Glossary

401(k) Plan

An employer-sponsored investment plan for retirement. Employees make contributions to the plan and choose from a variety of investments. Employers may match a portion of employees’ contributions.

 

Alpha 

Alpha measures the portion of an investment’s return that is unrelated to the performance of the overall market; it is the difference between an investment’s actual return over a period of time and its market return as measured by beta. Alpha is most commonly used with stock funds and is one way to measure the value that a portfolio manager adds to (or detracts from) a fund’s return.

Annuity 

A contract between an individual and an insurance company in which the individual pays money into an account in exchange for a guaranteed payment at or during retirement. Annuities offer tax-deferred growth potential. There are two types: fixed and variable.

Asset Allocation 

The process of dividing investments in your portfolio among different kinds of assets, such as stocks, bonds, real estate, and cash, to try to meet a specific objective.

 

Back-End Load 

A sales fee charged when you sell or redeem shares of a mutual fund.

Benchmark 

A market index used by individual investors, portfolio managers, and market researchers to determine how a particular market or market sector performs.

Beneficiary 

One who receives the proceeds of a trust, retirement plan, or life insurance policy.

Beta 

A way to measure the “risk” or price volatility of a particular stock or mutual fund as it compares with the market as a whole. A beta of 1.0 indicates that a security’s risk measurement is on par with the market. A beta of 1.20 indicates that a security is 20% more volatile than the market, while a beta of 0.80 indicates that a security is 20% less volatile than the market.

Bond 

An investment vehicle representing a loan to a corporation, government entity, or municipality. Bonds typically pay a fixed interest amount on a predetermined schedule and return their investment principal at maturity. Bonds issued by the U.S. government are backed by the full faith and credit of the United States. Other bonds are backed by the financial strength of their issuers and carry varying degrees of credit risk.

Bond Funds 

Mutual funds that invest in bonds issued by municipalities, corporations, and the U.S. government and its agencies. Bond mutual funds do not mature and are not guaranteed, although some of the individual bonds they invest in may be.

 

Call Risk 

The risk to a bondholder that a bond issuer may redeem, or “call,” a bond prior to its maturity date, often due to falling interest rates.

Capital Appreciation 

The difference between what you paid for shares purchased and what you realize when you sell them.

Capital Gain 

The profit earned from the sale of a capital asset, such as real estate or stocks. A capital gain is not “realized” until the asset is sold. A capital gain may be short-term (one year or less) or long-term (more than one year) and must be claimed on the owner’s income tax return for the year in which the asset was sold.

Capital Gains Distribution 

Profits distributed to shareholders that had resulted from the sale of securities held in a mutual fund’s portfolio.

Capital Loss 

The loss incurred when a capital asset, such as real estate or stock, decreases in value from its purchase price. A capital loss is not “realized” until the asset is sold.

Charitable Remainder Trust 

A trust that allows you to leave assets to a charity and receive income and tax benefits at the same time. You can receive income from the trust for a specified period of time, after which all remaining assets are transferred to the charity.

Commercial Paper 

The term used for the short-term IOUs (generally three to nine months in duration) of large, creditworthy corporations.

Compounding 

Earnings on an investment’s earnings. Over time, compounding can produce significant growth in the value of an investment.

Consumer Price Index 

The most commonly used measure of inflation, the CPI tracks the average change in the prices of a fixed “market basket” of goods and services, including energy, food, health care, clothing, and entertainment. It is revised monthly by the U.S. Bureau of Labor Statistics.

Contingent Beneficiary 

A named individual or entity who will receive a benefit from an insurance policy, pension plan, trust, or will if he, she, or it is predeceased by the named primary beneficiary. Also referred to as the secondary beneficiary.

Correlation 

The degree to which the movements of two or more variables (such as investment returns) are related.

Coverdell Education Savings Account 

Formerly known as the Education IRA. An account created to pay the higher education expenses of its beneficiary. Contributions, which are currently limited to $2,000 a year, are not tax deductible but any accumulated earnings are tax free if used to pay eligible bills. Contributions are not allowed after the child reaches age 18. 

Credit Quality 

The measure of a bond issuer’s ability to make regular interest payments and pay the face value of the bond at maturity.

Credit Risk 

1. A measure of a bond issuer’s ability to repay its principal and interest as promised; 2. An individual consumer’s creditworthiness, as reported on a credit rating.

 

Defined Benefit Plan 

An employer-sponsored retirement program that is funded by the employer and in which the participant receives a fixed amount of money each year in retirement. The precise amount of this pension is based on salary and length of time on the job. This contrasts with a defined contribution plan, in which the level of income available in retirement will depend on employee contributions and investment performance.

Defined Contribution Plan 

An employer-sponsored retirement program in which the participant sets aside a portion of his or her salary each year in an investment account on a tax-deferred basis. Contributions to DC plans may be deductible from current income, and employers may augment savings with matching contributions. The actual value of assets available to fund retirement will depend on investment performance. Profit-sharing, employee stock ownership, 401(k), 403(b), and 457 programs are all defined contribution plans.

Diversification 

The process of helping reduce risk by investing in several different types of individual funds or securities.

Dividends 

A percentage of a company’s profits paid to its shareholders.

Donor 

One who gives property or assets through a trust or as an outright gift.

Dow Jones Industrial Average 

An index that follows the returns of 30 well-established American companies, the Dow is a widely quoted measure of U.S. stock market performance. It has a history of more than 100 years.

Duration 

A measurement of the price sensitivity of a fixed-income investment. A higher duration indicates a higher level of price fluctuation for a given change in yield. Longer-term bonds tend to have greater durations than shorter-term bonds, but two bonds with the same time to redemption and the same current yield may still have different durations.

 

Education IRA 

Renamed the Coverdell Education Savings Account. An account created to pay the higher education expenses of its beneficiary. Contributions, which are currently limited to $2,000 a year, are not tax deductible, but any accumulated earnings are tax free if used to pay eligible bills. Contributions are not allowed after the child reaches age 18.

Estate Planning 

Preparing for the orderly administration, management, and distribution of a person’s assets and liabilities during one’s lifetime and upon death. In addition to a will, an estate plan may include trusts, insurance, and other elements intended to carry out the wishes of the estate owner and improve the estate’s after-tax value.

Estate Taxes 

This is the approximate amount your estate will pay in estate taxes. Keep in mind that your estate may also incur state and local transfer taxes and possible generation-skipping transfer taxes. Estate planning is a very complex topic with many governing laws, so you should consult a qualified tax or legal professional for advice.

 

Fixed Annuity 

An annuity that earns a guaranteed rate of interest for a certain period of time. The amount of the benefit to be paid out of the annuity when the contract is annuitized also is fixed.

Front-End Load 

A sales fee paid up-front when you purchase shares of a mutual fund.

 

Gift Tax 

Graduated federal tax imposed upon a person who gives assets of more than $14,000 in any single year to a recipient. This amount may be indexed for inflation in future years. Each individual also has a $5.45 million combined lifetime gift tax and estate tax exclusion. This limit is adjusted annually for inflation.

Grantor 

The owner of an estate who sets up a trust.

Guardian 

A person given legal responsibility for the rights and affairs of a minor or mentally incapacitated person.

 

High-Yield Bonds 

High-yield bonds are issued by organizations that do not qualify for “investment-grade” ratings by one of the leading credit rating agencies. For this reason, issuers of high-yield bonds must pay a higher interest rate to attract and to compensate them for the increased risk of default — not paying interest or principal in a timely manner — associated with investing in organizations of lower credit quality.

Home Equity Loan 

Indicate the current amounts owed on any equity lines of credit you may have, as well as the current principal balance of any mortgages or lines of credit you may have on other properties owned.

 

Incentive Stock Option 

A type of stock option that allows an employee to buy shares of an employer’s stock at a pre-established price. If the shares are held for a longer period of time, the sales price will reflect a favorable tax treatment.

Index Funds 

Mutual funds that attempt to mirror the composition and performance of a specific market index.

Individual Retirement Account (IRA) 

A retirement account to which you may be able to contribute up to a specific annual amount (the maximum amount is determined by Congress). Individuals aged 50 and older may also make additional annual catch-up contributions (up to a specified amount as set by Congress). IRAs give your money the potential to grow tax-deferred and, depending on your personal circumstances, contributions may be tax deductible (withdrawals prior to age 59½; may be assessed a 10% additional federal tax). Withdrawals from traditional IRAs are taxed at then-current rates. There are two types of IRAs: traditional and Roth.

Inflation Risk 

The risk that the purchasing power of savings will decrease due to rising prices. 

Inflation-Indexed Bond 

Promissory note in which the principal adjusts with inflation, thus locking in a specific after-inflation return if held to maturity. Treasury Inflation-Protected Securities (TIPS) and Series I savings bonds are backed by the United States government and are indexed semiannually to the Consumer Price Index (CPI).

Interest Rate Risk 

Most often associated with fixed-income investments, this is the risk that a security’s price will fall when interest rates rise in the market.

Investment Risk 

The potential for an investment’s price or return to deviate from its expected price or return.

Irrevocable Life Insurance Trust 

An irrevocable life insurance trust (ILIT) is a unique way to remove life insurance policy proceeds from your estate and pass them directly to your heirs. When properly executed, qualified assets in an ILIT pass along free of estate taxes. Consult a qualified legal professional for more information.

Irrevocable Trust 

A legal arrangement that gives a trustee control over select assets and cannot be modified once it is established.

 

Large-Cap Stock 

Shares issued by large companies, typically those with market capitalizations of $10 billion or more.

Liquidity 

The ability to quickly turn your investments into cash at prevailing market prices.

Long-Term Capital Gains 

Net gains on assets sold 12 months or more after purchase; taxed at a maximum rate of 15% for most taxpayers and 20% for higher-income taxpayers (generally those subject to the 39.6% tax bracket). In addition, a 3.8% Medicare surtax is added for most taxpayers earning more than $250,000 if married or $200,000 if single.

 

Market Capitalization 

A measure of a company’s value calculated by multiplying the number of shares outstanding by the current price per share.

Market Risk 

The portion of a security’s overall variability that can be attributed to the variability of the market as a whole.

Market Timing 

An investment strategy in which the investor tries to increase returns by trading in anticipation of major changes in market prices.

Maturity 

The date by which an issuer promises to repay a bond’s face value.

Medicare 

A federal program that assists people aged 65 and older by helping to pay for health care expenses. The traditional program has three parts — Hospital Insurance (Part A), Supplementary Medical Insurance (Part B), and Prescription coverage (Part D). Medicare Advantage (Part C) is a managed-care alternative to traditional Medicare. 

Money Market Funds 

Mutual funds that invest in short-term money market instruments, such as U.S. Treasury bills, commercial paper, certificates of deposit, and repurchase agreements. An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although a money market fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the fund.

Mortgage 

A loan used to finance the purchase of a home or other property. The borrower gives the lender a lien on property as security for the repayment of the loan. The borrower has full use of the property, and the lien is removed when the obligation is paid in full. Mortgage repayment periods generally run between 10 and 30 years.

Municipal Bonds 

Bonds issued by state or local government to raise money to pay for special projects, such as building schools, highways, and sewers. The interest that investors receive is often exempt from federal income taxes and, in some cases, state and local taxes too. Interest may be subject to the alternative minimum tax (AMT).

Mutual Fund 

A collection of securities — stocks, for example — owned by a group of shareholders and managed by an investment company. Mutual funds pursue a variety of goals, depending on their investment charter. Some funds work to generate income on a regular basis, while others seek to provide capital appreciation.

 

Nasdaq Composite Index 

An index of more than 3,000 issues. Created in 1971, the NASDAQ Composite represents all securities traded on the NASDAQ national market system.

 

Passive Management 

A mutual fund management style in which the fund manager simply attempts to replicate the return of a market index, usually by holding the securities that comprise the index.

Premium 

A payment that a policy owner makes when purchasing an insurance policy or an annuity. Premium also can refer to an amount by which the sale price of a bond or stock exceeds the par, or face, value.

Prepaid Tuition Plan 

A state-sponsored program that permits parents to pay tuition years before their child enrolls in college. Parents make payments based on current tuition at qualified colleges, thus avoiding increases in tuition over time. The payments are invested in a portfolio, and tuition is paid directly to the college when the child enrolls.

Primary Beneficiary 

A beneficiary that is designated first in line to inherit a financial asset following an individual’s death. Individuals typically name primary beneficiaries for life insurance, annuities, employer-sponsored retirement plans, individual retirement accounts, and other assets. Secondary, or contingent, beneficiaries inherit assets if the primary beneficiary dies or declines the inheritance.

Probate 

A court-supervised process that determines whether a person’s will is authentic. Probate typically encompasses a probate judge’s review of a will and an executor’s efforts to distribute property as specified by the decedent.

Prospectus 

The official document that describes a mutual fund to prospective investors. A prospectus contains information required by the SEC, such as investment objectives and policies, risks, services, and fees.

 

Repurchase Agreement 

A contract that requires a seller of securities to buy the investment back in the future at a designated time and price. Repurchase agreements also are known as repos or buybacks.

Required Minimum Distribution (RMD) 

The minimum amount that an IRA account holder is required to withdraw annually beginning by age 70½. RMDs also apply to employer-sponsored retirement plans, but may be postponed until retirement if an individual works beyond age 70½ and is still employed by the company that is sponsoring the plan.

Revenue Bond 

Bonds issued by government entities to finance specified revenue-generating projects. Investors are generally repaid from the project’s revenues and may not have any further recourse if revenues do not cover debt service costs.

Roth 401(k) Plan 

An employer-sponsored investment plan for retirement. Employees make after-tax contributions to the plan, any earnings grow tax-deferred, and qualified withdrawals are tax free. Withdrawals prior to age 59½ may be subject to a 10% additional federal tax. Employers may match a portion of employees’ contributions.

Roth IRA 

A retirement account to which you may be able to contribute up to a specific maximum amount each year (the maximum amount is determined by Congress). Individuals aged 50 and older may also make additional annual catch-up contributions (up to a specified amount as determined by Congress). Contributions are not tax deductible, but any growth is tax free and qualified withdrawals may be tax free. Certain holding periods and income restrictions apply.

 

Savings Bond 

Bonds issued by the U.S. Treasury, typically in amounts ranging from $50 to $10,000. Savings bonds are noncallable — which means the government cannot retire them before the maturity date — and are also nontransferable, which means that bondholders cannot transfer them to someone else. Because savings bonds are backed by the full faith and credit of the federal government, many investors consider them to have relatively low investment risk.

Section 529 Plans 

State-sponsored, tax advantaged plans that encourage individuals to invest in a pool of stocks and bonds for college savings. Contribution limits for Section 529 Plans vary from state to state. Generally, the asset allocation formula may be determined by a child’s age (generally more aggressive for younger children and more conservative as children approach college age) or may be selected by the investor based on his or her risk tolerance. Distributions made to pay qualified education expenses are tax free.

Sector Funds 

Funds that invest in specific industries and economic niches to seek above-average returns. Their narrow focus may make them more volatile than broadly diversified funds and more vulnerable to single economic, political, or regulatory developments.

Series EE Savings Bonds 

Bonds issued by the U.S. government at a 50% discount from face value. Series EE bonds come in denominations of $25, $50, $75, $100, $200, $500, $1,000, $5,000, and $10,000. Series EE Bonds replaced Series E Bonds and are subject to the same taxes.

Sharpe Ratio 

A statistical value, calculated by dividing a fund’s excess return by the standard deviation of those returns, that measures the relative reward of holding on to risky investments. The higher the ratio, the greater the potential for return for the same amount of risk. The lower the ratio, the worse the fund’s historical risk-adjusted performance.

Small-Cap Stock 

Shares issued by small companies, typically with market capitalizations of $2 billion or less.

Social Security Statement 

The Social Security statement shows your estimated benefit upon retirement. It can be obtained by calling the Social Security Administration at (800) 772-1213 or by visiting the website at www.ssa.gov.

Standard Deviation 

Statistical measure that shows how much an investment’s return may vary from its average over any given period. The larger the standard deviation is in relation to an investment’s return, the more volatile that investment is. 

Stock 

A share of ownership in a company, typically traded on one or more exchanges. Owners of stock usually receive voting rights on issues affecting the company and may receive a portion of the company’s profits in the form of dividends.

Stretch IRA 

Estate planning concept used to extend the financial life of an IRA across multiple generations. The strategy lets an IRA’s original beneficiary transfer, upon death, the IRA assets to his or her own beneficiary without triggering an immediate income tax liability. Such flexibility provides an opportunity to stretch an IRA’s tax-deferred growth potential longer than initially intended.

 

Tax Deferral 

The postponement of taxation on an investment until a later time. Tax deferral is widely viewed as a benefit to investing within a traditional IRA or 401(k) or to purchasing some life insurance products. The principle of tax deferral aids in the pursuit of long-term investment growth. Tax-deferred assets in a traditional IRA or 401(k) may be subject to a 10% additional federal tax if withdrawn prior to age 59½.

Taxable-Equivalent Yield 

The pre-tax rate that a taxable bond must yield to generate the same income as a municipal bond, which is exempt from paying taxes on income on some government level. This figure, which will vary depending on the investor’s individual tax bracket, helps compare the real earnings potential of a taxable investment with a tax-free investment.

Time Deposits 

A type of generally lower-risk savings vehicle, such as a certificate of deposit, with maturities typically ranging from seven days to several years. Time deposits often pay a higher interest rate than traditional savings accounts, but penalties may apply for withdrawing money before maturity.

Total Return 

A measure of a fund’s performance that encompasses all elements of return: dividends, capital gains distributions, and changes in net asset value. Total return is the change in the value of an investment over a given period, assuming any reinvestment of dividends or capital gains distributions, expressed as a percentage of the initial investment.

Traditional IRA 

A retirement account to which you can contribute up to a specified amount each year (the maximum amount is determined by Congress). Individuals aged 50 and older may also be eligible to make additional annual catch-up contributions (up to a specified amount). IRAs give your money the potential to grow tax-deferred and, depending on your personal circumstances, contributions may be tax deductible (withdrawals prior to age 59½ may be assessed a 10% additional federal tax). Withdrawals from traditional IRAs are taxed at then-current rates.

Treasury Bills 

Short-term debt securities issued by the U.S. Treasury, “T-bills” sell at a discount to their par (face) value and mature in less than a year. The interest an investor earns is the difference between the buying price and the amount paid at maturity.

Trust 

An agreement in which a grantor transfers assets to a trustee for the purpose of benefiting one or more beneficiaries.

Trustee 

The administrator of a trust.

 

U.S. Savings Bonds 

Represent loans to the federal government, to be repaid in full, with interest, at a specified future date known as the maturity date. Series EE bonds issued today are sold at a 50% discount to face value (the amount paid at maturity).

Unlimited Marital Deduction 

This provision of federal estate tax laws allows individuals to leave their entire estate to a surviving spouse tax free if the surviving spouse is a U.S. citizen.

 

Variable Annuity 

An annuity that allows you to invest your money in accounts offering variable rates of return, such as stock or bond portfolios. As a result, your premium dollars may be exposed to risk generally associated with investing in the markets.

Volatility 

The day-to-day (or year-to-year) fluctuation in the value of publicly traded securities and, by extension, broad markets.

 

Zero Coupon Bond 

A type of bond that does not pay regular interest, but is sold at a deep discount from its stated principal amount.

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Investing in securities involves risks, and there is always the potential of losing money when you invest in securities. Neither MDSS LLC nor any of its affiliates or financial advisors provide legal, tax or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions. Asset allocation, diversification and rebalancing do not ensure a profit or protect against loss in declining markets.

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