Glossary of Investment Terms

 

Advice: Guidance and/or recommendation such as advising specific investment asset allocations based on age and circumstances.

After-tax: Money you put into your 401(k) or other employer-sponsored retirement savings plan in addition to your pretax contribution.

Asset Class: Different categories of investments are sometimes described as asset classes. The major ones are stocks, bonds, and cash or cash equivalents.

Asset Allocation: An employee's division of money between different types of investment choices. An example of asset allocation would be 70 percent stocks and 30 percent bonds.

Automatic Payroll Deduction: When a plan participant arranges to have pre-tax contributions made directly from their paycheck, it is arranged through salary deduction.

Beneficiary: A person, persons or trust designated to receive the plan benefits of a participant in the event of the participant's death.

Bond: A certificate representing creditor ship; the issuer pays interest on specific dates and redeems by paying the principal at maturity.

Bull Market: A sharp, prolonged rise in the price of stocks, usually lasting several months. Because a bull attacks by thrusting upward, this term is associated with a rising market.

Compounding: The process of adding interest earned to principal

Contribution: Designated amount from pay set aside for 401(k) deferral. For example: a pre-tax 401(k) contribution is an amount deferred from pay each pay period before taxes and invested in the participant's 401(k) account.

Diversification: Reducing investment risk by putting funds in several different investment categories.

Deferral: A pre-tax contribution set aside from an employee's paycheck.

Defined Contribution Plan: An employer-sponsored plan in which contributions are made to individual participant accounts, and the final benefit consists solely of assets (including investment returns) that have accumulated in these individual accounts. Depending on the type of defined contribution plan, contributions may be made either by the company, the participant, or both.

Disclosure: Plan sponsors must provide access to certain types of information for participants, including summary plan descriptions, summary of material modifications, and summary annual reports.

Distribution: Any payout made from a retirement plan.

Dollar Cost Averaging: Investing equal dollar amounts at regular intervals; results in buying more shares when the price is low and fewer shares when the price is high, for an average cost per share lower than the average price per share.

Dow Jones: A price-weighted average of 30 actively traded blue-chip stocks. It is the oldest and most widely used of all stock market indicators.

Eligibility: Conditions that must be met in order to participate in a plan, such as age or length of service requirements.

Equity: Ownership interest in a corporation.

FICA: The Federal law that taxes employee wages for Social Security and other programs.

Fixed Income: government, corporate, and municipal bonds, preferred stock, and guaranteed , (GICs), pay interest or dividends on a regular schedule. In addition, bonds promise return of your principal when the bond matures.

Fiduciary: A person with the authority to make decisions regarding a plan's assets or important administrative matters. Fiduciaries are required under ERISA to make decisions based solely on the best interests of plan participants.

Global Fund: Funds that invest in stocks of foreign companies. A global fund may own securities from both the U.S. and non-U.S. market.

Hardship Withdrawal: When a participant withdraws plan funds prior to retirement, at the employer's option. Eligibility for such distributions exists when financial hardship is present. These distributions are taxable as early distributions and are subject to a ten percent early withdrawal federal income tax penalty if the participant is under age 59½.

Index Fund: Fund is designed to mirror the performance of a stock or bond index, purchases all of the securities included in the index, or a representative sample of them and adds or sells investments only when the securities in the index are changed.

Inflation: A steady process of a rising price level.

Interest: The profit in goods or money that is made on invested capital.

International Fund: Mutual funds that invest in stocks of foreign companies. An international fund may only own non-U.S. securities.

IRA: Personal retirement vehicles in which a person can make annual tax deductible contributions. These accounts must meet IRS Code 408 requirements, but are created and funded at the discretion of the employee. They are not employer sponsored plans.

IRS: This branch of the U.S. Treasury Department is responsible for administering the requirements of qualified pension plans and other retirement vehicles.

Large Cap Fund: The stocks of companies with market capitalizations of $5 billion.

Liquidity: How easily one's assets can be converted into cash.

Market Risk: The risk of a decline in the price of securities.

Market Volatility: The unpredictability of the investment market.

Matching Contribution: A contribution made by the company to the account of the participant in ratio to contributions made by the participant.

Mid Cap Fund: Is issued by a corporation whose market capitalization is between $500 million and $5 billion.

Mutual Fund: A professionally managed investment that sells shares to investors and pools the capital it raises to purchase stocks, bonds, or money market securities.

NASDAQ: A computerized stock trading network that allows brokers to get price quotations for stocks being traded electronically or sold on the floor of a stock exchange.

NYSE: The largest equity exchange in the world., Common and preferred stock, bonds, warrants, and rights are all traded on the NYSE, which is also known as the Big Board.

Plan Loan: Loan from a participant's accumulated plan assets, not to exceed 50 percent of the balance or $50,000, less the amount of any outstanding loans. This is an optional plan feature.

Portfolio: The combined securities held by an individual or institution. A portfolio may include stocks, bonds, mutual funds or other types of securities.

Portability: This occurs when, upon termination of employment, an employee transfers pension funds from one employer's plan to another without penalty.

Rollover: The action of moving plan assets from one qualified plan to another or to an IRA within 60 days of distributions, while retaining the tax benefits of a qualified plan.

Prospectus: A document giving details about an offering of securities investment for sale to the public. It gives a detailed financial background of the investment.

Risk Tolerance: The amount of investment emotion you can stand is called your risk tolerance. You do not want to abandon your plan because you have an unexpected emotional response to short-term results. Knowing your personal risk tolerance in important in establishing your long-term investment and savings plan.

SEC: The SEC is an independent federal agency that oversees and regulates the securities industry in the US, and enforces securities laws.

Securities: Any note, stock, debenture or certificate of participation.

Small Cap Fund: Fund comprised of relatively small publicly traded corporations, with a total market value, or capitalization, of less than $500 million.

Sponsor: The entity responsible for establishing and maintaining the plan.

Standard and Poor's: Five hundred widely held common stocks whose average performance serves as a broad-based measurement of changes in stock price.

Stock: Shares of a public corporation. Owners are usually entitled to receive dividends and vote on important company matters.

Summary Plan Description: A document describing the features of an employer-sponsored plan. The primary purpose of the SPD is to disclose the features of the plan to current and potential plan participants. ERISA requires that certain information be contained in the SPD, including participant rights under ERISA, claims procedures and funding arrangements.

Trustee: The individual, bank or trust company having fiduciary responsibility for holding plan assets.

Value Fund: Mutual fund manager buys primarily undervalued stocks for the fund's portfolio with the expectation that these stocks will increase in value.

Vested: The participants' ownership right to company contributions.

Wall Street: Name for the financial district in lower Manhattan, New York City, and the street where the NYSE, AMEX and many banks and brokerages are located. Sometimes also used to refer to the investment community in general.

 

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