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The Finance Dictionary: Learn the jargon your Finance friends speak!


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A

Absorbed Cost: When the cost for products or materials exceeds the original estimate, a decision may be made to absorb the cost difference and charge the additional amount to expenses rather than pass the cost increase on to the customer.

Account: Represents a relationship of mutual obligation, between buyer and seller, typically involving products, services, or cash inflows and outflows. Entries on a statement of cash flow generally itemize individual cash inflows and outflows in the account.

Account Balance: The net of credits and debits for an account at the end of a reporting period. For example, a credit card balance may show the amount you owe to the company as a result of your purchases, while a bank account balance may show the amount of money in your account at any given moment.

Accounts Payable: Businesses may establish open accounts with creditors for goods and services needed for operating a business enterprise. Open accounts with a balance due are called accounts payable.

Accounts Receivable: Businesses often establish open accounts and provide goods and services to customers, allowing delivery before receipt of payment. In financial statements, the amount due is listed under accounts receivable. Management has a gauge of their business liquidity level by reviewing the relationship between accounts receivable and current outstanding debt obligations maturing in less than one year.

Account Reconciliation: An accounting process used to determine whether the money leaving an account equals the amount spent. Deposits, interest received, and credits are added to the beginning balance on a ledger or in a checkbook register. From this total amount, automatic withdrawals, checks outstanding, checks negotiated, and account charges are subtracted. When the resulting balance equals the ending balance on the account statement, the account is reconciled.

Accrual Basis of Accounting: An accounting procedure, usually for income tax computations, in which inflows and outflows are acknowledged when an order has been received or delivered. The amount of payment is considered earned whether or not compensation has been actually received.

Accrued Benefits: Every fully vested employee who participates in a qualified retirement plan has a value of accrued benefits presently available. In a money purchase or profit sharing plan, the benefit is the total of the individual account. In a defined benefit pension plan, the accrued benefits would be based on years of service with an employer.

Accrued benefits may include vacation, sick or personal time off, or other related benefits. Employees who are laid off, retire or are fired must receive all unpaid accrued benefits.

Accrued Liability: An accounting term for an expense that a business has incurred but has not yet paid. A company can accrue liability for a pension account that will pay retirees in the future. If available assets do not offset the accrued benefits, the plan has an accrued liability that is unfunded. Accrued liabilities can be recorded as either short or long-term liabilities on a company's balance sheet.

Acid Test: A calculation that determines whether a firm has enough short-term assets to cover its current liabilities without selling inventory. The calculation establishes a ratio between liquid cash assets (e.g., cash, cash equivalents, marketable securities, and accounts receivable) and outstanding liabilities. If the amount of debt is less than the amount of available liquid assets, the company is usually in a firm financial position.

Acquisition: Also known as a takeover. The purchase of one company by another, or the attainment of controlling interest through an accumulation of shares. In order to gain control, an acquiring entity may be willing to pay more than the market value for shares, which may benefit the shareholders of the acquired company. The combination of companies either through the pooling of interests or purchase is generally referred to as mergers and acquisitions, or M&A.

Active-Participant Status: A person, or his or her spouse, who participates in an employer-sponsored retirement plan. The plans that qualify include the following: 1. Qualified plans, such as profit sharing plans, defined benefit plans, money purchase pension or target benefit plans and 401(k) plans

  1. SEP IRAs
  2. SIMPLE IRAs
  3. 403(b) plans
  4. Qualified annuity plans
  5. Employee Funded Pension Trusts (created before June 25, 1959)
  6. A plan established for its employees by the United States, by a State or political subdivision of the United States, or by an agency or instrumentality of the United States or any of its subdivisions

Actuary: Insurance contracts and retirement plans require professional calculation of payments to be received and benefits to be paid. An actuary is a professional statistician who analyzes all probability and risk estimates based upon past experiences to confirm obligations are practical and attainable.

Adjustable Rate Mortgage (ARM): Also called a variable rate mortgage, this mortgage has an interest rate that is adjusted periodically, usually at intervals of one, three, or five years, according to a specific benchmark or index, such as the rate on U.S. Treasury bills or the average national mortgage rate. In exchange for assuming some of the risk of a rise in interest rates, a borrower receives a lower rate at the beginning of an ARM than if he or she had taken out a fixed-rate mortgage.

Adjusted Gross Income (AGI): The amount of income subject to income taxes. To determine AGI, subtract certain qualified deductions, such as unreimbursed business expenses, medical expenses, alimony, or retirement plan contributions, from gross income, which generally includes employment income, interest income, dividends, and capital gains.

Ad Valorem Tax: Local governments impose a tax upon owners of local property within their jurisdiction. The tax is based on an assessed value.

Advance: A services company may establish a salary advance to assist new employees with initial cash flow problems or to help seasoned employees with emergency needs. The advance represents money received before it is actually earned. In addition, some businesses will establish an employee cash advance program to provide for business-related travel expenses.

Advance Directive: An estate planning document that expresses a person's wishes about critical care when he or she is unable to decide for him or herself. It does not authorize anyone to act on a person's behalf or make decisions like a power of attorney.

Adverse Selection: Insurance companies seek to avoid or lessen claims risk. However, some applicants may pose high risk ratios. Such individuals are considered in the adverse selection category, resulting in higher (rated) premiums, more limited coverage, or outright denial of coverages.

Affiliated Service Group: For employee benefit plans, the Internal Revenue Code (IRC) provides specific instruction to an affiliated service group that has separate units performing similar services to the public or to each other.

Agent: An insurance company representative that conducts sales and service. Life insurance agents may also be called field underwriters or life underwriters.

Aggressive Growth Fund: This is a type of mutual fund with the objective of maximizing long-term capital growth, rather than dividend income, by investing in narrow market segments and small company stocks. Aggressive growth funds are designed for maximum capital appreciation, and generally invest in companies with high growth rates.

Agreement: A written contract or unwritten promise between two or more parties that outlines policies or procedures involving future events or results. Some agreements are legally binding while others may be unenforceable.

Allocation Formula: Employers’ contributions to profit-sharing plans are allocated to participant’s accounts based on an allocation formula. The formula also governs the reallocation of funds forfeited by employees who terminate from the plan.

Alternative Minimum Tax (AMT): This tax calculation adds certain tax preference items back into adjusted gross income in order to prevent taxpayers from taking certain tax breaks to escape their fair share of tax liability. If AMT liability is greater than regular tax liability, the taxpayer generally needs to pay the regular tax and the amount by which AMT exceeds regular tax.

American Depository Receipt (ADR): A receipt from a U.S. bank for shares of stock of a foreign company. ADRs, which are traded in U.S. dollars on U.S. markets, carry the same risks as the underlying foreign shares.

American Stock Exchange (AMEX or ASE): Located in downtown Manhattan, AMEX has the third highest trading volume of any stock exchange in the U.S. The bulk of trading on the AMEX consists of index options and shares of small to medium-sized companies.

Amortization: This process brings gradual extinction to a debt, loan, or mortgage over a specific span of time. It can also be used to deduct capital expenses over a period of time. Similar to depreciation, it is a method of measuring the consumption of the value of long-term assets like equipment or buildings.

Amount at Risk: In a life insurance policy, the death benefit amount minus the cash value (if any) represents the financial liability to the insurance carrier. In a term insurance contract, the insurance carrier always assumes the total amount at risk.

Analyst: A professional who studies the performance of corporations and industries, and evaluates securities. Analysts may specialize in a company or an industry, and they generally work for analytic organizations or for financial institutions, such as brokerage houses, mutual fund companies, or investment banks. The opinions of an influential and respected analyst regarding a certain security may have an impact on the market price.

Annual Fee: The yearly fee some credit card issuers charge cardholders to use their credit cards.

Annual Percentage Rate (APR): The yearly cost of credit or a loan is expressed as a single percentage number. This number also includes any fees or additional costs associated with the agreement. The Federal Truth In Lending Act requires all consumer credit agreements and loans to disclose the APR to ensure the understanding of the full transaction costs .

Annual Report: This yearly statement outlines information on company management, operations, and financial reports. Annual Reports are sent to every shareholder and are available for public review. The Securities and Exchange Commission (SEC) requires an annual report to be published by all corporations that issue registered stock. A more exhaustive annual compilation of data is found in Form 10-K, which the SEC mandates from companies surpassing certain qualifications.

Annuitant: The person to whom an annuity is payable.

Annuity: A financial instrument sold by life insurance companies that guarantees payments, fixed or variable, to the purchaser in regular intervals. Fixed annuities offer consistent, predictable returns; whereas, variable annuities provide fluctuating returns based on the performance of an investment portfolio. Payments are usually scheduled to begin at a future time, such as retirement, but in certain cases may begin immediately. Some annuities, often part of retirement plans, provide tax-deferred earnings.

Annuity Cash Refund: In annuity that provides income for life, the contract may include a death benefit for the total premiums paid. When the annuitant dies, the annuity cash refund will be the net sum of premiums paid minus the amount received in annuity payments.

Annuity Certain: This option in an annuity contract allows the annuity owner to select a future income payment that is level and covers a specified number of years (generally ten years). If the annuitant dies before the expiration of the annuity payments, the remaining obligation is transferred to the designated beneficiary in the annuity contract.

Annuity, Joint Life: While two or more individuals may be named annuitants, payments cease at the death of the first annuitant in a joint life annuity contract.

Annuity, Joint and Survivor: This annuity option provides payments for two designated annuitants. Upon the death of the first annuitant, the surviving annuitant receives prearranged, continued payments for life, based on a percentage received by the first annuitant.  

Annuity, Modified Refund: In a contributory retirement plan, the annuity beneficiary of a deceased retiree receives the accumulated balance of the pension fund, which is referred to as the annuity modified refund.

Annuity Payout Option: Annuities may be received in a variety of ways: as a fixed dollar amount, for a fixed period, or over the lifetime(s) of one or two annuitants. An annuitant may choose one of these as the payout option.

Application Fee: A lender may charge a fee to process a loan application. Paying this fee does not guarantee loan approval. Some lenders apply the cost of the application fee toward certain closing costs if the application is approved.

Appraisal: This assessment of a property’s value, performed by a qualified professional, is based on information from recent sales of similar properties.

Arm’s Length Transaction: A business transaction between parties who consent without coercion, are not related (such as mother and daughter), and are influenced by independent interests.

Asset: Any property with a cash value that is expected to provide a future benefit, such as real estate, equipment, savings, or investments.

Asset Allocation: This process divides investments among different asset classes, such as stocks, bonds, and cash reserves. The goal of asset allocation is to optimize the risk/reward tradeoff based on the specific goals of the investor and/or the mutual fund. Many financial professionals believe that the mix of asset classes has a greater impact on long-term portfolio results than does the performance of any individual investment.

Asset Class: A specific category of assets or investments, such as cash reserves, bonds, and stocks. Assets within a class tend to exhibit similar characteristics and behave similarly in the marketplace.

Asset Value:  The value of tangible and intangible property assets that can be traded, bartered, or exchanged-in-kind. The net values per share of these assets represent the asset value of a corporation. Therefore, a company may be classified as undervalued when its asset value exceeds the fair market value (FMV) or the price that a given property or asset would get in the marketplace.

Assignment: The legal transfer of an asset to another person or entity, in entirety or partially , such as an insurance policy.

Audit: An independent professional examination of a company’s financial documents and a subsequent declaration that all data reviewed was consistent, fair, and met the professional standards of accounting principles.

Automatic Reinvestment: This preset investment plan automatically deposits mutual fund and stock dividends back into a stock to purchase additional shares, allowing the owner to take advantage of compounding.

Available Credit: The unused portion of a credit line, calculated as the credit limit less the current balance.

B

Back-End Load: A sales charge that is taken when mutual fund shares are redeemed (sold).

Backup Withholding: Tax that is imposed on investment income, at a predetermined tax rate, as the investor withdraws it. Backup withholding helps to ensure that government tax-collecting agencies (such as the IRS) receive income taxes owed to them from investors' earnings. At the time, the investor withdraws his or her investment income, the amount required by the backup withholding tax is forwarded to the government. Backup withholding may be avoided by filing a W-9 form when opening an account with a financial institution.

Bad Debt: An uncollectible account balance or loan. Bad debt, in whole or part, occurs when the debtor becomes insolvent or has not made payment during an extended period of time.

Balance: The amount of money in a bank account after deposits, withdrawals, interest, and bank charges.

Balance Sheet: A financial statement produced by most business operations on a monthly basis, detailing the composition of capital assets, total equities, and existing liabilities and shareholders’ equity at a specific point in time.

Balanced Fund: A mutual fund that invests in both stocks and bonds. The main objective is the preservation of capital with moderate income growth, and a secondary objective is capital gains. Balanced funds are one of the most conservative mutual funds investing in common stock.

Balloon Mortgage: This mortgage type has a final payment that is considerably larger than the preceding payments. Balloon mortgages are typically used when borrowers anticipate receiving a large sum of extra cash to pay the balance or when they expect to refinance before the balloon payment comes due.

Bankruptcy: A legal proceeding involving a person or business that is unable to repay outstanding debts. There are three parties to any bankruptcy proceeding: debtors, creditors, and a trustee. Bankruptcy is an expensive process and may adversely affect future credit opportunities. Some more recognizable bankruptcy applications include the following:

  • Chapter 7: A debtor (individual) is declared bankrupt, and a court-appointed trustee initiates a liquidation process and a discharge of all eligible debts. The debtor has no financial sources to attempt a reorganization. A separate taxable entity is created.
  • Chapter 11: A debtor (business, individual, or partnership) is declared bankrupt but is allowed reorganization to attempt debt repayment. Creditor approval is required. A separate taxable entity is created.
  • Chapter 13: A debtor (individual or sole proprietor) is declared bankrupt but is allowed to retain estate-related assets and to restructure debt obligations for eventual payment. No creditor approval is required.

Basis: The original cost and any additional expenditures represent the cost basis in equity investments or property. The Internal Revenue Service (IRS) computes the taxable gain, profit, or appreciation on the difference between the basis and the actual amount of sale. Therefore, defining basis as original price, and not as total cost, may incorrectly result in an inflated tax liability.

Basis Point: Is a measure of the variation in financial instruments which often fluctuate in very small increments. One basis point is equal to .01%; therefore, 100 basis points are equal to 1%. For example, a yield that has increased from 5.46% to 5.58% has increased 12 basis points.

Bear Market: A financial market condition that is characterized by an extended period of declining prices, usually by 20%. A prolonged downturn of general economic activity is often the catalyst for a bear market in stocks, whereas, rising interest rates are typically responsible for a bear market in bonds. The bear market is the opposite of the bull market.

Beneficiary: The person or entity named in a life insurance policy, a qualified retirement plan, or an annuity, who is eligible by the terms of such a policy or plan, to receive benefits upon the death of the insured or the plan participant.

Bequest: Also known as a legacy. Property gifted through a will.

Beta: The measure of a security’s price fluctuations (volatility) relative to an appropriate market index. For example, the Standard & Poor’s 500 Stock Index (S&P 500) has a beta of 1. Stocks with betas greater than 1 are subject to more rapid and extreme price fluctuations than the market. Conversely, price fluctuations for stocks with betas less than 1 are less frequent and smaller than the market. Conservative investors generally seek securities with lower beta values, while aggressive investors seek those with higher beta values.

Bid and Ask Price: The highest price a prospective buyer offers to pay for a security is a bid. The ask price is the lowest price a seller is offering. A quotation reflects both prices, and the difference between the bid and the ask price is called the spread.

Blue-Chip Stock: The common stock of a well-established company with a strong reputation and a long history of earnings growth and dividend payments. Examples of blue-chip companies include General Electric, International Business Machines (IBM), and DuPont.

Board of Directors: An elected group who generally set company policy and procedures, as well as appoint senior executives and officers. The board of directors must abide by and execute the company’s charter. A board member may be unaffiliated with the corporation, representing community interests, professional organizations, or industry establishments.  

Bond: This debt security issued by a corporation, government, or governmental agency obligates the issuer to pay interest at pre-determined intervals and repay the principal at maturity. Every bond has a set face value, also known as a par value, which names the amount of money the bondholder will receive when the bond reaches the date of maturity. The face value will never change, but the market value of a bond may fluctuate. If a bondholder sells a bond before its date of maturity, he or she may receive more or less than the face value.

Bond Fund: A mutual fund investing in bonds issued by the U.S. government, a municipality, or a corporation. Bond funds usually emphasize interest income rather than growth. Unlike bonds purchased by an individual investor, bond funds do not guarantee an interest rate, a maturity date, or a return of principal.

Book Value: Also known as net asset value (NAV), this is the total net assets of a company. On a per share basis, book value may be expressed according to individual shares of common or preferred stock and units of bonds. The book values of mutual funds are computed every day.

Broker: A financial professional who is a mediator between the buyer and seller during the trading of services or property, such as securities, real estate, insurance, or commodities. In return for services, the broker generally receives a commission.

Budget: Projected income and expenses for a given period. A surplus budget indicates profits are expected, a balanced budget anticipates that revenues will equal expenses, and a deficit budget suggests expenses will exceed expenses.

Bull Market: A financial market which is characterized by an extended period of rising security prices, usually by 20%. A high volume of trading often occurs in a bull market, which is the opposite of a bear market.

Burn Rate: During the initial “start-up” phase of a business, overhead expenses usually exceed operating income, resulting in a negative cash flow. Investors, especially venture capitalists, refer to the period between inception and the onset of an established positive cash flow as the burn rate.

Business Succession: The predetermined process that addresses the future orderly transfer of a business entity and plans for every alternative contingency that would affect any transfer. Business succession broadly involves legal, financial, tax, and family concerns.

Buy-and-Hold: This investment strategy advocates holding securities for the long term, while ignoring short-term price fluctuations in the market. Unlike market-timing investors, who actively buy and sell securities hoping to turn quick profits on short-term price fluctuations, investors who buy and hold securities hope for substantial gains over time.

Buy-Sell Agreement: This written, legal contract provides for the purchase of all outstanding shares from an owner who wishes to sell, wants to terminate involvement, is permanently disabled, or has died. A buy-sell agreement generally allows for a different, future ownership structure. The agreement may be funded with life and disability income insurance, and it may contain specific purchase arrangements.

Bylaws: Rules of an organization that govern internal procedural issues. In contrast, a charter typically addresses corporate structure and ownership issues. Bylaws may be amended by formal vote of the board of directors, and must conform to existing state and federal laws.  

C

Cafeteria Employee Benefit Plan: Also known as flexible benefit plans, cafeteria plans offer a variety of benefit options from which individual employees may select. Depending on personal needs and finances, employees may voluntarily elect benefits of their choice.

Call Loan: A loan agreement contains a provision that states the balance may be demanded by the lender with notice. Failure to pay installments may be sufficient cause for a lender to call a loan. Banks frequently issue call loans to brokers for covering customer account transactions. Many newspapers publish the call loan interest rate charged on a 24-hour callable loan.  

Call Option: A contract, for which a premium is generally paid, that grants the holder the right to buy a fixed number of shares of a certain stock, at a predetermined rate (the strike price), for a certain length of time. Because an option allows the holder to buy shares at a set price, the holder may be able to buy shares at less than the market value, if the market price of the shares rises above the set price. If stock prices remain the same or decrease, the holder, who is not obligated to purchase shares, can let the option expire.

Callable Bond: A debt security that grants the issuer the right to redeem the bond before it reaches maturity as outlined in a prospectus, which generally lists the first date it may be called. A bond is generally at risk of being called if interest rates fall significantly, and the market value of the bond falls below the par value.

Capital Appreciation: The increase in value of a security. For example, a stock purchased at $20 per share, but now worth $25, has appreciated $5 per share, which equals a 25% return on capital.

Capital Asset: Tangible property not relevant to a specific business venture. Capital assets may include buildings, factories, fixtures, furniture, machines, office buildings, and security systems.

Capital Budget: Itemization of a financing period and a payment schedule. The process in which a business determines what projects are worth pursuing.

Capital Expenditure: The use of existing financial resources to purchase or improve buildings, equipment, land, machinery, or other similar items.

Capital Gain: The amount by which an asset's selling price exceeds its initial purchase price. A realized capital gain is an investment that has been sold at a profit. An unrealized capital gain is an investment that hasn't been sold yet, but would result in a profit if sold. Capital gain is often used to mean realized capital gain.

Capital Gains Distribution: A payment of proceeds to shareholders prompted by a fund manager’s liquidation of underlying stocks and securities in a mutual fund.

Capital Gains Tax: A type of tax levied on capital gains from the sale of securities, or other assets, such as land, buildings, equipment, and furniture.

Capital Goods: Tangible property (e.g., factories, inventories, machines, raw materials, and warehouses) used in the manufacturing of products.

Capital Growth Fund: Also called a growth fund. A mutual fund with the objective of providing long-term capital gains and high potential future income, rather than current income. Capital growth funds are more aggressive than common stock funds, generally investing in more speculative issues.

Capital Loss: A decrease in the value of an investment or a capital asset from its purchase price.

Capital Requirements: The financial resources needed to maintain a productive, continuous business enterprise.

Capitalization Rate: A rate of return on a real estate investment property based on the expected income that the property will generate. Capitalization rate is used to estimate the investor's potential return on his or her investment. Capitalization Rate = Yearly Income/Total Value

Capitalization Ratio: Analysis of a business frequently includes the ratio of long-term debt and existing equity classes to the overall capital structure of a company. Short-term debt, liabilities, and accounts receivable are not included in this ratio. The capitalization ratio is often used to evaluate risk.

Cash Advance: This instant loan may be obtained from a line of credit or a credit card account. Issuers generally charge interest from the date the advance is made until it is repaid. They may also charge a transaction fee based on the amount of the advance.

Cash Basis: This accounting method recognizes cash inflows or outflows when they are actually expended or received. Accrual accounting, in contrast, recognizes income and expenses at the time revenue is earned (but not necessarily received) and liabilities are incurred (but not necessarily paid).

Cash Budget: A budget that is used to quantify an immediate, short-term cash flow. Reviewing daily, weekly, and monthly receivables and expenditures is essential for a resolution to establish credit lines or invest short-term idle cash.

Cash Flow: This accounting statement shows the aggregate of all cash inflows and outflows. The total during any given specified time period may be expressed as positive cash flow or negative cash flow.

Cash Surrender Value: The amount the policy owner receives when voluntarily terminating a cash value life insurance or annuity contract before its maturity or the insured event occurs. Computation of the cash surrender value is stated, by law, in the contract.

Cash Value: The accumulated cash buildup in a whole life policy that a policyholder receives if the policy is redeemed before its maturity or the policyholder’s death.

Cash Value Life Insurance: Also known as permanent or ordinary life insurance, it is life insurance with a cash value, such as whole life or variable life. This generally refers to most forms of life insurance other than term.

Casualty Loss: These usually sudden and unexpected losses are due to damage, destruction, fire, or theft. Generally, they are reimbursed either in full or in part by insurance contracts. Amounts of compensation listed for losses are not usually tax-deductible if full restitution is made by the insurance carrier. However, claims denied or not covered are potentially tax-deductible.

Certificate of Deposit (CD): An agreement with a commercial bank that promises a fixed interest rate on funds deposited for a specified period of time. Issued in denominations ranging from $100 to $100,000, with maturities ranging from a few weeks to several years, CDs typically earn compound interest and are insured by the Federal Deposit Insurance Corporation (FDIC) up to $100,000. There may be a penalty if funds are withdrawn before reaching maturity.

Certified Financial Planner (CFP): One who has successfully passed the exams of the Certified Financial Planner Board of Standards Inc., earning certification as a financial advisor. Areas of expertise generally include banking, investments, retirement, estate planning, insurance, and taxes.

Certified Public Accountant (CPA): An accountant licensed by the state in which he or she works. Duties generally include auditing, accounting, and filing tax returns.

Charter: The articles (by the founders) and certificate (by the state) of incorporation comprise the charter of a company. The charter gives the name of the company, the purpose, the board of directors’ names, and amount of authorized shares.

Check: This written, signed, and dated instrument allows for the transfer of money from a bank account to a payee.

Claim: A claim is a request for payment under the terms of an insurance policy.

Claims-Paying Ability Rating: This figure provides an assessment of an insurance company’s ability to pay claims, relative to other insurance companies.

Closed Corporation: A private company either owned by a family or by management in its entirety. The shares of a closed corporation are not traded publicly.

Closed-End Fund: A fund with a fixed number of shares outstanding, and one that does not redeem shares the way a typical mutual fund does. Such funds are often listed on a major stock exchange and trade like other securities. Unlike a typical mutual fund, a closed-end fund's share price can trade above or below its net asset value (NAV).

Closing: A reference to the end of a trading session or to the process of transferring real estate from a seller to a buyer.

Closing Costs: Also called settlement costs, these expenses include any costs (over and above the price of the property) involved in transferring real estate from a seller to a buyer. Typically included are fees or charges for loan origination, discount points, appraisal, property survey, title search, title insurance, deed filing, credit reports, taxes, and legal services. Closing costs do not include points and the cost of private mortgage insurance (PMI).

Cloud on Title: An apparent or potential claim, lien, or right on real estate. When present, the title is not clean, and a quitclaim deed must be filed to resolve the potential hindrance. For instance, a paid loan with property secured may not have been recorded, or a deceased owner may not have been removed from the deed to a house or title of a car.

Codicil: A written supplement to a will.

Combined Financial Statement: An individual or corporation may own more than one affiliated business enterprise. Each has a complete set of financial documents. To provide a financial overview of all affiliates, a combined financial statement will present side-by-side accountings of balance and net worth statements.

Commercial Loan: Businesses in need of short-term financing will frequently bolster immediate cash flow with a commercial loan. The loan will be based on the credit worthiness of the business and/or owner and the prime lending rate.

Commercial Paper: This unsecured, short-term debt instrument is used by corporations to fund short-term liabilities. Since firms must have high-quality debt ratings to secure this funding, commercial paper is usually considered a safe investment. Maturity on the investment is usually less than six months.

Commission: This fee is charged by an agent for his/her services in facilitating a transaction, such as buying or selling securities or real estate, based on the dollar amount of the trade, the transaction, or the number of shares involved.

Commitment: This written agreement specifies the terms and conditions under which a lender will loan and a borrower will borrow funds to finance a home.

Commodities: Bulk goods, such as cotton and metals, commonly used to produce consumer goods, and traded on a commodities exchange. Currency may also be considered a commodity. Commodity prices are generally determined by supply and demand.

Common Stock: This security represents partial ownership, also called equity, in a corporation. Common stock ownership entitles a shareholder to participate in stockholder meetings and to vote for the board of directors.

Compensating Balance: The account balance that is required to maintain a line of credit. A percentage of credit actually used might require an increase in the compensating balance and an additional deposit.

Compounding: The process of applying investment growth not only to the original investment, but also to income and gains reinvested in prior periods. To illustrate, if you earn compound interest on savings, you earn interest on the principal amount and the accumulated interest, as it is earned. If you earn simple interest on savings, you earn interest based only on the principal amount.

Conglomerate: A corporation that is made up of a number of different, seemingly unrelated businesses. A conglomerate, containing diverse business entities, does not violate antitrust laws.

Consolidation Loan: A loan that combines and refinances other existing loans or debt. It is usually designed to reduce an individual’s total monthly debt payment.

Construction Loan Note: This short-term obligation, in the form of a note, is used to fund a construction project. In most cases, the note issuers will repay the note obligation using a long-term bond, the proceeds of which can pay back the note. As an example, a city might use a construction loan note to fund a housing project to meet the demands of its growing population.

Consumer Price Index (CPI): A measure of inflation calculated monthly by the U.S. Bureau of Labor Statistics. The CPI tracks price changes in basic goods and services, such as housing, health care, food, transportation, and electricity.

Contingent Beneficiary: On most insurance applications, owners have the option to name a primary beneficiary and a contingent or secondary beneficiary. At the death of the insured, a death benefit may be payable to a beneficiary. If the primary beneficiary revokes, is ineligible, or is deceased, the contingent beneficiary receives the proceeds. When no individual is named, proceeds are usually payable to the deceased’s estate.

Contingent Liability: The possibility of an obligation to pay certain sums on future events. It also refers to defined obligations for which the chances of payment are minimal.

Controlled Group: The Internal Revenue Code (IRC Section 1563) determines that the common ownership of stock by one company in another company may represent a controlled group. Under certain circumstances, a parent company with subsidiaries, a brother-sister group, and a combined group will qualify as a controlled group and be treated as a single employer. A controlled group status has implications for the deductibility of contributions of an employer to an employee’s trust, annuity plan, and compensation under a tax-deferred retirement plan (IRC Section 404).

Convertible Term Insurance: In contrast to nonconvertible term life insurance, convertible term insurance provides the policyholder with a voluntary right (as described in the policy) to convert the face amount of coverage in term insurance to a guaranteed identical face amount of whole life insurance.

Copyright: A Federal statute protecting the works of artists and authors, and allowing the holder of the copyright to determine who may publish such copyrighted materials.

Corporate Bond: This debt security is issued by a corporation, as opposed to the government, and it obligates the issuer to pay interest periodically and repay the principal at maturity. Corporate bonds generally feature higher interest rates because of the possible default risk, and the interest earned is often taxable.

Corporation: State and Federal laws permit a group of people to act jointly for business and tax purposes. Individuals who comprise the corporation are able to incur debt and realize profit without immediate legal or taxable liabilities. The corporate entity provides the advantages of attracting outside capital by selling shares of ownership; protecting owners from liability beyond their investment outlay; providing continuity of operations beyond the lives of current shareholder owners; and providing for change of ownership through transfer of shares.

Correction: Reverse movement, usually downward, in the price of an individual stock, bond, commodity, or index, which brings it more in line with its underlying fundamental value. If prices have been rising on the market as a whole, and then fall dramatically, this is known as a correction with an upward trend.

Co-Signer: This individual adds his or her signature to a loan or a credit card agreement along with the principal applicant, thereby assuming responsibility for the outstanding balance if the applicant defaults.

Cost Basis: The original price paid for an investment; the purchase price and subsequent cost of capital improvements and alterations, except maintenance and repair; and the elected value on Form 706 of an inheritance, called “date of death valuation.”

Cost Benefit Analysis: An analysis that ascertains that each planned expenditure will be of benefit to the business. For example, a business may consider the purchase of a new piece of equipment that will increase efficiency and reduce costs.

Cost of Capital: The cost of funds used for financing a business. Some may use the term “opportunity cost.”

Cost of Insurance: The total premium outlay paid for a potential death benefit from a life insurance policy. On an annual basis, the policy owner may consult a government publication, or if available, the annual renewable term rates from the carrier for the “pure” insurance cost at each attained age.

Cost of Occupancy: A representation of the total cost incurred to occupy a business property or location without considering costs expended in the operation of a business.

Cost-Plus Contract: In business situations where the estimated completed cost may not be ascertainable, a cost-plus contract calls for full payment for all costs incurred plus a stated percentage or fixed fee amount. The contract guarantees the provider no loss in providing the product or service to a customer.

Covenant not to Compete: A contract to sell a business, offer employment, or form a partnership often includes a clause that obligates a party to refrain from performing similar professional or business activities. The legal enforcement of a covenant not to compete depends on the wording, compensation, duration, and situation.

Coverdell Education Savings Account (Coverdell ESA): Formerly known as the Education IRA, this savings vehicle allows parents to accumulate tax-deferred savings on money earmarked for a child’s college education. There are limits on income eligibility and on how much may be set aside per year.

Covered Compensation:  Each year, the Internal Revenue Code establishes the minimum and maximum levels of covered compensation subject to an Old-Age, Survivors, and Disability Insurance (OASDI) premium tax. This amount is factored into integration plan computations for employee benefit plans.

Credit History: A record of how a party has paid past debts.

Credit Line: This revolving agreement allows a person to borrow any amount up to a preapproved limit for purchases or cash advances. As the outstanding balance is paid off, credit again becomes available to fund new purchases or cash advances.

Credit Management: The way in which an individual handles borrowed money. For example, a person who pays more than the minimum due on a credit card, and does not exceed his or her credit limit, practices good credit management.

Credit Rating: This formal assessment evaluates the ability of individuals and corporations to handle credit. The credit rating, which may be used by lending institutions when considering loan applications, is based on a party’s history of borrowing and repayment, as well as the availability of assets and the extent of liabilities.

Credit Reference: An individual who can vouch for a credit applicant’s creditworthiness by providing information on his or her employment history, personal reliability, or other relevant factors.

Credit Report: A report that discloses an individual’s credit history. For use by lenders, prospective employers, and landlords to determine creditworthiness. The information is gathered and sold by credit reporting agencies. It includes personal information, such as age, marital status, current and former addresses, Social Security number, and employment information. It also lists the names of credit issuers, current account balances, and the timeliness of payments. Missed or late payments may remain on a credit report for seven years; bankruptcy is listed for ten years.

Current Assets: Business cash, account receivables, inventory, and assets that are most likely to have a noncash life cycle of less than one year.

Current Balance: Includes any unpaid balance from prior months, plus new purchases, cash advances, interest, and charges, such as a late fee or annual fee.

Current Liabilities: Existing, planned debts and fixed liabilities or obligations (for example, salaries, taxes, and insurance premiums) discharged within one year.

Current Ratio: The potential of a company to pay current liability with current assets.

D

Day Trader: An individual who buys and sells investments in the same day, generally trying to capitalize on and profit from quick price changes in the short term.

DBA/Doing Business As: In many cases, self-employed individuals or sole proprietors will conduct a business operation with a unique trademark name. To maintain identification and to have a public record of the business operation, the owner should file for a DBA with the proper local governmental agency.

Death Benefits: Payments from an insurance policy or an Individual Retirement Account (IRA) to a beneficiary.

Debit Balance: The balance in accounts receivable represents the debit balance for each individual order per account number.

Debit Card: A debit card is issued by a bank to allow an individual access to his or her funds without having to physically go to the bank. A debit card can be used to withdraw cash from an automated teller machine (ATM) or to make purchases at merchant locations. At the time of use, funds are immediately deducted from the checking or savings account linked to the card.

Debt: Debt is the legal obligation, written or oral, to deliver a product, service, or cash.

Debt Service Coverage: The percentage of cash flow needed within a span of twelve months to cover principal and interest payments on a debt obligation.

Debt-to-Equity Ratio: The ratio of total debt to total shareholder equity indicates an entity’s capacity to repay outstanding creditors. In addition, long-term debt as a function of shareholder equity indicates the degree of leveraged money to improve shareholder rates of return.  

Debt-to-Income Ratio: The ratio of total debt divided by gross income. It is often used by a lender to determine if a loan applicant has sufficient income to meet the obligations of a new loan.

Decreasing Term Insurance: This term insurance policy has a death benefit that decreases over time. Decreasing term insurance is often used in conjunction with a mortgage or other amortized debt. For example, a holder of a 30-year mortgage may also hold a 30-year decreasing term insurance policy to cover the mortgage if he or she dies before it is paid off.

Deed: A document identifying legal ownership of real estate and used to transfer it from a seller to a buyer.

Deferred Annuity: This type of annuity pays an income or lump sum at a future date, as specified in the terms of the contract.

Deferred Compensation: The deferral of constructive receipt of current earned income or compensation to a later date, usually retirement, so future receipt might experience a potentially lower marginal tax rate.  

Defined Benefit Plan: This employer-funded retirement plan is designed to pay a predetermined benefit to an employee on years of service and salary or wages. Employer contributions adjust annually on an actuarial basis, and the employer is responsible for all investment selections and decisions.

Defined Contribution Plan: Through this retirement plan, an employer sets aside a certain amount or percentage of salary each year for the benefit of employees. In contrast to defined benefit plans, the employer contribution is fixed, but the employee benefit is not. Some plans allow employees to make voluntary, individual contributions and to choose the investment mix of their individual monies.

Deflation: The opposite of inflation, deflation is the reduction in the price of goods and services. Deflation can be caused by a decrease in the supply of money or credit, or by a reduction in spending by individuals or the government.

Dependent Student: An unmarried student under age 24 with no dependents, who still relies on parental support.

Depreciated Cost: The original cost or purchase price of a property (asset) minus the current decline in value over its projected lifetime.

Depreciation: Depreciation is the decreasing value of a fixed asset during its projected life expectancy. The Internal Revenue Service permits several processes to calculate annual depreciation amounts over asset life expectancy, resulting in certain tax consequences. Depreciation can also refer to the decrease in value of one currency in relation to another.

Derivative: This characteristics and value of this financial instrument depend upon the value of an underlying instrument or asset, typically a commodity, bond, equity, or currency. Examples include futures and options.

Derivative Action: When a minority stockholder brings civil action against a corporation for its failure to take action as a fiduciary against the “mismanagement” and “bad” direction of the company.

Diminution of Value: The difference between the value of property after construction and its current value, resulting from a breach of contract.

Direct Rollover: A direct rollover is the tax-free transfer of money or property from the trustee or custodian of one qualified retirement plan or account to another.

Disability Benefit: Benefits received from an insurance policy that are payable if the insured becomes totally (and, in some cases, partially) disabled.

Disability Income Insurance: This policy pays a portion of the insured’s income in the event that a temporary or permanent total disability prevents the insured from working.

Discount Broker: A broker who buys and sells securities at lower rates than a full service broker. Discount brokers generally do not offer all the services of full service brokers, such as research and advice.

Discounted Cash Flow: A method of establishing the value of a future stream of income payments from a capital investment. The rate of return chosen should be equal to or higher than the rate of return available on a risk-free investment.

Diversification: This investment strategy is designed to reduce the risk of investing in a single industry/market sector or a small number of companies by spreading the risk over several industries/market sectors or a larger number of companies. The operating assumption is that diversified investments are unlikely to all move in the same direction, allowing the gains of one investment to offset the losses of another.

Dividend: A taxable payment declared by a company's board of directors and given to its shareholders out of the company's current or retained earnings. Usually quarterly and generally given as cash (cash dividend), but it can also take the form of stock (stock dividend) or other property. Usually on a quarterly basis, the board of directors of a company votes to distribute dividends to shareholders. In participating whole life insurance policies, a dividend is credited based on lower mortality experience, fewer expenses than projected, and higher than expected earnings from investments. Most mutual funds pay dividends on a regular basis from the income received. However, for tax purposes, the dividend represents capital gains, interest, and dividends received from the investment vehicles selected.

Dividend Options for an Insurance Policy: Five of the most common elections for dividend options include the policy owner’s election to receive cash, apply to reduce premiums due, deposit in an interest-bearing reserve, purchase additional term insurance to increase the face amount, and purchase paid-up additional insurance.

Dividend Reinvestment Plan (DRIP): A company arrangement that automatically reinvests a shareholder’s dividends into more shares of the company’s stock. Because investors may buy shares directly from the company, brokerage fees are limited. In addition, DRIPs provide shareholders with the opportunity to regularly purchase shares and take advantage of dollar cost averaging.

Dividend Types:

  • Cumulative: A stipulation that a dividend not paid as scheduled would be added to the subsequent scheduled dividend in the future.
  • Additions: A dividend option in a traditional whole life insurance policy used to purchase paid-up additional insurance amounts without evidence of insurability.
  • Preferred: Cash paid to one class of stock prior to payment to common stock shareholders.
  • Stock: Instead of cash payment, stockholders receive additional shares of stock. The total distribution of shares remains in parity with other shareholders.
  • Liquidation: In completing the termination of a business venture, shareholders usually receive a final distribution of any net profit or loss.

Dividend Yield: The annual percentage return of a dividend-paying stock. To calculate the current yield, divide the dividend received on each share by the share’s current market price. For example, a stock with a share price of $40 that pays a dividend of $1 per share will have a dividend yield of 2.5%. The dividend yield does not reflect a return based on an original investment.

Dollar Cost Averaging: This method invests a fixed dollar amount in securities at set intervals, regardless of market prices. With this approach, an investor buys more shares when prices are low, and fewer shares when prices are high. This generally results in a lower average cost per share than if the investor had purchased a constant number of shares at the same periodic intervals.

Double Taxation: The result of tax laws that cause the same earnings to be taxed twice. Business profits and income of sole proprietors, partnerships, and S corporations receive taxation only at the individual taxpayer level. However, C corporations experience taxation at the corporate level, and the individual taxpayers pay taxes on dividends.

Dow Jones Industrial Average (DJIA): The price-weighted average of 30 actively traded blue-chip stocks. Commonly referred to as “the Dow,” this average is widely used to measure the performance of U.S. financial markets.

Due Date: The day on which payment on a debt is due to a creditor. After this date, the creditor may assess a late fee, or consider the account delinquent and report it to a credit reporting agency.

Durable Power of Attorney: A legal document that authorizes an individual to act as “attorney-in-fact” on behalf of the individual signing the document.

E

Early Withdrawal: The removal of funds from a fixed-term investment before the maturity date or from a tax-deferred investment or retirement savings account before a fixed time. One example would be a distribution from an Individual Retirement Account (IRA) taken before age 59½, other than for death or disability. Early withdrawals may be subject to a penalty.

Early Withdrawal Penalty: A 10% Federal income tax penalty levied against withdrawals from a qualified retirement plan (e.g., IRA, 401(k) plan, or profit-sharing plan) that are taken prior to age 59½. Certain situations may qualify as exceptions, for example, if an individual is disabled, has higher education expenses, has first-time homebuyer expenses, has unreimbursed medical expenses that exceed 7.5% of adjusted gross income (AGI), is responsible for medical insurance premiums as a result of unemployment, is receiving payments in the form of an annuity, or is a beneficiary.

Earnings Report: Issued by large companies to the general public usually in a quarterly or annual statement. These reports include total sales, net income, average shares, and share earnings.

Electronic Banking: Many banking institutions provide computerized network services that provide account holders access to their accounts by personal computer. Customers may make payments directly to stores, credit card accounts, mortgage companies, utility companies, and other creditors. Individuals having two or more bank accounts may also transfer cash between accounts.

Electronic Commerce: Electronic Commerce, also known as Ecommerce, refers to the use of the Internet by an individual or business to conduct business, buy or sell goods, or provide or purchase a service.

Electronic Funds Transfer System (EFTS): Funds may be electronically transferred between accounts of buyers, sellers, and other individuals. This service allows for direct deposits or withdrawals without processing written checks.

Emerging Market Funds: A mutual fund investing primarily in developing countries that are becoming industrialized. Emerging market funds tend to be highly volatile.

Employee Benefit Plan: The total compensatory package of employee benefits offered by an employer beyond the salary or wage scale.

Employee Benefit Plan Document: All qualified pension plans require submission of an approved plan document outlining terms of the plan, the funding of benefits, and the administration by the plan sponsor.

Employee Pension Benefit Plan: An employer-sponsored benefit plan for eligible employees to provide additional retirement accumulations through pre-tax and tax-deferred contributions.

Employee Retirement Income Security Act (ERISA): Most pension and retirement plans became subject to government overview and the establishment of several Federal limitations and practices under ERISA in 1974.

Employee Stock Ownership Plan (ESOP): This employer-sponsored program encourages employees to purchase shares of their companies, thereby aligning the interests of a company’s employees with those of its shareholders. An ESOP may be part of a bonus or retirement package, and it may allow employee-shareholders to participate in management of the company.

Employee Welfare Benefit Plan: In contrast to pension plans, employees are offered fringe-benefit or employee welfare benefit plans, which may include health, disability, paid vacations, paid state and national holidays, or compensation to beneficiaries at death. In some plans, the health portion of coverage may describe dollar or percentage coverages for medical, surgical, or hospital needs based on an itemized schedule.

Endowment: Any assets, funds, or property that is donated to an individual, organization, or group to be used as a source of income.

Endowment Policy: A specific form of insurance that pays the face amount on a maturity date, assuming the insured is still living. With the advent of more investment control by  policy owners, and variable death benefits, the popularity of endowment policies has declined.

Equity: Anything that represents ownership interests, such as stock in a company. Equity also generally refers to the difference between an asset’s market value and the debt against it. For example, if you own a car valued at $15,000, but owe $10,000 on a car loan, your equity in the car is $5,000.

Equity Income Fund: A conservative mutual fund with the objective of attaining income and growth from blue-chip stocks and utilities that pay high dividends. Equity income funds favor long-term growth with a limited risk to principal.

Equity Loan: This type of loan allows a homeowner to borrow against the accumulated equity in his or her home using the property to secure the debt. An equity loan may be structured as a line of credit the homeowner can access with a check or credit card.

Escrow: This independent third-party agent or account assumes possession of a contract, a deed, or money from a grantor until completion of any outstanding obligations or commitments. Upon the satisfaction of all parties, the agent delivers the property held in escrow to the grantee.

Estate Planning: This process plans for the orderly administration and disposition of assets after the owner dies.

Estate Tax: These Federal and/or state taxes are levied on the assets of a decedent (person who dies). Estate taxes are paid by the decedent’s estate rather than his or her heirs.

Estoppel: An act of law that prevents someone from continuing to make untrue statements or assertions that are contrary to fact, previous representations, and the law. Estoppel prevents statements intentionally made to mislead an innocent person or to openly deny the truth.

Excess Compensation: In a benefit pension plan that is integrated with Federal old-age, survivors, and disability insurance (OADSI), excess compensation is above that specified amount upon which calculations for future benefits are based.

Exchange Privilege: The ability of mutual fund shareholders to transfer assets between funds within a fund family, often at no additional charge. For example, suppose you have money invested in a growth fund, which has an objective of providing high potential future income, but you would like a fund that provides more immediate income. Exchange privilege may allow you to shift your investment to an income fund, which generally seeks to maximize current income.

Executor: This person is named under a will to administer the distribution of the deceased’s assets as directed by the will. An executor is often a family member, a trusted friend, or a bank trust officer.

Expected Family Contribution (EFC): The amount a student and his or her family are expected to pay toward the student’s college costs.

Expense Ratio: The percent of a mutual fund shareholder’s total investment paid as operating expenses and management fees. For example, if a fund has an expense ratio of 1%, an investor will be charged $1 for every $100 invested. Mutual funds with lower expense ratios are able to distribute a higher percentage of their total returns to their shareholders.

F

Face Value: The value of a bond at maturity as noted by the issuer on the face of the bond, also known as the par value. Interest payments are based on the face value, which is not an indicator of market value.

Family Limited Partnership (FLP): This partnership of family members is set up to arrange for generational transfers, maintain control within the general partners, and reduce potential liability to the transferor and transferee. Family limited partnerships utilize the benefits in wealth preservation, taxation, credit protection, and estate planning.

Family of Funds: A group of mutual funds operated by the same company. Each fund generally has a different objective. For example, one may be a growth fund, another may be a growth and income fund, and still another may be a money market fund. Shareholders are often allowed to transfer their assets between funds at no additional cost.

Federal Deposit Insurance Corporation (FDIC): A government agency that guarantees deposits in the event a member bank fails. Coverage is generally restricted to $250,000 per account.

Federal Home Loan Mortgage Corporation (“Freddie Mac”): A shareholder-owned corporation that buys mortgages from lending institutions, then packages them as mortgage-backed securities, and resells them to investors.

Federal Methodology (FM): A formula established by Congress and used to calculate the Expected Family Contribution (EFC) for higher education costs. The FM excludes family assets, such as home equity.

Federal National Mortgage Association (“Fannie Mae”): A shareholder-owned corporation that buys mortgages, often from the U.S. Federal Housing Administration (FHA), then packages them as mortgage-backed securities, and resells them to investors.

Federal Reserve System (The Fed): This seven-member Board of Governors oversees Federal Reserve Banks, establishes monetary policy (interest rates, credit, etc.), and monitors the economic health of the country. Its members are appointed by the President, subject to Senate confirmation, and serve 14-year terms.

Fee Simple: A conveyance of ownership in property is fee simple when transferred to another individual without restriction, exclusion, or any future circumstance that would limit absolute right to, or enjoyment of, the property.

Fiduciary: An individual who provides investment advice for a fee or who exercises discretionary authority or control in managing assets. Also, a fiduciary can refer to an individual, company, or association responsible for holding assets in trust and investing them wisely for the benefit of a trust’s beneficiary. Examples of fiduciaries include trustees, bankruptcy receivers, and executors of wills and estates.

Finance Charge: The cost of consumer credit, including interest.

Financial Aid: Financial aid refers to the financial support a student receives from federally and privately funded sources in order to attend college. Financial aid includes loans, grants, scholarships, and work-study programs.

Financial Aid Officer (FAO): An employee of a college, university, or other eligible school, who administers the financial aid process.

Financial Statement: In terms of a business, it is a written record concerning the financial circumstances of a company, firm, or organization. Such a statement generally includes balance sheets, changes in retained earnings, profit and loss statements, cash flows, and other forms of financial analysis that are beneficial to management.

Financial Structure: A complete listing of all debt (borrowed funds) and equities (ownership) constitutes the financial structure of a business.

First-to-Die Life Insurance: This type of life insurance policy covering two or more people pays the death benefit when the first person dies.

Fixed Annuity: An investment contract sold by a life insurance company that guarantees regular payments to the purchaser for a specified period of time, or for life. The purchaser generally pays a premium either in a lump sum or in installments.

Fixed-Income Fund: A mutual fund with the objective of providing current income by investing in fixed-income securities, such as government bonds, corporate bonds, municipal bonds, or preferred stock.

Fixed-Income Investment: A security that pays a fixed rate of return on a regular schedule, such as a bond or a certificate of deposit (CD). Fixed-income investments are generally considered less volatile than other investment vehicles, such as common stock and, as a result, they tend to provide lower rates of return and less protection against rising inflation.

Fixed-Rate Mortgage: A mortgage that has a set interest rate that will not vary for the life of the loan.

Floating Debt: Refers to the use of government Treasury bills or short-term corporate bonds which, when continually renewed, pay off current liabilities or finance cash flow.

Flood Insurance: Insurance that protects against losses that are a direct result of flood damage. Flood insurance may be required by lenders for property located in flood zones.

For Sale By Owner (FSBO): When the sale of a home is attempted directly by the owner, the owner assumes all fiduciary responsibilities involved with the execution of all legal contracts, documents, and transactions.

Foreclosure: The legal procedure by which a mortgage holder, such as a bank, savings and loan, or private individual, can seize the property of a borrower who has not made timely payments on a mortgage. The lender must obtain a court order to seize the property, which it may then sell to satisfy the debt.

Forfeitures: Employees who terminate from an employer’s pension plan are forced to forfeit non vested employer contributions. These forfeitures may be applied as credits to remaining employee accounts or used to offset future employer contributions, depending on the pension plan.

Form 10-k: A public disclosure that the Security and Exchange Commission (SEC) requires when a company has $1 million dollars in gross assets, is listed on a securities exchange, is a registered security, and has 500 or more shareholders.

Franchise: A license may be granted by a business or company allowing a designee to sell and market its products or services in a fixed geographic area. Usually consummated with an initial cash requirement, the agreement may offer consultation, financing, promotional assistance, or other stated benefits on an arranged percentage of sales basis.

Fringe Benefits: Opportunities and services offered beyond wages or salary in compensation for employment. They are not generally taxable to the employee, but they may have tax benefits to the employer. The employer contribution may be full payment, partial payment, or merely providing the opportunity for employee involvement. Some common fringe benefits may include paid holidays, sick days, paid vacation days, insurance coverage, or retirement plans. Other less common benefits are a company car, an expense account, and stock options.

Front-End Load: This sales fee (load) is paid up-front by investors at the time they purchase an investment. The front-end load is deducted from the investment amount, thus lowering the size of the investment.

Full-Time Employees: The Internal Revenue Service mandates minimum participation standards of qualified employee benefit plans. Most individuals qualify as full-time employees after at least 1,000 hours of employment over 12 consecutive months. However, individual states or employers may require other criteria for eligibility for employee welfare benefit plans.

Futures: An agreement to buy or sell a specific amount of a commodity or financial instrument at a set price on a specific future date.

G

General Ledger: This contains all the financial accounts and statements of a business, including its debits, credits, and balances.

General Partner: Someone who is presumed to be the authorized agent of the partnership and of all other partners for all purposes within the scope and objectives of the business. The term general partner refers to all the members of a general partnership, as well as all general partners of a limited partnership.

Gift: A voluntary transfer of assets or property from the transferor to the transferee with no compensation. The transferor cannot retain any incidence of ownership (e.g., control, possession, enjoyment, right to income, or power to designate persons who will receive benefits of ownership) after relinquishing control in the transferred gift.

Gift Tax: A tax levied by the Federal government, and some states, on assets transferred from one person to another. The tax rate increases with the value of the gift. The donor pays the tax, not the recipient.

Global Fund: A mutual fund investing in securities worldwide including the United States. In addition to managing trends in particular securities markets, global funds must also manage foreign currency movements.

Going Concern Value: In contrast to a book value, the going concern value is usually higher for an operating business venture. The presence of significant goodwill and a sizable return on equity usually exceeds net worth.

Going Public: When a company makes an initial public offering (IPO), and sells shares of its stock to the public for the first time.

Golden Boot: Offering lucrative financial incentives or an extension of benefits usually to persuade an older employee to exercise the option for “early retirement.”  This voluntary election by an employee helps avoid any conflict with age discrimination codes.

Golden Handcuffs: Providing additional benefits to a valued and productive employee as an inducement to remain with the company.

Golden Parachute: A benefits package secured by top executives if a layoff occurs due to a corporate buyout or takeover. The benefits may include, but are not limited to, out-placement, six months to two years of severance pay, stock options, and/or a substantial bonus.

Government Bond: A debt security issued by the U.S. government. Two common types are savings bonds and marketable securities; both tend to have a low default risk. Government savings bonds are not traded on any exchange; therefore, they are immune to market fluctuation. In contrast, “marketable” U.S. government securities, such as U.S. Treasury bills, Treasury notes, Treasury bonds, and Treasury Inflation-Protection Securities (TIPS), are commonly traded.

Government National Mortgage Association (“Ginnie Mae”): An agency of the U.S. Department of Housing and Urban Development that guarantees certain mortgage-backed securities (Ginnie Maes) issued by private institutions with the full faith and credit of the Federal government.

Grace Period: The period of time after the due date for a payment during which the overdue payment may be made without penalty or lapse in contractual obligations.

Grantor: Also known as a settlor. The creator of a trust, who transfers assets or property to a beneficiary or beneficiaries.

Green Card: Prior to applying for naturalized citizenship in the United States, a permanent resident alien must obtain a green card to secure employment and taxpayer status.

Gross Domestic Product (GDP): The sum of all goods and services produced inside the United States.

Gross Estate: At the time of death, this estate consists of the total dollar value of his or her assets and property before taxes and other debts.

Gross Monthly Income: The total monthly income from all sources, before taxes and other expenses.

Group Life Insurance: This life insurance policy insures a group of people. Group life insurance is often provided by employers as an employee benefit, or by a professional association for its members.

Group Permanent Insurance: Some pension benefit plans seek to provide greater death benefits, as well as a retirement income. The employer contracts with an insurance carrier to provide group permanent insurance to participating employees. At retirement, an employee’s retirement accumulations may be augmented by the cash surrender value of the policy. On the other hand, some insurance carriers offer employees a payroll-deducted permanent insurance plan not connected with the company’s employee pension benefit plan and is usually offered with simplified underwriting.

Group Renewable Term Insurance: Many employee welfare benefit plans offer employees group renewable term life insurance with face amounts based on increments of salary or a minimum flat amount for all participating employees.

Group Underwriting: With both employee welfare and pension benefit plans, multi-life group underwriting may consist of three procedures, usually based on the employee census:

  • Guaranteed issue: Those who apply are issued insurance coverage. Above a minimum base participation number, adverse selection is lessened considerably, allowing a carrier to price an insurance product according to the insurance company’s standard issue criteria;
  • Simplified issue: Some carriers will simplify an offer, asking a minimal number of questions, usually five or six, normally inquiring about possible pre-existing conditions, hospitalizations, and criminal arrests;
  • Regular issue: Usually, with very small businesses, some insurance carriers may require full underwriting of each applicant employee at the initial plan issue or with each participating, new employee hired.

Growth and Income Fund: A mutual fund with the objective of providing long-term principal and income growth, as well as current dividend income. For example, a growth and income fund may invest in high-yield bonds, as well as in blue-chip companies expected to return regular dividends while their shares grow more valuable over time.

Growth Fund: Also called a capital growth fund. A mutual fund with the objective of providing long-term capital gains rather than current income. Growth funds are more aggressive than common stock funds, generally investing in more speculative issues.

Guardian: An individual who has been given legal responsibility for a minor child or a legally incapacitated adult.

H

Health Care Proxy: Also called a living will. A written document that allows an individual to designate a representative to make medical decisions on his/her behalf in the event he/she becomes incapacitated due to accident or illness. Often, a living will identifies specific medical treatments a person does or does not wish to have.

Hedging: An investment strategy designed to reduce the risk of loss. Hedging strategies may include buying put options, selling call options, selling short, or purchasing assets to outpace inflation.

Hidden Asset: Balance sheets of corporations may include undervalued assets, resulting from recent years of high inflation and tax deductions. In addition, long-term capital assets may be unintentionally valued at original values rather than in current dollars. On occasion, hidden assets may be natural resources that are actually unidentified (e.g., an artesian basin, petroleum reserves, or precious metals).

Highly Compensated Employee (HCE): The Internal Revenue Code has determined that a highly compensated employee of an employee benefit plan is one who receives compensation in the top 20% of all employees, is a 5% owner of the business, and exceeds certain annual compensation levels. This category is used in performing nondiscrimination tests.

Home Equity: The difference between a property’s current market value and the sum of all claims against it. For example, a homeowner with a house currently valued at $200,000, and carrying a $150,000 mortgage, has $50,000 in equity.

Home Equity Line of Credit: A revolving credit agreement that allows a person to borrow an amount up to a preapproved limit, based on existing home equity, for purchases or cash advances. As the outstanding balance is paid off, the credit again becomes available to fund new purchases or cash advances.

Home Equity Loan: A loan taken by a homeowner against the accumulated equity in his or her home, using the property to secure the debt. Also, a variation on a second mortgage. An equity loan may be structured as a line of credit the homeowner can access with a check or credit card.

Home Sale Exclusion: A Federal tax exclusion available to each taxpayer on the gain of the sale of a primary residence. The deduction amount is contingent upon current tax laws and marital status. There are a number of requirements that must be met in order to use this exclusion either partially or in full.

Hope Credit: This Federal tax credit gives families a tuition credit per student per year for the first two years of post-secondary education.

Household Income: Household income is the combined income of all household members from all sources, including wages, commissions, bonuses, Social Security and other retirement benefits, as well as unemployment compensation, disability, interest, and dividends.

Housing Ratio: Also called the front-end ratio or payment-to-income ratio, this ratio compares the monthly housing payment to total monthly income.

Human Capital: Craft knowledge possessed by a worker, including skills learned during schooling and past experiences, forms the human capital of a business. Better skills and more knowledge may result in the increase of income and productivity.

Hypothecation: Using property to secure a loan without a deed or title transfer. However, in the event of default in payments, the property transfers to the lender.

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Income: The amount received from all sources, including wages, commissions, bonuses, Social Security and other retirement benefits, as well as unemployment compensation, disability, interest, and dividends.

Income Fund: A mutual fund with the objective of paying a higher-than-average rate of return by concentrating in securities not generally favored by other investors. Income funds generally invest a high percent of their assets in bonds.

Index: A hypothetical portfolio of securities that represents a particular market or portion of it. Indexes are used to measure the amount of change in a particular security by comparing it to the change of similar companies. Some well-known indexes are the New York Stock Exchange Index (NYSE), the American Stock Exchange Index (AMEX), the Standard & Poor’s 500 Index (S&P 500), the Russell 2000 Index, and the Value Line Index.

Index Fund: A mutual fund that attempts to match the performance of a market index by patterning the portfolio on the index. Index funds assume that it is impossible to consistently outperform the market.

Individual Retirement Account (IRA): A tax-deferred retirement savings account that allows individuals to contribute a limited amount per year. A traditional IRA may allow individuals, depending on their income and participation in employer-sponsored retirement plans, to deduct part or all of their contributions on their tax returns. Withdrawals made after age 59½ are taxed at the current tax rate. In contrast, Roth IRAs allow individuals to withdraw earnings tax free anytime after the age of 59½, but the initial contributions are taxed.

Individual Retirement Account (IRA) Rollover: Individual Retirement Accounts may be the recipient of eligible IRA fund transfers. An IRA Rollover permits continued tax-deferred accumulations on transferred funds and avoids the early withdrawal penalty.

Inflation: The general rise in the prices of goods and services that occurs when demand increases relative to supply. Inflation is usually measured by the Consumer Price Index (CPI) and the Producer Price Index. As a result of inflation, the purchasing power of the dollar decreases. For example, if inflation occurs at 3% annually, $100 in one year would be worth only $97 in the next.

Inflation-Indexed Security: An investment, such as a bond or Treasury note, that promises a return greater than inflation if held until maturity. Inflation-indexed funds are mutual funds that invest in inflation-indexed securities.

Initial Public Offering (IPO): A company’s first public offering of stock. Often, companies go public when their need for cash exceeds the amount private investors, such as venture capitalists, are willing or able to provide. Investment banks buy shares, and then offer them to the public at an offering price. As the stock is traded, the market price may be more or less than the offering price.

Insider Trading: The buying or selling of a company’s shares by management, the board, or anyone with a 10% interest in the company. Insider trading based on information available to the public is legal. Illegal insider trading takes advantage of corporate information not available to the public.

Installment Loan: A loan repaid in equal payments over time according to a set schedule. Payments include principal plus interest. Examples of installment loans include home equity loans, auto loans, and student loans.

Insufficient Funds (NSF): When a bank account does not contain enough money to cover a specific check, it is said to have insufficient funds.

Insurability: The ability of an insurance applicant to be accepted by an insurer, based on health, occupation, lifestyle, and finances.

Insurable Interest: Insurable interest refers to a potential beneficiary who has a vested financial interest in the life of another person and who might suffer loss upon their disability or death.

Insurance Age: This is the age of the insured at the time of application. There are two methods used to compute insurance age. Some carriers ascertain insurance age as the present age of the applicant. Others use the age to the nearest birthday.

Insured: An individual who is covered by an insurance policy.

Intangible Asset: Nonphysical resources that provide gainful advantages in the marketplace. Copyrights, software, logos, patents, goodwill, and other intangible factors afford name recognition for products and services. They are all examples of intangible assets that may provide significant value to a business operation.

Integrated Plan: An employee pension benefit plan may be included for benefit calculations with Federal Insurance Contribution Act (FICA) benefits, also known as Social Security, or with Old-Age, Survivorship, and Disability Insurance (OASDI) contributions.

Intellectual Capital: A representation of the financial value that human innovations, inventions, and intelligence bring to a business enterprise.

Inter Vivos Trust: Also known as a living trust. A trust created during a grantor’s lifetime in which the grantor has the authority to revoke or change the trust until death. Upon the death of the grantor, the trust becomes irrevocable. In contrast, a will may contain a testamentary trust that comes into existence only when the probate court authenticates a deceased grantor’s will and the provisions become irrevocable.

Interest: The cost of borrowed money. It may be the payment you receive from an investment such as a bond, or the amount you pay for a loan, which is generally a percentage of the total amount borrowed. For example, if you take out a $5,000 loan for a year at 9% interest, the cost of taking the loan would be 9% of the total amount borrowed—$450. Also, the term interest can refer to a right or share in an asset or property

Interest Rate: The cost of borrowed money expressed as a percentage for a given period, usually one year, is an interest rate. Interest rates are considered by many to be key economic indicators. The Federal Reserve (The Fed) regulates interest rates. The Fed may lower interest rates—making borrowing money less expensive—in an effort to stimulate growth in the economy, or it may raise them—making borrowing money more expensive—in an effort to slow economic growth.

Internal Rate of Return (IRR): The theorem of internal rate of return is, in effect, compounding interest in reverse, or discounting. Generally speaking, the higher a project's internal rate of return, the more desirable it is to undertake the project. The rate of return on a proposed investment should be equal to the present value of all future benefits, including revenues, as well as the gross costs associated with the (current) property investment. IRR is important in planning capital outlays, as well as in evaluating rental real estate investments

International Fund: A mutual fund that can invest in companies located anywhere outside of its investors' country of residence. International funds, which may be invested in the emerging markets of developing countries, more established economies, or a combination, must manage foreign currency trends, as well as trends in the securities markets.

Inventory Turnover: Increases of sales in relation to inventory indicates inventory turnover or an inventory utilization ratio. A decline in sales, or low inventory turnover, might adversely subject an inventory item to falling prices, indicate a decline in market effectiveness, indicate a lack of an enthusiastic, efficient, or productive sales force, or lower overall rates of return because unsold inventory items have a potential to decrease the total financial return.

Inventory Valuations: The original price paid or existing fair market value of inventory items.

Investment Grade: A bond rating evaluating the likelihood that the bond issuer will meet its payment responsibilities in full and on time. Bonds rated BBB and higher by an independent agency are considered investment grade.

Investment Objective: A financial goal. Different investment vehicles have different objectives. For example, a fixed-income fund may have outlined in its prospectus an objective of providing current income by investing in fixed-income securities, whereas, a capital growth fund looks to provide long-term capital gains and high potential future income. Individual investors also have personal investment objectives, based on their own time horizon and tolerance for risk.

Irrevocable Trust: This trust cannot be altered, stopped, or canceled without the permission of the beneficiary, or trustee. The grantor, who has transferred assets to the trust, gives up all ownership rights to the assets and to the trust. During circumstances where the trustee cannot interpret or carry out his or her specific duties, the court is then asked to make legal determinations.

J

Joint Credit: Credit based on the income, assets, and credit history, generally of a couple. Although combining resources may help both applicants obtain a higher line of credit than either could attain individually, if one person fails to pay on the debt, a creditor may hold the other liable, even if the couple is separated or divorced.

Joint Tenancy: Also called joint tenancy with right of survivorship, this form of property ownership involves two or more people who own an undivided interest in a property. Upon the death of one joint owner, ownership automatically passes to the surviving joint owner(s) without a court proceeding. Joint tenancy applies to property with titles or other certificates of ownership, such as mortgages, securities, and bank and brokerage accounts.

Joint Venture: On an initial or short-term basis, two or more parties in a business undertaking may share profits, losses, and liabilities before formalizing their operation into a legal entity (e.g., partnership or corporation).

Jumbo Loan: A loan in excess of a limit set by the Federal Home Loan Mortgage Corporation (Freddie Mac) and the Federal National Mortgage Association (Fannie Mae). Since jumbo loans cannot be funded by Freddie Mac or Fannie Mae, they usually carry a higher interest rate.

Junior Mortgage: A secondary or tertiary mortgage of lower claim value than a primary or first mortgage by a creditor. In the junior mortgage agreement the lender usually confirms that his or her claim will be lower in rank to other senior outstanding debts.

Junk Bond: Also known as a high-yield bond. A debt security with a credit rating below investment grade. Junk bonds, which are often issued by companies with questionable credit, generally pay higher yields than investment grade bonds, but carry a greater risk of default.

K

Keogh Plan: A tax-deferred defined benefit or defined contribution plan that is established by a self-employed individual for himself/herself and his/her employees.

Key Employee: An employee who possesses highly valued skills, craft knowledge, and intellectual or organizational abilities. The individual is considered crucial to the ongoing operation of the business and is difficult to replace. The term “key employee” is used in applying top heavy tests for qualified referral plans under Internal Revenue Code (IRC) Section 416.

Key Person Insurance: Companies often have employees who possess craft or scientific knowledge, leadership, and valued skills. Hiring a replacement might alter business planning, profit, stability, and management. To address the financial aspects of replacing a key employee, the corporation becomes owner and beneficiary on an insurance policy that reimburses the company for the untimely loss of a key employee.

L

Labor-Intensive: When labor costs constitute an extremely high percentage of the operating budget of a business. Many small businesses are labor-intensive, with higher costs associated with paying employees than with buying and maintaining equipment and machinery.

Laddering: A method of maintaining a series of fixed-interest investments, such as bonds or certificates of deposit (CDs), with staggered maturities. Laddering may offer a fixed-income investor liquidity options, as well as a hedge against inflation and fluctuating interest rates.

Lapsed Policy: A policy that is canceled for nonpayment of premiums. The term also refers to a policy canceled before it has cash or surrender value.

Lease: A contract granting the use of real estate or a fixed asset, such as a vehicle or equipment, for a specific period in exchange for periodic payments.

Leaseback (sale and leaseback): An arrangement whereby a seller of an asset leases back that same asset from the purchaser. For example, a business owner may sell all or part of the property from which the business operates to raise cash for business operations. The business owner then may agree to lease the sold property for a term of years from the new owner. The leaseback offers security to the new property owner because the seller (the business owner) becomes the tenant with business operations remaining at their present location on a potentially long-term basis.

Lease-Purchase Agreement: An agreement that stated that a portion of each lease payment applies to a future purchase of the leased property or that the leaseholder possesses a right to buy the property during or at the conclusion of the lease term.

Legacy: Also referred to as a bequest. Property gifted through a will.

Legatee: A legacy, usually money or property, is received by a legatee in a will. A legatee is also known as a beneficiary or heir.

Lender: One who parts with something of value for specific compensation, provided for a predetermined or open period of time.

Letter of Credit (by a Bank): A bank, as an issuer, may substitute its creditworthiness for a recipient customer and a buyer in a single or series of sales transactions. The seller assumes little risk associated with the buyer because of the letter of credit. A significant variation of the letter of credit is a letter guaranteeing performance for the completion of a contract.

Level Premium Term Insurance: A life insurance policy for which premiums remain the same from year to year for a specified period.

Leveraged Buyout: A transaction wherein buyers borrow funds to purchase another company. Groups of investors may leverage the assets of the targeted company to secure funding for the buyout, or takeover. They purchase a majority of outstanding stock, often paying more than its current market price.

Liability: Something for which one is held liable, such as an obligation, responsibility, or debt. Business liabilities may include loans, mortgages, accounts payable, deferred revenues, and accrued expenses. Current liabilities are debts payable within one year, whereas long-term liabilities are payable over longer periods.

Life Annuity: An annuity that provides income for life.

Life Cycle: The time period from the beginning to the demise of a business or a product. A corporate business entity frequently has a life cycle that is longer than the lives of its founder or current owners; therefore, small family businesses may compute life cycles in generational terms to plan an eventual transfer or liquidation.

Life Expectancy: The average number of years individuals of a given age are expected to live, according to a mortality table based on factors such as gender, age, heredity, and health.

Life Insurance: A contract wherein a premium is paid to an insurance company in return for the insurance company’s promise to pay the beneficiary a defined amount on the death of the insured. Various types of life insurance are available, including term life, whole life, and universal life.

Lifetime Learning Credit: A Federal tax credit for parents and students to help them offset tuition and other higher education expenses.

Limited Liability Corporation (LLC): In contrast to the unlimited liability inherent in proprietorships as a form of business ownership, a limited liability corporation provides limited liability to each shareholder to the extent of invested capital.

Limited Partnership: A financial affiliation, consisting of a general partner and limited partners, that invests in various business projects. The general partner, in return for fees and a percentage of ownership, manages operations and is ultimately liable for any debt. Limited partners, who may receive income, capital gains, and tax benefits in return for their investment, have little involvement in management. They also have limited liability, which limits their maximum loss to the amount they invested.

Liquid Asset: Cash and short-term investment vehicles (e.g., commercial paper, checking accounts, account receivables, Treasury bills) are cash equivalents, or liquid assets. Typically, liquid assets can be sold quickly with little or no loss of value.

Liquidity: The degree to which assets can be quickly and easily converted into cash without incurring a significant loss.

Liquidity Ratio: Several types of ratios (cash asset ratio, current ratio, quick ratio) that quantify a company’s ability to discharge debt obligations that mature within one year.

Living Trust: Also called an inter-vivos trust, a trust that is established by a living person and allows that person to control the assets he or she contributes to the trust.

Living Will: Also called a health care proxy, a written document that allows an individual to designate a representative to make medical decisions in the event that he or she becomes incapacitated due to accident or illness. Often, a living will identifies specific medical treatments a person does or does not wish to have in the event that life-sustaining treatment is necessary.

Load Fund: A mutual fund that assesses a sales charge for a broker’s services. Such a fund may be front-end loaded (the fee is owed when shares are bought) or back-end loaded (the fee is owed when shares are sold). Fund representatives often offer advice on buying and selling.

Loan Originator: A bank, mortgage broker, or mortgage company that issues loans. Many lenders only originate loans and then resell them to third parties.

Loan-to-Value Ratio (LTV): Many financial lenders use this ratio when originating primary residential real estate. It is the ratio of the size of a loan to the property’s value and is a key risk factor that lenders use in the process of qualifying borrowers seeking mortgages.

Locking-In: The process of assuring that an interest rate, such as that of a mortgage, certificate of deposit (CD), or fixed-rate bond, has been set. In the case of a mortgage, a fee may be associated with locking-in a rate.

Long-Term Care Insurance (LTC): A type of insurance that covers the cost of long-term nursing home care or in-home assistance.

Long-Term Debt: Liabilities that are due in a year or more and that are payable as the debt matures.

M

Mailbox Rule: Courts have consistently maintained that a response to an offer is consummated with the posting of written acceptance. However, the cancellation of a contract is not valid until written notification has been received.

Management Buyout: When managers or executives of a company purchase a controlling interest in their company from existing shareholders. The motivations for management buyout may include preservation of present management positions, privacy in management operations, and the potential for substantial capital gain with future business expansion and anticipated profits.

Management Fee: A charge against an investor’s assets for the fund manager’s services in overseeing the investor’s portfolio. The charge is calculated as a fixed percentage of the fund’s asset value, usually 1% or less, and terms of the fee should be disclosed in the fund’s prospectus.

Mandatory Employee Contribution: Although participation in an employee benefit plan is voluntary, some plans, typically some deferred benefit plans, require mandatory employee contributions for employees to accrue benefits under the plans.

Market Price: The most recent price of a security traded on an exchange.

Market Risk: Also called systematic risk, market risk is the portion of a security’s risk common to all securities in the same asset class, and it cannot be eliminated through diversification. For example, a market risk associated with investment in stocks is the general tendency of share prices to decrease during an economic downturn.

Market Timing: An investor who practices market timing makes buy-sell decisions by attempting to predict market trends, such as the direction of stock prices, the direction of interest rates, or the condition of the economy. Unlike investors who buy and hold securities with the hope of substantial gains over an extended period of time, market-timing investors actively buy and sell securities, hoping to turn quick profits on short-term price fluctuations.

Market Value: The price at which securities are being traded. Estimated market value refers to the highest potential price a buyer might pay and a seller would accept.

Marshaling: During a liquidation, a trustee must prioritize and arrange (marshal) a scheduled process for selling properties to satisfy debtors.

Maturity: The date of maturity is the date on which a debt becomes due for payment. For example, if a bond has a face value of $1,000 and a 30-year term of maturity, the bondholder should receive $1,000 in 30 years.

Medicaid: A Federal program that covers long-term nursing home care for individuals who are financially unable to do so.

Medicare: A Federal program that covers health care for individuals age 65 and over, or individuals with certain disabilities.

Medigap: Private health insurance that is generally purchased by seniors as a supplement to Medicare.

Minimum Participation Requirements: Employee benefit pension plans usually have minimum participation requirements. Generally, a participant must be a full-time employee, be at least 21 years of age, and have been employed at the company for one year.

Money Market Fund: A mutual fund, usually no-load, investing in highly liquid short-term securities, such as certificates of deposit (CDs), U.S. Treasury bills, commercial paper, bankers’ acceptances, and repurchase agreements. Most money market funds are not federally insured, although some carry private insurance. Many are part of fund families that allow investors to transfer money between accounts at no charge.

Monthly Housing Expenses: These expenses include the sum of the principal, interest, and taxes a borrower pays toward housing on a monthly basis. This figure is used to determine affordability of a house in relation to total income.

Mortality Table: A statistical table showing the death rate of people at each age, usually expressed as the number of deaths per thousand.

Mortgage: A debt instrument, generally for real estate, wherein a lender takes as security a lien on a borrower’s property until the debt has been repaid.

Municipal Bond: A tax-exempt bond that may be issued by a state government or agency, or by a town, county, or other political subdivision or district. Interest payments are generally not subject to Federal taxes, and they may be exempt from state and local taxes if the bondholder is a resident of the state where the bond was issued.

Mutual Fund: A fund managed by an investment company that raises money from shareholders and invests it in stocks, bonds, real estate, money market securities, commodities, or options. Mutual funds offer investors the benefits of professional management and diversification, for which they charge a management fee. Some mutual funds charge a sales fee (load).

N

National Association of Securities Dealers Automated Quotations (NASDAQ): A computerized system that facilitates trading and provides current price quotes for the most actively traded over-the-counter (OTC) securities.

Negative Amortization: Occurs when lenders arrange a loan agreement that calls for loan payments that do not cover the interest owed. The amount of shortfall increases the principal balance of the loan and is “charged against equity.” Therefore, the loan balance actually increases rather than decreases over the term of the loan.

Negative Working Capital: When current liabilities exceed current assets. Unless this situation is immediately rectified, a business with negative working capital may have to anticipate the approaching possibility of bankruptcy. Current liabilities and current assets both have life cycles of less than twelve months.

Net Asset Value (NAV): The market price an investor pays for a mutual fund share. Also called the bid price. The NAV is computed at the end of each business day by adding the closing market value of the fund’s securities to the value of its other assets, subtracting liabilities, and then dividing the sum by the total number of shares outstanding.

Net Income: Subtracting total costs, expenses, and taxes from total revenue results in the net income.

Net Lease: A lease in which the lessee is responsible for paying all insurance, maintenance expenses, and taxes, in addition to rent.

Net Margin: A ratio of a company’s net profit to its revenue. This ratio indicates the efficiency of pricing strategies in comparison with other business enterprises selling similar product lines.

Net Operating Loss (NOL): When net expenses exceed net income, a company is experiencing a net operating loss. The Internal Revenue Code contains provisions to allow corporations and businesses to either carry forward a loss for 20 years or carry back NOLs for two years.

Net Worth: The amount of asset value exceeding total liabilities.

New York Stock Exchange (NYSE): Also called the Big Board and the Exchange, the NYSE is the oldest and largest stock exchange in the U.S., listing the country’s largest corporations. Memberships are sold to brokers, who buy and sell stocks on the floor of the exchange.

No-Load Fund: A mutual fund that does not charge a sales fee (load). Investors in no-load funds purchase shares directly from the fund company, rather than through a broker. Because no-load funds do not charge commissions, a salesperson may not be available to offer advice on buying and selling. Some companies selling no-load funds may charge an annual fee for marketing, commonly called a 12b-1 fee.

Noncontributory Retirement Plan: A pension plan that is funded only with employer contributions and that requires no employee contributions.  

Noncurrent Asset: Unlike a current asset, a noncurrent asset might experience a loss in value if converted to cash within 12 months. Machines, land, patents, goodwill, and equipment are examples of assets classified as noncurrent assets.

Noncurrent Liability: Unlike a current liability, a noncurrent liability represents debt or outstanding obligations that mature in over one year.

Nondeductible Contribution: A contribution made to an Individual Retirement Account (IRA) and designated by the holder as nondeductible for income taxes.

Nonforfeitable Benefit: An employee benefit that cannot be forfeited once vested and that is payable at certain points listed in the plan document. Some benefits may be conferred immediately or on a deferred basis.

Nonqualified Pension Plans: Employee benefit arrangements that avoid Internal Revenue Service (IRS) discrimination rules, thus allowing employers selectivity in rewarding or retaining key employees.

Nonqualified Plan: A retirement or employee benefit plan that does not meet the requirements of Section 401(a) of the Internal Revenue Code and, therefore, is not eligible for favorable tax treatment.

Nonrecourse Loan: A loan that is usually specific to a limited partnership entity and that provides limited liability for limited partners. The individual partners secure the loan by their underlying ownership interests. The lender has no recourse beyond the liability exposure of each limited partner, which is usually the amount invested in the partnership.

Notary Public: An officer of the public who can authenticate signatures on documents and take depositions or oaths. A state or jurisdiction may authorize an applicant to certify specific documents usually for a term of years. Banks, insurance agencies, legal offices, and government buildings often have people on staff who are notaries public.

O

Occupational Safety and Health Act (OSHA): Legislation enacted by Congress in 1970 that empowers the Secretary of Labor to secure safe working environments for employees and to institute Federal safety and health standards.

Offering Price: In terms of investing, this price is the per-share price at which a stock or mutual fund is offered to the public. Companies going public for the first time issue shares of stock at an offering price, as do companies who are issuing new shares. The market price may be more or less than the offering price. With no-load funds (mutual funds that do not charge sales commissions), the offering price is the same as the market price. With load funds (mutual funds that charge sales commissions), a sales charge is added to the market price to reach the offering price.

Old-Age, Survivors, and Disability Insurance (OASDI): OASDI, usually known as Social Security, is a comprehensive Federal benefits program that includes retirement benefits, disability income, veterans’ pensions, public housing, and the SNAP program. The Social Security tax, which is levied on all self-employed and employed workers, is used to fund the program.  

Operating Expenses: Nonmanufacturing costs associated with operating a business. Utility bills, taxes, insurance, and the daily management of an income-producing business venture are operating expenses. Manufacturing, product costs, and raw materials are not operating expenses.

Operating Profit (Loss): If inflows from the sale of specific services and products exceed outflows, the business venture experiences an operating profit. An operating loss results when total outflows of costs and expenses exceed inflows.

Operating Rate: The rate of operation as compared to full operation. Economic conditions may permit some businesses to operate at full production capacity. In abstract terms, operating at full capacity would mean using 100% of production capacity. Generally, however, an operating rate exceeding 85% of production capacity is considered full production. An operating rate of less than 50% is low and could lead to a decline in profits.

Option: An option gives the buyer the right, but not the obligation, to buy or sell a security at a set price on or before a given date. Investors, not companies, issue options.

Oral Contract: Although most business and financial agreements are contracts or documents in writing with the signatures of interested parties (e.g., real estate conveyances, securities transactions, and estate planning documents), some businesses have promises, expectations, or procedures that are oral (verbal). Courts usually enforce oral contracts when the terms are consistent with the surrounding family, business, or environmental circumstances.

Ordinary Income: Income derived from normal business activities, such as wages and salary, as distinguished from capital gains, which are earned from the sale of assets.

Ordinary Life Insurance: Life insurance with a cash value, such as whole life or variable life. Ordinary life insurance generally refers to most forms of life insurance other than term insurance. This type of insurance is also referred to as cash value or permanent life insurance.

Organizational Capacity: The macrocosm of business enterprises includes capital, plants, machines, and labor, as well as leadership, engineering knowledge, research, patents, trademarks, sales expertise, and skills. Organizational capacity reflects the coordination and combining of these resources and knowledge.

Over-the-Counter (OTC): A security is considered over-the-counter if it is traded in a context other than on a formal exchange, such as the NYSE, TSX, and AMEX. OTC also refers to a market where transactions are conducted among securities dealers over a network of telephone and computer lines, rather than on the floor of an exchange.

Overdrawn: When more money is withdrawn from a bank account than it contains.

Overhead: The costs related to rent, insurance, taxes, and utilities are separate from the costs related to the production of goods and services, but must be factored into the pricing of those goods and services sold. These indirect costs and expenses represent overhead.

P

Paid-Up Additions: Paid-up additions refer to additional life insurance coverage that is typically purchased with policy dividends. Paid-up additions may have a cash value component in addition to a death benefit.

Paper Profit: After an individual purchases ownership in a property, its value may increase. The difference between fair market value and the purchase price may be the capital appreciation. However, until assets are sold, the gain remains a paper profit rather than a taxable profit.

Par Value: The face value of a stock or bond when issued. The par value may bear little relationship to a security’s current market value.

Partnership: A contractual association between two or more individuals who share in the management of a business venture. If the agreement contracts for only an investment obligation, the investor is a limited partner. If responsibilities include management or supervision of operations, the holder of that responsibility is a general partner. Partnerships employ general partners, while limited partners associate through securities transactions.

Past Due: Many lenders allow for a specified time period after a due date during which loan payment can be made without penalty. Any amount owed that is not received by the end of this grace period is considered past due. When an account is past due, the creditor may assess a late fee or consider the account delinquent and report it to a credit reporting agency.

Past Service Liability: A company’s liability associated with funding the service of employees for their years of work before the company established a defined benefit pension plan.

Patent: An official license provided by the U.S Patent and Trademark Office that grants an individual or business exclusive right to the production or sale of a specific invention, process, or design, for a specified period of time.

Pension: An employer-provided qualified retirement plan. Examples of pension plans include defined benefit plans, profit-sharing plans, bonus plans, employee stock ownership plans (ESOPs), thrift plans, target benefit plans, and money purchase plans.

Pension Benefit Guaranty Corporation (PBGC): A Federal corporation created by the Employee Retirement Income Security Act (ERISA) in 1974 to ensure that participants and beneficiaries under covered deferred benefit plans would not lose benefits because an employer prematurely canceled or underfunded a plan benefit.

Pension Plan: A written structured contractual agreement that permits an employer to make tax-deductible financial contributions to employee retirement plans. At an employee’s retirement age, the pension plan provides either timely fixed income payments or a lump sum distribution.

Permanent Life Insurance: A policy that does not expire and that combines a death benefit with a savings portion. The savings portion can build cash value, which can be borrowed against or withdrawn for cash needs. The two main types of permanent life policies are whole life and universal life.

PITI: The components of a mortgage payment: principal, interest, property taxes, and insurance. “Principal” is the money used to pay down the balance of the loan, “interest” is the charge you pay to the lender for the privilege of borrowing the money; “taxes” are the property taxes you pay as a homeowner, and “insurance” refers to both your property insurance and your private mortgage insurance. Residential mortgage lenders usually require evidence that homeowners have property and casualty insurance if they do not fund the insurance as part of their monthly payment.

Plan Administrator: As designated in insurance or retirement documents, this person administers employee benefit programs, maintains adherence to government regulations and procedures, and confirms that all participating employees receive annual reports.  

Plan Sponsor: An employer who establishes and perpetuates a qualified employee benefit pension plan. Although ultimately responsible for plan administration, plan sponsors often use outside consultants, corporations, government agencies, or labor organizations to confirm that Internal Revenue Code (IRC) regulations and guidelines are adhered to in plan administration.

Points: In terms of real estate mortgages, points quantify the initial fee charged by the lender, with each point being equal to 1% of the total principal of the loan. For example, on a $100,000 mortgage, four points would cost a borrower $4,000.

Policy: A legal written document that states the terms of an insurance contract.

Policy Dividend: A refund of part of a life insurance premium that reflects the difference between the premium charged and the insurer’s actual cost of providing coverage, if lower than previously anticipated.

Policy Exclusion: An item specifically not covered by an insurance policy.

Policy Loan: A loan made by an insurance company that is secured by the cash surrender value of a life insurance policy.

Policy Reserves: Funds that a state requires an insurer to hold in order to cover all policy obligations.

Policy Rider: A provision that may be added to an insurance policy, to increase, at an additional cost, or limit the benefits the policy otherwise provides.

Policyholder: The person or entity owning an insurance policy. The policyholder is usually the insured but may also be a spouse, business partner, partnership, or corporation.

Portability: A property of an employee benefit that allows an employee to keep that benefit after employment ceases. With a mobile workforce in which employees move from one company to another, portability of employee benefits, especially insurance and retirement plans, is important.

Portfolio: The combined security holdings of an individual investor or mutual fund. A portfolio can consist of any combination of stocks, bonds, derivatives, and other holdings. A typical objective of keeping investments in a portfolio is to reduce risk through diversification.

Power of Attorney: During a person’s lifetime, a grantor may wish to authorize someone full or limited powers to perform specified acts or make decisions for him in the event that he is unable to do so. A power of attorney designates who has this this power in a document usually drafted in accordance with state law. The power terminates at the death of the conveyor, unless it is a durable power.

Preferred Stock: A type of stock that pays a fixed dividend, regardless of corporate earnings, and that has priority over common stock in the payment of dividends. Should earnings rise significantly, however, the preferred-stock holder receives only the same fixed dividend while common holders collect more. Owners of preferred stock have no voting rights at shareholder meetings, whereas owners of common stock do. However, preferred stock takes precedence in claims against a company’s profits and assets.

Premium: In terms of insurance, a payment of a specified amount paid according to a fixed schedule and required by the insurer to provide coverage under a specific policy.

Premium Loan: A loan made from an insurance policy to cover its premiums.

Prepayment: The payment of a debt before its due date or a payment that exceeds a scheduled debt repayment amount. Some loans, particularly mortgages, include prepayment clauses that allow a borrower to repay them in advance of the regular schedule without a penalty.

Prepayment Penalty: In the absence of a prepayment clause, a lender may charge a prepayment penalty, a fee for repaying all or part of a loan before it is due.

Present Value: The amount a future sum of money is worth today given a specified rate of return. For example, an investment that earns 10% per year and can be redeemed for $1000 in five years would have a present value of $620. In other words, $620 today will be worth $1000 in five years at a 10% rate of return.

Previous Balance: The balance on the prior month’s credit card statement.

Price to Earnings (P/E) Ratio: Also called the “multiple,” this ratio is calculated as a stock’s price divided by its earnings per share. It gives investors an idea of how much they are paying for a company’s current earnings. For example, a stock selling for $30 a share with earnings per share of $2 has a P/E ratio of 15. In other words, the investor paid $15 for each $1 of earnings. Faster growing, or higher risk companies, generally have higher P/E ratios than slower growing, or less risky, firms.

Primary Beneficiary: The named beneficiary who receives the proceeds of an insurance policy or annuity contract when the insured or annuitant dies.

Prime Rate: A standardized short-term borrowing rate established by the Federal Reserve Board. Most banks use the prime rate as a base for determining a final loan rate that reflects the creditworthiness and collateral of bank customers.

Principal: The original amount of money invested in a security, the face value of a bond, or the remaining amount owed on a loan, separate from interest. “Principal” can also refer to the owner of a private company or the main party in a financial transaction.

Private Letter Ruling: On request, the Internal Revenue Service (IRS) may issue a private letter ruling judgment, which is an interpretation of a tax situation in light of a particular individual’s circumstances. A private letter ruling is nonbinding and is not to be seen as a precedent for individuals with seemingly similar circumstances.

Private Mortgage Insurance (PMI): Insurance that protects the lender in case of default. Lenders typically require borrowers to purchase PMI when the loan-to-value ratio is greater than 80%.

Private Placement: The sale of investments, to an institutional investor, that does not require registration with the Securities and Exchange Commission (SEC).

Professional Corporation (PC): Many states permit lawyers, doctors, architects, and other similar professionals to form professional corporations for the benefit of engaging in their specialized activities. A professional corporation entity allows two or more individuals practicing in the same business to avoid liability for the practices and actions of other practicing shareholders. The corporate form of ownership can provide favorable tax advantages.

Profit and Loss Statement: Also known as an income statement, a statement that summarizes the revenues, costs, and expenses incurred during a specific time period. Such records provide information about the ability of a company to generate profit by increasing revenue and reducing costs.

Profit-Sharing Plan: A defined contribution plan in which employers allow employees to share in company profits. The employer’s contribution, a percentage of profits generally based on an employee’s earnings, may vary from year to year with no minimum required. Funds generally accumulate on a tax-deferred basis until the employee leaves the company or retires. An employee’s retirement benefit depends on the amount in his or her account at retirement.

Prohibited Transaction: In terms of Individual Retirement Accounts (IRAs), a transaction that is forbidden by the Internal Revenue Code (IRC). Examples include borrowing against an IRA, using an IRA as collateral, and investing IRA funds in collectibles.

Promissory Note: A binding legal document listing a borrower’s rights and responsibilities under a loan agreement, including when and how the loan must be repaid.

Property: Anything that has a value and is owned. It may be tangible or intangible (incorporeal), personal or public, or common.

Proprietorship: Self-employed individuals who are sole owners of a business venture have a proprietorship entity. Proprietorships are not incorporated and, therefore, the owner assumes full liability for all business operations, but also maintains an absolute right to all profits. This form of business entity terminates at the death of the owner-proprietor.

Prospectus: An official document that must be provided (according to Securities and Exchange Commission [SEC] regulations) by the issuer to potential purchasers of a new securities issue. The reports within a prospectus provide information on the financial well-being of the issuer and the specifics of the issue itself.

Put Option: A contract that grants the buyer of an option the right to sell a set number of shares of stock at a predetermined price (the strike price) to the seller of the option, over a certain length of time. Because the buyer of the put option has paid a premium, the seller of the option must purchase the shares if called to do so.

Q

Qualified Plan: A retirement plan that meets the requirements of Section 401(a) of the Internal Revenue Code, one that is, therefore, eligible for favorable tax treatment.

Quotation: The highest bid and lowest offer (asked) price available for a security at any given time. For example, an investor requesting a price on XYZ Company might be quoted “40 to 40½.” This means that the best bid price (the highest price any buyer will pay) is currently $40 a share, and the best offer price (the lowest price any seller will accept) is $40.50.

R

Rate of Return: The gain or loss of an investment over a specified period expressed as a percentage increase over the original investment cost. For stocks, the rate of return is the dividend and capital appreciation. The yield is the rate of return on fixed-income securities. Analysts use the return on equity to compare the rates of return of differing investment vehicles. Accountants use internal rates of return when reviewing investment contracts, budgets, and investment opportunities.

Rated Policy: Also called an “extra risk” policy, a policy that covers a higher risk and is paid for with a premium that is higher than usual. For example, an insured person with a dangerous occupation or impaired health condition often has a rated policy that costs more, to protect the insurer from added risk.

Ready, Willing, Able: Generally, in real estate transactions, buyers are called ready, willing, and able when they are prepared to commit to a purchase and sales agreement.

Real Estate Investment Trust (REIT): A security that sells like a stock on the major exchanges and invests primarily in real estate through properties and mortgages.

Real Estate Limited Partnership (RELP): A limited partnership that invests in shopping malls, hotels, industrial parks, shopping centers, warehouses, and other similar properties. Subsequent to the Tax Reform Act of 1986 (TRA ’86), investors could use RELPs to produce tax deductions against earned income with Since TRA ’86, however, income earned from RELPS is passive income and losses are passive losses. Currently, investors use RELPS for their high income potential and long-term gain possibilities.

Recapitalization: Recapitalization occurs when a company changes its capital structure by exchanging preferred stock for bonds, to reduce taxes or to avoid or emerge from a bankruptcy. Often, new debt (e.g., reorganization bonds) is issued to replace existing debt.

Recourse Loan: A loan for which a borrower’s default makes a guarantor or endorser liable for payments.

Redemption: The repayment of a debt security or preferred stock, either for par value at maturity or for a premium before maturity.

Redlining: An illegal discriminatory practice in which financial institutions make it extremely difficult for those in poor neighborhoods to get a mortgage and take out loans. The financial institution bases its decision not the financial history of the individual but on the higher default rates in poor neighborhoods.

Remaindermen: In legal and trust language, individuals who have either a future vested or contingent interest on the property of an estate or trust.

Renegotiated Rate Mortgage: A residential mortgage that, per an agreement, has a new interest rate after a specific term of years.

Required Minimum Distribution (RMD): A legally required minimum annual distribution that must be taken from a retirement account by an IRA holder or a qualified plan participant. RMDs, which are calculated by dividing the year-end account balance by the applicable distribution period or life expectancy, must begin by April 1 of the year following the year an individual reaches age 70½.

Retained Earnings: The portion of net earnings, included as part of the net worth of a business, that is not distributed or expended. These earnings accumulate within the business. Above certain limits, retained earnings are subject to an accumulated earnings tax.

Return on Equity (ROE): The percentage of net income per common stock shareholder before the distribution of common stock dividends. ROE is a ratio used for comparisons of a company with other similar companies.

Return on Sales: The total revenue from pretax sales divided by net sales produces a return on sales ratio, which can be used for comparison with industry average ratios. Businesses use the return on sales ratio to analyze management, marketing, and sales operations.

Revenue: Thee amount of money that a company receives during a given period from the sale of goods and services, before expenses and taxes.

Reverse Mortgage: A type of loan that turns home equity into cash. The lender makes regular tax-free payments to the homeowner (borrower), which are usually used to fund retirement needs.

Revolving Credit: A credit agreement allowing a borrower to pay part or all of the outstanding balance on a credit card or loan. As the balance is repaid, the credit again becomes available to fund new purchases or cash advances.

Risk: The quantifiable likelihood of loss or less-than-expected returns. For example, U.S. savings bonds that are backed by the full faith and credit of the Federal government are generally considered low risk, whereas junk bonds that are issued by companies with questionable credit are generally considered high risk. Historic or average returns are often used to measure risk.

Risk Tolerance: The measurement of an investor’s ability to handle declines in the value of his/her portfolio. For many investors, risk tolerance is an important consideration when developing a diversified portfolio.

Rollover: A tax-free transfer of funds from one retirement plan to another.

Roth IRA: A type of Individual Retirement Account (IRA) in which contributions are not tax deductible. However, account funds grow tax free, and withdrawals are tax free, provided certain conditions are met.

Roth IRA Conversion: The process of converting an existing IRA into a Roth IRA. Roth conversions have specific income eligibility requirements and income tax consequences.

S

S Corporation (Subchapter S of the Code): An incorporated business that is a “pass-through” entity for tax considerations. The legal status of S corporations is similar to that of C corporations: limited liability, avoidance of double taxation, and continuity of business in succession transfers. The maximum number of shareholders is 75.  

Salary Reduction Plan: A salary reduction plan is any qualified retirement program in which employees make tax-advantaged contributions on a pretax basis.

Sale and Leaseback: A company may sell its own debt-free property (long-term asset) to acquire working capital. After the sale, the former owner may lease the property. The company has not acquired more debt, but it has added cash, to expand inventories, for research and development, and for plant equipment or machinery. The sale of a long-term asset allows a company to avoid adding debt to its statements of financial condition.

Savings Account: An account with a bank or savings and loan company that pays interest on money deposited.

Second Mortgage: A loan secured by property that was originally financed under a first mortgage. Often, an alternative to a second mortgage is a home equity loan.

Section 162 (Executive Bonus) Plan: Internal Revenue Code Section 162 provides employers a deduction for trade or business expenses. Through this executive bonus plan, the employee owns a life insurance policy for which the employer pays premiums. The employee pays taxes on the premiums. Unlike split-dollar arrangements, the employer never recovers the outlay and has little control over the fringe benefits provided.

Sector Fund: A specialized mutual fund that invests in one industry or market sector, such as chemicals, electronics, energy, or health care. Sector funds tend to be more volatile than more diversified funds.

Secured Card: A credit card guaranteed by a deposit in a savings account or a certificate of deposit (CD). The card’s credit line usually equals the deposit. If the cardholder defaults on repayment, the issuer applies the deposit toward the balance owed.

Secured Debt: Debt for which repayment is secured with collateral. If the borrower defaults on the loan, the issuer may seize the collateral. Assets used as collateral may include homes, cars, and cash deposits. For example, a car loan is secured with the vehicle as collateral.

Securities and Exchange Commission (SEC): The primary Federal agency that regulates the securities industry. Its responsibility is to promote full disclosure and protect investors against fraudulent and manipulative practices. In addition to regulation and protection, it also monitors corporate takeovers in the U.S. The SEC is composed of five commissioners appointed by the president and approved by the Senate.

Security Deposit: A type of payment usually required of an individual wishing to secure a personal loan or a rental property, or to guarantee a later purchase.

Self-Dealing: Individuals having financial responsibilities to others (fiduciaries), often trustees of a trust, may manage investments or properties in which they may benefit or receive profit. Unless specifically instructed to do so by income and remainder beneficiaries, the practice is considered self-dealing and typically results in liability to the fiduciary.

Self-Directed IRA (SDA): An Individual Retirement Account allowing a holder a wider choice of investments, including stocks, bonds, mutual funds, and money market funds. SDAs may be opened at institutions with trust powers, state FDIC-insured institutions, Federal credit unions, and federally chartered savings banks or savings and loans associations.

Self-Employment Tax: A Social Security tax imposed on self-employed individuals. The self-employed need to file a special “Computation of Social Security Self-Employment Tax (Schedule SE)” with their annual “Individual Income Tax Return Form 1040.”

Seller Financing: A “creative financing” technique in which an owner sells property, usually real estate, to a buyer. The title or deed transfers only when the loan is fully paid, and a foreclosure results in the property reverting to the seller. This technique is often used if the market interest rates are too high for the buyer and the seller does not require principal from the sale. Seller financing was very popular during the 1980s when real estate values escalated. Buyers used seller financing to arrange no-money-down purchases of real estate.

Selling Short: A trading technique wherein an investor who anticipates a decline in a stock price borrows shares of that stock from a broker, then sells them, and waits for the share price to drop. If the share prices drop, the investor generally buys back shares at the lower price, and his/her profit equals the difference between the two prices (often minus interest and commission). If share prices rise, the investor may experience a loss. For example, suppose an investor sells 100 shares of borrowed stock valued at $20 per share and receives $2,000. When the stock price drops to $15 per share, the investor buys 100 shares for $1,500 and then returns them to the broker, having profited $5 per share, or $500. On the other hand, if stock prices had gone up instead of down, and the investor had to sell 100 shares at $25, the loss experienced would be $5 per share or $500.

Series EE Savings Bond: A U.S. government-issued debt instrument with face values ranging from $50 to $10,000. The interest is exempt from state and local taxes; Federal taxes are deferred until the bond is redeemed. Savings bonds are generally considered safe investments, since they are backed by the U.S. government.

Settlement Costs: Also called closing costs, these are the expenses involved in transferring real estate to a buyer from a seller. Settlement costs typically include fees or charges for loan origination, discount points, building appraisal, property survey, title search, title insurance, deed filing, credit reports, taxes, and legal services. Closing costs do not include points and the cost of private mortgage insurance (PMI).

Settlor: Also known as a grantor. The creator of a trust. The settlor’s assets go to a beneficiary or beneficiaries.

Share: A certificate representing one unit of ownership in a corporation, mutual fund, or limited partnership.

Shrinkage: When actual inventory is less than recorded inventory. Shrinkage may result from breakage, theft, disintegration, loss, or accounting errors.

Silent Partner: Individual investors who are not identified or publicly associated with the business even though they share in the profits or losses of the enterprise. Silent partners do not have responsibilities in management or production supervision.

SIMPLE (Savings Incentive Match Plans for Employees) Plan: A retirement plan, which can be set up as a 401(k) or IRA, that allows employees to make pretax contributions and requires employers to match contributions. All contributions are immediately vested in a SIMPLE plan.

Simplified Employee Pension Plan (SEP): A tax-deferred retirement plan allowing both an employer and an employee to contribute to the employee’s Individual Retirement Account (IRA) on a discretionary basis, subject to special rules on eligibility and contributions.

Situs: The location or position of a property. For intangible property, such as debt, the situs is generally the jurisdiction in which the debt obligation was issued.

Small Business Association (SBA): A Federal government organization that provides small businesses programs and opportunities to enhance their growth and success.

Social Security Tax: Since inception, the Social Security system has been funded by a Social Security tax, which is paid by both employers and employees. These levies are deposited in trust funds for investment. At various optional retirement ages, employees may qualify for fixed-income payments based on marital status, fiscal quarters employed, and wages earned. The self-employed worker has a different contribution schedule, but he or she has equal treatment on all distributions at retirement or disability.

Specialty Fund: A mutual fund with a particular focus, such as a single industry or sector, a group of related industries, industries within a particular region, or nonfinancial assets, such as real estate.

Split-Dollar Insurance Arrangement: A contractual arrangement between employer and employee for sharing the obligations and benefits of a life insurance policy. The shared arrangement may govern ownership and the payment of premiums, death proceeds, cash values, and dividends.

Spousal IRA: A spousal IRA is an Individual Retirement Account for a nonworking spouse funded with contributions from the working spouse. The Internal Revenue Service sets a limit on the combined amount a married couple may contribute to a traditional and a spousal IRA.

Spread: The difference between two measurements. In stocks, the spread equals the difference between a bid (the highest price offered by a buyer) and the ask price (the lowest price offered by a seller). For fixed-income investments, the spread represents the difference in yield either between securities with the same credit ratings but different maturity dates or between securities with different credit ratings but the same maturity dates.

Standard & Poor’s 500 Index (S&P 500): An index of 500 of the most widely held common stocks on the New York Stock Exchange (NYSE). It is used as a measure of the overall health of the U.S. stock market.

Statement of Cash Flow: A representation of the cash flow of a business. The statement breaks down the balance sheet and shows operating, investing, and financing activity. As such, the statement of cash flow becomes a barometer for measuring both sound and struggling business ventures.

Stock: A stock is a security representing partial ownership, also called equity, in a corporation. Each stock share represents a proportionate claim against the company’s profits and assets. Common stock entitles shareholders to participate in stockholder meetings and to vote for the board of directors. Preferred stock does not confer voting rights, but it takes precedence in claims against profits and assets.

Stock Certificate: A document indicating legal ownership of shares of stock in a corporation. Stock certificates are made out to the shareholder or the brokerage firm, and they identify the issuer, the number of shares, the par value, and the stock class. A stock certificate must be endorsed by the shareholder before the shares. can be sold.

Stock Exchanges: Formal organizations, approved and regulated by the Securities and Exchange Commission (SEC), made up of members who use the exchange facilities to exchange certain common stocks. The two major national stock exchanges are the New York Stock Exchange (NYSE) and the American Stock Exchange (ASE or AMEX).

Stock Fund: A mutual fund that invests primarily in stocks.

Stock Market: A general term referring to the organized trading of securities in the various market exchanges and in the over-the-counter (OTC) market.

Stock Purchase Plan: A mechanism that allows employees to purchase company stock. Increasingly, companies are encouraging employee participation in ownership opportunities. Employees may purchase company stock in Employee Stock Ownership Plans (ESOPs), in Dividend Reinvestment Plans (DRIPs), as stock options, via automatic investment plans, and through other creative plans. In theory and practice, employees have the potential of becoming majority stockholders through participation in a stock purchase plan, and thus assuming a viable role in corporate planning.

Stock Split: A distribution of additional shares to each stockholder in proportion to the shares the individual already owns. A stock split has no immediate effect on a stockholder’s equity. For example, if a stock splits 2-for-1, a shareholder who owns one share with a $100 par value before the split would own two shares, each with a $50 par value after the split.

Straight-Term Mortgage: A mortgage in which the borrowed amount is due at the conclusion of a term, or maturity date.

Street Name: Rather than holding certificates in a customer’s name, a broker or broker’s nominee can hold a customer’s securities under its corporate street name. The shares of each stock position are listed in the customer’s account. If a customer wants to liquidate designated holdings, street name registration allows for timely liquidation by the broker.

Strike Price: The price at which an option holder may purchase shares of stock. An option generally sets the strike price, which may be higher or lower than the market price of shares.

Style Analysis: A method of categorizing the underlying portfolio of a mutual fund so that an investor’s mutual fund selections are in concert with his or her goals and objectives.

Subsidiary: A corporation owned by another, larger corporation. A subsidiary corporation possesses all the legal elements of a normal corporation. However, another corporation owns more than 50% of all voting stock and, therefore, the “veil” separating the two seemingly separate companies may not exist.

Supply and Demand: Supply refers to the availability of a commodity, while demand refers to the desire consumers have for that commodity, and the amount they are willing to purchase. The relationship between supply and demand generally influences price.

Surety: An individual or company offers surety to guarantee, in a legal contract, the debt of another.

Survivorship Life Insurance: Also called second-to-die or last-to-die insurance. Survivorship life insurance covers the lives of two people and pays benefits when the second person dies. It is often used by couples to help fund estate tax liability.

Sweat Equity: Often, a small business accrues increased valuation because of the hard work (sweat equity) of its owner(s) and not from inflation or outside investments.

Sweep Account: Business owners want cash invested at all times. Usually, at the conclusion of each business day, money in substantial, non-interest-bearing cash accounts is “swept” (by the fiduciary) into money market funds or other securities to earn interest.  

T

Takeover: The purchase of one company by another, or the attainment of a controlling interest through an accumulation of shares (also known as an acquisition). Traditionally, corporate ownership changes when companies are purchased on the open market. In recent times, however, takeover bids have been attempted by either friendly or “hostile” means. To gain control, an acquiring entity may be willing to pay more than the market value for shares, which may benefit the shareholders of the acquired company. The combining of companies either through the pooling of interests or purchase is generally referred to as “mergers and acquisitions,” or M&A.

Tangible Asset: An asset that has a value and physically exists. Land, machines, equipment, automobiles, and even currencies, are examples of tangible assets. On some financial statements, however, a nonmaterial item may often be listed as a tangible asset, such as a payment to be made on products or goods already delivered.

Tangible Net Worth: The amount of asset value exceeding total liabilities is its total net worth. To calculate tangible net worth, intangible assets are subtracted from net worth.

Tax Credit: A credit that reduces a taxpayer’s taxable amount due dollar-for-dollar. A $1,000 tax credit saves the taxpayer $1,000 in taxes. In many cases, tax credits offer incentives to support social change (e.g., providing jobs for the disadvantaged, supporting research and development, and constructing low-income housing).

Tax Deduction: A deduction that reduces tax liability by the percentage of the taxpayer’s marginal tax bracket. For example, a $1,000 tax deduction for a taxpayer in the 25% marginal tax bracket saves only $250 in tax (0.25 X $1,000). Allowable deductions include charitable contributions, state and local taxes, and some interest expense.

Tax Deferred: The postponement of taxes on accumulated investment earnings until the investor takes possession of them. For example, an Individual Retirement Account (IRA) holder may postpone paying taxes if he or she waits until age 59½ to make withdrawals.

Tax Exempt: Not subject to taxation by Federal, state, and/or local authorities.

Tax-Exempt Bond: A bond issued by a municipal, county, or state government whose interest payments are not subject to Federal, state, or local taxes.

Tax Free: The elimination of income tax liability on accumulated investment earnings.

Tax Lien: A claim against property for unpaid taxes (including city, county, school, estate, income, payroll, property, or sales taxes). A tax lien, which lasts until the claim is satisfied or a statute of limitations takes effect, may make creditors aware of a delinquent’s tax liability.

Tax-Sheltered Annuity: Also called a 403(b), an annuity that is a retirement plan under Section 403(b) of the Internal Revenue Code, which allows employees of government and nonprofit organizations to make pretax contributions up to a predefined annual limit.

Tax-Sheltered Investment: An investment vehicle that legally avoids or limits tax liabilities. For example, an Individual Retirement Account (IRA) allows for tax-deferred capital growth on retirement savings. Other examples include municipal bonds (munis) and annuities.

Taxable Event: An event or transaction with a tax consequence. One example for an investor is receiving interest and dividends.

Taxable Income: A taxpayer’s gross income less all allowable adjustments. Incorporated businesses derive net income before taxes after deducting total costs and expenses from gross sales.

Tenancy at Sufferance: An agreement that allows a tenant who has rented premises for the duration of a lease to continue to live at those premises until asked to leave by the landlord.

Tenant for Life: An individual may be given legal power to remain as a tenant for life on the premises of a property. The tenant has no ownership interest. Generally, on termination of the tenancy, the property either passes to a remainder beneficiary or reverts to the grantor.  

Tenants at Will: A person who lives on the premises of a property at the will or discretion of the owner, landlord, or property manager. The agreement is usually verbal.

Tenants by the Entirety: Spouses commonly use this form of ownership. Each spouse theoretically owns 100% of the property, but complete ownership passes at the first death to the surviving spouse without tax and probate.

Tenants in Common: Two or more owners who have undivided ownership (not necessarily equal) in property. This form of ownership does not have a right of survivorship in the event that one owner dies.

Term Certain: In terms of an annuity contract, a payout option that requires income to be paid for a specified period of time.

Term Insurance: A type of life insurance that pays benefits only when the insured dies within a specific period. If the insured lives beyond the end of the period, no benefits are payable. Term insurance has no cash value.

Time Deposit: An interest-bearing savings account or a certificate of deposit (CD) held by a banking institution for a fixed duration of time. Any withdrawal before the expiration date of the agreed term may result in a penalty to the depositor. Time deposits are often CDs, which are offered with maturities ranging from 30 days to five years. Usually, the longer the money is held, the better the return.

Time Horizon: The projected length of time for which an investor plans to hold investments.

Title: A document that identifies legal ownership of a property and is used to transfer ownership from a seller to a buyer.

Title Insurance: A form of insurance that protects against loss due to a defect in a real estate title, such as an ownership dispute or a lien against property. A mortgage lender generally stipulates that a borrower must purchase a title insurance policy.

Title Search: The inspection of city, town, or county records to determine the legal owner of a real estate property, as well as any applicable liens, mortgages, or future interests.

Top-Heavy Plan: A retirement plan that discriminates in favor of key employees and shareholder employees and that must abide by special rules. Generally, if more than 60% of benefits or account balances accrue to key employees, special vesting schedules apply and minimum benefit provisions for lower-paid employees are mandated.

Total Disability: A total disability usually indicates that a worker cannot complete most job requirements based on a physical or mental disability. In some cases, total disability is immediately subsequent to the loss of sight or limbs. In other situations, an “elimination” period provides a passage of time to confirm the disability status before an individual receives benefits. Private disability plans, employer group disability benefits, and Social Security replace a percentage of lost income for gainfully employed workers who have experienced a total disability.

Total Return: The gross annual return on an investment, including capital appreciation and distributions, interest, and dividends.

Trademark: A registered word, name, or insignia that may identify goods sold or services rendered as belonging to a business enterprise. A trademark is protected by law to prevent other businesses from producing similar symbols that would unfairly confuse the consumer.

Traditional Individual Retirement Account (IRA): A tax-deferred retirement savings vehicle that allows individuals to contribute a limited amount per year. Depending on their income and participation in employer-sponsored retirement plans, individuals may be able to deduct part or all of their contributions on their tax returns. Withdrawals are subject to ordinary income tax, and regulations stipulate that mandatory withdrawals, generally referred to as required minimum distributions (RMDs), must begin by age 70½. Withdrawals made before the age of 59½ may be subject to a 10% Federal income tax penalty.

Transaction Fee: A charge for various credit-related activities, such as receiving a cash advance or using an ATM.

Treasuries: Negotiated debt obligations that the U.S. government regularly offers at public auction through the Federal Reserve Bank. Treasuries have varying maturities and yields. Treasury bills have maturities of less than one year; notes less than ten years; and bonds less than 30 years. Issued treasuries may be purchased in the public marketplace and reflect current yields to maturities.

Treasury Bill: Also called a T-bill, a negotiable debt obligation that is issued by the U.S. government and backed by its full faith and credit. It has a maturity of one year or less and is exempt from state and local taxes. Treasury bills have face values ranging from $10,000 to $1 million, and they sell at a discount based on current interest rates.

Triple Net Lease: A lease in which the lessee pays for a property’s cost of maintenance and upkeep, taxes, utilities, and insurance. The tenant bears the risks associated with these fluctuating expenses.


Trust: A fiduciary relationship, wherein a grantor (also referred to as a settlor) transfers assets or property to a beneficiary or beneficiaries. A trustee, who may or may not be the grantor, manages the trust. Duties often include holding title to property, distributing assets, and overseeing investments and payments. A living trust is a trust created during the grantor’s lifetime; whereas, a testamentary trust is a trust created by a will.

Trustee: An individual or party responsible for managing a trust on behalf of a beneficiary or beneficiaries. Duties often include holding title to property, distributing assets, and overseeing investments and payments.

Truth In Lending Statement: A written statement required by the Federal Truth In Lending Law in which lenders must disclose to borrowers, in easy-to-understand language, the true cost of borrowing, including the interest rate, annual percentage rate (APR), and terms of the loan.

Turnkey: In the context of constructing housing, a development company would build a finished housing project ready for use by tenants. The management authority merely had to give the tenant a key to the apartment (hence, turnkey). This concept applies to any company that builds, produces, or installs a finished project or product that the receiving company, without technical servicing skills, can immediately put into full operation.  

U

Underwriting: The process by which an insurance company determines whether, and on what basis, it can assume the risk of a specific life insurance policy. Also, underwriting is the business of investment bankers, who purchase new issues of securities from a company or the government and then resell them to the public.

Unearned Income: Payment received in advance for undelivered products or incomplete service is unearned income and a current liability on business ledgers. Individual taxpayers must report all income not directly resulting from one’s profession, business, or occupation as unearned income.

Unemployment: When a previously employed worker is laid off or involuntarily “not in gainful employment,” he or she is considered unemployed and possibly eligible for certain state and Federal compensation and benefits.

Uniform Gift to Minors Act (UGMA): Also called the Uniform Transfer to Minors Act (UTMA) in some states, these laws adopted by most states allow an adult to contribute to a custodial account in a minor’s name without having to establish a trust or name a legal guardian.

Uniform Transfer to Minors Act (UTMA): Also called the Uniform Gift to Minors Act (UGMA) in some states, these laws adopted by most states allow an adult to contribute to a custodial account in a minor’s name without having to establish a trust or name a legal guardian.

United States Savings Bonds: Nonmarketable debt securities issued by the U.S. Treasury Department that are backed by the full faith and credit of the Federal government. They are considered low risk, and the interest income is generally not subject to state or local taxes. The Treasure Department currently offers three types of U.S. savings bonds: Series EE, Series I, and Series HH.

Universal Life Insurance: Life insurance that allows the holder to vary the amount and timing of premiums and to change the death benefit, based on the policyholder’s changing needs and circumstances. It is generally considered more flexible than traditional whole life insurance and includes a cash value savings feature that may allow certain premium funds to earn tax-deferred interest.

Unsecured Debt: Debt that is not guaranteed by collateral. If the borrower defaults, the issuer has no assets to back up the loan.

V

Valuation: Placing a value or price on an asset. For shares of stock, valuation is usually the relationship of price to earnings per share. For estate valuation, a professional appraisal assesses the value of all assets. For an unmarketable asset, a fair market valuation is a price upon which an informed buyer and seller might agree, assuming all pertinent facts are known.

Variable Annuity: A long-term contract sold by life insurance companies in which premiums are invested, and future payments to the purchaser are based on the performance of the underlying subaccounts. If an individual dies before receiving income from his or her variable annuity, the individual’s beneficiaries are entitled to the amount invested in the annuity, regardless of the portfolio’s performance.

Variable Interest Rate: A variable interest rate is one that fluctuates with a measure or an index, such as current money market rates or the lender’s cost of funds. Often, variable interest rate loans have a fixed rate for several years and then become variable. The borrower is usually protected from dramatic increases in the loan rate by a “rate cap.”

Variable Life Insurance: Life insurance with a face amount and cash value that fluctuates according to the performance of a separate investment fund.

Variable Rate Mortgage: Also called an Adjustable Rate Mortgage (ARM), a mortgage for which the interest rate is adjusted periodically, usually at intervals of one, three, or five years, based on a measure or an index, such as the rate on U.S. Treasury bills or the average national mortgage rate. In exchange for assuming some of the risk of a rise in interest rates, a borrower receives a rate at the beginning of an ARM that is lower than that of a fixed-rate mortgage.

Variable Universal Life Insurance: A life insurance policy that combines features of both variable life insurance and universal life insurance. A policyholder may invest a portion of premium funds, after certain deductions; modify the death benefit; and vary the coverage amount and/or the premium payments. Because investments may include securities, the Securities and Exchange Commission (SEC) generally requires a variable universal life insurance policy to include a prospectus that discloses policy operations, risks, expenses, and fees.

Venture Capital: For start-up business ventures, “seed money” provided by wealthy individuals, banks, Small Business Investment Companies (SBICs), Small Business Associations (SBAs), and other financial sources. While incorporating a higher degree of investment risk, these opportunities offer a greater potential for return on the venture capital invested.

Vested Interest: A claim on an asset or entity from which a participant, shareholder, or employee may procure future personal gain or profit. Those who possess vested interests generally promote and protect their common property.

Vesting: The process leading to a future point at which time money or property held in trust belongs to an individual, though it may not be available for distribution until a future date or occurrence. Vesting usually refers to the scheduled confirmation of ownership rights in qualified employee benefit retirement plans.

Volatility: The relative rate at which the price of a security moves up and down, found by calculating the annualized standard deviation of the daily change in price. The more volatile a security or mutual fund, the more it is subject to rapid and extreme price fluctuations relative to the market.

Voluntary Employee Contribution: An employee may be permitted to make voluntary contributions to a retirement plan, usually unmatched by the employer, in excess of mandatory contributions to his or her plan account. Voluntary employee contributions can be arranged to be deposited on a pretax or post tax basis.

W

Waiver of Premium: An insurance policy rider that allows a policyholder to stop making premium payments if the insured suffers a permanent disability. Generally, an additional cost is associated with for this rider.

Whole Life Insurance: Insurance that provides coverage for the insured’s entire life, provided the insured continues to pay the premiums. Premiums generally remain level for the life of the contract. In addition, there is also a cash value component that can be used to help supplement future financial needs.

Wholly Owned Subsidiary: A corporation acquired by another company: the buying company owns more than 50% of the voting stock of the acquired corporation.

Wide Area Network (WAN): A network that covers a large area, such as one that crosses national boundaries. The Internet is a wide area network.

Will: A written declaration documenting an individual’s wishes for the distribution of his/her assets after death. A will may also be used for other declarations, such as for naming guardians for minor children.

Withholding: The process by which an employer deducts a portion of employee wages, usually for income taxes. Employers base the withholding amounts on Form W-4, Employee’s Withholding Allowance Certificate, which employees submit when commencing employment.

Workers’ Compensation Insurance: Prior to 1971, a contract for employment was considered a voluntary act—signed by a laborer, worker, or employee—that absolved an employer from most acts of negligence. Today, however, workers’ compensation insurance compensates eligible employees who suffer physical harm or damage, disability, or death from an injury related to employment. Employees receive benefits on a no fault basis.

Working Capital: During the business life cycle, capital or money ensures that the business will be able to operate on a daily basis.

Work-Study: Federal program that awards students financial aid in exchange for on- or off-campus jobs.

X



Y

Yield: The annual gain or loss on an investment, generally expressed as a percentage. To determine the yield on a bond, divide the amount of interest received from the bond by the amount paid for the bond. For example, suppose an individual paid $5,000 for a bond. At 5% interest, he/she would earn $250 annually in interest income. The yield, $5,000 divided by $250, would be 5%. Similarly, to determine the yield on stocks, divide the dividend received per share by the amount paid per share.

Yield to Maturity (YTM): The return an investor receives if a long-term interest-bearing investment, such as a bond, is held until the date it becomes due and payable (maturity date). A calculation to determine the YTM of a bond, for example, would account for the interest rate, the payment schedule, the market value, the face value of the bond, and the length of the term.

Z

Zero-Based Budgeting: A type of budgeting in which every line item expense must be approved and justified. The budget starts from a “zero base.” With traditional budgeting, by contrast, only those expenditures that vary from the previous year need to be justified.

Zero Coupon Bond: A bond that makes no periodic interest payments, but sells at a deeply discounted face value. At the maturity date, the investor receives the full face value of the bond.

#’s

12b-1 Marketing Fee: The percent of a mutual fund’s assets used to defray marketing and distribution expenses. The amount of the fee is stated in the fund’s prospectus. A true no-load fund has neither a sales charge nor a 12b-1 fee.

200% Declining Balance: Also known as the double-declining balance depreciation method, an accounting method that—compared to the standard straight-line method—doubles an asset’s value, thereby accelerating its depreciation.

401(k): A qualified tax-deferred retirement plan that allows eligible employees to contribute a certain amount of compensation on a pretax basis. Employers may match a stated percentage of employee contributions to the plan. In many cases, employees have general responsibilities for investment choices and enjoy the direct tax savings.

401(k) Loan: A loan taken from a 401(k) retirement account. Some plans allow an individual to withdraw a percentage of an account balance; set minimum and maximum amounts are allowed. The loan is generally paid back, with interest, through payroll deductions. If an individual with an outstanding loan leaves an employer, the full amount of the loan is generally due. If the individual fails to repay the loan, it is considered a distribution, and ordinary income taxes are due. In addition, an early withdrawal tax penalty may apply if the individual is under the

403(b): Employees of nonprofit and governmental agencies have opportunities to invest for retirement under Section 403 of the Internal Revenue Code. Most 403(b) contributions are to tax-deferred fixed and variable annuity contracts.

529 Plans: State-sponsored higher education savings plans that offer tax benefits while allowing higher contributions than other savings alternatives, such as Coverdell ESAs (formerly known as Education IRAs) and custodial accounts. Although the details of these plans vary by state, they generally come in two forms: 1) prepaid tuition programs that allow participants to “lock in” tuition rates at eligible state colleges or universities with a lump sum investment or monthly installment payments, and 2) savings programs that allow for investment in the stock and bond markets. You may not need to reside in a state to participate in its plan.


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