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The trading of securities to take advantage of market opportunities. In contrast to passive management, active managers rely on research, market forecasts, and their own judgment and experience in selecting securities to buy and sell.
A list of the money owed on current account to a creditor, which is kept in the normal course of the creditor's business and represents unsettled claims and transactions
An insurance contract issued by a life insurance company. The contract provides income at regular intervals for a defined period of time, such as a specific number of years or for life.
A group of securities or investments that have similar characteristics and behave similarly in the marketplace. Three common asset classes are equities (such as stocks), fixed income (such as bonds), and cash alternatives or equivalents (such as money market accounts).
One-hundredth of one percent, or 0.01%. For example, 20 basis points equals 0.20%. Investment expenses, interest rates, and yield differences among bonds are often expressed in basis points.
An unmanaged 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 Index.
A measure of the market/nondiversifiable risk associated with any given security in the market. A ratio of an individual's stock historical returns to the historical returns of the stock market. If a stock increased in value by 12% while the market increased by 10%, the stock's beta would be 1.2.
An individual, institution, trustee or estate that will receive (or may become eligible to receive) money and/or other benefits upon the death of a certain person. Money and/or benefits are distributed according to the deceased person's will, insurance policy, retirement plan, annuity, trust or other contract.
A debt security that represents money borrowed by a corporation, government, or other entity. The borrower repays the amount of the loan, plus a percentage as interest. Income funds generally invest in bonds.
A person who acts as an intermediary between the buyer and seller of a security, insurance product or mutual fund. This person is often paid a commission. The terms broker, broker/dealer and dealer are sometimes used interchangeably.
A bond issued by a corporation, rather than by a government. The credit risk for a corporate bond is based on the repayment ability of the company that issued the bond.
The risk that a bond issuer will default. In other words, not repay principal or interest to the investor, as promised. This is also known as default risk.
An estimate of bond price sensitivity to changes in interest rates. The higher the duration, the greater the change (higher risk) in relation to interest-rate movements.
Generally, economies that are in the process of growth and industrialization. Developing markets, such as Africa, Asia, Eastern Europe, the Far East, Latin America and the Middle East may hold significant growth potential in the future. Investing in emerging markets may provide significant rewards, as well as significant risks.
A security or investment representing ownership in a corporation. Equity is often used interchangeably with stock. Compare to a bond, which represents a loan to a borrower
A measure of what it costs to operate an investment, expressed as a percentage of its assets or in basis points. You pay for these costs through a reduction in the investment’s rate of return. See operating expenses and total annual operating expenses.
Any person or party who exercises any discretionary authority or control over the management of a plan, or the disposition of its assets. For a fee, a fiduciary gives investment advice, or has the authority to do so. A fiduciary also has discretionary responsibility in the administration of that plan.
There are two basic types: (1) a debt instrument, which is a loan with an agreement to pay back funds with interest; (2) an equity security, which is share or stock in a company.
The written record of the financial status of a fund or company. Financial statements are usually published in a company’s annual report. They generally include a balance sheet, an income statement, and other financial statements and disclosures.
The risk that the exchange rate on a foreign currency will move against the position held by an investor such that the value of the investment is reduced.
Gross receipts, whether in the form of cash or property, of the taxpayer received as compensation for independent personal services, and the gross receipts of the taxpayer derived from a trade, business or services, including interest, dividends, royalties, rentals, fees or otherwise.
A fund that invests primarily in the stocks of companies with above-average risk in return for potentially above-average gains. These companies often pay little or no dividends, and their stock prices tend to have the most ups and downs from day to day.
Hedge funds are actively managed investment pools whose managers use a wide range of strategies, often including buying with borrowed money and trading esoteric assets, in an effort to beat average investment returns for their clients. They are considered risky alternative investment choices.
An individual or company owning or planning to own a cash commodity–corn, soybeans, wheat, U.S. Treasury bonds, notes, bills, etc.–and concerned that the cost of the commodity may change before either buying or selling it in the cash market. A hedger achieves protection against changing cash prices by purchasing or selling futures contracts of the same or similar commodity and later offsetting that position by selling or purchasing futures contracts of the same quantity and type as the initial transaction.
How much contract price has fluctuated over a period of time in the past; usually calculated by taking a standard deviation of price changes over a time period.
A benchmark used to evaluate a fund’s performance. The most common indexes for stock funds are the Dow Jones Industrial Average and the Standard & Poor’s 500 Index.
An investment fund that seeks to parallel the performance of a particular stock market or bond market index. Often referred to as passively-managed investments.
The general upward price movement of goods and services in an economy. Inflation is generally one of the major risks to investors over the long term because it erodes the purchasing power of their savings.
The fee charged by a lender to a borrower, usually expressed as an annual percentage of the principal. For example, someone investing in bonds will receive interest payments from the bond’s issuer.
The possibility that the market value of a bond or bond fund will decrease due to rising interest rates. When interest rates (and bond yields) go up, bond prices usually go down, and vice versa.
A corporation or trust that invests pooled shareholder dollars in securities that are appropriate to the organization’s objective. The most common type of investment company, a mutual fund, stands ready to buy back its shares at their current net asset value.
The gain or loss on an investment over a certain period, expressed as a percentage. Income and capital gains or losses are included in calculating the investment return.
The job market is the market in which employers search for employees and employees search for jobs. The job market is not a physical place as much as a concept demonstrating the competition and interplay between different labor forces. It is also known as thelabor market.
The modern corporation has its origins in the joint-stock company. A joint-stock company is a business owned by its investors, with each investor owning a share based on the amount of stock purchased.
A speculative bond rated BB or below by Standard & Poor's Corp. and Ba or below by Moody's Investor Service. See Bond Rating. "Junk bonds" are generally issued by corporations of questionable financial strength or without proven track records. They tend to be more volatile and higher yielding than bonds with superior quality ratings. "Junk bond funds" emphasize diversified investments in these low-rated, high-yielding debt issues.
Jurisdiction risk refers to the risks that can arise when operating in a foreign country or jurisdiction. These risks can arise simply by doing business, or else by lending or borrowing money in another country. Risks could also stem from legal, regulatory, or political factors that exist in different countries or regions.
Keynesian economics is a macroeconomic economic theory of total spending in the economy and its effects on output, employment, and inflation. Keynesian economics was developed by the British economist John Maynard Keynes during the 1930s in an attempt to understand the Great Depression. Keynesian economics is considered a "demand-side" theory that focuses on changes in the economy over the short run. Keynes’s theory was the first to sharply separate the study of economic behavior and markets based on individual incentives from the study of broad national economic aggregate variables and constructs.
Insurance on the life or health of a key individual whose services are essential to the continuing success of a business and whose death or disability could cause the firm a substantial financial loss.
The process that has to be undertaken by banks and other financial institutions to ensure that proper check is made of the investors transacting with them. This is done in order to ensure that the client is known to the financial entity and there is no money laundering taking place.
Stocks of companies with a large market capitalization. Large caps tend to be well-established companies, so their stocks typically have less risk than smaller caps, but they also offer less potential for dramatic growth.
The ease that an investment can be converted into cash. If a security is very liquid, it can be bought or sold easily. If a security is not liquid, it may take additional time and/or a lower price to sell it.
The market value of a company. Market capitalization can be determined by multiplying the number of outstanding shares of a company’s stock by the stock’s current market price per share.
Stocks of companies with a medium market capitalization. Mid caps are often considered to offer more growth potential than larger caps, but less than small caps. They also are considered to offer less risk than small caps, but more than large caps.
A mutual fund that invests in short-term, high-grade fixed-income securities. Money market funds seek the highest level of income consistent with preserving capital. In other words, they try to maintain a stable share price.
An investment company that buys a portfolio of securities selected by a professional investment adviser. Mutual funds can have actively-managed portfolios, where a professional investment adviser creates a unique mix of investments to meet a particular investment objective. They can also have passively-managed portfolios, in which the adviser tries to match the performance of a selected benchmark or index.
An unmanaged index that includes 100 of the largest domestic and international nonfinancial securities listed on the Nasdaq Stock Market, based on market capitalization.
The purchaser of either a call or put option. Option buyers receive the right, but not the obligation, to assume a futures position. Also referred to as the holder.
The person who sells an option in return for a premium and is obligated to perform when the holder exercises his right under the option contract. Also referred to as the writer or granter.
All rights, benefits and privileges under life insurance policies are controlled by their owners. Policy owners may or may not be the insured. Ownership may be assigned or transferred by written request of the current owner.
The process or approach to operating or managing a fund in a passive or non-active manner, typically with the goal of mirroring an index. Passive management funds are often referred to as index funds and differ from investment funds that are actively managed.
A measure of how frequently investments are bought and sold within an investment fund during a year. The portfolio turnover rate is usually expressed as a percentage of the total value of an investment fund.
The official document that describes certain investments, such as mutual funds, to prospective investors. The prospectus contains information required by the SEC, such as investment objectives and policies, risks, services and fees.
Quick assets are equal to the summation of a company’s cash and equivalents, marketable securities, and accounts receivable which are all assets that represent or can be easily converted to cash.
The quick ratio is an indicator of a company’s short-term liquidity position and measures a company’s ability to meet its short-term obligations with its most liquid assets.
A quota is a government-imposed trade restriction that limits the number or monetary value of goods that a country can import or export during a particular period. Countries use quotas in international trade to help regulate the volume of trade between them and other countries. Countries sometimes impose quotas on specific products to reduceimportsand increase domestic production. In theory, quotas boost domestic production by restricting foreign competition.
Quality management is the act of overseeing all activities and tasks that must be accomplished to maintain a desired level of excellence. This includes the determination of a quality policy, creating and implementing quality planning and assurance, and quality control and quality improvement. It is also referred to astotal quality management(TQM).
Qualitative analysis uses subjective judgment to analyze a company's value or prospects based on non-quantifiable information, such as management expertise, industry cycles, strength of research and development, and labor relations.
A fee, generally charged by a mutual fund, to discourage certain trading practices by investors, such as short-term or excessive trading. If a redemption fee is charged, it is done when the investment is redeemed or sold.
A swap isa derivative contract through which two parties exchange the cash flows or liabilities from two different financial instruments. Most swaps involve cash flows based on a notional principal amount such as a loan or bond, although the instrument can be almost anything.
A fund that invests in a particular or specialized segment of the marketplace, such as stocks of companies in the software, health care or real estate industries.
Calculated using standard deviation and excess returns over the 3-month U.S. Treasury Bill to determine reward per unit of risk. The higher the Sharpe ratio, the better the fund’s historical risk adjusted performance. The Sharpe ratio is calculated for the past 36-month period by dividing a fund's annualized excess returns by the standard deviation of a fund's annualized excess returns.
Stocks of companies with smaller market capitalization. Small caps are often considered to offer more growth potential than large and mid caps, but they may come with more risk.
An investment fund that seeks to preserve principal and provide consistent returns and liquidity. Stable value funds include collective investment funds sponsored by banks or trust companies, as well as contracts issued by insurance companies.
An unmanaged, market capitalization-weighted index of leading large-cap U.S. companies in leading industries. This index gives a broad look at the U.S. equities market and the stock price performance of those 500 companies.
A statistical measure of risk. It reflects the extent to which an asset’s rate of return may fluctuate from period to period. When a fund has a high standard deviation, the predicted range of performance is wide, implying greater volatility. Morningstar computes standard deviation using the trailing monthly total returns for the appropriate time period. All of the monthly standard deviations are then annualized.
A policy owner who is not the prospective insured. The policy owner and the insured may be and often are the same person. If for example, you apply for and are issued an insurance policy, the owner and the insured is the policy owner insured.
A measure of what it costs to operate an investment. These expenses are typically expressed as a percentage of an investment’s assets, a dollar amount or in basis points. You pay these costs through a reduction in the investment’s rate of return. See expense ratio and operating expenses.
A person or entity, such as a bank, trust company or other organization, that is responsible for the holding and safekeeping of trust assets. The trustee may have other duties, such as investment management. A trustee serving as a “directed trustee” is responsible for the safekeeping of trust assets, but has no discretionary investment management duties or authority over the assets.
Debt securities issued by the United States government and secured by its full faith and credits. U.S. Treasury securities are the debt-financing instruments of the U.S. government. Often referred to as treasuries.
A representation of ownership in an investment that doesn’t issue shares. Most collective investment funds are divided into units instead of shares. See share.
The process of making an estimate of worth of real property or real property or other assets for a particular purpose eg.letting, purchase, sale, audit, rating, compulsory purchase or taxation. That purpose and the relevant circumstances will determine assumptions and facts that are appropriate and hence the process used.
A measure of exposure within a given portfolio, which attempts to estimate how much the portfolio would be expected to lose, given the recent behavior of the securities contained therein.
A source of money for start up companies. This is typically raised by venture capital firms who invest in private companies that need capital to develop and market their products. In return for this investment, the venture capitalists generally receive significant ownership of the company and seats on the board.
The amount and frequency of fluctuations in the price of a security, commodity or market within a specified time period. Generally, an investment with high volatility is said to have higher risk because there’s an increased chance that the price of the security will have fallen when an investor wants to sell.
The surrender of a right or privilege. In life insurance, a provision that sets certain conditions, such as disablement, which allow coverage to remain in force without payment of premiums.
Tax on income imposed at source, i.e. a third party is charged with the task of deducting the tax from certain kinds of payments and remitting that amount to the government. Withholding taxes are found in practically all tax systems and are widely used in respect of dividends, interest, royalties and similar tax payments. The rates of withholding tax are frequently reduced by tax treaties.
International government organization (with over 120 members) designed to shape an international trade system; it was created in 1994 as the GATT successor. WTO headquaters is in Geneva. Although the Soviet Union was a member of the GATT, Russia is not a member of WTO yet.
X-efficiency refers to the degree of efficiency maintained by firms under conditions of imperfect competition. Efficiency in this context means a company getting the maximum outputs from its inputs, including employee productivity and manufacturing efficiency. In a highly competitive market, firms are forced to be as efficient as possible to ensure strong profits and continued existence. This is not true in situations of imperfect competition, such as with a monopoly or duopoly.
The term xenocurrency refers to any currency that is traded in markets outside of its domestic borders. Its name derives from the Greek prefix “xeno”, meaning “foreign”. Today, the term “eurocurrency” or “foreign currency” is more frequently used.
Year to date (YTD) refers to the period of time beginning the first day of the currentcalendar year orfiscal year up to the current date. YTD information is useful for analyzing business trends over time or comparing performance data to competitors or peers in the same industry. The acronym often modifies concepts such as investment returns,earnings, and net pay.
Yield to worst is a measure of the lowest possible yield that can be received on a bond that fully operates within the terms of its contract without defaulting. It is a type of yield that is referenced when a bond has provisions that would allow the issuer to close it out before it matures. Early retirement of the bond could be forced through a few different provisions detailed in the bond’s contract—most commonly callability.
A zero-coupon swap is an exchange of cash flows in which the stream of floating interest-rate payments is made periodically, as it would be in aplain vanilla swap, but where the stream of fixed-rate payments is made as one lump-sum payment at the time when the swap reaches maturity, instead of periodically over the life of the swap.
A statistical measure that quantifies the distance (measured in standard deviations) a data point is from the mean of a data set. In a more financial sense, Z-score is the output from a credit-strength test that gauges the likelihood of bankruptcy.
The term is used in relation to VAT, where the rate of tax which is in principle levied but at a rate of 0% so that in effect no tax is payable, but will result in refunds of input tax credits.
