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Investment Glossary
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A
Active Management: An investment approach that seeks to outperform
benchmark returns.
Alpha: The additional return
earned by a security or portfolio, in excess of a particular benchmark.
Historical alpha measures excess returns over time.
Asset Allocation: The process
of choosing the right investment class, such as stocks, bonds
and cash equivalents, and allocating funds to them, in order to
achieve a portfolio's investment objectives.
Asset Allocation Funds: Asset
allocation funds have the ability to shift assets among asset
classes (for example equities, bonds, and short-term instruments).
Asset allocation funds take the concept of a private asset manager
- a skilled professional who builds and manages a comprehensive
portfolio for a client - and apply it to a mutual fund.
B
Basis Point: A unit of measurement
equal to 1/100 of one percent.
Benchmark: An index that serves
as a standard against which a fund's performance is measured. For
example, a fund may be compared to a benchmark such as the Standard
& Poor's 500 Index in order to assess how it performs over time.
Beta: A measure of risk, expressed
as the volatility of a stock or portfolio relative to the market.
The greater the beta, the greater the volatility.
Blue-chip Stocks: Stocks of
well-established companies that have had a history of earnings and
dividend payments, as well as a reputation for sound management
and quality of products and services. While not all large cap stocks
are blue chip stocks, there is usually a large cap bias to blue
chip stocks.
Bond: An interest-bearing
promise to pay a specified sum of money -- the principal amount
-- due on a specific date.
Bond Funds: Registered investment
companies whose assets are invested in diversified portfolios
of bonds.
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C
Call Feature: The terms of
the bond contract giving the issuer the right or requiring the issuer
to redeem or "call" all or a portion of an outstanding
issue of bonds prior to their stated dates of maturity at a specified
price, usually at or above par.
Capital Gains: This is earnings from the sale of a security
at a higher price than the original purchase price.
Capital Gains Tax: This is
a tax on profits from the sale of certain assets such as securities
and real estate.
Capital Market: The market
where capital funds -- debt (bonds) and equity (stocks) -- are traded.
Collective Funds: Like mutual
funds, collective funds are "pooled" vehicles that commingle
the assets of multiple individuals or organizations to cost effectively
invest in a diversified portfolio. However, mutual funds must be
registered as investment companies under US securities laws. Bank
collective funds are organized as group trusts, and are exempt from
this registration requirement.
Collective funds are regulated by the Office of the Comptroller
of the Currency (OCC), which enforces US banking laws. Mutual funds
are registered with, and supervised by, the Securities and Exchange
Commission (SEC), which enforces US securities laws.
Credit Creation: Refers
to the process of creating new purchasing power out of nothing.
Current Yield: The ratio
of interest to the actual market price of the bond stated as a
percentage
Cyclicals: Stocks of companies
whose business prospects are tied to economic cycles. For example,
steel companies often do poorly in a recession, when consumers
are buying fewer large items such as cars and refrigerators.
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D
Derivative: A financial contract
that is one step removed (or derived) from a share of stock, commodity,
interest rate, currency or market index. A stock option, for example,
is a derivative security whose value depends on the price of the
underlying stock. Derivatives can be used by investors as a speculative
tool, or to protect assets against changes in value.
Disequilibrium: Since the necessary conditions
to obtain equilibrium are so stringent that they only ever apply
in a theoretical environment, we know that there cannot be equilibrium
in any market in the real world. All markets are in a state of
disequilibrium, hence rationed, hence determined by quantities
(short side principle) not prices. For more see 'New Paradigm
in Macroeconomics', R. Werner, Palgrave Macmillan, 2005.
Dividends: Mutual fund dividends
are paid out of income from the fund's investments. The tax on such
dividends depends on whether the distributions resulted from interest
income, or dividends received by the fund.
E
Emerging Market: A securities
market that is of smaller size or that has a short operating history,
for example, Greece, Russia, China, and Brazil. Usually volatility
and risks tend to be higher than in other markets.
Expense Ratio: Annual percentage
of fund's assets that is paid out in expenses. Expenses include
management fees and all the fees associated with the fund's daily
operations.
F
Futures Contract: An obligation
to buy or sell a particular asset or commodity at a future date
and at a pre-set price. Unlike forward contracts, futures are exchange-traded
securities and are subject to strict regulation.
G
Global Funds: These broadly
diversified funds offer the highest level of diversification among
international funds because they can invest anywhere in the world,
including the U.S.
Growth Funds: Growth funds
are designed to pursue capital appreciation over the long-term.
Some growth funds are broad-based, meaning that they have a wide
range of stocks and industries in which they can invest. Others
have a narrower focus - for example, they may invest in a particular
type of stock, such as small-cap or cyclical stocks, or use a specialized
approach to stock selection, such as investing only in stocks that
are currently underpriced. Growth funds are more volatile than more
conservative income or money market funds and generally reflect
changes in market conditions and other company, political, and economic
news.
Growth Stocks: Stocks of companies
that have shown or are expected to show rapid earnings and revenue
growth. Growth stocks are riskier investments than most other stocks
and usually make little or no dividend payments to shareholders.
H
Hedge: A financial technique
whose purpose is to offset the risk of loss from future price fluctuations.
In a currency hedge, for example, a US investor who buys Japanese
stocks would simultaneously purchase a futures contract in yen,
in order to protect himself against a decrease in the value of the
Japanese currency, which would lower the return of his stock investment
in dollar terms.
I
Index Funds: A passively managed,
limited-expense (advisor fee no higher than 0.50%) fund designed
to replicate the performance of an unmanaged stock index on a reinvested
basis.
Index Investing (also called passive
investing): an investment strategy in which the goal is to replicate
the results of a particular market index or benchmark.
Institutional Investor: An
organization whose primary purpose is to invest its own assets or
those held in trust by it for others. Includes pension funds, investment
companies, universities, and banks.
Investment Grade or Investment
Grade Bond: The broad credit designation given to corporate
and municipal bonds which have a high probability of being paid
and minor, if any, speculative features. Bonds rated Baa and higher
by Moody's Investors Service or BBB and higher by Standard &
Poor's are deemed by those agencies to be "investment grade."
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J-K
Junk Bond: A bond rated lower
than Baa/BBB, also called a "high-yield" bond. Junk bonds
are speculative compared with investment grade bonds.
L
LLI: Leading Liquidity Index.
Proprietary indicator of Profit Research Center Ltd. which measures
the net credit creation of the central bank.
Load: A sales charge added
to the price of the fund. Mutual funds that don't have any sales
charges are called no-load funds.
M
Market Capitalization: In
a Company Profile, the last closing share price times the latest
number of shares outstanding.
Market Neutral: A way of
investing such that a positive return can be achieved, no matter
whether the market is rising or falling. This may take the form
of buying (taking a 'long position') when the market is expected
to rise, and selling (even if one does not own the asset, which
is called 'shorting') when it is expected to fall. An overall
market neutral strategy can also be achieved on an international
scale by suitable asset allocation, such as buying stocks in an
accelerating economy and buying bonds in a decelerating economy.
Mid-cap Stocks: An investment
categorization based on the market capitalization of a company.
Modern Portfolio Theory: An
investment approach that emphasizes the rigorous analysis of risk
and return as the basis for investment decisions. Modern portfolio
theory holds that investors weigh risk and return when making investment
choices, and that they generally seek higher returns in exchange
for assuming greater levels of risk. The theory also emphasizes
three elements that are crucial to building portfolios, including
asset allocation; optimization of the risk/return tradeoff; and
performance attribution.
Moving Averages: The average
price of a mutual fund calculated periodically over some designated
period of time and plotted on a chart against actual price. The
effect of a moving average is to minimize short-term price fluctuations
and highlight long-term price fluctuations. A long-term moving
average is the average of each week's closing adjusted NAV for
the past 13 to 39 weeks. The long-term moving average chart shows
the weekly average for the past two years and four months for
the domestic and international equity funds. The Select funds
have an additional short-term moving average chart that shows
the daily average for the past three months. A short-term moving
average is the average of each day's closing adjusted NAV for
the past 13 and 39 weeks.
Mutual Fund: An investment
that pools shareholders money and invests it toward a specified
goal. The group's money is invested by a professional investment
manager.
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N
NASDAQ Composite Index: A
market capitalization-weighted index that is designed to represent
the performance of the National Market System which includes over
5,000 stocks traded only over-the-counter and not on an exchange.
Net Asset Value (NAV): The
dollar value of one share of a fund determined by taking the total
assets of a fund, subtracting the total liabilities, and dividing
by the total number of shares outstanding.
Net Yield: Rate of return
on a security net of out-of-pocket costs associated with its purchase,
such as commissions or markups.
Nikkei 225 Average Index:
The Nikkei-225 Stock Average is an unmanaged price-weighted index
of 225 top-rated Japanese companies listed in the First Section
of the Tokyo Stock Exchange. The Nikkei Stock Average was first
published on May 16, 1949, where the average price was Y176.21 with
a divisor of 225.
Nominal Yield (Coupon Yield):
The stated interest rate paid on a bond, computed by dividing the
amount of annual income by the bond's par value.
O
Option: A right to buy or
sell shares at a guaranteed price for a specific period of time.
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P
Paper: Any short-term debt
security.
Par: The nominal or face
value of a security as given on the certificate or instrument.
The par value is the amount on which interest payments are calculated.
Portfolio: The mix and composition
of an investor's holdings among different classes of securities
such as bonds, mortgages, and common stocks.
Public Offering: This refers
to the offering of stock to the investment public. This occurs after
Securities and Exchange Commission regulatory regulations have been
satisfied. The offering is usually made by an investment banker
or syndicate, group of financial institutions, on behalf of the
issuer (e.g., the company that wants to sell its stock to the public).
Put Option: A contract that
gives the holder the right to sell a stock or bond at a future date
and at a pre-set price.
Q
Quantitative Funds: Mutual
funds whose portfolio management decisions are based on quantitative
analysis, which is usually developed using computerized statistical
models of market behavior.
R
R2: Beta should be considered
with R-squared (R2), a historical measurement which indicates how
closely a fund's past fluctuations have correlated with the fluctuations
of its benchmark index, such as the S&P 500. For example, a
fund with an R-squared of 0.80 indicates that 80% of the fund's
past fluctuations were explained by fluctuations in the benchmark
index. Generally, the higher the R2, the more meaningful the beta
figure.
Ratings: Designations used
by investors' services to give relative indications of credit quality.
Real Estate Investment Trust -
REIT: A company, usually traded publicly, that manages a portfolio
for real estate to earn profits for shareholders.
Redemption: The paying off
or buying back of a bond by the issuer.
Relative Volatility: A ratio
of a portfolio's standard deviation to the standard deviation
of a benchmark index.
Return: The ratio of the value
of an investment at the end of a period, plus any payouts during
the period, divided by the initial value.
Risk: Simply put, risk is
the possibility that a particular outcome may not occur. In investment
terms, risk is used to define all of the uncertainty relating to
the outcome, including upside as well as downside possibilities.
(The popular definition of risk is the downside only). Risk in investment
returns is measured by the variance of the historical returns.
S
Sector Funds: Sector funds
invest in the stocks of one specific sector of the economy, such
as health care, chemicals, or retailing. These funds tend to be
more volatile than funds holding a diversified portfolio of stocks
in many industries.
Security: Generally, an instrument
evidencing debt of or equity in a common enterprise in which a person
invests on the expectation of financial gain. The term includes
notes, stocks, bonds, debentures or other forms of negotiable and
non-negotiable evidences of indebtedness or ownership.
Settlement: This refers to
the point at which a broker either pays for the securities bought
by an investor or receives payment from the investor that brought
the securities.
Small-cap Stocks: An investment
categorization based on the market capitalization of a company.
Stock Option: A contractual
right that a corporation grants to an individual so that he/she
may purchase a specified number of shares of stock at a specified
price for a specified period of time. In general, there are two
types of stock options, incentive stock options (ISO) and non-qualified
stock options (NSO).
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T
Tokyo Stock Exchange (TOPIX): The Tokyo Stock Exchange
Index (TOPIX) is a market capitalization weighted index of over
1,100 stocks traded in the Japanese market.
Total Return: Return on an investment, taking
into account capital appreciation, dividends or interest, and
individual tax considerations adjusted for present value and expressed
on an annual basis.
U
Unit Investment Trust (UIT): An SEC registered investment
company that invests in a portfolio of securities on behalf of
investors who share a common objective. Investors receive periodic
interest and, upon maturity, redemption value. The UIT is not
actively managed.
V
Value Stocks: Stocks that are considered to be undervalued
based upon such ratios as price-to-book or price-to-earnings (P/E).
These stocks generally have lower price-to-book and price-earnings
ratios, higher dividend yields and lower forecasted growth rates
than growth stocks.
Volatility Measures: Volatility measures the
variability of historical returns. Relative Volatility, Beta,
and R2 compare a portfolio's total return to those of a relevant
market, represented by the benchmark index. Standard Deviation
is calculated independent of an index.
W
Withholding Tax: A tax assessed by the relevant tax authority
on dividends and interest. Tax rates can vary by market, instrument,
and type of investor. In some markets, withholding tax is partially
refundable.
XYZ
Yield: The percentage of return an investor receives, based
on the amount invested or on the current market value of holdings.
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