Glossary of Terms

Active Investing

Making investing decisions with the expectation of earning better returns than average.

Annual Expense Ratio (Expense Ratio)

The annual fee charged by investment companies for managing the funds, stated as a percentage of total assets under management.

Asset Allocation

The process of allocating one's funds to the major asset categories such as stocks, bonds , cash equivalents, real estate, gold, and so forth. The percentages add up to 100 percent.

Bond Index Fund

A mutual fund holding bonds designed to match the performance of a stated bond index.

Capital Gain

The difference between the net sales price of a security and its net cost (sometimes called the basis). The capital gain arises because the sales price is greater than the original cost.

Capital Gains Distribution

Profits distributed to shareholders as a result of a mutual fund selling securities in its portfolio. For tax purposes, capital gains are treated differently than income distributions.

Capital Loss

The difference between the net cost of a security and the net sales price. The capital loss arises because the cost was greater than the sales price.

Cash Dividend

A dividend paid in cash to a company's shareholders. Dividends are taxed at ordinary tax rates, as opposed to capital gains, which are taxed at a special capital gains rate.

Class A Shares

The traditional type of mutual fund shares carrying a load fee, charging a front-end sales charge. Thus, buyers pay up front when purchasing Class A shares. A small 12b-1 fee may be charged.

Class B Shares

Shares of a load mutual fund that carry a deferred sales charge payable when the shares are sold, and declining over a five- or six-year period until eliminated. Generally a larger 12b-1 fee is charged annually, such as one percent. The annual operating expense ratio may be higher than in the case of Class A shares.

Class C Shares

These shares could charge a small redemption fee, and do charge a higher 12b-1 fee similar to that on the Class B shares. These shares do not convert after a period to Class B shares, and therefore charge the higher 12b-1 fee each year. The annual operating expense ratio for Class C shares is often higher than for other shares.

Closed-end Investment Company

One of three forms of an investment company, closed-end funds trade on exchanges like individual stocks. Like a mutual fund, they hold portfolios of securities and are owned by investors.

Compounding

The process of reinvesting each cash flow payment to earn additional returns. The reinvested cash flows become part of the principal and earn additional returns over future periods.

Direct Investing

Investors make their own buy-and-sell decisions, typically through a brokerage account.

Distribution Fee (12b-1 fee)

An additional fee charged by some mutual funds intended to pay for the promotion, distribution, and marketing of the fund. Generally ranges from 0.25% of assets to 1% of assets. A true no-load fund does not charge this fee, although some no-loads charge a fee of 0.25%. This fee is a direct cost to the shareholders.

Diversification

The act of spreading investing risk by holding multiple securities instead of one or a few securities.

Equity (Stock) Funds

Funds that primarily hold common stocks.

Exchange Traded Funds ( ETFs )

An alternative to mutual funds that combines the features of an index mutual fund with the advantages of trading individual stocks at a very low annual expense.

Family of Funds

One investment company, such as Fidelity or Vanguard, managing multiple funds, each of which has a different objective.

Fund Supermarket

A vehicle for allowing investors to choose from hundreds or thousands of mutual funds and hold them in one place, their brokerage account.

Folios

A set of stocks taken together, under the control of the investor, and administered by a third party such as FOLIOfn.

Growth Stocks

Stocks with investor expectations of above-average future growth in earnings and above-average valuations as a result.

Index Fund

A fund that is not actively managed, but rather designed to mimic an index of securities such as the S&P 500 Index.

Indirect Investing

Process whereby an investor turns his or her money over to an investment company, who assumes the job of investing and managing the money.

Investment Company

Financial company whose business is to offer portfolios of securities that investors can own.

Investment Company Act of 1940

Federal legislation governing investment companies, widely considered a very successful piece of legislation.

Investment Company Institute ( ICI )

The trade organization for investment companies, providing information, education, lobbying, and so forth, for mutual funds and closed-end funds.

IShares

ETFs offered by Barclays Global Investors, covering various specific markets, countries , industry sectors, and so forth.

Large-Cap Stocks

Stocks with a market capitalization (price multiplied by number of shares) of $5 billion or more.

Load Fund

A fund that charges a sales charge to the buyer when the fund is purchased. The sales charge is stated as a percentage of the purchase amount.

Mid-Cap Stocks

Stocks with a market capitalization (price multiplied by number of shares) of $1 billion to $5 billion. While "large" companies, these stocks can still grow significantly in size.

Money Market Funds

Funds that invest in short- term , "safe" assets, such as Treasury bills, certificates of deposit, and so forth.

Morningstar

An investment advisory/newsletter service that covers mutual funds, providing information about them, ratings, and so forth.

Morningstar Ratings

Morningstar's system of rating mutual funds, using one to five stars. The ratings are based on historical risk-adjusted performance for funds that have at least a three-year history.

Mutual Fund ( Open -end Investment Company)

The most popular form of investment company. Mutual funds hold a portfolio of securities on behalf of their shareholders, who buy shares from the fund and sell them back to the fund. The shareholders are entitled to a pro rata share of all income and capital gains earned by the mutual fund, after deduction of expenses.

Net Asset Value ( NAV )

The per-share value of the mutual fund, determined by calculating the total value of all securities in its portfolio and dividing by the number of shares of the mutual fund outstanding.

No-Load Fund

A mutual fund that does not charge a sales charge when shares are purchased. Therefore, 100 percent of the investor's funds are invested, without deduction for a sales charge.

Open-end Fund

Popular name for a mutual fund, which is one of three forms of an investment company.

Passive Investing

Investing without making regular decisions as to stock selection and market timing. Basically, a buy-and-hold approach is taken.

Prospectus

Funds are required to provide prospective purchasers with a statement ”the prospectus ”outlining such details as investing objectives, all costs, illustrative performance over a period of time, purchase and redemption procedures, and so forth.

Qubes

An ETF, designed to match the Nasdaq 100 Index.

Russell 2000

A well-known index of so-called small stocks. Size is measured by the market capitalization of the company (stock price multiplied by the number of shares outstanding).

S&P 500 Index

A major measure of the overall stock market, reflecting the performance of 500 large companies. This index is heavily used by institutional investors.

Securities and Exchange Commission ( SEC )

The federal agency with jurisdiction over financial markets, enforcing regulations, and monitoring conditions.

Separately Managed Account (Managed Account)

A privately managed investment account opened with brokerage firms, or through financial advisors. Such accounts combine into one fee-based alternative the convenience of a mutual fund with the control of a brokerage account.

Small-Cap Stocks

Stocks with a market capitalization (price multiplied by number of shares) of $1 billion or less.

SPDRs ("Spiders")

A well-known exchange-traded fund that concentrates on the S&P 500 Index.

Survivorship Bias

When a group of mutual funds is measured as to performance, the results do not reflect that a number of funds were closed during the measurement period primarily because of bad performance. The resulting distortion in the results, arising from leaving out these bad performers, is referred to as survivorship bias.

Taxable Investing

Investing in normal brokerage accounts, and so forth, in which the investor must pay taxes yearly on any taxable income and capital gains received.

Tax-Deferred Investing

Investing in a tax-deferred account, such as an IRA or SEP, in which taxes are not payable each year. Once funds start to be withdrawn from these accounts, the monies become taxable.

Tax Efficient Funds (Tax Efficiency)

Funds managed on the basis of after-tax returns, by taking actions to minimize taxable distributions.

Treasury Bills

Short-term debt of the federal government, presumed to be free of default risk. Maturities range up to one year. Sold at a discount.

Treasury Bonds

Long-term debt of the federal government, presumed to be free of default risk. Pays semiannual interest.

Turnover Ratio

The percentage of a fund's securities that are replaced each year or turned over. A high turnover ratio for a fund indicates frequent trading of the fund's positions .

Value Stocks

Stocks with cheap assets and strong balance sheets, generally with characteristics such as low P/E ratios, low Price/Sales ratios, and so forth.

Wilshire 5000 Index

Actually contains 6,000+ stocks. The broadest measure of the U.S. stock market.