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​​​PERSONAL & BUSINESS WEALTH DESIGN 

Financial Terms Glossary 

Financial Terms Glossary Page  Advantage Investment Management 

Annuity (Deferred) – Deferred annuities allow you to accumulate tax deferred funds for retirement. There are two basic types of deferred annuities: Fixed rate and Variable rate annuities. Fixed rate annuities offer you a fixed interest rate enabling your money to grow federal tax-free. They allow you the ability to shelter your assets from the volatility of the stock or bond market, while providing guaranteed income for your spouse or heirs. Variable rate annuities offer a wide range of investment options (often based on the securities market), and tax-free growth for investors who seek long-term growth. They are generally geared for investors who have a higher risk tolerance or who may have already fully contributed to their other tax deferred accounts. 

Annuity (Immediate) – Immediate Annuities are purchased by a single deposit. They usually start making regular monthly payments to you immediately after the date you make that deposit. The key ingredient for an immediate annuity is the exchange which takes place between the insurance company and the buyer. The company promises to pay a monthly income for the duration you specify and the buyer gives up his rights to ever receiving his deposit back in a lump sum. Once an immediate annuity makes its first payment, it generally cannot be cashed in.

Assets – Securities, cash, and receivables owned by an individual or business.

Asset allocation – The strategy of diversifying a percentage of your money among various assets such as stocks, bonds, and cash. The value of allocating among different asset classes is that each class tends to react differently to the economy. Asset Allocation is determined by your comfort with Market Risk (Risk Tolerance) and the amount of time before you need access to your savings (Investment Horizon).

Asset class – The definition of asset class is dependent upon the context the term is used and often the opinion of the person providing the definition. The most general definition breaks asset classes down by type of investment: stocks, bonds, real estate, commodities, precious metals and collectibles. Others define asset class by market segment, market capitalization and/or investing style. To someone employing a worldwide indexing strategy, the total U.S. stock market, emerging markets debt and international real estate would all be considered asset classes.

Benchmark – Commonly known as a market index, it is a group of securities whose performance is used as a standard to measure investment performance. Some well-known benchmarks are the Dow Jones Industrial Average and the S&P 500. 

Bear market – A period of time during which the majority of securities prices in a particular market (such as the stock market) drop substantially. One generally accepted measure is a price decline of 20 percent or more over at least a two-month period. The opposite of a bull market. 

Bonds – A debt instrument sold by government, states, cities, corporations or other institutions issued for more than one year with the goal of raising capital by borrowing. By issuing a bond (debt), an institution promises to repay the principal donation along with interest (coupons) on a specified date (maturity date).

Broker-dealer – A firm that buys and sells mutual fund shares and other securities from and to investors, operating as either a broker or dealer depending on the transaction.

Bull market – A period of time during which a majority of securities prices in a particular market (such as the stock market) rise substantially. The opposite of a bear market.

Call – An option contract giving the owner the right (but not the obligation) to buy a specified amount of an underlying security at a specified price within a specified time.

Capital gain
 – The amount by which an assets sales price exceeds the original cost, or purchase price. 

Capital Loss – The amount by which an asset’s original cost or purchase price exceeds its final sales price. 

Compounding – The effect of growth on reinvestment of future earnings. Over time, compounding can produce significant growth in the value of an investment.

Custodian – A financial institution that holds customers' securities for safekeeping so as to minimize the risk of their theft or loss. A custodian holds securities and other assets in electronic or physical form. Since they are responsible for the safety of assets and securities that may be worth hundreds of millions or even billions of dollars, custodians generally tend to be large and reputable firms.

Dividend – A share of profits given, usually every quarter, by a board of directors to its shareholders out of the company’s retained earnings. General a dividend is a taxable payment given as cash, but they can also take the form of stock or other property.

Diversification – The strategy of spreading your investments between different types of securities, industries, or asset classes to minimize an investor's exposure to risk. Diversification is analogous to not putting one's eggs all in one basket.

Dollar-cost averaging – The practice of investing a fixed amount of money at regular intervals, regardless of whether the securities markets are declining or rising, in the hopes of reducing average share cost by acquiring more shares when prices are low and fewer shares when prices are high.

Exchange-traded fund (ETF) – An investment company, typically a mutual fund or unit investment trust, whose shares are traded intraday on stock exchanges at market-determined prices. Investors may buy or sell ETF shares through a broker just as they would the shares of any publicly traded company.

Financial Industry Regulatory Authority (FINRA) – A self-regulatory organization with authority over broker-dealer firms that distribute mutual fund shares as well as other securities.

Fiduciary – A person, corporation or association that is legally appointed and is authorized to hold and manage the assets for another party. 

Investment horizon 
– The period of time an investor uses for financial planning purposes. This is often referred to as the holding period. An investor may have several investment horizons during the different stages of life, such as pre-retirement and post-retirement.

Investment objective – The goal of the client (e.g., current income, long-term capital growth) that advisors use as a guide to recommend appropriate investments for their clients.

Market order – An order that an investor makes through a broker or brokerage service to buy or sell an investment immediately at the best available current price. A market order is the default option and is likely to be executed because it does not contain restrictions on the buy/sell price or the timeframe in which the order can be executed

Money market fund – A mutual fund that invests in short-term, high-grade fixed-income securities, and seeks the highest level of income consistent with preservation of capital (i.e., maintaining a stable share price).

Mutual fund (Open Ended) – An investment company that buys a portfolio of securities selected by a professional investment adviser to meet a specified financial goal (investment objective). Mutual funds can have actively managed portfolios, where a professional investment adviser creates a unique mix of investments to meet a particular investment objective, or passively managed portfolios, in which the adviser seeks to track the performance of a selected benchmark or index. One hallmark of mutual funds is that they issue “redeemable securities,” meaning that the fund stands ready to buy back its shares at their current net asset value.

Preferred stock – A class of stock that is a notch above common stock in that, in the event of there being a shortfall of funds available to pay dividends, preferred dividends will be paid first and the remaining funds, if any, will then be used to pay dividends to the owners of common stock. In the event of liquidation, preferred shareholders' claims on the firm's assets take precedence over common shareholders' claim on the firm's assets. In the hierarchy of stakeholders, preferred stock falls between bonds and common stock.

Prospectus – The official document that describes an investment company to prospective investors. The prospectus contains information required by the SEC, such as investment objectives and policies, risks, services, and fees.

Put – An option contract giving the owner the right, but not the obligation, to sell a specified amount of an underlying asset at a set price within a specified time. The buyer of a put option estimates that the underlying asset will drop below the exercise price before the expiration date.

Risk tolerance – The measurement of an investor’s comfort level with the market. A high risk tolerance indicates that the investor is willing to accept greater risk for greater return, while a low risk tolerance indicates that the investor is more interested in maintaining his original investment, and is willing accept a smaller return.

Securities – Financial instruments representing a claim on the assets of some entity, such as a corporation or government. Securities can be debt (bonds), equity (stock) or derivative (derives its value from some underlying asset). Mutual fund shares are securities in that they represent the ownership of a portion a portfolio of securities.

Securities and Exchange Commission (SEC) –The SEC regulates the creation, registration, sale and trading of securities in the United States.

Stop order – An order to buy or sell a security when its price surpasses a particular point, thus ensuring a greater probability of achieving a predetermined entry or exit price, limiting the investor's loss or locking in his or her profit. Once the price surpasses the predefined entry/exit point, the stop order becomes a market order. 

Stocks – An instrument used to signify an ownership position, or equity, in a corporation including a share of its assets and profits.

Straddle – An options strategy with which the investor holds a position in both a call and put with the same strike price and expiration date. 

Yield – The annual rate of return on an investment, often expressed as a percentage.