Investing

Alpha

Definition: The amount of return expected from an investment from its inherent value.

Example: Sarah's investment fund has an alpha of 2.0, indicating that it outperformed the market by 2% based on its inherent risk level and expected returns.

Alternative Minimum Tax (AMT)

Definition: The amount of return expected from an investment from its inherent value.

Example: After filing his taxes, John realized he owed more under the AMT rules, designed to ensure high earners like him pay a minimum amount of tax, regardless of deductions and credits.

Annual Report

Definition: The yearly audited record of a corporation or a mutual fund's condition and performance that is distributed to shareholders.

Example: The shareholders received the company's annual report, which provided a detailed account of its financial performance, including profits, losses, and future projections for the year.

Annualized

Definition: A procedure where figures covering a period of less than one year are extended to cover a 12-month period.

Example: When reviewing the quarterly earnings, the financial analyst annualized the data to project what the earnings might look like over a full 12-month period.

Annualized rate of return

Definition: The average annual return over a period of years, taking into account the effect of compounding. Annualized rate of return also can be called compound growth rate.

Example: Lisa's investment portfolio has an annualized rate of return of 7%, reflecting the compounded growth of her investments over the last five years.

Appreciation

Definition: The increase in value of a financial asset.

Example: The house James bought five years ago for $200,000 has seen significant appreciation and is now valued at $300,000 due to market growth.

Asset allocation

Definition: The process of dividing investments among cash, income and growth buckets to optimize the balance between risk and reward based on investment needs.

Example: Tom's retirement portfolio has a conservative asset allocation, with 40% in stocks, 50% in bonds, and 10% in cash, to balance risk and stability.

Asset class

Definition: Securities with similar features. The most common asset classes are stocks, bonds and cash equivalents.

Example: The financial advisor recommended diversifying across multiple asset classes, such as stocks, bonds, and real estate, to manage risk effectively.

Average maturity

Definition: For a bond fund, the average of the stated maturity dates of the debt securities in the portfolio. Also called average weighted maturity. In general, the longer the average maturity, the greater the fund's sensitivity to interest-rate changes, which means greater price fluctuation. A shorter average maturity usually means a less sensitive - and consequently, less volatile - portfolio.

Example: The bond fund's average maturity is seven years, making it more sensitive to interest rate changes but potentially offering higher returns than a shorter-term bond fund.

Balanced fund

Definition:A mutual fund that seeks both growth and income by investing in a mix of stocks and bonds from various industries and regions.

Example:Maria invested in a balanced fund that includes a mix of stocks and bonds from various industries and regions to achieve both growth and income. This fund offers a moderate risk level by diversifying across asset types and geographical areas, providing her with stable returns.

Bear market

Definition:Definition:A prolonged period of declining stock prices, typically marked by a drop of 20% or more, often due to widespread pessimism, rising unemployment, or a recession. The opposite of a bull market.

Example:During the 2008 financial crisis, the stock market entered a bear market, with prices dropping over 20% amid fears of a deepening recession and increasing unemployment. Investors were selling off assets, leading to further declines driven by widespread pessimism.

Best in class

Definition:A top-performing product, service, or individual within a specific category or peer group. / (or) A sustainable investment approach that focuses on companies leading their peer groups in sustainability performance.

Example:Green Investments focuses on a best-in-class approach by investing in companies that are leaders in sustainability within their industries. These companies not only deliver strong financial returns but also demonstrate top environmental, social, and governance (ESG) practices.

beta

Definition:Definition:A measure of an investment's volatility compared to the overall market, where 1 is neutral, above 1 is more volatile, and below 1 is less volatile.

Example:John's portfolio has a beta of 1.2, meaning it is 20% more volatile than the overall market. This suggests his investments could yield higher returns, but they also come with a higher risk of loss during market downturns.

Blue chip

Definition:A high-quality, low-risk investment, typically referring to the stocks of large, well-established companies with a history of reliable performance. The term comes from poker, where blue chips are the most valuable.

Example:Emily prefers investing in blue-chip stocks like Apple and Microsoft, as these companies have a long history of stability, solid earnings, and consistent dividends. These investments are considered low-risk compared to smaller, less-established companies.

bond

Definition:A type of loan made by an investor to a corporation, municipality, or the U.S. government, where the issuer agrees to repay the loan on a specified date and pay interest at regular intervals.

Example:Mark bought a municipal bond issued by his city, which promises to repay him the principal amount in ten years. In the meantime, he will receive interest payments semi-annually, providing a steady income stream.

breakpoint

Definition:The investment level at which a mutual fund investor qualifies for a reduced sales fee, which can be achieved through a single large purchase or multiple smaller ones.

Example:When Jack's investment in a mutual fund reached $50,000, he hit the breakpoint, qualifying him for a reduced sales fee. This discount encourages investors to invest more money into the fund.

Bull market

Definition:A market characterized by rising prices and optimistic investor sentiment. The opposite of a bear market.

Example:In the late 1990s, the stock market experienced a bull market, with stock prices rising steadily over several years. Investors were optimistic about economic growth and corporate earnings, leading to increased buying activity.

Bond fund

Definition:Definition:A mutual fund that invests primarily in bonds.

Example:Sarah invested in a bond fund that diversifies her investment across various types of bonds, including government and corporate bonds. This fund offers lower risk than stocks and regular interest income.

Capital gain

Definition:The profit made when a security is sold for more than its purchase price.

Example:Alex bought shares of a company for $100 each and sold them a year later for $150 each, realizing a capital gain of $50 per share. This gain would be subject to taxes based on the holding period.

Capital gains ex-date

Definition:The date after which a shareholder is no longer eligible to receive a declared capital gain distribution from a security or mutual fund.

Example:If an investor sells shares on the capital gains ex-date, they are not entitled to the capital gains distribution declared by the mutual fund. The ex-date typically precedes the record date by one business day.

Capital gains long term

Definition:Definition:The profit from selling an asset for more than its purchase price, held for over one year.

Example:Maria held shares in a renewable energy company for three years and then sold them for a $10,000 profit. Since the holding period was more than a year, this qualifies as a long-term capital gain, taxed at a lower rate.

Capital gains reinvest NAV

Definition:The profit from selling an asset, automatically reinvested into more shares of the same security or mutual fund at its net asset value.

Example:Jason's mutual fund generated a $1,000 capital gain, which he chose to reinvest automatically in more shares of the fund. The reinvestment was done at the net asset value (NAV) of the fund on the distribution date.

Capital gains short term

Definition:The profit from selling an asset for more than its purchase price, held for less than one year.

Example:Emily bought stock for $20 per share and sold it six months later for $30 per share, achieving a short-term capital gain of $10 per share. This gain is taxed at the same rate as her ordinary income.

Capital loss

Definition:The loss incurred when a security is sold for less than its purchase price.

Example:David bought a stock for $500 and sold it a year later for $400, resulting in a capital loss of $100. He can use this loss to offset other capital gains or up to $3,000 of ordinary income on his taxes.

Cash equivalent

Definition:The total market value of a company, calculated by multiplying the number of shares by the price per share.

Example:Sarah invested in a Treasury bill as a cash equivalent because it is highly liquid and can be quickly converted to cash with minimal risk. She uses it as a safe place to park money temporarily.

Common stock

Definition:hares that represent ownership in a corporation.

Example:As an owner of common stock in ABC Corp., Jennifer has voting rights at the company's annual shareholder meeting and benefits from potential dividends and capital appreciation. However, her shares come with higher risk compared to preferred stock.

Contingent deferred sales charge (CDSC)

Definition:A fee charged when shares are sold from a fund, typically decreasing over time.

Example:When withdrawing money from his mutual fund, Tim had to pay a 2% CDSC because he redeemed his shares within two years of purchase. The CDSC decreases each year he holds the investment.

Corporate bond

Definition:A long-term loan made to a corporation, represented by a bond.

Example:General Electric issued a corporate bond with a 10-year maturity to raise capital for expanding its manufacturing facilities. Investors in these bonds receive periodic interest payments until the bond matures.

Country breakdown

Definition:The distribution of a portfolio's securities based on the countries they're from.

Example:Emily's global equity fund provides a country breakdown showing 40% of investments in the U.S., 30% in Europe, and 30% in Asia. This helps investors understand the geographic exposure and potential risks of their investments.

custodian

Definition:A bank that holds a mutual fund's assets, handles trades, and helps calculate the fund's net asset value (NAV).

Example:ABC Bank acts as the custodian for GreenLeaf Mutual Fund, safeguarding the fund's assets and handling all trades and valuations. The custodian ensures the fund's transactions are properly settled and reported.

Daily dividend factor (date)

Definition: The daily dividend amount distributed by a money market mutual fund.

Example:On September 1st, a money market mutual fund declares a daily dividend factor of $0.0005 per share. This amount is distributed to shareholders holding shares on that date and is calculated based on the fund's earnings.

default

Definition:When a borrower fails to make timely payments of interest or principal, or does not meet other terms of a bond agreement.

Example:When ABC Corporation couldn't meet its bond interest payments for three consecutive months, it went into default. As a result, the bondholders initiated legal action to recover their investments.

Distribution schedule

Definition:Definition:A tentative plan for when a mutual fund will pay out dividends and capital gains to its investors.

Example:XYZ Mutual Fund released a distribution schedule indicating quarterly dividend and capital gains distributions in March, June, September, and December. Investors can use this schedule to plan their cash flow or reinvestment strategy.

diversification

Definition:The strategy of spreading investments across different assets to reduce risk and increase potential returns by balancing performance.

Example:To reduce risk, Olivia diversified her portfolio by investing in a mix of stocks, bonds, real estate, and international funds. This strategy helps balance losses from one investment with gains from others.

dividend

Definition:A portion of a company's profits paid to shareholders. Dividends provide income to investors, even if the stock isn't growing rapidly. Companies are not required to pay dividends.

Example:ABC Corporation declared a quarterly dividend of $1.50 per share, rewarding its shareholders with a portion of its profits. This provides income to shareholders and can attract more investors looking for steady returns.

Dividend pair

Definition:The amount of money paid to a shareholder from a security or mutual fund.

Example:On June 30th, shareholders of XYZ Mutual Fund received a $0.25 per share dividend paid directly to their accounts. This amount represents a portion of the fund's earnings over the quarter.

Dividend reinvest NAV

Definition:Dividends automatically reinvested in more shares of the same security or mutual fund, purchased at the current net asset value.

Example:Instead of taking her $200 dividend payout in cash, Sarah chose to reinvest it in additional shares of the mutual fund at the current net asset value (NAV). This reinvestment allows her to compound her returns over time.

Dividend yield

Definition:The annual return a mutual fund earns from dividends, expressed as a percentage of its net asset value or public offering price.

Example: If a mutual fund has an annual dividend of $2 per share and a current NAV of $40, its dividend yield is 5%. Investors use this yield to assess the income-generating potential of the fund.

Dollar cost averaging

Definition:An investment strategy where a fixed amount of money is invested regularly over time, regardless of the share price. This helps lower the average cost of investing by buying more shares when prices are low and fewer when prices are high.

Example:John invests $500 every month into a mutual fund, regardless of the market conditions. By doing so, he buys more shares when prices are low and fewer when prices are high, potentially lowering his average cost over time.

Dow jones industrial average (DOW)

Definition:A key indicator of stock market performance, based on the prices of 30 major U.S. companies. It reflects the average stock price of these companies, adjusted for stock splits and changes in the index.

Example:The Dow dropped 200 points today due to economic uncertainties, affecting the stock prices of the 30 major companies it tracks. Investors use the Dow to gauge the overall health of the U.S. stock market.

EPS (earnings per share)

Definition:The portion of a company's profit assigned to each share of common stock, indicating its profitability.

Example:If XYZ Corporation reports an annual profit of $10 million and has 2 million shares outstanding, its EPS is $5.00. This metric helps investors evaluate the company's profitability and growth potential.

equities

Definition:Definition:Stocks that represent ownership in a company. They differ from bonds, which are fixed-income investments.

Example:Karen decided to invest in equities by purchasing common stock in various technology companies. These shares represent ownership in the companies and come with both the potential for high returns and higher risk.

Equity fund

Definition:A mutual fund that invests primarily in stocks, either common or preferred, based on the fund's investment goals.

Example:The ABC Equity Fund primarily invests in large-cap technology stocks, aligning with its objective of long-term growth. Investors choose this fund to gain exposure to high-growth sectors in the market.

exclusions

Definition:An investment strategy that excludes specific investments or sectors based on certain values or criteria. / (or) A sustainable investing approach that avoids certain industries, like tobacco or fossil fuels, based on ethical or environmental concerns.

Example:The socially responsible mutual fund excludes tobacco and fossil fuel companies from its investment portfolio. This exclusion is based on ethical criteria that align with the values of its investors.

ex-dividend

Definition:The period between the announcement and payment of a stock's next dividend.

Example:A stock trading ex-dividend no longer carries the value of its next declared dividend. Investors who buy shares on or after the ex-dividend date are not entitled to the upcoming dividend payout.

Ex-dividend date

Definition:The date when a stock starts trading without the upcoming dividend included. Typically, this is about three weeks before the dividend is paid to shareholders.

Example:On March 15th, ABC Corp.'s stock went ex-dividend, meaning anyone who purchased the stock on or after this date would not receive the upcoming dividend. Existing shareholders of record before this date will be paid the dividend.

Exchange privilege

Definition:The option to transfer money between different mutual funds within the same fund family.

Example:Mary utilized her mutual fund's exchange privilege to move her investment from a bond fund to a growth stock fund within the same fund family without incurring additional fees. This allows her to adjust her portfolio based on market conditions.

Expense ratio

Definition:The percentage of a mutual fund's assets used to cover operating expenses and management fees each year.

Example:The XYZ Mutual Fund has an expense ratio of 0.75%, meaning investors pay $7.50 annually for every $1,000 invested to cover management and operational costs. A lower expense ratio typically indicates a more cost-effective fund.

Expense ratio (date)

Definition:The annual percentage of total investment that shareholders pay for mutual fund operating expenses and management fees.

Example:For the year ending December 31st, ABC Growth Fund reported an expense ratio of 0.65%. This amount represents the proportion of its assets used for administrative, management, and other expenses.

Federal funds rate (fed funds rate)

Definition:The interest rate banks charge each other for overnight loans to meet reserve requirements. It is a key indicator of the direction of interest rates, as it is set daily by the market.

Example:When Bank A has excess reserves and Bank B needs overnight funds to meet its reserve requirements, Bank A lends the money at the Federal Funds Rate. This rate, determined daily by the market, influences overall interest rates in the economy.

Federal reserve board (the fed)

Definition:The governing body of the Federal Reserve System, responsible for regulating the money supply and credit conditions in the U.S. economy.

Example:The Federal Reserve Board decided to raise the discount rate to control inflation. By doing so, it made borrowing more expensive, tightening the availability of credit in the economy.

Financial materiality

Definition:Information or events that could significantly impact a company's financial condition or performance, considered important in making investment decisions.

Example:A sudden lawsuit against a tech company for patent infringement is considered financially material, as it could impact the company's stock price and investors' decisions. Potential losses or legal costs must be evaluated in the investment analysis.

Fixed income fund

Definition:A fund that primarily invests in bonds, offering no fixed maturity date or repayment guarantee.

Example:Emily invested in a fixed income fund that primarily includes government and corporate bonds. This fund aims to provide steady interest income with lower risk compared to stock funds.

Fixed income security

Definition:A financial instrument that pays a fixed interest rate on a regular basis, such as bonds.

Example:A 10-year U.S. Treasury bond paying a fixed 2% interest rate annually is an example of a fixed income security. Investors receive regular interest payments over the bond's life.

fund

Definition:A pooled investment vehicle that collects money from multiple investors to purchase securities. These funds are usually offered as mutual funds by securities companies or as collective funds by bank trust departments.

Example:John invested his savings into a mutual fund, which pools money from multiple investors to buy a diversified portfolio of stocks and bonds. This allows him to invest in various securities without buying them individually.

Green bonds

Definition:Bonds issued to finance environmentally friendly projects, such as renewable energy or conservation efforts.

Example:A city issues green bonds to finance the development of a solar energy farm. Investors in these bonds support environmentally friendly projects while earning interest.

Green bond principles

Definition:Voluntary guidelines that promote transparency and integrity in the Green Bond market by recommending best practices for issuing Green Bonds.

Example:To issue a green bond, a company adheres to the Green Bond Principles, ensuring transparency about how the funds will be used for eco-friendly projects. This practice helps maintain trust and integrity in the green bond market.

Growth stock

Definition:A stock from a successful company with rapidly increasing earnings and revenue, typically paying little or no dividend.

Example:ABC Tech Inc. is considered a growth stock due to its impressive year-over-year revenue increases. It reinvests profits back into the company, opting not to pay dividends.

growth style funds

Definition:Mutual funds that invest in stocks expected to grow faster than the overall market, focusing on companies in rapidly expanding sectors.

Example:The XYZ Growth Fund targets companies in sectors like technology and healthcare with high potential for rapid earnings growth. The fund's strategy focuses on future capital appreciation rather than current income.

Impact investing

Definition:An investment strategy that aims to generate positive social or environmental impact alongside financial returns, often focusing on areas like affordable housing, education, or healthcare.

Example:Sarah invests in an impact fund that finances affordable housing projects in urban areas. She aims to achieve both financial returns and positive social impact through her investments.

Investment stewardship

Definition:The practice of engaging with companies and voting on shareholder matters to protect and represent clients' interests, focusing on responsible capital allocation and long-term value creation.

Example:A mutual fund manager practices investment stewardship by engaging with companies on issues like executive compensation and environmental sustainability, ensuring long-term value for investors.

index

Definition:A benchmark that tracks the performance of a group of investments to measure the overall performance of a specific market or investment category, like the S&P 500 for large U.S. companies.

Example:The S&P 500 index tracks the performance of 500 large U.S. companies, providing a benchmark for investors to compare their stock portfolios' performance. Many funds and ETFs use it as a standard for large-cap U.S. equities.

Individual retirement account (IRA)

Definition:A tax-deferred savings account for retirement, allowing eligible individuals to contribute up to $3,000 annually ($6,000 for a married couple filing jointly).

Example:James contributes $5,000 to his IRA annually to take advantage of tax-deferred growth on his retirement savings. This helps him build a nest egg for his future.

inflation

Definition:The general increase in prices of goods and services, which reduces purchasing power.

Example:Over the past year, the inflation rate in the country rose to 4%, meaning the average prices for goods and services increased by that amount. This decrease in purchasing power impacts consumers and investors.

Interest rate

Definition:The percentage of the face value of a bond that the issuer agrees to pay to bondholders as interest.

Example:A corporate bond issued by XYZ Corporation offers a 3.5% interest rate annually. This rate is the return paid to bondholders based on the bond's face value.

Interest rate risk

Definition:The risk that a rise in interest rates will decrease the value of a bond or other fixed-income security.

Example:When the Federal Reserve raises interest rates, the market value of existing bonds typically decreases, creating interest-rate risk for bondholders. Investors holding bonds might see a drop in their portfolio value.

Investment grade bonds

Definition:Bonds considered safe for purchase by cautious investors due to their lower risk of default.

Example:The government issues AAA-rated bonds, which are considered investment grade and safe for conservative investors. These bonds typically offer lower yields but have a lower risk of default.

Junk bond

Definition:A lower-rated bond (BB or lower) that usually offers a higher return but comes with more risk.

Example:XYZ Corporation issues junk bonds with a BB rating to attract investors seeking higher returns. While these bonds offer high yields, they also carry a higher risk of default.

Large- cap

Definition:Companies with a market value greater than $10 billion, often well-established and stable.

Example:Apple Inc., with a market capitalization over $2 trillion, is a large-cap company. Such companies are generally stable and widely traded in the stock market.

Letter of intent

Definition:A document from a mutual fund investor expressing intent to invest certain amounts over time, often qualifying for reduced fees. It's not a binding contract.

Example:An investor signs a letter of intent with a mutual fund, committing to invest $50,000 over the next year. In return, the investor qualifies for reduced sales charges

Lipper ratings

Definition:Rankings of mutual fund performance by Lipper Analytical Services, comparing funds by category, like growth or income funds.

Example:The ABC Growth Fund received a 5-star Lipper rating for outperforming other funds in its category. Fund managers strive to maintain high Lipper ratings to attract investors.

Loads (back end, front end, and no load)

Definition:Fees on mutual funds. A back-end load is charged when you sell shares; a front-end load is paid when you buy shares. No-load funds have no sales charges.

Example:John invested in a front-end load mutual fund, paying a 3% fee at the time of purchase. Alternatively, he could have chosen a no-load fund with no sales charges.

Long-term investment strategy

Definition:A plan focused on long-term goals, ignoring daily market ups and downs.

Example:Maria adopts a long-term investment strategy, focusing on stocks she believes will grow over the next 10 years. She avoids selling based on daily market volatility.

Market price

Definition:The current price of an asset.

Example:The market price of Tesla's stock today is $700 per share, reflecting the current value that buyers are willing to pay. Market prices fluctuate based on supply and demand.

Market risk

Definition:The chance that an investment won't reach its financial goals.

Example:When the overall stock market declines, even well-performing stocks may experience losses due to market risk. Diversifying a portfolio can help mitigate this risk.

maturity

Definition:The date when a bond or note must be paid back.

Example:A 5-year bond issued by ABC Corporation has a maturity date in 2029. On this date, the principal amount is repaid to the bondholder.

Maturity distribution

Definition:The timeline for when the investments in a portfolio will be paid back.

Example:A bond fund's maturity distribution includes 30% short-term bonds, 40% medium-term, and 30% long-term. This diversification affects the fund's sensitivity to interest rate changes.

Median market cap

Definition:The middle value of market capitalization (stock price times number of shares) in a portfolio, with half the stocks being larger and half smaller.

Example:In the XYZ Equity Fund, the median market cap is $15 billion, meaning half the stocks are above and half are below this value. This indicates a mix of large- and mid-cap stocks.

mid-cap

Definition:Companies with a market value between $3 billion and $10 billion, typically in a growth phase.

Example:A company with a market capitalization of $5 billion falls into the mid-cap category. These companies often have strong growth potential but may be riskier than large-caps

Money market mutual fund

Definition:A short-term investment fund that aims to protect your principal and earn income through safe investments like Treasury bills.

Example:John invests in a money market mutual fund to preserve his capital while earning a modest return. These funds invest in low-risk securities like Treasury bills.

Morningstar ratings

Definition:A system by Morningstar Inc. that rates mutual funds and annuities from one to five stars based on risk-adjusted performance.

Example:The DEF Balanced Fund has a 4-star Morningstar rating, reflecting good risk-adjusted returns compared to its peers. Many investors rely on Morningstar ratings for fund selection.

Mutual fund

Definition:An investment fund that collects money from shareholders to invest in stocks, bonds, or other assets.

Example:Sarah invests in a mutual fund that pools money from multiple investors to buy a diversified portfolio of stocks and bonds. This allows her to access a professionally managed portfolio.

NASDAQ

Definition:A computerized system providing price quotes for over-the-counter and many New York Stock Exchange-listed securities.

Example:Microsoft and Amazon are traded on the NASDAQ, a digital marketplace known for listing technology companies. NASDAQ provides real-time price quotes for its listed securities.

Net asset value per share (NAV)

Definition:The value of one share in a mutual fund, calculated daily by dividing the fund's total assets minus liabilities by the number of shares.

Example:The ABC Mutual Fund's NAV is calculated daily by dividing the total value of the fund's assets minus liabilities by the number of shares outstanding. This value determines the share price.

P/B ratio (price to book ratio)

Definition:The price per share of a stock divided by its book value (assets minus liabilities) per share.

Example:If a company's stock price is $50 per share and its book value is $25 per share, its P/B ratio is 2. A higher ratio might indicate the stock is overvalued.

Par value

Definition:The original amount paid for a bond, which will be repaid at maturity, typically in $1,000 increments.

Example:A corporate bond issued with a par value of $1,000 will repay $1,000 to the bondholder at maturity. Par value represents the face value of the bond.

Portfolio allocation

Definition:The distribution of assets in a portfolio into different types of investments.

Example:Jane's portfolio allocation is 60% stocks, 30% bonds, and 10% cash. This strategy reflects her moderate risk tolerance.

Positive tilt

Definition:An investment approach that focuses more on sectors, companies, or projects with positive environmental, social, and governance (ESG) characteristics.

Example:An ESG-focused mutual fund has a positive tilt towards companies with strong environmental practices. This approach aligns with investors who prioritize sustainability.

Power purchase agreements (PPAs)

Definition:A deal where a developer installs a solar energy system on a property, often at little or no cost, and the property owner buys the power generated.

Example:A company enters a Power Purchase Agreement to install a solar energy system on its roof without upfront costs. The company benefits from lower energy prices while the developer maintains ownership.

Preferred stock

Definition:A type of stock with a fixed dividend that takes priority over common stock in dividend payments and asset liquidation.

Example:An investor buys preferred stock from XYZ Company, which pays a fixed dividend of 5% annually. If the company is liquidated, preferred shareholders are paid before common shareholders.

premium

Definition:The amount by which a bond or stock sells above its original value.

Example:If a bond with a par value of $1,000 is selling for $1,050, it is selling at a $50 premium. The premium reflects demand and market interest rates.

price-to-book

Definition:The stock price divided by its book value per share. For a portfolio, it's the average P/B ratio of all the stocks.

Example:A company with a stock price of $40 and a book value of $20 has a price-to-book ratio of 2. This ratio helps investors assess whether a stock is over or undervalued.

Price to earnings ratio (P/E)

Definition:The stock price divided by earnings per share, showing how much investors are paying for a company's earnings.

Example:If a stock trades at $100 and its earnings per share (EPS) is $5, the P/E ratio is 20. A higher P/E can indicate that investors expect future growth.

P/E ratio (1 yr trailing) (long position)

Definition:The stock price divided by earnings from the past year.

Example:A stock with a trailing P/E ratio of 25 suggests it is trading at 25 times its earnings from the past year. Investors use this to evaluate if the stock is overvalued.

P/E ratio (1 yr forecast)

Definition:The stock price divided by projected earnings for the next year.

Example:A company's forward P/E ratio of 18 is based on its projected earnings for the coming year. This metric helps investors anticipate future growth.

Public offering price (POP)

Definition:The price to buy a mutual fund share, including any sales charges.

Example:When John buys shares of a mutual fund, he pays the public offering price, which includes the net asset value (NAV) plus any sales charges. This is the purchase price for new investors.

Quality distribution

Definition:The breakdown of a portfolio's investments based on their quality ratings.

Example:A bond fund's quality distribution might show that 30% of its holdings are AAA-rated, 40% are AA-rated, 20% are A-rated, and 10% are BBB-rated. This breakdown helps investors understand the credit risk associated with the fund's portfolio.

R-2

Definition:A measure showing how much of a fund's performance is explained by its benchmark index, ranging from 0 to 100. An R2 of 100 means the fund's movements exactly match those of the index.

Example:An R2 of 85 means that 85% of the fund's movements can be explained by movements in its benchmark index. This indicates a high correlation with the index, suggesting the fund's performance closely tracks the index's performance.

Ratings

Definition:Evaluations of the credit quality of bonds, usually provided by independent agencies. Higher ratings indicate a lower risk of the bond issuer missing payments.

Example:A bond rated AAA by Standard & Poor's is considered extremely safe with a very low risk of default. Conversely, a bond rated BB is considered more speculative and carries higher risk.

Recessaion

Definition:A period of economic decline, often defined as at least two consecutive quarters of falling GDP.

Example:The 2008 financial crisis led to a severe recession, characterized by a sharp decline in GDP for multiple quarters. Unemployment rates soared, and consumer spending dropped significantly.