, be it either the highest bid price for that security
or the lowest ask price.
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R
Real Estate
Land, permanent structures on land, and accompanying rights
and privileges, such as crop or mineral rights.
Real Estate Investment Trust (REIT)
A portfolio of real estate- related securities in which
investors can purchase shares that trade on major stock
exchanges.
Real Rate of Return
The Real Rate of Return refers to the annual return on an
investment after being adjusted for inflation and taxes.
Real-Time Quotes
A requirement that trades in a NASDAQ (over the counter
market) security be reported within 90 seconds of execution.
Thus, information is current up to 90 seconds of the market,
rather than typical quotes which have a 15 or 20-minute delay.
Reciprocal Immunity
A principle of taxation where state and local governments
don’t tax earnings on federal debt securities and the federal
government doesn’t tax earnings on state/local debt
securities.
Reinvest
Reinvestment is the use of capital gains, including interest,
dividends, or profit, to buy more of the same investment. For
example, the dividends received from stock holdings may be
reinvested by buying more shares of the same stock.
Risk
Exposure to loss of investment capital (i.e., amount of money
invested).
Risk Management
Actions taken (e.g., purchase of insurance) to provide
protection against catastrophic financial losses (e.g.,
disability and liability). Risk management is an important
investing prerequisite.
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S
Sales Charge
The amount charged to purchase mutual fund shares. The charge
is added to the net asset value per share to determine the per
share offering price.
Savings Incentive Match Plan for Employees (SIMPLE Plans)
A tax-deferred retirement plan for owners and employees of
small businesses that provides matching funds by the employer.
Securities
A term used to refer to stocks and bonds in general.
SEC (Securities and Exchange Commission)
The Securities and Exchange Commission is a federal government
agency comprised of 5 commissioners appointed by the president
and approved by the Senate. The SEC was established to protect
the individual investor from fraud and malpractice in the
marketplace. The commission oversees and regulates the
activities of registered investment advisors, stock and bond
markets, broker/dealers, and mutual funds.
Securities Investor Protection Corporation (SIPC)
A nonprofit corporation that insures investors against the
failure of brokerage firms, similar to the way that the
Federal Deposit Insurance Corporation (FDIC) insures bank
deposits. Coverage is limited to a maximum of $500,000 per
account, but only up to $100,000 in cash. SIPC does not insure
against market risk, however.
Simplified Employee Pension (SEP)
A tax-deferred retirement plan for owners of small businesses
and the self-employed.
Standard & Poor’s Corporation
A rating agency that analyzes the credit quality of bonds and
other securities.
S&P (Standard and Poor's) 500 Index
The Standard and Poor's 500 Index is a market index of 500 of
the top-performing United States corporations. This index is a
broader measure of the domestic market than the Dow Jones
Industrial Average, indicating broad market changes. The S&P
500 index includes 400 industrial firms, 20 transportation
firms, 40 utilities, and 40 financial firms.
Split
A split is when a company's board of directors and the
shareholders agree to increase the number of shares
outstanding. The shareholders' equity does not change;
instead, the number of shares increases while the value of
each share decreases proportionally. For example, in a 2-for-1
split, a shareholder with 100 shares prior to the split would
now own 200 shares. The price of the shares, however, would be
cut in half; shares that cost $40 before the split would be
worth $20 after the split.
Stock
Security that represents a unit of ownership in a corporation.
Substandard Grade (a.k.a., "Junk") Bond
Bond rated below the top four grades by a rating service such
as Moody’s and Standard & Poor’s. They generally provide a
higher return than investment grade securities to compensate
investors for an increased risk of default.
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T
Tax Deferral
Investments where taxes due on the amount invested and/or its
earnings are postponed until funds are withdrawn, usually at
retirement.
Tax-Exempt
Investments (e.g., municipal bonds) where earnings are free
from tax liability.
Ticker
The ticker displays information on a moveable tape or, in
modern times, as a scrolling electronic display on a screen.
The symbols and numbers shown on the ticker indicate the
security being traded, the latest sale price of the security,
and the volume of the last transaction.
Total Return
The return on an investment including all current income
(interest and dividends), plus any change (gain or loss) in
the value of the asset.
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U
Underwriter
An underwriter is an individual distributing securities as an
intermediary between the issuer of the security and the buyer.
For example, an underwriter may be the agent selling insurance
policies or the person distributing shares of a mutual fund to
broker/dealers or investors. Generally, the underwriter agrees
to purchase the remaining units of the security from the
issuer, such as remaining shares of stocks or bonds, if the
public does not buy all specified units. An underwriter may
also be a company that backs the issue of a contract, agreeing
to accept responsibility for fulfilling the contract in return
for a premium.
Unit Investment Trust (UIT)
An unmanaged portfolio of professionally selected securities
that are held for a specified period of time.
U.S. Treasury Securities
Debt instruments issued by the federal government with varying
maturities (bills, notes, and bonds).
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V
Value Stock
A stock with a relatively low price compared to its historical
earnings and the value of the issuing company’s assets.
Variable Annuity
An annuity where the value fluctuates based on the market
performance of its underlying securities portfolio.
Volatility
Volatility is an indicator of expected risk. It demonstrates
the degree to which the market price of an asset, rate, or
index fluctuates from average. Volatility is calculated by
finding the standard deviation from the mean, or average,
return.
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W
Warrant
A warrant is similar to an option, giving the holder the right
to purchase securities at a set price for a specific period of
time. Warrant certificates last longer than options, typically
holding value for a few years or indefinitely. Warrants are
often traded as securities at a price that reflects the
underlying security.
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X-Y-Z
Yield
Yield is the return, or profit, on an investment. Yield refers
to the interest gained on a bond or the rate of return on an
investment, such as dividends paid on a mutual fund. Yield
does not include capital gains.
Zero-Coupon Bonds
Debt instruments issued by government or corporations at a
steep discount from face value. Interest accrues each year but
is not paid out until maturity.
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