Glossary of Terms

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A
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Annuity
An investment contract usually purchased from an insurance company that will provide the purchaser (annuitant) with future payments at regular intervals or a lump-sum payout. If the annuitant dies during the payout period, the remaining benefits are paid to the named beneficiary.
FIXED ANNUITY:
The insurance company invests the purchaser’s principal in “Fixed Income” instruments (Bonds, Mortgages, etc.) and guarantees the principal and a minimum payout.

VARIABLE ANNUITY:
The insurance company invests the purchaser’s principal in “Equities” (Common Stock) and neither principal nor payout is guaranteed.
NOTE: Some companies allow purchasers to split their principal between fixed and variable components. Funds placed in an annuity accumulate and compound tax-free until they are withdrawn. At withdrawal, part of the payout is considered return of principal and is exempt from tax. Annuities can be purchased by a single payment or through periodic installments.

Asset Allocation
ACTIVE:

PASSIVE:


B
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Bear Market
Blue Chip Stocks
Bonds
Certificates of debt. (When you buy bonds, you are lending money). They are issued by the government or a corporation, which guarantees payment of the original investment plus interest by a specified future date. Thus, bonds are referred to as “Fixed Dollar Investments” because their yield is predetermined.
  • "Guaranteed” as to principal if assets are available at maturity
  • “Guaranteed” as to rate of return if funds are available.
  • Not guaranteed to grow, regardless of any increase in the profits of the issuing corporation.
CORPORATE BONDS:
Are normally rated according to credit worthiness – AAA bonds are the most secure. The yields are primarily influenced by overall interest rates and the credit worthiness of the issuing company. In general, the higher the grade the lower the yield.

CONVERTIBLE BONDS:
These are the corporate bonds, which are convertible into common stock. They offer a chance for capital appreciation if the price of the underlying common stock rises, and generally their current yield is higher than the dividend return on the common stock.

GOVERNMENT BONDS:
These bonds are backed by the Federal, State, or Municipality issuing them.

ZERO COUPON BONDS:
There are several kinds: treasury zeros, corporate zeros, or municipal zeros. These vehicles function as automatic compounding machines. They do not pay any interest (zero) and are sold at a fraction of what their face value (full value) will be at maturity. They allow an investor to lock into a future return that is wholly predictable, that is, assuming the issue does not default.
NOTE: You have to pay taxes each year on the accrued interest even though you do not have it. This provision makes zeros most suitable for Keoghs, IRAs and other tax deferred savings plans.

Bull Market
C
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Capital
(Sometimes referred to as Principal) The actual amount of money that you invest. If, for example, you buy shares of a mutual fund for $500, the $500 represents your capital investment.

Capital Appreciation or Growth
The increase in or market value of an investment over and above the purchase price.
Certificate of Deposit (CD)
A receipt issued by a bank for a cash deposit for a specified period of time (a week to several years) at a fixed rate of interest. At maturity the bank pays the principal plus all accumulated interest. Generally C.D.s offer a better pre-tax return than money funds, but you forego some liquidity. Used for “parking cash” – longer periods.
SHORT TERM CD:
Come in standard maturities of 3, 6, 9, 12 months. The Federal Government insures both principal and interest up to $100,000 per person.

NEGOTIABLE CD:
May be transferred before maturity

NON-NEGOTIABLE CD:
Are not readily transferred and early withdrawals are subject to interest penalties.
NOTE: Substantial penalties for early withdrawal. Early withdrawal penalties are tax deductible.
Certified Financial Planner™ (CFP®)
A certification mark that identifies financial practitioners who have demonstrated their professionalism by voluntarily submitting to the rigorous CFP® Certification process that includes demanding education, examination, experience and ethics to prove that they are committed to providing expert advice and services with competence and ethical proficiency.

Collectibles / Tangibles / Hard Assets
These assets hold the promise of offering some protection from the ravages of inflation. Included in this group: gold and silver bullions and coins, rare gold and silver coins, junk silver coins, colored gemstones, rare stamps, and mutual funds that invest in gold stocks.

NOTE: These assets have historically done well when the mood of the economy was bleak and uncertain. Be aware that tangibles and collectibles do not yield interest or dividends. Their value depends on future price appreciation.

Commodoties
A generic term for goods such as grain, foodstuffs, livestock, oils and metals traded on national exchanges.
Consumer Price Index (C.P.I.)
The standard measure of change in the price of goods and services. Note: Social Security checks are based on the C.P.I. If the C.P. I. rises 3 percent or more in a year, next year’s Social Security benefits will rise 3 percent or more.
D
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Dividends
A distribution to shareholders of income earned by individual securities and mutual funds.
Dollar Cost Averaging
Investing a fixed amount of money at regular intervals in either equity mutual (common stock) funds or individual stocks. This results in lowering the average price of the security below the average market price per share over the investment period. It works! D.C.A. is a long-term investment technique that mathematically beats the market…by ignoring its ups and downs while continuing to invest.
Dow Jones Average
Based on the prices of 30 top blue-chip stocks. This is the most popular index but has not been the most reliable over the past 10 or 15 years because of the increased number of smaller companies. What happens to small companies often has little to do with performance by the Dow’s blue chips.
F
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Financial Planner
A financial expert who helps you get organized, identifies your goals, and helps you move from your current position toward your financial goals.
Financial Planning
The on-going creation, implementation and updating of a financial road map designed to get you from where you are to where you want to be.
Financial Speed
The rate at which your investments must grow to accumulate the amount needed to fund your objective.

NOTE: Risk no more than is required to reach your goal.

H
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Hard Assets
(See Collectibles)
J
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Junk Bonds
(See Mutual Funds: Bonds: High-“Yield” Funds)
L
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Liquidity
How available is your capital? Liquidity is the degree of ready access to your money.
Loaner (Fixed)
One who gives to others the use of his/her money for a period of time and for a fixed rate of interest.
Ways of Loaning Your Money:
  • Annuities
  • Bonds – Government and Corporate
  • Cash surrender value of life insurance
  • Certificate of Deposit
  • Checking Account
  • Federal agency obligations (Federal, National Mortgage Assoc., Government National Mortgage Association.)
  • Loans receivable
  • Money market mutual funds
  • Passbook savings or Credit Union
  • Treasury bills or notes
Purpose: Safety of Principal and Income

Risks of Loaning: Purchasing Power Risk, Interest Rate Risk, Business Risk.


M
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Margin, Buying On
When you buy stocks on margin, you pay only a portion of the cost of the stock and borrow the balance of the cost of the stock from your broker. This option gives you leverage which works in both directions. You only pay a percentage of the purchase price and the risk of loss is multiplied, as is the possibility of gain.
Market Cycle
The time it takes to go from a high point to a low point to a subsequent high – typically 3-5 years.
Market Timing (of mutual funds)
A strategy or process based upon various economic and market indicators that switches an investor’s money from the mutual fund (stock or bond) to its companion in the money market fund. Timing is an attempt to avoid market down turns, minimize losses, and maximize gains.

NOTE: Be certain to look for mutual funds that offer the privilege of exchanging one fund for another. This is referred to as The Exchange Privilege and will be mentioned in the prospectus.
Money Market Funds
A savings accounts with a depository institution. The Federal Government insures both principal and interest up to $100,000 per person at one institution.
Money Supply (M-1)
All currency in circulation plus all checking accounts are designated as M-1.

NOTE: Economic theory says that when more money is chasing after the same quantities of goods and services, prices are driven up by the pressure of demand; conversely, when the M-1 remains steady or drops, prices do likewise.
Mutual Fund (M-1)
A mutual fund pools the small investments of a number of people who have similar objectives. That money is then invested in a wide range of securities by a full-time, professional investment manager. Each person who invests in a fund owns part of the portfolio. How big that part is depends upon the total value of the securities in the portfolio. Investors receive a proportionate amount of all the earnings from the securities in the portfolio. Mutual funds offer small investors the same advantages that large investors receive: diversification, lower transaction costs (because the fund can buy securities in big blocks), and full-time professional management.

NOTE: Mutual funds were developed to offer average investors a way to invest like the wealthy. If an investor only has a few hundred or a few thousand dollars to invest, the investments cannot be so diversified. “Millionaire’s” for example, can afford a broadly diversified portfolio to reduce risks, and can pay the high fees of the finest advisers to manage the portfolio day by day, selling and buying at the most appropriate times. A millionaire trading in huge lots can get a discounted commission. Mutual funds offer average investors the “Millionaire’s Advantage”. The mutual fund concept has proved so successful that now millionaires and huge corporations invest in them as well, partly because it is much easier to let a fund handle all the bothersome details of buying, selling, record keeping, and holding the securities in a safe place.

N
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NASDAQ
O
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Owner
One who owns an asset. Assets are characterized by their variable growth, i.e., the ability to increase or decrease in value.

Ways of Owning:
  • Stocks
  • Real Estate
  • Limited Partnerships, such as: Real Estate, Energy, and Equipment Leasing.
  • Investment Grade Tangible Assets, such as Rare Coins, Precious Metals and Collectibles.
Purpose: Growth of principal and to fight inflation.

Risks of Owning: Business Risk, Market Risk, and Liquidity Risk.
P
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Prime Rate
The interest rate major banks charge on short-term loans to their most credit-worthy customers. The Government adjusts the Prime Rate to help stimulate the economy.
Principal
(See Capital)
Prospectus
Important reading! It is a legal document used to offer a new issue of securities to the public. It describes a company’s investments, objectives, policies, services, officers, directors, restrictions, financial statements, charges, and other pertinent information. By law, a publicly traded company is required to publish a prospect.
Purchasing Power
The value of the dollar in terms of the good and services it can buy. As the consumer price index rises, purchasing power declines.
R
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Real Estate Investment Trusts (REIT's)
Trusts designed for people or entities who may not meet all the financial requirements or who may not choose to invest a larger amount of money in a less liquid limited partnership. Developed for individuals and retirement plans who wanted to invest small amounts of money in the profit potentials that real estate investing offers, but who wanted at the same time to maintain the liquidity of a stock. A REIT is a vehicle that receives money (like a mutual fund) and acquires and holds income properties of all types (Industrial, Residential, Commercial), yet has the shares publicly traded (on the exchanges and over the counter). Distributions may be partially or wholly tax-sheltered, but net operating losses cannot be passed through to an investor to be used to shelter income from other sources – as can occur in a limited partnership.
Real Rate of Return
The amount left over after subtracting taxes, commissions and inflation.
Risk
Uncertainty. There are five kinds of risk:
  • Purchasing Power Risk
  • Market Risk
  • Interest Rate Risk
  • Liquidity Risk
  • Event Risk
Risk Management
The identification and management of those areas or events that may disrupt or destroy various financial goals. Areas of exposure: accident, fire, physical disability, death, and mental incapacity. Owing an insurance policy is one example of risk management.
Rule of 72
Gives you the answer to the question of how long it will take to double your money: to make $1.00 become $2.00 at various rates of return.

To apply this rule, simply divide the rate of return into 72.

Here’s a table to help you:
Interest Rate "72" Years to Double Money
6% 72 12
7% 72 10.2
8% 72 9
9% 72 8
12% 72 6

14.4 years • 5% interest • 72.0 base


S
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Safety (of one's money)
The ability to purchase as much goods and services in the future as you can today.
Stability (of one's money)
The guaranteed return of invested capital.

NOTE: One’s money can be stable and not safe. This would be due to inflation and the resulting loss of purchasing power.

Stock
A security representing a portion of ownership in a corporation. Stockholders buy direct ownership in a corporation. Performance of the investment depends on the success or failure of the company. Thus, stocks are called variable-dollar investments because there is no predetermined return.
COMMON STOCK:
Holders of common stock have the greatest control over the management of the company, but the last claim on its earnings and assets…and therein lies the risk. However, after the fixed claims of the bondholders and preferred stockholders have been met, common stockholders are entitled to share in all the company’s further earnings. (i.e. dividends)

PREFERRED SOCK:
A stock that is non-voting (has no control over the management of the company), but on which a fixed dividend must be paid before the common stockholder is entitled to a dividend each year.
NOTE: “Preferred” does not mean “better”. Unless it is convertible, it has neither the growth potential of a common stock nor the relative stability of a bond.
T
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Tangibles
(See Collectibles)
Timing
(See Market Timing)
Treasury Bills (T-Bills)
These are short term, and highly liquid. In essence you are loaning Uncle Sam your money for a short while; he is paying you a rate that reflects what the market place is paying during each seven day period. T-bills come in maturities of 3, 6, and 12 months. They are available in a minimum denomination of $10,000 and in multiples of $5,000 above that. T-bills are sold at a discount from their face value, and redeemed (cashed-in) at full face value when they mature. Used for safely parking cash.

NOTE: Interest on T-bills is subject to federal income tax, but exempt from state and local taxes. To avoid sales charges purchase from Federal Reserve banks or branches.

Treasury Bonds
Have maturities of 5 to 30 years and some are available in $500 denominations. Interest is paid semi-annually and is exempt from state and local taxes.
Treasury Notes
Notes are medium term. They mature anywhere from one to seven years and can be purchased in $1,000 denominations and up. Interest is paid semi-annually and is exempt from state and local taxes.
U
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Unit Trusts
(Similar to a mutual fund) The primary difference between UT’s and MF’s is the result of the structure of underlying portfolios:
A mutual fund is managed full time. Manager has option to buy, sell, or hold bonds in the portfolio to adapt to changing conditions or implement a change in strategy.

A unit trust on the other hand, is not actively managed. Trust sponsors buy mostly long-term bonds and hold them until maturity unless they see a default. Even when they cash in their bonds, they do not add new ones.


V
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Volatility
The speed at which the market moves up and down.
Y
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Yield
Income received on investments. It is usually expressed as a percentage of the market price of the security. Fixed annual interest payment divided by the bond’s price (Market value).