Idaho Department of Finance

Financial Terms

A | B | C | D | E | F | G | H | I | J | K | L | M | N | O | P | Q | R | S | T | U | V | W | X | Y | Z

A

Accrued Interest: The estimated amount of interest that would be received upon a sale. In most cases, it is calculated from the date of the last coupon payment up through the closing date of the account statement.

Annual and Semi-Annual Reports: Also known as financial statements. These are the reports a mutual fund company sends to its unit holders which describe the fund’s performance over the past year or six-month period and that identifies the securities held by the fund.

Assets: What a firm or individual owns.

Asset Allocation: An investment strategy that divides assets among major asset categories such as stocks, bonds, or cash, usually balancing risk and creating diversification.

B

Back-End Load: A sales charge levied when mutual fund units are redeemed.

Balanced Funds: A mutual fund that holds a mix of securities – usually money market, bonds and equities. The relative balance of these securities can be changed to take advantage of phases in the economic cycle.

Balance Sheet: A financial statement showing the nature and amount of a company's assets, liabilities and shareholders' equity.

Bear Market: A market in which prices are generally falling.

Bid and Ask: The bid price is the highest price anyone is willing to pay to buy a stock; while the ask is the lowest anyone will accept to sell a stock. Together, the bid and ask prices are referred to as a "quote".

Bond: A long-term debt instrument with the promise to pay a specified amount of interest and to return the principal amount on a specified maturity date.

Bond Fund: A mutual fund whose portfolio consists primarily of bonds.

Book Value: The value of net assets that belong to a company’s shareholders, as stated on the balance sheet.

Broker: An agent who handles the public's orders to buy and sell securities, commodities or other property. A commission is generally charged for this service.

Bull Market: A market in which prices are generally rising.

C

Capital Gain or Loss: A income tax term referring to profit or loss resulting from the sale of an asset, such as a security.

Capital Stock: All classes or types of shares representing ownership of the issues.

Cash Equivalent: Assets that can be quickly converted to cash. These include receivables, Treasury Bills, short-term commercial paper and short-term government and corporate bonds and notes.

Closed-End Funds: A fund company that issues a fixed number of shares. Its shares are not redeemable, but are bought and sold on stock exchanges or the over-the-counter market.

Common Shares: Securities which represent part ownership in a company and generally carry voting privileges.

Compounding: The process by which income is earned on income that has previously been earned.

Confirmation: This written notice provided by a brokerage acknowledges completion of a securities transaction. It includes details such as the date of purchase, price, number of shares, commission, fees, and settlement terms.

Consumer Price Index: A statistic that is a measure of the change in the cost of living for consumers. It is used to illustrate the extent that prices have risen or the amount of inflation that has taken place over a period of time.

Cum-Dividend: A term applied to stock at a time when the purchaser will be entitled to a forthcoming dividend.

Current Yield: The annual rate of return that an investor purchasing a security at its market price would realize. This is the annual income from a security divided by the current price of the security. It is also known as the return on investment.

Custodian: A financial institution, usually a bank or a trust company, that holds a mutual fund’s securities and cash in safekeeping.

D

Day Order: An order to buy or sell a security valid only for a limited period, normally less than a day.

Day Trading: Refers to establishing and liquidating the same position or positions within one day's trading.

Debt: An obligation to repay a sum of principal, plus interest. In corporate terms, debt often refers to bonds or similar securities.

Deflation: A condition of decreasing prices. Deflation is generally measured by the Consumer Price Index.

Discretion: Prior formal authorization, frequently referred to as “trading authority,” that permits a broker to make transactions in a client’s account without having to first get authorization for each trade. You and your broker should discuss your overall goals and risk tolerance before you decide whether to grant this authority.

Distribution: The sale of securities. Also refers to a sum payable to shareholders representing their share of profits. A distribution of profits may be in cash or by additional shares.

Diversification: The investment in a number of different securities to reduce the risk of loss inherent in investing. Diversification may be among types of securities, companies, industries or geographic locations.

Dividend: A portion of a company’s profit paid to the shareholders.

Dividend Fund: A mutual fund that holds preferred and common stock that generally pay regular dividends.

Dollar Cost Averaging: A principle of investing where equal dollar amounts are invested in a share or unit at regular intervals in the hope of reducing the average cost by acquiring more shares in periods of lower securities prices and fewer shares in periods of higher securities prices.

Drips (Dividend Reinvestment Plan): A plan offered by some companies where the shareholder’s dividends are used to purchase additional shares in the company. Many companies will absorb the commission charge that would normally be paid by the investor for additional purchase and many companies offer discounts on shares purchased through a DRIP plan.

E

Equity: Another word for “stock.” It represents an ownership interest by shareholders in a corporation. In a margin account, equity is the difference between the value of your stock and the amount of money you have borrowed in that account.

Equity Fund: A mutual fund whose portfolio consists primarily of common and/or preferred stock.

Estimated Income And Current Yield: In most cases, estimated income is the amount of dividend and/or interest expected to be received annually. Current yield is the annual interest on a bond divided by the market price.

Ex-Dividend: Without dividend. The buyer of shares quoted ex-dividend will not receive an already declared dividend. When shares are cum-dividended, the purchaser will receive the declared dividend.

Expense Ratio: A mutual fund company’s cost of doing business. It includes the fund’s management fee as stated in the Simplified Prospectus. Price and performance is always shown net of this percentage which is charged against assets held by the fund.

F

Fixed Income Investments: Investments that generate a fixed amount of income that does not vary over the life of the investment.

Front-End Load: A sales charge levied on the purchase of mutual fund units.

Futures: Contracts to buy or sell specific quantities of a commodity or financial instrument at a specified price with delivery set at a specified time in the future.

G

Growth Fund: A growth fund is a type of mutual fund that usually focuses on the purchase of equities likely to have superior growth potential. These funds take higher investment risks and invest in more volatile stocks to achieve above average growth. Stock values may appreciate or depreciate depending on the success of the companies invested in and other market factors.

Guaranteed Investment Certificates: A deposit instrument paying a predetermined rate of interest for a specified term. Available from banks, trust companies and other financial institutions.

I

Income Fund: Alternatively called a bond fund. Income funds are a type of mutual fund that holds debt instruments such as government bonds and corporate debentures. Its return is based on both interest earnings and capital gains.

Index: Statistical measure of the state of the stock market or economy based on the performance of stocks or other components.

Index Fund: A mutual fund that matches its portfolio to that of a specific financial market index, with the objective of tracking the general performance of the market in which it invests.

Inflation: A condition of increasing prices. Inflation is generally measured by the Consumer Price Index.

Interest: Payments made by a borrower to a lender for the use of the lender's money. A Corporation pays interest on bonds to its bondholders.

International Fund: A mutual fund that invests in securities from a number of countries.

Investment Adviser: An individual who furnishes investment advice for a fee.

Investment Company: A corporation or trust whose primary purpose is to invest the funds of its shareholders.

Investment Fund: A term generally interchangeable with "mutual fund."

Investment Manager: Investment counsel to a mutual fund.

L

Leveraging: The borrowing of money for investment purposes.

Limit Order: An order to buy or sell securities in which the client has specified the price. The order can be executed only at the specified price or a better one.

Liquidity: The ability of the market for a security to absorb a reasonable amount of buying or selling without major price changes.

Load: Commissions charged on the purchase or sale of mutual fund units.

Long: A term signifying ownership of securities. "I am long 100 XYZ," means that the speaker owns 100 shares of XYZ.

M

Management Company: The business entity that establishes, promotes and manages a fund or funds.

Management Expense Fee: The sum paid to the investment company's advisor or manager for supervising its portfolio and administering its operations.

Management Expense Ratio: A measure of the total cost of operating a fund as a percentage of average total assets.

Margin: The amount paid by clients when they use credit to buy a security. The remainder is loaned by their brokers.

Margin Debt: The difference between the collateral deposited by the client and the amount borrowed (currently a maximum of 50 percent of the current market value of the securities) represents margin debt. Should the stock decrease in value, the investor must keep the proper maintenance level, either by putting up more money or by selling marginable securities. The use of borrowed money to purchase securities is referred to as “buying on margin.” This strategy dramatically increases both upside potential and downside risk.

Market Capitalization: Value of a corporation as determined by the market price of its issued and outstanding securities. It is calculated by multiplying the number of outstanding shares by the current market price of a share.

Market Order: An order to buy or sell a security immediately at the best possible price.

Market Price: In the case of a security, market price is usually considered the last reported price at which the stock or bond is sold.

Market Value: The price that the market – any market – sets at a particular time as the price at which an asset can be bought or sold.

Maturity: The date on which a loan or bond or debenture comes due and must be redeemed or paid off.

Money Market: A sector of the capital market where short-term obligations such as Treasury bills, commercial paper and bankers' acceptances are bought and sold.

Money Market Fund: A mutual fund made up of government Treasury-Bills and other short-term paper such as a Promissory Note and Banker’s Acceptances. Interest yield fluctuates and is generally paid monthly.

Mortgage Fund: A mutual fund that holds mortgages.

Mutual Fund: An investment entity that pools shareholder or unit holder funds and invests in various securities. The units or shares are redeemable by the fund on demand by the investor. The value of the underlying assets of the fund less liabilities establishes the current price of units.

N

Net Asset Value: Net asset value is the price set on a fund’s units by deducting liabilities from assets and dividing by outstanding units.

Net Asset Value Per Share: Net asset value of a mutual fund divided by the number of shares or units outstanding. This represents the value of a share of unit of a fund and is commonly abbreviated to NAVPS.

No-Load Fund: A mutual fund that does not charge a fee for buying or selling its shares.

O

Odd Lot: A number of shares which is less than a board lot.

Open-Ended Fund: An open-ended mutual fund continuously issues and redeems units, so the number of units outstanding varies from day to day. Most mutual funds are open-ended.

Open Order: An order to buy or sell a security at a specified price. The order is valid until executed or cancelled.

Options: Contracts which give the holder the right to buy (call options) or sell (put option) a fixed amount of a certain stock at a specified price within a specified time.

Over-The-Counter: The over-the-counter (OTC) or unlisted market maintained by securities dealers for issues not listed on a stock exchange.

P

Portfolio: All the securities which an investment company or an individual investor owns.

Preferred Shares: Shares that carry dividends at fixed rates which must be paid before any dividends are paid to common shareholders.

Price/Earnings Ratio: A common stock’s current market price divided by the company’s annual per share earnings.

Prospectus: A legal document describing securities being offered for sale to the public. It must be prepared in accordance with provincial securities commissions regulations.

R

Real Estate Fund: A mutual fund that owns real estate, often commercial properties.

Real Return: Real Return is the net return of an investment, adjusted for inflation during the time you have held that investment but prior to tax considerations.

Realized and Unrealized Gain/Loss: The results of securities transactions are usually categorized into either realized gains or losses upon the sale of security. An unrealized gain or loss is the appreciation or depreciation in the value of an unsold security since the time it was originally acquired (informally known as “paper gains or losses”).

Realized Earnings: Realized Earnings is investment income as earned by a fund and considered part of you income.

Redemption: A redemption is the right given to a security holder to sell, at any time, some or all of his/her units back to the fund for cash.

Registered Representative: An investment salesperson or broker who is licensed by the SEC (Securities and Exchange Commission) and by the NYSE (New York Stock Exchange).

Reinvestment: Using dividends, interest, and/or capital gains distributions generated by a mutual fund investment to purchase additional shares, rather than receiving the distributions in cash. With stocks, using dividends to purchase additional shares instead of receiving payments in cash.

Right: A temporary privilege granted to existing common shareholders to purchase additional shares directly from the company at a stated price.

Risk: The possibility of loss; the uncertainty of future returns.

S

Sales Charge: In the case of mutual funds, these are commissions charged to purchasers of fund units, usually based on the purchase or redemption price. Sales charges are also known as "loads."

Securities Act: Legislation regulating the underwriting, distribution and sale of securities.

Settlement Date: The date on which a securities buyer must pay for a purchase or a seller must deliver the securities sold. In general, settlement must be made on or before the third business day following the transaction date.

Shares: A document signifying part ownership in a company. The terms "share" and "stock" are often used interchangeable.

Short Sales: The sale of shares which the seller does not own. The seller is speculating that the price will fall, in the hope of later purchasing the same number of securities at a lower price, thereby making a profit. Sellers must advise their brokers when they are selling short.

Small Cap Fund: A small Cap Fund is a mutual fund that holds the stocks of small capitalized companies as opposed to large "blue chip" companies.

Specialty Fund: A Specialty Fund is a mutual fund that focuses its holdings in specific types or geographic areas.

Stock Yield: The annual dividend as a percentage of the price of the stock. For example, a stock selling at $40 a share with an annual dividend of $2 a share yields five percent.

Systematic Withdrawal Plans: A withdrawal feature offered by companies whereby unit holders can receive regular payment from their investments.

T

Total Return: Total Return is the change in value of the fund plus any distribution (i.e. capital gain, interest, and dividends) divided by the value of the fund at the beginning of the period (i.e. cost).

Trade Date v. Settlement Date: The trade date is the day a trade is executed. The settlement date is the agreed upon date when payment must be made and/or securities presented. For purchases of securities, the brokerage firm must receive payment no later than three business days after the trade date (T+3). Currently, the industry is progressing to a T+1 settlement cycle in 2005.

Transfer Agent: A trust company appointed by a company to keep a record of the names, addresses and numbers of shares held by its shareholders. Transfer agents are often responsible for distributing dividend checks.

Treasury Bills (T-Bills): Treasury Bills are short-term government issued debt instruments whose return is determined by prevailing market rates of return.

U

Underwriting: The purchase for resale of a new issue of securities by an investment dealer or group of dealers.

W

Warrant: A certificate giving the holder the right to purchase a security (such as a stock) at a set price within a specified period of time.

Y

Yield: Yield is most commonly associated with a money market fund’s return. "Current Yield" is based on daily return, "Effective Yield" on the annual compounded return. Yield to Maturity: The annual rate of return an investor would receive if a bond were held until maturity.

Z

Zero-Coupon Bond: A corporate or municipal debt security sold at a deep discount to its face value that does not pay periodic interest. The profit is realized when the bond is redeemed at maturity for its full face value.