vocab quiz

Margin

A speculative technique whereby an investor borrows part of the money needed to buy a particular stock.

Reinvestment plan

A service provided by an investment company in which income dividends and capital gain distributions are automatically reinvested to purchase additional shares of the fund.

Earnings per share

A corporation’s after-tax income divided by the number of outstanding shares of a firm’s common stock.

No-load fund

A mutual fund for which the individual investor pays no sales charge.

Maturity date

For a corporate bond, the date on which the corporation is to repay the borrowed money.

Liquidity

The ability to readily convert financial resources into cash without a loss in value.

Load fund

A mutual fund in which investors pay a commission (as high as 8½ percent) every time they purchase shares.

Market order

A request to buy or sell a stock at the current market price.

Dividend yield

The annual dividend amount divided by the investment’s current price per share.

Corporate bond

A corporation’s written pledge to repay a specified amount of money with interest.

Business cycle

The increase and decrease in a nation’s economic activity.

High-yield bonds

Corporate bonds that pay higher interest but also have a higher risk of default.

Contingent deferred sales load

A 1 to 5 percent charge that shareholders pay when they withdraw their investment from a mutual fund.

Fundamental analysis

An investment practice based on the assumption that a stock’s intrinsic or real value is determined by the company’s future earnings.

Face value

The dollar amount the bondholder will receive at the bond’s maturity.

Debenture

A bond or unsecured debt instrument that is backed only by the reputation of the issuing corporation.

Asset allocation

The process of spreading your assets among several different types of investments (sometimes referred to as asset classes) to lessen risk.

Exchange-traded fund (ETF)

A fund that generally invests in the stocks or other securities contained in a specific stock or securities index.

Dividend

A distribution of money, stock, or other property that a corporation pays to stockholders.

Yield to maturity

A yield calculation that takes into account the relationship among a bond’s maturity value, the time to maturity, the current price, and the dollar amount of interest.

Government bond

A written pledge of a government or a municipality to repay a specified sum of money, along with interest.

Rate of return

The percentage of increase in the value of savings as a result of interest earned; also called yield.

Call feature

A feature that allows the corporation to call in, or buy, outstanding bonds from current bondholders before the maturity date.

Secondary market

A market for existing financial securities that are currently traded among investors.

Net value asset (NVA)

The current market value of the securities contained in the mutual fund’s portfolio minus the mutual fund’s liabilities, divided by the number of shares outstanding.

Mutual fund

Pools the money of many investors—its shareholders—to invest in a variety of securities.

Preferred stock

A type of stock that gives the owner the advantage of receiving cash dividends before common stockholders are paid any dividends.

Portfolio construction

The process of choosing different types of stocks, bonds, funds, and other investment alternatives to obtain larger returns while reducing risk.

Expense ratio

All the different management fees, 12b-1 fees, if any, and fund operating costs for a specific mutual fund.

Capital gain distribution

The payments made to a fund’s shareholders that result from the sale of securities in the fund’s portfolio.

Turnover ratio

The percentage of a fund’s holdings that have changed or “been replaced” during a 12-month period.

Bond indenture

A legally binding contract that details all of the conditions relating to a bond issue.

Dividend payout

The percentage of a firm’s earnings paid to stockholders in cash.

Total return

A calculation that includes the annual dollar amount of dividends as well as any increase or decrease in the original purchase price of the investment.

Limit order

A request to buy or sell a stock at a specified price or better.

Price-earnings ratio

The price of a share of stock divided by the corporation’s earnings per share of stock.

Primary market

A market in which an investor purchases financial securities, via an investment bank or other representative, from the issuer of those securities.

Open-end fund

A mutual fund whose shares are issued and redeemed by the investment company at the request of investors.

Emergency fund

An amount of money you can obtain quickly in case of immediate need.

Beta

A measure reported in many financial publications that compares the volatility associated with a specific stock issue with the volatility of the overall stock market or an index like the Standard & Poor’s 500 Stock Index.

Securities exchange

A marketplace where member brokers who represent investors meet to buy and sell securities.

Stop-loss order

An order to sell a particular stock at the next available opportunity after its market price reaches a specified amount.

Common stock

The most basic form of ownership for a corporation.

Day trader

An individual who buys and then later sells stocks and other securities in a very short period of time.

Initial public offering (IPO)

Occurs when a corporation sells stock to the general public for the first time.

Speculative investment

A high-risk investment made in the hope of earning a relatively large profit in a short time.

Closed-end fund

A fund whose shares are issued by an investment company only when the fund is organized.

12b-1 fee

A fee that an investment company charges to defray the costs of marketing and selling fund shares and commissions paid to brokers who sell shares in the mutual fund.