The brief definitions below are designed to (hopefully) allow an investor, insurance purchaser, those needing estate planning, etc. to more easily comprehend some basic concepts used in the industry. The difference is that I have added some cautionary commentary that should help you further understand what they really mean and some of the "things" to look out for.

For more sophisticated and extended commentary, investors are referred to the major works on investments, estate planning, college funding, etc. For an excellent resource on investments, see Investments by Bodie, Kane and Marcus; for bonds, see Handbook of Fixed Income Investments, edited by Fabozzi. Be forewarned, these are master's level material- but they are very good.

Any opinions expressed herein are mine alone. (Though if I do happen to be wrong in an interpretation, I will try to blame it on others. See male ego.)


1099 TAX FORM: Dividends and capital gains that are distributed by a stock or mutual fund are taxable events (even in reinvested- called constructive receipt) unless the accounts are in tax sheltered vehicles to begin with. The amount of the distributions are identified on IRS form 1099 distributed to each taxpayer each year. These amounts increase tax basis and reduce the amount of appreciation that is taxed when the assets are subsequently sold.

12b-1 FEES: All mutual funds charge expense fees for running the fund. Others may also charge front end or back end loads. Several years ago, 12b-1 fees were also introduced. (12b-1 is the appropriate section of the Investment Company Act of 1940.) They add additional ongoing annual fees to the expense ratio to compensate the fund for promotion, sale and other activities connected with the distribution of the shares. Funds may charge up to a .25% fee and still call themselves no-load. 12b-1 fees are similar to loads overall since they continually eat into the funds return. Most commentary on 12b-1 fees is negative and most should avoid them like the plague. Better to pay a front end load and be done with it.

401(K) PLAN: This is a retirement plan offered by employers that allows an employee to put away a certain portion of their salary into various investments. Employers may offer contributory amounts. The selection of investments, per rule 404(C) must include at least three different risk types. Loans are available. Contributions are not currently taxed so it and the annual returns are fully tax sheltered. Monies always grow faster in a fully tax sheltered account than that in a partially taxable or fully taxable account, so even if your employer contributes nothing, investing just your own money is normally worthwhile. BUT NOT ALWAYS- check your present and subsequent tax brackets- as well as your estate- to be sure.

403(b) & 501(C)3 Plan: These are tax deferred plans offered to non profit organizations- schools, hospitals, charities, etc. A portion of one's salary- similar to the 401(K) plan- may be invested on a pre tax basis. Mostly marketed as conservative fixed rate investments, mutual funds have also gotten a foot hold. Special calculations are used to determine the amount that may be invested, including a catch up election.

404(C): This code section requires that employers give employees formal instruction on the risks and rewards of investing, primarily because many (most?) employee investors have negligible background in the risks of investing and have had a tendency of using the most conservative (and lowest returning) investments in the portfolio. Congress determined that professional and independent instruction was required to properly instruct employees about the investments available to them. If instruction is not provided in a proper manner, 404(C) indicates that employers may retain liability for inadequate employee retirement accounts. Most current information is sophomoric and does not address the real risks and rewards of investing. Look for litigation in the future once the market comes back to earth.


ACCIDENTAL DEATH AND DISMEMBERMENT: This is coverage built into a policy or, more often, purchased as a rider that pays additional amounts if the disability or death was due to an accident. Though the cost is usually not exorbitant, what is the true value? If somebody dies, the need for money for the survivors is the same be the death through accident or disease, etc. If you have a disability, it is more apt to be due to a back injury, not dismemberment. If you are going to spend the extra money anyway, it is probably preferable to simply buy more insurance up front.

ACCELERATED DEATH BENEFIT: If the policyholder should become terminally ill (normally), the benefit allows distribution of the insurance proceeds before death. Very restrictive, normally requiring physician's statement, etc. but can be a godsend if money is needed.

ACCRUED: Means added or owed to. For example, if interest is not paid on a liability, it is added to or accrued to the principal. If you do not pay your credit card in full, interest and finance charges will be added to or accrued to your bill. For bonds it means the interest that has accumulated since the last interest payment was made; the buyer of the bond pays the market price plus accrued interest.

ACCUMULATION PERIOD/STAGE. The time from when an annuity contract is issued until the start of income payments. Once payments begin, it's called the Annuitization Stage

ACCUMULATION UNIT. A term used in variable annuity products and represent the value of the investment you hold in such contract. Once you start a payout, they are converted to Annuity Units. To calculate the current value of the accumulation, multiply the number of units owned by the current value of one accumulation unit.

ACTIVITIES OF DAILY LIVING: (ADL) Used in long term care policies, they represent the "triggers" defined in the policy that are used justify the payments for home health and nursing home care. The major ADL's include, bathing, eating, mobility, transferring, toileting, continence as well as others. Some states require that only two ADL's be impacted before coverage will commence (California for example)- others allow three.

ACTUARY: A person trained to analyze the odds of insurance, mathematically and statistically, through mortality tables, law of averages and probabilities, etc. They calculate premiums, reserves and other values and are, most notably, used by insurance and annuity companies.

ADJUSTABLE RATE MORTGAGE. A mortgage whose interest rate may be adjusted due to the movement of a specified benchmark- 6-month or 1-year Treasury Bills, 11th District Average Costs of Funds, LIBOR, etc. Do your homework here since, depending on the projected movement of rates, you can find your own rates moving quickly or slowly.

ADJUSTED GROSS INCOME (AGI). Your income shown on your 1040 after allowing for certain "adjustments", but before subtracting Standard or Itemized Deductions and personal exemptions. There's also Modified Adjusted Gross Income that is used in other calculations such as the determinations of IRA's.

AD VALOREM TAX: The tax on the value of an asset. For general obligation municipal bonds, it is largely the tax on real estate that is used to pay interest due.

AGE WEIGHTED RETIREMENT PLAN: Allows a small business owner to make annual retirement contributions based on an employees' age as well as compensation. Older employees- and most probably the owner- are able to receive proportionately larger contributions than the younger employees. In other words, they can really be "top heavy" retirement plans for certain business owners.

AGGRESSIVE GROWTH FUNDS: Seek maximum capital gains and current income is not a significant factor. Many different concepts used- picking out of favor stocks, momentum investing, or possibly using option writing, hedging, futures. You need to carefully read a prospectus in order to determine the risk.

ALPHA: In combination with beta, it represents the ability of the fund manager in picking the best stocks available for the level of risk assumed. For example, if a fund's stocks had a beta of 1.0, you could assume that the fund would merely match the basic index- S&P 500 (beta 1.0). But if the manager statistically outproduced the given beta and index by, say 20%, the fund or manager therefore would have shown an ability to pick the best stocks from those available to get the higher return. He/she would have a positive alpha of , say, 2. Positive alphas are good; negative alphas reflect poor performance on the part of the fund manager.

Alphas should be drawn over a period of time to show consistent results- probably three years. Shorter periods of review- 1 month or even a year- do not necessarily have statistical usefulness. Even positive alphas over three years may have been due to luck and therefore cannot be solely relied upon for future results. Alphas may be determined by different formulas by different services and the figures from one service to another may vary. They mean the same thing but could be interpreted differently/incorrectly. Therefore compare alphas from one service to another carefully.

The formula for alpha is ( (Sum of Y) - ( (B) (Sum of X) ) / N

Where N = number of observations

B = Beta of fund

X = Rate of return for S&P 500

Y = Rate of Return for fund.

ALTERNATIVE MINIMUM TAX: Established by the 1986 tax act, it is an alternative way of figuring the tax owed by an individual- primarily a heavy hitter with extensive writeoffs- other than the regular 1040. It is also a major problem for some corporations. The AMT uses what is called preference items, too numerous and detailed for this glossary. An individual computes the taxes both ways and has to pay the higher of the two.

AMERICAN DEPOSITORY RECEIPT: (ADR) Buying a foreign security directly is fraught with risk- assuming you could do it directly anyway. An ADR is a U.S. security that is a repackaged foreign security. A U.S. bank creates an ADR based on ownership of the shares in the foreign security, while the underlying shares are held in a depositary in the issuing company's home country. The certificate, transfer, and settlement practices for ADRs are identical to those for U.S. securities.

Americanesia Expressaphobia, n 1. Financial affliction, first diagnosed in the late twentieth century, in which the sufferer forgets the amount charged on a credit card but is terribly afraid it's way too much. Closely related to Visago, n, in which a high level of debt prompts feeling of nausea and dizziness.

AMORTIZATION: The process of gradually reducing a debt through installment payments of principal and interest, instead of paying off the debt all at once. A mortgage for example where the principal and interest are amortized over a period of time.

ANNUAL REPORT: Mutual Funds must provide annual reports to all shareholders. You will find a complete listing of assets owned- but recognize that the allocation may have already changed by the time you receive the report. Nonetheless, it gives shareholders an opportunity to review the holdings at that time and determine if they fit the risk profile assumed. This is must reading for all shareholders.

Individual companies provide reports as well and show a very definitive position of its balance sheet, income statement, assets, liabilities, earnings profits, etc. and are known as 10K's. May be combined with other reports to offer a direction of management and competency, but may be difficult to interpret properly.

ANNUITANT: The person named in the policy on whose life the annuity will be based and is normally the person to receive such money.

ANNUITY: A tax sheltered retirement vehicle where investors put in money and the growth remains tax sheltered until pulled out at age 591/2 or later. Penalties apply for early withdrawal by most the annuity companies and decline over time. Rates of return vary tremendously from company to company, not only during the pay in period but also on the payout period. Some companies pay good returns for the, say, 15 years you put money into an annuity, but then pay dismal rates for the 20 to 25 years of retirement. You or you adviser may well need an HP 12C (described below) to figure out the rates of return. You need to absolutely consider inflation, how long you will live, what budget is expected during retirement, if assets are to go to beneficiaries and a host of other related issues. Not for the faint of heart though usually addressed as the most conservative of investments. These are long term contracts/investments, so analyze carefully before investing.

ANNUITY CERTAIN: An annuity payout for at least a minimum period of time and perhaps for life. For example, a 10 year certain period means that the annuitant will receive payments for life. But should he or she die before at least 10 years of payments, the survivor gets payments to equal 10 years' worth. For example, if the annuitant died after 7 years, the survivor would get payments for 3 more years and then they would cease.

There is confusion with a period certain. Under this scenario, the annuitant gets payments just for the time contracted for and nothing more. If he contracts for 15 years, then payments are made just for the 15 years and then they cease.

APPRECIATE: To grow or increase in value. Primary focus in equities and real estate- though bonds may do so as well in certain interest rate environments.

ARBITRAGE: There are times when there might be two different prices on a stock on two different exchanges. If you were "fast" enough, you could profit from this discrepancy by buying low on one and selling higher on the other. First, it is rare that the differences would be that significant. Secondly, you would need a lot of shares and money in order to make a reasonable profit. Third, it's all done by computers and institutions buying large amounts so the average investor will never be able to do this.

ARBITRATION: Many firms require that a new investor sign a form agreeing to arbitration for disputes rather than going to court. Unquestionably cheaper than court and, for the most part, far quicker as well. However the simplicity does not mean any better recognition of the problem by the arbitrators (most require two independent arbitrators and one from the industry). Nor does it mean a greater return to the investor either since most attorneys take from 25% to 33% of award. It is binding on both parties- meaning that you can't appeal, in most cases, to the court system. You can represent yourself- and may be forced to if claim is small since most attorneys will not accept a case less than $50,000. But hire someone at least as an adviser otherwise you'll get eaten by the system. Don't expect anyone to play fair. If the case is large enough, and the opportunity arises, you may wish to consider court. It may take longer and cost more, but, through my experience as an expert witness and arbitrator, I think the outcome could be better. That said, if you used the standard securities attorneys I have seen to date, it won't make any difference since they don't even understand diversification and their presentations end up not addressing the true violations that have occurred.

ARITHMETRIC MEAN: See Geometric Mean

ARTIFICIAL INTELLIGENCE: Almost all funds in existence are run by human managers- though literally all use computers to analyze their various investments. However a few funds have developed computer programs which do literally everything- analyzing, picking stocks, changing allocations etc. Recent statistics show they have done reasonably well, but the verdict is still out on future returns.

ASSET ALLOCATION: An attempt to design a portfolio of various investments that work well together through the use of, normally, random correlations to provide a mixture of risk and rewards consistent with an investors overall risk tolerance. Choices are among the broad asset classes of stocks, bonds and cash with other lesser categories of real estate, options, commodities, etc.

Aggressive portfolios tend to use more stocks and other investments with potential higher standard deviations. Low risk portfolios may focus more on bonds and lower risk investments.

The importance of using various investments to smooth out risk (standard deviation) while potentially keeping solid returns cannot be overstated. Recent studies have shown that a 93.6% of a portfolios return is due to the asset allocation of the portfolio. Only a small amount is due to either the individual stocks picked or to market timing.

ASSIGNMENT: A legal transfer of ones rights to another- such as assigning an insurance policy to another. You normally give up all rights under an assignment.

ATTENDING PHYSICIANS STATEMENT: This is a form completed by a prospective insured's physician(s) that outlines the current and past medical history of the applicant. It is used by the underwriters in evaluating the risks of approving an application. Some insurance companies do not required an APS, but it is the norm with all major policies including long term care.

AUDIT: An official examination of accounts of a corporation for the purposes of supplying accurate figures and adequate accounting controls. In a mutual fund, the annual report must be audited.

AUTOMATIC REINVESTMENT: An option available to shareholders to have either or both of the dividends and capital gains reinvested in the mutual fund. Investors must recognize that all such dividends and capital gains are normally taxable in the year of receipt unless the account is in a tax deferred or tax sheltered form.

AVERAGE RETURN: You need to know how well a fund has done over time. But the manner in which the returns are developed could lead to serious errors. Assume you started with $100

Year Return %

1 10

2 5

3 -10

4 15

5 0

Total 20 divided by 5 years = 4%.

But is that really how you did? Look at the real world numbers below. You started with $100 and went up and down as shown below. For the first year, a return of 10% (compounded annually for those who are already ahead of me) gives you $110.00 at year end. For the second year, you take what is in the kitty ($110) and multiply it by the return of the second year (5%) to get the value at the end of the second year of to get $110.00 + $5.50= $115.50). And so on till the amount at the end of year five is $119.43.

Year Return % $

1 10 $110

2 5 $115.50

3 -10 $103.95

4 15 $119.43

5 0 $119.43

If you had a financial calculator, the annual compounded rate of return is 3.63%- less than the simplistic method above. There are other ways of doing these numbers, but the point is this: you MUST be sure how a return is being quoted- other wise you can be misled/will not understand the difference in one fund's return versus another.

AVERAGE WEIGHTED MATURITY: Used primarily with bond funds, it gives a reasonable time frame for the average maturity dates of ALL the bonds held in the portfolio. Weighted means this. If you have only two bonds in a portfolio- the value of one is $999,999 with a maturity of 10 years and the other bond's value is $1 and matures in 5 years, the "average" maturity of the portfolio is 7.5 years (10 years plus 5 years divided by 2). However it should be clear that the larger valued bond of $999,999 means that the weighted maturity of the entire portfolio is essentially 9.999999 years. The $1 bond's impact is essentially negligible. Always be sure you ask for weighted average- or possibly duration, which is explained below.



BACK END LOAD: Loaded funds used to charge just front end loads- a percentage of the investment immediately deducted from the amount invested. Back end loads were introduced in the 80's that allowed all monies to go to work. Investors faced a charge only if they left the fund within a certain number of years. For example, a back end charge of 5% usually would cost 5% of the amount withdrawn the first year, dropping by 1% per year until five years had gone by. At such time the investor could withdraw all funds with no back end surrender charge. Commissions are paid to the brokers nonetheless through higher ongoing fees and expenses charged on an annual basis. Therefore back end charges tend to be combined with 12b-1 fees.

BALANCED FUND/INVESTMENTS: The use, primarily, of stocks, bonds and cash to balance the growth and risks of one investment versus another and per the perceived direction of the economy. Like asset allocation funds however, managers tend to have vastly different opinions regarding what percentages to take in the various assets and they therefore might not perform as anticipated.

BASIS: This relates to determining how much you actually made on an investment. To do so, you must determine what your actual cost/purchase price of the fund or investment was. For example, buying a fund for $5,000 means your original basis was $5,000. If it grew to $8,000 in five years, you would subtract your original basis of $5,000 (which was also your current basis) for a total taxable return of $3,000. That's fairly simple. But what if you had invested more money each year along with your original investment? Each one of those investments must be added to basis to determine a current basis that is then to determine how much you actually made. For example, if you also invested $250 each year, you would add another $1,250 (5 years x $250) to the original $5,000 for a total investment of $6,250 (called adjusted or current basis). Your appreciation is now smaller at $1,750. ($8,000- $6,250 = $1,750)

If your investment also paid dividends or capital gains which were REINVESTED, these are also added to basis. That is because you could have taken the money and spent it but decided to reinvest (called constructive receipt). Assuming the dividends were $150 per year and the capital gains were $50, the basis would now readjust to $7,250 (5 x $150= $750 plus 5 x $50= $250 and added to the $6,250 above). Now the return drops to just $750.00 ($8,000 - $7,250 = $750.00). The key point to also recognize is that you will be taxed on a much lesser gain. In the first case, the tax on $3,000 gain at 28% is $840. By keeping track of all the extra investment and the dividends and capital gains, the tax on $750 at 28% is just $210. The amount of dividends and capital gains for mutual funds are identified each year to investors via IRA form 1099.

See also step up in basis

BASIS POINTS: Most people are familiar with percent- 1% for example. A basis point is simply 1/100th of a percent. It is frequently used in many articles regarding interest rates, real estate, and other articles on the economy. The articles may say that interest rates increased 25 basis points. That means rates went up 1/4 of one percent. If a rate went from 10.05% to 10.72%, it went up 67 basis points.

BEAR MARKET: Different economists define what a bear market represents- a prolonged drop over 10% in the stock is probably an acceptable definition. In general terms, it represents a consensus by economists and market watchers that the stock market is suffering or will suffer a downtrend at least for the foreseeable future.

BENEFICIARY: An individual or organization who has any present or future interest in the assets of a trust, insurance policy, etc.

BENEFIT PERIOD: Normally associated with a disability policy, it is the time period, after the elimination period has passed, during which the disability income payments are made.

BETA: A mandatory understanding for risk. It is not prefect (most analysis of securities is an imperfect gauge for future performance since the statistics are all based on past performance) and should not be used as an absolute determination of future performance- but it's a great place to start. It relates to the return of an investment as compared to the S&P 500, in most cases. The S&P 500 moves with beta of 1.0. If you have a stock that has a beta of 1.0, it, statistically, should move exactly the same as the S&P 500. If the fund or stock has a beta of 1.2, it should move 20% more than the S&P 500. If the S&P market moved up 10% during a day, the fund should have moved 12%. By the same token, if the market moved down, the fund should have dropped 20% MORE. If a fund or stock has a beta less than 1.0, it is considered conservative; conversely if it is greater than 1.0, it is considered aggressive. Betas should be measured over two or three years. Beta's measured over short periods of time are statistically meaningless. Beta's over ten years may involve periods of time so economically different as to provide inappropriate conclusions.

Beta's of a fund should only be compared to the beta of an index if the fund's assets closely match the index's type of assets. For example, comparing a gold fund's beta to the index 500's beta has essentially no validity since they have literally no similarity. Same with high yield bonds, small cap stocks, etc. But there are other indexes that more closely resemble their own mix and that is what should be used.

The formula for beta

( (N) (Sum of XY) ) - ( (Sum of X) (Sum of Y) )

Where N = the number of observations

X= rate of return for the S&P 500 Index

Y = Rate of return for stock or fund.

Bid and Ask. Bid is the highest price

a potential investor is willing to pay

(e.g., for a stock); ask is the lowest price acceptable to a potential

seller. For more detailed info, click here

BLUE CHIP: Common stock of a highly recognized national company with a history of earnings growth and dividend growth. Does not guarantee certainty about future projections however- consider the volatility of IBM in recent years.

BOND: A certificate representing an agreement by a company, federal government or municipality to pay a certain amount per year to you (usually twice) for the "loan" you have given the entity. Further, at a certain period in time, the company, federal government or municipality agrees to return your principal- the maturity date. For example, if you bought a bond for $1,000 (defined as the "par value" for most bonds) with a coupon rate of 7%, the entity agrees to pay you $35 each six months ($70 per year). Further, if the bond had a maturity date of 05, it means that they will pay you back your $1,000 plus any accrued interest in 2005 (absent default or other problem). (A date of 97 means 1997, 15 means 2015.)

IMPORTANT NOTE: Most bonds have call dates- explained below- and many investors will have their principal paid back early under several conditions- most notably falling interest rates. If you buy individual bonds, ask about callability. If you buy bond funds, expect the many bonds to be called in the portfolio. This can cause significant adjustments to returns via risk of reinvestment- also described below.

BOND RATINGS: See text for chart. Basically, the higher the bond ratings, the less the risk of default on either the interest payments or the principal at maturity. Rating services include S&P, Moody, Fitch, Duffs and Phelps and many others. However, they tend to review different areas and may have different interpretations of this same company/municipality.

BOOK VALUE: The net value of a company less its liabilities as shown on its balance sheet. It will reflect amortization and depreciation, which are used for accounting purposes, and therefore may have little relationship to the company's net asset value if evaluated at market value.

BREAKPOINT SALE: Available in most loaded mutual funds, it allows a purchaser to get a reduced sales charge if he/she puts in enough money. For example, assume that any monies deposited between $0 and $9,999 will be charged a 6% front end load. From $10,000 to $24,999, it's 4%. If an investor therefore commits $15,000, they are not charged 6% on the first $9,999 and 4% thereafter. They are charged 4% overall- on the entire $15,000. The breakpoint for this fund (varies between funds) is the $10,000 level. Another breakpoint may exist at $25,000 and the sales charge might be 2.5%. If you therefore deposit $27,000, you'll be charged 2.5% on the ENTIRE $27,000.

BROKER: (Also called registered representatives, financial consultants, financial advisor, etc.) Each individual that can sell a product for a commission has passed one or more various licensing exams and becomes registered with the NASD. The series 7 license allows the sales of all products except commodities. The series 6 license allows the broker to sell just mutual funds. The unfortunate part of the licensing training is that the reps have never been taught anything of significance in terms of risk, reward, suitability or most other areas mandatory in analyzing an investment or determining proper investments for a client. Absolutely necessary that additional background through other degrees- business, economics- or designations- CFA, Certified Planner, ChFC- be utilized. Nothing wrong with paying a commission for valued service- but competency is NOT provided by any required training through SEC or NASD. Continuing education commenced in 1995. So far, I am not impressed.

BULL MARKET: The reverse of a bear market- where investors expect a prolonged up market.

BUSINESS CYCLE: The fluctuation of business activity and the stages of recovery, prosperity, recession and depression. Also can be shown as the stages of initial growth, rapid expansion, maturity and stabilization or decline. It's really important to know where the economy is- or might be since there is sometimes a lot of second guessing- because different investments work better at different times. Admittedly you are not trying market timing (getting in at exact low as and out at exact highs) but, as stated elsewhere, basic rebalancing should take place once per year to reflect current or anticipated economic events and cycles. Some say that the continued expansion of the past 10 years means that business cycles are a thing of the past. Get real!

BUSINESS OVERHEAD INSURANCE: A policy which will insure the costs of operating a business- per the $ limits- when a business owner is disabled. Provides a short term relief for fixed operating expenses.

BUY/SELL AGREEMENT: A formal agreement between business partners outlining the terms and conditions of a potential sale to either party under certain circumstances.



CAFETERIA PLAN: An employee benefit plan offered under Internal Revenue code 125 where you are allowed so many dollars to distribute among various benefits on a pre tax basis.

CALLABLE BONDS: Very Important since it effects most bonds offered today whether purchased individually or in mutual funds. It allows an issuer to redeem a security prior to the stated maturity. Assume you bought a bond that pays 8%, maturing in 15 years. BUT it is callable by the institution after 5 years at their discretion. It means that they can pay you back all your money (perhaps with a small premium) before the normal maturity of the bond. Why would this happen? Undoubtedly because rates were dropping- say to 5% in year 6. By paying you off, they can then reissue new bonds costing them substantially less in interest payments. Unfortunately, you got back your money early and now have to find another investment paying a return as high as you just left. Good luck- or take on more risk. Brokers should tell you about the bond when purchased- it will be mentioned in mutual fund prospectus. Make sure you understand this issue since it makes planning with bonds difficult. You can never be sure what is going to happen and how long your income stream will last.

IMPORTANT: GNMA's, Freddie Mac and FNMA's have UNLIMITED call dates and these can be very volatile investments. Do more homework before buying these and see my other article herein.

CALL PROTECTION: Where the institution cannot call a bond for a certain period of time- say five years. As an investor, you are at least guaranteed to receive dividend payments for that period of time.


CAPITALIZATION: The sum of a company's long term debt, capital stock and surpluses. Most commonly referred to in mutual funds as the size of the companies in a fund. Large cap stock fund may refer to companies with over $1 billion. Small cap stock funds may have capitalization of $500 million or less. Mid cap stocks exist in between. However this definition is not consistent form fund to fund or text to text and one needs to read the prospectus to be sure what category the stocks really fit in.

CAPITALIZATION RATE: Used in real estate, it is the percentage computed by dividing the real or expected net operating income into the sales price/value of the property. For example, a $100,000 property with a net income of $10,000 would have a cap rate of 10. If the income was $20,000, the cap rate would be 5. As may be seen therefore, the higher the cap rate the greater the overall risk simply becuase the income is not as great.

CAPITAL EXPENDITURES: When a company invests in plant, equipment or property assets. May be seen by investors as a positive sign.


Equation in modern portfolio theory expressing the idea that securities in the market are priced so that their expected return will compensate investors for their expected risk. The equation is:

r = Rf + beta x ( Km - Rf )


r is the expected return rate on a security;

Rf is the rate of a "risk-free" investment, i.e. cash;

Km is the return rate of the appropriate asset class.

The risk factor beta is calculated in terms of the chosen asset class.

CAPM is used theoretically, to relate securities to the market as a whole, and practically, as the discount rate in discounted cash flow calculations to establish the fair value of an investment.

And from Bloomberg- An economic theory that describes the relationship between risk and expected return, and serves as a model for the pricing of risky securities. The CAPM asserts that the only risk that is priced by rational investors is systematic risk, because that risk cannot be eliminated by diversification. The CAPM says that the expected return of a security or a portfolio is equal to the rate on a risk-free security plus a risk premium multiplied by the asset's systematic risk.

CAPITAL GAIN: Refer also to basis above. If you have an investment worth $55,000 and your original investment basis plus all added monies and reinvested dividends and capital gain distributions is $40,000 (current or existing basis), the gain for tax proposes $15,000. This may be taxed at the long term capital gain rate of 20% if held one year or more. If the asset has been held less than one year, the gain is taxed as short term rates which are the same as ordinary incomes tax rates. Not available for pension plans, 401(k)'s, IRA's and other qualified plan assets. See TAX section herein for more definitive explanation of the 1997 tax law.

CAPITAL GAINS DISTRIBUTION: Mutual fund mangers are normally required to distribute most gains from any sale of appreciated stocks in the portfolio (may be offset by losses). Capital gains are distributed once per year and are taxable to the investor unless the account is in a tax deferred or tax sheltered form. Losses in a fund may be carried over an offset in subsequent years.

CAPITAL LOSS: In this case, the value of the asset is less than the current basis. For example, if the basis is $40,000 but the asset is now worth only $25,000, there is a $15,000 capital loss. If the asset has been held over year or longer, it is a long term capital loss; less than one year, it's a short term capital loss. See capital netting below.

CAPITAL NETTING: Long term capital gains may be netted against capital losses each year. Short term gains may be netted against short term capital losses each year. If the long term and short term are different, one also and one a gain, they may be netted together. Whatever is larger is what it is. If a gain results, or both are gains, then tax as identified in capital gains above. If the netting results in a loss or both short term and long term losses result, then this special constraint exits. YOU CAN ONLY USE $3,000 OF A LOSS EACH YEAR. WHATEVER IS LEFT OVER IS CARRIED FORWARD TO THE NEXT YEAR AND THE NETTING STARTS ALL OVER AGAIN. YOU MUST UNDERSTAND THIS (OR AT LEAST YOUR ACCOUNTANT) BECAUSE IT MAKES A BIG DIFFERENCE IN SALES OF INVESTMENTS DURING THE YEAR AND THE ULTIMATE TAXES YOU WILL PAY.

Long Term Capital Gain.... LTC Loss...... Short Term Capital Gain..... STC Loss

$50,000 ............................$40,000 ........$30,000 ..............................$70,000

.......................Net........................................................... Net

...................$10,000 LTC Gain..................................... $40,000 STC Loss


..................................................$30,000 STC Loss

But only $3,000 can be used this year. The rest ($27,000 of short term capital loss) is carried over to next year and the process is repeated all over again.

CASH DIVIDEND: Many stocks and almost all bonds pay cash dividends to investors, perhaps several times per year. They are based (bonds) on the yield indicated on the bonds purchased. Dividends (stocks) are based on profits generated by the company (most often) and whether the Board of Directors votes to have dividends paid to investors (not required). Dividends other than cash may also be paid to shareholders.

CASH SURRENDER VALUE: The amount of money PRE TAX that the policyholder will receive if he/she cancels the contract/coverage.

CASH WITHDRAWAL: A provision in an insurance or annuity contract that allows participants to withdraw some or all of an accumulation from the policy.

CAVEAT EMPTOR: Latin for "buyer beware". In colloquial terms it means "there's a good possibility you could get screwed".

CERTIFICATE OF DEPOSIT: (CD's) An obligation issued by a bank showing that a given amount of money has been deposited for a certain time and that it will earn (normally) a fixed rate of return. Normally guaranteed under FDIC to $100,000. Interest rate usually higher than those of treasury instruments but less than the return of corporate bonds. Returns are taxable unless the CD's are in IRA's or other tax deferred vehicles.

CERTIFIED FINANCIAL PLANNER: A good designation conferred by the National Endowment for Financial Education in Denver. Five mandatory courses. Weak on insurance. Should only be utilized in conjunction with corresponding additional degree- business, economics, etc. By itself, it may not be as encompassing as required for many planning situations. Definitely not as good as degree in financial planning. Continuing education required.

CHARITABLE GIFT ANNUITY: Your basic gift of an asset to a charity but retaining an income for life from the sale of the proceeds and subsequent investment by the charity. The income can cover one or two lives (or more if children are added) and are based on the actuarial lifetimes and the minimum payments established by law.

CHARITABLE LEAD TRUST: Essentially the reverse of the above where the charity receives the income for a period of time but the assets are subsequently paid to a noncharitable beneficiary(ies) (generally either the donor or his or her heirs)

CHARITABLE REMAINDER ANNUITY TRUST:  the donor (or other beneficiary) receives an  annuity based on a fixed amount of at least 5% but not more than 50% of the fair market value of property placed in the trust, for life or for a period of up to 20 years. One (or more) charities is the named recipient of the remainder interest upon the death of the donor (or other beneficiary). The value of the charitable remainder interest must be at least 10% of the net fair market value of all property transferred to the trust, as determined at the time of the transfer

CHARITABLE REMAINDER UNITRUST: the donor (or other beneficiary) receives an  annuity based on a fixed amount of at lea st 5% but not more than 50% of the annually revalued trust assets, for life or for a period of up to 20 years. One (or more) charities is the named recipient of the remainder interest upon the death of the donor (or other beneficiary). The value of the charitable remainder interest must be at least 10% of the net fair market value of all property transferred to the trust, as determined at the time of the transfer

CHARTERED FINANCIAL ANALYST: (CFA) Excellent designation in security analysis- particularly as it relates to individual company review. Mostly used at institutional level though if you have LOTS of money and want to deal in individual stock issues, a CFA may wish to act as adviser. Continuing education required. Not versed in financial planning.

CHARTERED FINANCIAL CONSULTANT: (ChFC) A good designation conferred by the American College at Bryn Mawr, Penn. Twelve courses. Heavy emphasis on insurance. By itself, it may not be as encompassing as required for most planning situations. Should only be utilized with conjunction with corresponding additional degree- business, economics, etc. Definitely not as good as degree in financial planning. Continuing education required.

CHARTERED LIFE UNDERWRITER: (CLU) A designation offered through American College (see directly above) that focuses on the use of life insurance. Several steps up from just an insurance licensee but preferable to use the ChFC which encompasses even more competency. Better yet to use an MSFS (Master of Science in Financial Services) that are offered through the same College.

CHURNING: Where a broker is manipulating an account by masking innumerable trades primarily to generate a commission. Illegal, even if account may be making some money. Since trades are checked each day by a supervisor (or should be), it seems impossible that this trading wouldn't be noticed, but it still happens since there are no specifics ever taught in licensing training. Read your statements.

CIRCUIT BREAKER-- A procedure instituted in extreme volatility that temporarily halts trading on all U.S. stock markets for one hour when the Dow Jones Industrial Average falls 250 points or more within a trading day. The pause supposedly allows time for the markets to absorb the news that caused the decline. Further, should the average fall another 150 points within the same day, trading would again be halted, this time for two hours.

CLASS A, B, C, D MUTUAL FUND LOADS and EXPENSES: Both front and back end loads and 12b-1 fees are explained herein. In past years, loaded mutual the funds might have applied one fee or the other, but not all fees combined together. However, in an effort to increase commissions, loaded funds- particularly at the bigger wire houses, introduced various combinations of front end fees with or without a 12b-1 fee; back end loads with or without a 12b-1 fee, or with fees lasting only a period of time, etc,. etc. A selection may depend on how long one anticipated to hold a fund, whether rebalancing was indicated and a host of other implications. If you changed your mind from your initial position, you might experience higher fees overall than had you picked another type load. Frankly, very confusing. And many prospectuses had to spend more pages explaining how the fees worked than how the fund worked. Why bother. If you want sophistication in funds, this ain't it.

CLOSED END FUND: This is significantly different from an open end or mutual fund in that the purchase and sale of the fund occurs through brokers on an exchange, not directly from the fund. The managers invest in many stocks or bonds (normally) and manage similarly to a mutual fund. However, since they are not required to redeem shares from shareholders, they don't have to hold extra cash in case of a "run on the bank" and therefore may be more fully invested at any time. The fund's value is based on supply and demand, not necessarily on the net asset value of the underlying securities. Historically, shares tend to trade at a DISCOUNT to net asset value (don't ask why- they just do) and investors wishing to capitalize on the difference in value try to buy at the lower end of the discount range and then sell or profit as the discount narrows. For example, if the net asset value was $10.00 per share, the share price might actually be $8.00. If the normal trading range was $8.50 to $9.00, an investor would buy in the hopes that the discount would go back to "normal". Shares may also trade at a premium- but investors buying at that point can only hope that the price will go even higher (greater fool theory).

Investors can buy new offerings of closed end funds but it is NOT considered wise since the price must drop by the amount of commissions generated. Almost always wise to buy after initial public offering.

Historical returns have exceeded those of many mutual funds but the risks are higher. Better really do your homework. If you are looking at single country funds, check out Spider and WEBS first.

COGNITIVE DISSONANCE: The dynamics of overconfidence is clearly an important issue. It is logical to think that if we recall our successes and failures equally clearly, over time we should obtain an accurate view. Experience should make us wise. On the other hand, the prevalence and persistence of overconfidence suggest that forces able to eliminate it are weak. The reality is that we prefer to forget what did not go our way: this is called cognitive dissonance.

COINSURANCE. An insurance policy provision under which the insured and the insurer share losses a the deductible is met according to the contract ( 20% for the insured, 80% for the insurer). There usually is a specific dollar limit (say $1,00,000) after which the insured is no longer required to pay and the insurer bears all covered costs.

COLLATERALIZED MORTGAGE OBLIGATION: (CMO) Actually you really don't want to know since there are going to be few reasons why you would bother with these. However, many funds DO use them and that's the real importance. They are a derivative that start with mortgages. As stated elsewhere, an investor really doesn't know what monies they are going to get when since mortgages may be prepaid, some payments missed, etc, etc. A CMO merely takes mortgages and breaks them into tranches or slots of payments. The first tranche gets any monies paid to them first- the latter tranches get money only when everyone else is paid off. The first tranches have less risk- hence lower return. The latter tranches take far more risk and have a higher reward- whenever that may be. These tranches can be just a few to far beyond twenty. Requires a level of sophistication beyond most investors. See if they are used in the GNMA funds you are offered. If so, and the manager is correct, the return on a fund can go up. If they are wrong, the yields can suffer significantly. Caveat Emptor.

COMMISSION: A percent received by most brokers on the sale of a product. Since 1975, commissions are negotiable. Inherent conflict of interest since broker recommending a purchase may be dong so to increase his remuneration rather than providing the best product and price. Good advice is worth the fee. However, brokers have never been trained to know that much about risk and reward to begin with so paying for (probable) inadequate advice is not logical. Fees can range per year to about 3% of an account before the firm or any regulatory body may take notice that excessive commissions may be charged. This led to discount brokers which, supposedly, do not offer advice but simply execute the trade. However these lines are blurring with some discount firms now offering advice- even financial planning advice. But brokers, absent some formal additional training, are unable to spell financial planning, never mind do it. Before paying a fee or commission on anything, look to knowledge and competency of individual offering advice.

COMMODITY FUTURES. Contracts for future delivery of certain products like wheat, soybeans, pork bellies, metals, and financial instruments or indices of financial instruments. Commodity futures specify both prices and delivery dates and are traded on special exchanges, such as the Chicago Mercantile Exchange. These can be used to REDUCE risk if you are the farmer that produces the commodity and wish to hold onto a specific price. Many others use them for speculation. Most shouldn't. If you know what diversification is and what the Sharpe Ratio represents, you may have the capability to utilize. Otherwise you are WAY out of your league and probably a schmuck to boot.

COMMON STOCK: Also referred to as the equity of a company, an investor purchasing common stock owns a piece of the company and hopes that the management and fortune of the company increases. Shareholders have voting rights and may receive dividends. Bondholders and preferred stock holders have prior claims of all assets before common stockholders.

COMPOUND VERSUS SIMPLE INTEREST: Compounding a rate of return means that you multiply the rate of return by the amount of the initial principal plus (or minus) any accumulated interest or other gain. For simplicities sake, take a $100 savings account that earns 5%. At the end of one year, the value is $105. If I use compound interest, I multiply 5% return on the initial money ($100) PLUS any accumulated interest ($5.00). So, 05 x $105 = $5.25 which is added to the original amount of $105 at the end of the first year which totals $110.25 at the end of the second year. And so on. It's interest on top of interest.

Simple interest is the same $5 each year- there is no interest on accumulated interest. With simple interest, the first year's amount would be $105- the same as the above. But the total for the second year would simply be an additional $5 or $110. Third year = $115.00.

CONFIRMATION: A written statement by the brokerage firm confirming that a sale or purchase has occurred. It spells out price, amount, time and other terms. It may include commissions, but if you did a trade through NASD market makers, you'll only see net amounts on purchases and sales. You MUST review ALL confirmations of every transaction. Many of the mistakes seen in arbitration could have been avoided/limited if investors paid more attention to what was happening to their account. Being diligent stops a lot of problems.

CONSTRUCTIVE RECEIPT. If you could have gotten something- even though it was reinvested- the IRS will determine that it WAS received for tax purposes and apply tax. For example, if buy a mutual fund (non deferred account), you have the option of indicating whether or not you want dividends reinvested. Even if they are reinvested, since you had the option of getting them, they will be taxed to you. You will see that on your 1099 each year. Capital gain distributions is done the same way. Also an issue in tax deferred exchanges as well as other investment strategies. You'll see this often and is something you need to understand. Many investors don't. But then again, they are not real investors.

CONSUMER PRICE INDEX: A statistical measure of change in the price of goods and services calculated from one period to another of a basket of goods. Synonymous in many ways to a change in inflation.

CONTINGENT DEFERRED SALES CHARGE: A back end load that may be levied on a mutual fund or insurance contract if the investor/policyholder terminates/surrenders the contracts prior to the time frame set forth in the contract. Can vary considerably from company to company.

CONTINUING EDUCATION: Recently started by the National Association of Security Dealers in 1995. Since training of registered representatives does NOT include almost all basic info needed to address requirements to determine investors risk and suitability, the jury is still out as to whether the continuing education is any good either. Early reviews show training is pretty weak. Education also required for Certified Planners, ChFC and most real estate and insurance agents. (California instituted continuing education for insurance agents in 1991- many states already required.) Some of it is also terrible and sophomoric, but many courses are truly designed to advance knowledge and competency. The best "consumer protection" available since it weeds out many who are not really interested in pursuing a profession.

CONTRACTUAL PLAN: Instead of buying shares directly from a fund or through a broker charging the "normal" 4.5% to maximum 8.5% load, and having the option to buy or not buy at any time, the contractual plan is a formalized agreement wherein the purchaser agrees to contribute a (normally) small amount per month over an extended period of time. Unfortunately, purchasers usually pay up to a 50% front end load (not greater than 9% over the term of the plan). Used a lot for military personnel since contractual firms hire retired military and get them to sell new recruits. Also used for the unsophisticated. Some plans have done well since they know you are gong to be in the contract for a very long time and can invest more aggressively, but your flexibility is nil and your initial costs are exorbitant. Bottom line- higher fees and loss of control. Sucker bet. If you are offered one of these plans, be afraid, Be very, very afraid. Run away.

CONVERSION PRIVILEGE: Also called exchange privilege and allows an investor in a particular loaded fund family to sell shares in one fund and purchase another fund in that family without having to pay an additional sales charge (certain restrictions and funds may apply). Unless the account is tax sheltered or tax deferred, the sale is a taxable event and investor will be taxed on any gains (or use losses) accordingly.

CONVERTIBLE BOND: A bond with the option of the shareholder to convert into a prearranged number of common stock. The conversion ratio designates the number of shares. The yield on convertible bonds should normally be lower than other bonds due to conversion privilege, but risk adverse investors may like these since they at least get some return along with the option of converting to stock at their discretion to pick up (hopefully) the additional appreciation of the equity. There are both convertible bonds and convertible preferred stock.

CORPORATE BOND FUNDS: They purchase debt instruments of U.S. corporations as possibly some Treasury instruments and other fixed income securities.

CORPORATION: A form of a business organization in which the value of the company is divided into shares of stock each representing a unit of ownership. Each shareholder is liable only to the investment made- not to any additional exposure by the company's management.

CORRECTION: A difficult term to describe since it does not have a clear cut definition. In general terms it means that the market has dropped (or is expected to drop) for some reason that analysts may have difficulty explaining. They may say that the market has gone up so high that it must come down to correct for the fast upsurge. Others could say that the market was correcting for recent government or international news- i.e. the continued drop in the dollar, a spot of gravy on Greenspan's tie, literally anything they think they can justify. Most tend to state that as long as the market is not continuing to go down and down and down- the beginning of a bear market- it is just a correction. May say a correction can be up to 10% of the market value.

CORRELATION: A term used in asset allocation and portfolio construction in an attempt to find other securities or funds that do not move in necessarily the same manner at the same time for the same reasons or in the same amount. In building a portfolio, you are attempting to utilize different investments so that if one doesn't necessarily do well for whatever reason, the other one(s) might since they are not tied to the same underlying issues. For example, U.S. stocks might react unfavorably to U.S. changes in interest rates, but Korean stocks may not do anything at all in regards to that condition but move independently due to conditions in Southeastern Asia. Admittedly, with the world becoming "smaller" and with instant transmission of almost all data, many countries and investments may be impacted by another country' idiosyncrasies, politics, or economics and tend to do the same thing.

A correlation of +1 indicates perfect positive correlation- the investments move exactly in the same direction; a -1 indicates a perfect negative correlation- investments will move in a negative direction to each other. Most portfolios end up with random correlations with a positive correlation leaning.

COST OF LIVING RIDER: On a disability policy, it allows the policyholder the ability to increase the coverage on an annual basis by the cost of living index- normally established the government. The increase may be made by simple or compounded math (compounding is far more acceptable). There are two scenarios however- a cost of living rider to adjust the coverage obtainable PRIOR to disability and then another rider to adjust the disability payments AFTER disability.

A cost of living rider for a long term care policy is essentially the same though the riders are only for adjusting the coverage PRIOR to a entry into a nursing home.

COUPON RATE: The agreed on rate of yearly payment by the company, municipality or federal government. For example, if the coupon (or stated or nominal rate) is 8%, the institution will pay (absent default) $40 each six months or $80 for the year. It doesn't make any difference what you paid for the bond (because of changes in economic interest rates), you'll always get the $80.00 Also called nominal or stated rate.

COVARIANCE:  A statistical measure of correlation of the fluctuations of two different quantities. In finance, covariance is applied to the annual rates of return of different investments, to measure the correlation of their year-to-year fluctuations in performance.

CREDIT LIFE INSURANCE: Term life insurance issued though a lender to insure for payment of a loan, installment purchase in case of death. Many times a rip off because it's so unbelievably expensive,

CREDIT RATING: Bonds are normally rated by several different firms as to the perceived ability to make scheduled interest and principal payments. The services include the more prominently known as Standard and Poor's and Moody's. Credit ratings are also attached to life insurance companies and include the services such as AM Best, Duffs and Phelps, Weiss, etc. The reviews are done periodically (and differently by the different firms) m and may change at any time. Changes in ratings are immediately felt in the marketplace by changes in stock or bond prices, interest rate requirements and so on.

CURRENCY RISK: See Foreign Exchange Rate Risk

CURRENT YIELD: This is different from coupon rate, but based on it nonetheless. Assume you bought a 8% coupon yielding bond in the secondary market and paid only $800 because interest rates in the economy had gone up. (New bonds were paying 10% so your bond was worth less since it only paid 8%). The current yield is $80 divided by the current price of $800 or 10%. If the bond had been purchased for $1,200 (probably due to the fact that economic interest rates had fallen and your bond was worth more), the current yield would have been $80 divided by $1,200 or just 6.67%.

If you own stock, the current yield is determined by analyzing the current payment and dividing by the current price of the stocks. For example, if a stock paid an annualized dividend of $6 and the current price is 77 ½, the current dividend is $6 divided by $77.50 = 7.74%.

CYCLICAL STOCKS: The movement of a company's stock is tied to the business cycle. When the economy is strong, certain businesses do well- steel, auto for example. When the economy declines, so supposedly should the stock values



DEATH BENEFIT. The amount payable to a beneficiary at a death. Also called the Survivor Benefit.

DECLINATION: The rejection by a life insurance company of a potential insured's life insurance application- normally for health reasons or occupation.

DEDUCTIBLE: The amount policyholders must pay out-of-pocket before the insurance company will reimburse them according to the contract ($500 for example)

DEFENSIVE STOCK: An investment in an industry that is unaffected by business cycles- such as the food industry and utilities. They supposedly provide stability in a down market.

DEFERRED ANNUITY: Money within an annuity that is not to be withdrawn until the future. See annuity

DEFINED BENEFIT PLAN: A traditional pension plan that provides employees a predetermined amount of retirement pension income and is based on income, years worked and age of retirement. Being replaced by defined contribution plans. Portions of payments are backed by the Pension Benefit Guarantee Corporation should the company default.

DEFINED CONTRIBUTION PLAN: Different from Defined Benefit above in that the value of the pension is not determined but simply the amount that is contributed annually. The ending benefit is determined by how well the assets are invested each year. Basic defined contribution plans are money purchase, 401(k), profit sharing and Simplified Employee Pension (SEP) Plans

DEMUTUALIZATION: A mutual insurer is owned by the policyholders. Mutual insurers typically provide returns by paying dividends to policyholders. These ownership rights may not be sold or transferred. In a full demutualization, company shares, or their equivalent in cash or benefits, are given to eligible policyholders. Those who receive shares become the owners and the stock of the company would trade on the open market.

DEPRECIATION: An allowance under tax law that provides for the "wasting away" of an asset. For example, real estate will finally require rebuilding sometime in the future. The IRS code allows the investors to write off the declining value of the property over a certain period of time depending on the type- commercial, multi family, etc. Depreciation also allowed on cars, furniture and other assets used for business or investment purposes. Schedules do not have to make sense; also change on whim of congress.

DERIVATIVES: A financial security where the value is dependent on the movement of a certain other conditions or thing. Options on stocks are dependent on the movement of that underlying equity. Options on the S&P 500 index are dependent on the movement of the index overall. They may be used to hedge risk, not to increase it. Other derivatives may be based on esoteric issues- the movement of interest rates in Korea solely between July and August- and the contracts may be very highly leveraged. If the guess is right, substantial profits. But if the guess is wrong- or very wrong- substantial losses may occur. Many money market funds in 1994 used derivatives to enhance yields. But when interest rates moved the wrong way, huge losses were reported. Investors need to check a fund to determine if, and most importantly, HOW derivatives are being used.

DIRECT PARTICIPATION PROGRAM: (DPP) An investment which allows a flow through of tax "benefits" to the participants. Otherwise known in the trade as limited partnerships. Limited offerings in the marketplace in the 90's due to the number of projects that tanked in the 80's as well as the major tax law change of 1986. If you still hold partnerships, check Moody's Directory for the companies that may list or buy the units. But be careful- the prices may bear no relationship to the actual value.

DISABILITY INSURANCE: A type of insurance that pays upon disability of a policyholder per the term of the contract. May cover for permanent or temporary disability and for full or partial depending on the terms of the contract. Due to the massive claims by professionals from about 1990, terms have become very restrictive, coverage limited and costs very expensive.

DISCOUNT: The difference between the maturity value or future worth of an asset as compared to its current value. May be due to liquidity factors or stated features on the instrument. For example, paying off a mortgage early may allow a discount from the full price. Having to sell a thinly traded security quickly may require the investor discount the price for a fast sale. A discount can also apply to a bond where economic interest rates have gone up. The older bond is discounted in value since it pays less. See par.

DISCOUNT BROKER: A firm charging less commission than the full service wire house firms. Usually they execute orders only- the investor does all of the analysis to determine what to buy and sell- but some are now offering advice as well.

DISCOUNT RATE: The rate charged by the Federal Reserve Bank of New York to other member banks who need short term loans to cover for a lack of reserves. Instrumental with the federal funds rates in determining where national rates will go. If the FED wants to increase rates (to slow inflation for example) it would adjust these rates upward. Synonymously, U.S. banks would follow with an upturn in their interest rates to almost all borrowers. Consider the reaction of the financial industry when the FED raised rates in 1994. Consider the numerous drops in 2001.

DISCRETIONARY INCOME: The amount your income available for "spending" after the essentials have been met. Mandatory to do a budget to properly determine. Mandatory for any type of financial or retirement planning.

DIVERSIFIED: Several meanings- many not well understood. Further, it is not clearly defined in a prospectus. By law, it actually means that at least 75% of the assets in a mutual fund must be invested so that not more than 5% of the assets may be invested in any one company nor own more than 10% of a company's outstanding stock. For most the rest of us, diversified should mean the definition directly below- having at least 10 to 15 stocks in a portfolio in order to insulate due to unsystematic risk (yes, you must read below. It's mandatory). And that assumes good correlation. Otherwise you might need as many as 30. Others also use diversified to mean not putting "all your eggs in one basket" but that is better defined by the term asset allocation explained above.

DIVERSIFIABLE RISK: Also referred to as unsystematic risk. The ability to reduce diversifiable or unsystematic risk by the addition of non or randomly correlated securities to the portfolio until the number tend to reach the level of systematic risk. Based on statistics, it means that the ownership of just one stock in a portfolio represents an extensive risk since if the company went bankrupt, you could lose everything. That risk, depending on several factors, may be as much as 70% greater than being in an S&P 500 index fund- the benchmark for most investors. As you add more securities, the corresponding risk drop so that by the time you have purchased 10 to 15 securities, you have managed to reduce the risk to the marketplace overall- but that assumes a random correlation. With fully correlated securities, you need even more securities. For example, with a correlation of 0.4, you'd need about 30 securities. Also if you purchased only auto or computer stocks, you have still NOT diversified into other areas/industries and your risk remains high and much greater than the diversified S&P 500. In general, the less the correlation among security returns, the greater the impact of diversification on reducing variability.

This is the reason why the purchase of an employers stock- where it represents a major portion of an employees pension plan- is so much of a risk. Also a reason why there is little sense in buying single issue securities. You'd need a whole mess of them before you were adequately diversified. Otherwise your risk is many times greater than that of the S&P 500.

If you don't understand diversification by the numbers, you have no business buying individual stocks. You have no idea what risks you are taking and that is stupid.

New for 2000- due to a higher correlation, you need from 40 to 50 stocks in order to be properly diversified. Maybe as many as 350 (University of Nevada)

DIVIDEND: A distribution of cash (normally) or stocks or other property distributed by a corporation per the voting by the Board of Directors. In insurance, it represents a return of part of the premium n participating insurance to reflect the differences between the premium charged and the combination of revised mortality, company expenses and the true investment experience. Premiums are initially calculated to provide some margin over the anticipated cost of insurance.

DIVIDEND ADDITION: An amount of paid up insurance purchased with a policy dividend and added to the face amount on the policy.

DIVIDEND REINVESTMENT PLAN: Automatic reinvestment of cash dividends by the shareholder or fund holder. Unless the investment is held in a tax sheltered plan, the dividends are a taxable event regardless (because you could have received the money- constructive receipt) and will be added to basis in subsequently determining taxable gain or loss on investments. Amount of dividends that an investor will be taxed upon is found on the 1099 tax form submitted at the end of each year by the company or fund.

DOLLAR COST AVERAGING: (DCA) The process of investing small amounts of money over a period of time instead of putting all the money to work at once. Statistically not valid since studies have shown that investing all the money at once has outproduced dollar cost averaging about two thirds of the time. . When you invest monthly amounts to 401(k), 403(b) plans, IRA's and the like, you are doing monthly investing. It looks the same as DCA and, everything else being equal, it coems very close. But you just didn't have a lumps sum to start with so the reference to DCA is wrong.

Even if DCA is utilized, there are several methods that have been shown to outproduce the simple "putting in $x per month" regardless of market volatility. Further, many investors using DCA do not review investments closely enough and are apt to lose more through a bad market.

DOW JONES INDUSTRIAL AVERAGE: The most well known average and followed by almost all financial services. However it reflect s the movement of just 30 large actively traded stocks- about 15% of the NYSE on a weighted basis. For example, IBM at 110 carries more than three times the weight of Woolworth at 35. Most analysts use the S&P 500 average or other indices that reflect a larger portion of the overall market.

DOW JONES TRANSPORTATION AVERAGE: This consists for the stocks of 20 major transportation companies

DOW JONES UTILITY AVERAGE: This consists of 15 major utilities that provide geographic representation.

DUE DILIGENCE: The review of a product, client, investing, insurance, etc., situation that should have been conducted to determine risk and suitability PRIOR to the investment or use. Must be made at least at the prudent man level. If conducted by those of advanced background or PERCEIVED capability (consider a broker with a title of Vice President), then higher standards should/will be applied.

DURABLE POWER OF ATTORNEY: A formal legal document giving the power to another person to act in your stead for certain acts as defined in the document. A plain power of attorney terminates upon disability. A durable power extends even when you are disabled- exactly when you need it the most. A general power gives most rights- a specific power more definitively details what powers are allowed. Difficulty in terminating since proper notification should be given to all parties. Also, many do not want to grant powers UNTIL disabled and that can be done through a SPRINGING Durable Power of Attorney.

DURATION: Represents the price volatility of a fixed income security- a bond for example. It is the weighted average term to maturity of the bond's cash flow. It is a better measure of a bond's sensitivity to interest rate changes than maturity because it takes into account the time value of cash flows generated over the (proposed) life of the bond. Say what? An example might help. Assume you owned bond A with 10 years to maturity and it paid 8%. You also owned bond B with a 8 year bond paying 8%. With which bond will you get back more money faster? B obviously since it will pay off the $1,000 par value sooner. How about Bond A with a 10 year maturity and a yield of 8% and bond B with 8 years to maturity paying 6%. Now which one is better? Now it's not so easy because in bond A you certainly get back a higher interest rate per year but the $1,000 is not due till 10 years. With bond B, you get less money per year but get the $1,000 two years earlier. There's a few formulas that can show you, but the overall issue is this. The shorter the duration on a bond or bond fund, everything else being equal (like ratings for example), the better. The higher the yield, the shorter the duration. The shorter the maturity date, the shorter the duration. More funds are providing this number to investors and even some of the basic financial magazine comment on it. So does the SEC. You need to be able to PV calculations with an HP12C if you want to do this yourself. Your adviser MUST have the capability of doing it. For more detailed info, click here.



EAFE: The European, Australian, Far East Index computed by Morgan Stanley and is a widely used index for non U.S. stocks.

EARNINGS: The net income for the company during the period of time selected- usually annually

EARNINGS PER SHARE: (EPS) Net income for the past 12 months divided by the number of common shares outstanding.

EE SAVINGS BONDS: Bonds offered by the U.S. government that are secure and possibly tax free if used for certain purposes by certain people. Limited yield that has changed several times during the last few years.

ECONOMIC RISK: The risk related to international developments and domestic events. For example, the changes in the money supply or interest rates by the FED are an economic risk. Also a devaluation of a country's currency.

EDUCATION IRA. An education savings plan that allows a person to put aside funds each year for the college expenses of a specific beneficiary. Contributions are not tax-deductible, but any earnings are tax free.

EFFICIENT FRONTIER: An investment where you are able to get the highest return for the risk taken. But even if you did get it right initially with your investment, the frontier has already changed. The theory is valid: the moving target makes it almost impossible to know if you did it right.

ELIMINATION PERIOD: For insurance policies, it is the time frame in which the insured elects to self insure until the disability or long term care policy starts to pay. The longer the time of self insurance/elimination period, the lower the cost of the policy premium.

ENDORSEMENT: An added document- not a part of the original contract- that becomes a part of such contract when attached thereto and cites certain added/revised terms and conditions. Riders to life insurance contracts are similar to endorsements.

ENDOWMENT: In life insurance, it is the life insurance payable to the policyholder, if living, on the maturity stated on the contract- or to the beneficiary if the insured dies prior to that date.

ERISA: Employee Retirement Income Security Act established in 1974 governs the operation of most private pension and benefit plans. Will guarantee certain monies on defined benefit plans if the corporation falls into bankruptcy.

ESTATE: The asset owned by an individual at death. For tax purposes, it is usually the net estate after expenses, mortgages, etc. have been deducted. Each citizen has the right to exclude $675,000 from taxes in 2001 going up to full exclusion by 2010.

ESTOPPEL: A legal term with "real life" implications. It refers to a pattern of history that allows other to rely upon even if documentation might indicate otherwise. For example, assume you had to make payments on a car by the 30th of each month. However, the lender always accepted payments made five days later. Then, out of the blue one day, they took your car because the payments weren't made according to the written agreement. The essentially are ESTOPPED from doing so since they have allowed such practice to continue. They would have to renotify you of their intent to change the terms to correspond to the stipulated agreement. The court would hold that their pattern of activity was one you could have relied upon.

EXCLUSIONS: The circumstances delineated for which the policy will not pay.

EX DIVIDEND DATE: In regards to stock, it represents the date where, as an owner of the stock, you are entitled to the dividend or it remains with the seller. Theoretically, the stock will drop exactly by the amount of the dividend paid so no "harm" to either party. However, if a purchaser buys a stock close to the ex dividend date, he/she will get the dividend paid back out of recently contributed monies AND THE DIVIDEND IS TAXABLE. The same result happens with mutual funds and therefore all investors need to know when the ex dividend date is to they can avoid the excessive taxation. Read the prospectus or call your broker or fund. Reading is better.

EXCHANGE: A national or regional auction market where stocks, bonds, options and futures commodities and indices are traded. Some exchanges include the New York Stock Exchange, American Stock Exchange, Pacific Stock Exchange, etc.

EXCLUSIONS: In life insurance, it defines the circumstances under which benefits will not be paid.

EXPENSE RATIO: This is the cost to run a mutual fund and includes almost all charges paid by the fund on an ongoing basis. (It does not include front and back end loads). The fees include costs for the manager, postage, rent, 12b-1 charges, etc. The ratios vary tremendously between funds and fund families but are normally less for bond funds than U.S. stock funds . International funds costing the most due to more extensive and costly analysis and travel expenses. Ratios also tend to be higher overall for load versus no load funds. Everything else being equal, the lower the fees the better.

EXPERIENCE: Used by many in the investment business to justify capability and knowledge. They are NOT one and the same. A twit with 20 years experience may have simply repeated one years worth of mistakes 20 times. You still have a twit that can screw things up. If you think that is too caustic and cynical, consider the huge debacle in Orange County. Merrill Lynch has been around a long time- lots of experience. So had the Orange county treasurer- lots of experience. But between the years and years of experience, they screwed up the entire bond market in California  and the people in Orange County will be paying back the losses for a long time. Prudential had lots of experience. Between the debacle in limited partnerships and insurance and about $2 billion in fines, they are lucky they are still in business. Experience is great when coupled with a good background /degrees/designations and current knowledge. Otherwise, CAVEAT EMPTOR if you are using this as your sole justification for using someone.



FACE AMOUNT: The amount stated on the face of a policy that indicates how much will be paid in case of death, disability, at the maturity of the policy, etc. It does not include the additional amounts available under included riders (accidental death) or indicate the amount of the offset that may be due to loans.

FACE VALUE: Also referred to par value of a bond or note when issued. On bonds, it's normally $1,000; Municipal- $5,000. Remember, this is not necessarily the amount that you will purchase the security for in the secondary market. Many factors- most notably a change in ratings or economic interest rates- will alter the market value of the security at the time of purchase. The face value is usually what you expect to receive at maturity.

FAMILY LIMITED PARTNERSHIP: A legal ownership of a business (normally) wherein the general partners are the parents and the limited partners are the children (though obviously there are numerous variations). The idea is for the parents to retain control of the business as they get older but have the ability to gift part of the business to the children at discount. The discounts are attributable to a minority ownership and the lack of liquidity. Such discounts are as high as 40% and effectively allow up to $16,667 of real assets to be passed and still fall within the $10,000 annual gift limitations. These are highly touted, but recognize a major flaw that has not really been addressed. Parents ARE giving away a part of their business/assets and the assets become the sole ownership of the child. Bankruptcy, divorce, rivalry, estrangement, etc. can all cause major subsequent problems and are not the panacea many planners make them to be. You should consider post nuptial agreements, formal valuations, etc. Caution advised. Also be careful of state laws and IRS audits if you push your luck.

FANNIE MAE: One of several types of mortgages that are purchased by the Federal National Mortgage Association (FNMA) may be placed in a pool and purchased by investors separately or through mutual funds. These issues are not fully backed by the Federal Government regarding default. The market value will fluctuate according to the interest rate environment. See also GNMA's.

FDIC: Federal Deposit Guarantee Corporation responsible for guaranteeing certain deposits of banks up to $100,000.

FEDERAL FUNDS RATE: One of several interest rates directly impacted and effected by the Federal Reserve Board. It represent the rate charged by one institution lending federal funds to another for temporary reserve shortages.

FEDERAL RESERVE BOARD: A seven member group appointed by the president (approved by Congress) to oversee the operations of the Federal Reserve System. Last two directors have been Volcker and Greenspan . The FSB is responsible for money direction in the United States.

FEDERAL RESERVE SYSTEM: The central bank system of the U.S. Responsible for controlling the flow and amount of money and the interest rates.

FEE ONLY FINANCIAL PLANNER: These planners charge only a fee- no commissions- so that the conflict of interest is apparently negated. Not so- they are still selling advice so a conflict always exists. Most importantly, it still says nothing about capability and competency. A twit charging a commission is a twit. If they revert to simply charging a fee, they're still twits. Fee only planners must be registered with both the SEC and most states as registered investment advisers and in some states for insurance licensing.

Also note that fee-only is the definition only for the planner. If you are charged a fee for insurance advice, for example, and end up paying a commission through someone else, true fee only planning for the client has not been accomplished.

FINANCIAL CALCULATOR: These "special" calculators can do the present and future value of money. It is absolutely mandatory that your adviser-whether in investments, insurance, financial planning, estate planning, etc. know how to use one. Read again- it is MANDATORY. If you adviser doesn't have one of these, be afraid. Be very afraid. Run away.

FINANCIAL PLANNER: Individual who professes an ability to analyze and interpret a client's financial situation and risk profile (though other areas may be involved) and then determine a plan that effectively incorporates all aspects of the client's needs. Most planners focus on investments, but the review should/may incorporate issues of insurance, estate planning, retirement, college funding and a host of other areas since they are all interrelated. Most planners must be registered at the government level through the SEC as registered investment adviser if they charge a fee for advice. In the alternative, they must be registered representatives with the SEC and licensed to sell product. Individuals may also be required to be licensed by the State department of Insurance as well if they provide any info on insurance (usually required in any planning).

Regardless, neither the registration or licenses represents any specific capability. Caution is advised when using any planner. Certain designations indicate an effort by the individual to enhance knowledge, but background may still be- and in many cases is- inadequate to address most concerns.

Clients should demand a complete background history of planner and refer to local and national governmental agencies to check out record. Most planners still work on commissions so there is an inherent conflict of interest in the selection of any product to buy. See material herein- Who Can You Trust- for more complete definitions and clarification.

FLEXIBLE PREMIUM POLICIES: A life insurance or annuity policy where the policyholder has the option of varying the amounts or timing of premium payments. In life insurance, they are also known as universal policies.

FOREIGN EXCHANGE RATE: The market relationship between the currencies of two countries. May fluctuate widely depending on economics of both countries and may subject an investor in either country to severe swings in value. For example, if an investment is made in a foreign country in their currency, and if the dollar declines in value compared to this country (it has been declining for years compared to many other foreign countries) or the value of the foreign fund APPRECIATES in value to the dollar , then the investor has made money even though the actual investment may have gone nowhere. By the same token, if the dollar appreciates- or in the same vein, the foreign currency depreciates in value to the dollar, then the investment has lost money, everything else being equal. A major risk factor with international stock and bond funds.

FORWARD PRICING: In regards to mutual funds, the value of the portfolio may not be priced till the end of the day (must be done at least once per day, normally after the close of the market). Therefore, investors selling during the day will have no idea of the actual price till the next time the portfolio is priced. Implications are obvious when one thinks of 1987. Those selling at 10 a.m. did not get that price- but the much lower price at the close of the market. When you buy, it's the same thing. You buy at the day's closing price. Some funds price hourly but whatever it is, it is indicated in the prospectus.

FRONT END LOAD: A fee charged by loaded funds to compensate a broker (normally) for selling the fund to investors. The charge can be as high as 8.5% (standard mutual fund- can be higher in certain instances) but most funds have lowered fees to around 4.5% to 5.5% average. Some funds charge loads but simply keep the money for themselves. The majority of funds sold are loaded funds but the percentage has continually dropped over the last number of years. Most commentary on loads is whether the broker provided valued service.

FUND FAMILY: The entity that sells and repurchases the shares of any number of funds. The larger fund families are Vanguard, Fidelity, Putnam, etc.

FUND MANAGER: The individual (normally) or committee that oversee the selection of the investments in the fund. The greatest amount of the expense ratio payment for the fund is for the manager. Investors need to look at past performance of fund manager- and how long they have been doing it for the fund in question and experience overall. Clearly one of  the most critical items in review of any fund.

FUNDAMENTAL ANALYSIS: In the review of the potential growth of a company and the market overall, one can use charts and graphs (technical analysis) or study the economics, industry conditions and forecasts, market share, financial statements, management quality and capabilities, competition, P/E ratios, etc. The latter represents the fundamentals on which the company or the economy is projected to respond. The vast majority of analysis used by investors and advisers is fundamental. It doesn't mean that the interpretation is the same, just that they usually start with the same focus.

FUND SWITCHING: Only a item with loaded funds. It represents the ability to move from one fund in a fund family to another in that group and not have to pay another load. For example, assume you bought the "Great Appreciation" loaded fund for $10,000 and paid a 5% front end charge. Now you decide to sell "Great Appreciation" and move into "Great Value" in the same fund family. Most fund's allow you to simply move your money without incurring another load. The prospectus will tell you if this is available.

If the fund is back end loaded, the time you have accumulated in the first fund is normally "tacked on" to the second fund and no back end charge is imposed. For example, if the back end load for "Great Appreciation" covered five years (dropping 1% per year) and you had been in it for two years and you took all your money and left the family, "Great Appreciation" would levy a 3% load for totally removing your money. However, by going into "Great Value", there is no back end charge and the fund would "say" that you had been in Great Value for two years already. Variations now occur with the innumerable combinations of front, back end loads and the 12b-1 fees. You need to read the prospectus.

SPECIAL NOTE: Even though you move to another fund in the same fund family, this is a sale of one asset and the purchase of another. Any gain on the first sale is TAXABLE (or a loss may be deductible). So check your tax position for the year before making any switches.

FUTURE VALUE: How much a sum of money today will be worth in the future based on the number of years, compounding, interest rate(s) assumed t heat a future date. Requires use of a financial calculator such as the HP12C.



GAAP: Generally Accepted Accounting Principles which public companies are to confrom to.

GENERAL OBLIGATION BOND: When purchasing a municipal bond, you need to address how the municipality is going to pay the annual interest payments. A general obligation bond means that the bond is backed by the full taxing power of the municipality. It essentially means that the governmental entity can "simply" increase taxes to make sure the bond payments are kept current. The greatest amount of tax received by a municipality is generally through real estate (ad valorem).

GENERAL PARTNER: Whereas limited partners are effectively limited in liability to their contributions, a general partner has unlimited liability and is responsible for the day to day management.

GENERATION SKIPPING TAX: A tax assessed on amounts greater than $1,000,000 that pass to anyone at least two generations below the donor. Assets are still taxed at the regular estate level and this is an additional tax if beyond $1,000,000. generation-skipping transfer tax.  Three types of generation-skipping transfers will trigger this tax: taxable terminations, taxable distributions, and direct skips.

GEOMETRIC MEAN: The geometric mean answers the question, "if all the quantities had the same value, what would that value have to be in order to achieve the same product?"

For example, suppose you have an investment which earns 10% the first year, 50% the second year, and 30% the third year. What is its average rate of return? It is not the arithmetic mean, because what these numbers mean is that on the first year your investment was multiplied (not added to) by 1.10, on the second year it was multiplied by 1.60, and the third year it was multiplied by 1.20. The relevant quantity is the geometric mean of these three numbers.

The question about finding the average rate of return can be rephrased as: "by what constant factor would your investment need to be multiplied by each year in order to achieve the same effect as multiplying by 1.10 one year, 1.60 the next, and 1.20 the third?" The answer is the geometric mean . If you calculate this geometric mean you get approximately 1.283, so the average rate of return is about 28% (not 30% which is what the arithmetic mean of 10%, 60%, and 20% would give you).

GIFTS: An individual is able to gift up to $11,000 of a present interest to anyone per year without incurring a gift tax. A present interest does not include life insurance save for special circumstances involving minors and Crummey powers. An individual may also use any or all of their lifetime exclusion of $1,000,000 at any time during life without incurring a gift tax. Maximum one time gift, therefore, to any one individual with no recognition of gift tax could be $1,0110,000 and going up.  Recognition of all prior gifts are analyzed on the estate tax return. The $11,000 gift can be relatively straight forward but one would still need to document basis for subsequent sales (except for cash) by the beneficiary. I'd suggest that you contact an advisor before giving away any assets.

GLOBAL INVESTING: A specific foreign fund may invest in just one country. International funds may just invest in non U.S. stocks/bonds. But a global equity fund may invest in both foreign and U.S. stocks. It may therefore be difficult to use this fund in asset allocation since you are not really sure just where the investments are being made and what the impact of correlation might be on the entire portfolio. A global bond fund may use bonds of other countries which, in many cases, pay higher returns than the U.S. However, there is considerable risk with either foreign equity or bonds due to currency exchange rates. Reversals can wipe out any returns made in the country and create higher risks. Since returns on bonds are limited, I tend to forgo global or foreign bonds and just use equities where the higher potential return can offset any currency differences.

GOVERNMENT NATIONAL MORTGAGE ASSOCIATION: (GNMA) Similar to FNMA explained previously, GNMA's buy groups of mortgages where the borrowers had to comply with stringent lending requirements. GNMA then pools some together that pay the same rate of interest and sells them directly to individual investors in $25,000 blocks. Investors can also buy them on the secondary market or through mutual funds that own millions of dollars in different groups of (normally) 30 year mortgages. However, GNMA's are paid off well before 30 years due to refinancing and the fact that, on average, about 16.5% to 20% of Americans move each year. GNMA principal is backed directly by the U.S. government in case of default. The payments are NOT guaranteed. Irrespective of the guarantee, prices of GNMA's are all over the board since value changes due to fluctuation in economic interest rates. In fact, this volatility and a uniqueness in valuation can make them MORE risky than regular bonds in a highly charged interest rate environment. First see Bond Valuation in text. You'll note that a bond's value drops as interest rates rise and vice versa. One would therefore tend to expect GNMA's to rise in value as interest rates drop. Almost absolutely not. That's because as interest rates decline, mortgage holders want to refinance. Investors therefore get back money as rates drop. So the value of GNMA's may therefore drop as interest rates decline- the opposite of "regular" bonds. Additionally, as rates rise, mortgage holders hold onto their mortgage longer and it tends to make GNMA's end up as longer term, lower return investments. They are good if rates are fairly stable. Otherwise, you must understand the risk.

GRACE PERIOD: A period of usually 30 days after a premium due date where you could still make payments and be covered without penalty and without additional evidence of insurability.

GRANTOR: The person who establishes a trust.

GROSS DOMESTIC PRODUCT: Real Gross Domestic Product (GDP) is the output of goods and services produced by labor and property located in the United States.

GROUP INSURANCE: A policy covering an company's employees and sometimes their dependents. The risks are distributed over a large number of people and therefore group life and health plans may offer broader coverage at lower costs than individual policies. BUT NOT ALWAYS. This is a perception that requires further research before one blindly opts for group coverage.

GROWTH STOCK/FUND: Capital appreciation is the primary goal, not dividend payments. Most earnings are plowed back into the company for expansion, research or other development. Small capitalization funds and stocks may immediately come to mind since they are know for their almost sole effort to grow. Dividend payments are usually nil.

GUARANTEED: The word guarantee may be used for Treasury instruments directly backed by the U.S. government, GNMA's principal that is guaranteed against default and for many bank accounts under FDIC protection up to $100,000. Outside of these minimal presentations, the word guaranteed cannot be used in the securities business since none of the other investments are "absolutely" guaranteed against a loss. Even buying insurance on a bond is not an absolute guarantee since the insurance company could go bust. And certainly guarantee may not be used to assure growth, payment of dividends or anything of the like. If you are presented a "guaranteed investment" that is not defined above, run away. Or be prepared to get screwed.

GUARANTEED INSURABILITY: Notable on life policies, it is a contractual requirement that the policy will always cover an individual in subsequent years as long as the rest of the terms are complied with- premium payments for example. However, the term does NOT guarantee that the premiums will not increase. For example a 10 year level term policy will, in most cases, guarantee insurability after the ten year period, but if you happen to be ill at that time, the premium increases may cause you to die. That's the main reason why term policies that are NEEDED (versus wanted) can cost so much as to be prohibitive. As regards LTC policies, see guaranteed renewable below.

GUARANTEED INVESTMENT CONTRACTS: A fixed income investment backed by an insurance company. Rates may change every six months or year or so depending on the contract. The return may be closely comparable to bonds but without the interest rate risk fluctuation. However, returns still are limited as compared to stocks. Also recognize that as interest rates decline or stay low overall, reinvestment by the insurance company in new bonds will be at lower interest rates and projected future return must be reduced. Guarantee is only as good as rating of insurance company- and even good rated companies have had problems in the last few years.

GUARANTEED RENEWABLE: Similar to guaranteed insurability, it means that the company will continue to the policy at the end of the current period of coverage, BUT THAT IT CAN INCREASE THE PREMIUMS AT THAT TIME. The disability or LTC company may change rates for an entire group within the state. Some have by as much as 600% and many elderly simply dropped the far too expensive policy when they needed it most. A noncancellable policy is one that does not increase in price. It is therefore the reason that if you need long term coverage to consider one that cannot increase. Not possible with most companies but there are some that have payments over 10 years and then cease. No subsequent increase.



HEALTH MAINTENANCE ORGANIZATIONS (HMO): Health plans that contract with medical groups to provide a full range of health services for their enrollees for a fixed pre-paid, per-member fee (called capitation). There are three different kind of HMOs: Group, Staff and IPA Model HMO's.

Group Model HMOs contract with independent groups of physicians that provide coordinated care for large numbers of HMO patients for a fixed, per-member fee. These groups will often care for the members of several HMOs.

Staff Model HMOS employ salaried physicians and other health professionals who provide care solely for members of one HMO.

Independent Practice Associations (IPA) contract with groups of independent physicians who work in their own offices. These independent practitioners receive a per-member payment or capitation from the HMO to provide a full range of health services for HMO members. These providers often care for members of many HMOs.

Point of Service (POS): More HMOs now offer a Point of Service (POS) option. These dual plans allow HMO members to seek care from non-HMO physicians but charge extra for the right.  And normally, there are deductibles as well.

HEDGING: Through the use of certain types of derivatives, firms, mutual funds managers and the like try to reduce the volatility of a portfolio by reducing the potential for loss. For example, buying a put option (the value of which goes up as the underlying securities value goes down) can help a manager who wishes to hold a particular security but is uncertain about current economic events that might drop the price. Other hedging vehicles include selling call options, futures investing, short selling, etc. Considered to be good conservative strategy by many. Recognize, however, that it costs the funds to implement these strategies and therefore the ultimate return to investors would be lower.

HEWLETT PACKARD 12C CALCULATOR: (or similar) The standard financial calculator in the industry is the HP 12C (though not the fastest nor the best). It does present and future value, can determine interest rates, IRR, etc. If you use a broker or financial adviser that does not have and cannot use one of these, you are committing economic suicide since the adviser simply does not have the essential competency to do basic numbers. Run away.

HIGH YIELD BOND FUNDS: Such funds use bonds that are less that "Investment Grade" which are rated by S&P as BBB. Anything below BBB is euphemistically called a junk bond and is a higher risk- with a commensurate higher yield. But within a fund, you can have average weightings of BB which is pretty good and the risk is somewhat limited. On the other hand, you can take far more risk and use a fund that has an average weighting of C. Of course if the economy/ business is good, a C rated company might have its rating revised to a B. In such cases the bond value will escalate nicely and the returns for such funds are much higher than those funds than using higher ratings to begin with This is more similar to a small cap equity fund and they should be identified as such in your asset allocation as such. Just remember that when you sue lower rated bonds and the economy is poor, you can lose money all the faster. AS I have always stated, a review of current economics is mandatory.

HYPOTHECATION: The term represents the pledging or loaning of securities in your brokerage account as collateral to secure a loan and is required for a margin account.



IMMEDIATE ANNUITY: Upon giving money to an annuity (insurance company) payments immediately commence. However, while you get money, without an HP12C, you will not know of the yield provided. Payments may cover for life, but at a 2%, 3% or 4% return (some will be negative) that 's not good retirement planning unless you live a VERY long time. See also deferred annuity

INCOME PORTFOLIO/STOCKS: Stocks most notable for paying high dividends- such as utilities. They tend to be favored by the more conservative investors seeking high current income, but their value is still subject to fluctuations due to interest rate movements. That is the reason one considers asset allocation.

INCOME REPLACEMENT RATIO: The percentage of income that an individual needs to maintain the same standard of living during each year of retirement. Many magazines and consulting services say that that is anywhere from to 60% to 90% of a current budget. Garbage. Do a full budget since that is the only way to determine what you are actually spending and what might be anticipated during retirement. Rules of thumbs are useless when you find out at age 72 that you will run out of money at age 76. Too late to do anything then Do your research early to avoid these mistakes.

INDEX: A statistical benchmark that measures the stock or bond market or a part of it and represents the common, systematic or market risk of investing. The most notable is the S&P 500 index- explained more fully herein- though there are many others.

INFLATION: The result of supply and demand of various goods in the economy usually reflecting a rise in prices of products and services now and in the future. Has varied tremendously over the last 25 years- much lower and with less volatility in the past 10. Statistical evidence clearly shows that low inflation produces stronger growth nationally and internationally.

INFORMATION: Kirschenheiter (2002) proposes the following distinction between hard and soft information: “Hard information (…) is when everyone agrees on its meaning. (…) Honest disagreements arise when two people perfectly observe information yet interpret this information differently (i.e. soft information)”.:

INITIAL PUBLIC OFFERING: (IPO) This is the first offering of a stock to investors. Many are small companies where there is high risk coupled with considerable volatility, at least in the first year or two. Substantial profits may be made, but good IPO's are essentially presold to institutional investors and the odds of small investors buying them may be nil. Statistically, for the average consumer, it's a crap shoot with most of the crap burying the little guy.

INSIDE INFORMATION: Directors, officers, attorneys, accountants, brokers, investors, etc. are not allowed to divulge information that has not yet been relayed to the general public and on which someone would have an advantage in trading. If they use such information to their advantage, they and the recipients of such knowledge are subject to fines and jail time.

INSURABILITY: Acceptance of an applicant by an insurance company.

INSURED: The person named on the policy as the person covered by the policy. Do not confuse with owner since the do NOT have to be the same.

INTEREST RATE RISK: Described more fully in the text, the impact is most noticeable on bonds. As an example, if you own a bond that pays 7%, you get $70 per year regardless of what happens to economic interest rates. But if economic rates actually went up, new bonds may have to pay 9%. If an investor could get $90 a year buying a $1,000 bond, it stands to reason he/she would pay less for your bond paying only 7%. Hence the older bond is discounted down in price, perhaps $800. In the reverse, if interest rates went down to, say 5%, and new bonds paid $50 per year, an investor would pay more for your bond earning 7%- everything else being equal. You must understand this risk scenario before buying bonds.

Does not necessarily happen with GNMA's and the like. See other commentary herein.

INTERNAL RATE OF RETURN: A somewhat sophisticated method of determining the return on an investment. It is the rate of discount at which the present value of the future cash flows equals the initial investment. May not be necessary for mutual fund analysis but very useful with real estate, partnerships and similar investments. You or your adviser must have use of a financial calculator.

INTERNATIONAL FUNDS: Unlike global funds, international invest solely in foreign stocks/bonds. Still subject to currency risk and that makes bonds funds all the more risky since their upside is essentially limited to yield. See also Global.

INTERNET: You undoubtedly know about the super information highway but the point here is to indicate that there are many services on the Internet that provide info on investing, investing and most everything else. Admittedly some are blatant product endorsements, but check around and you'll find come valuable commentary. Watch the chat lines, though. You never know if the person you're "speaking to" knows what they are talking about. And everyone is now an investment expert simply because their stock or fund has gone up.

INTESTATE: The legal term for dying without a will. One of the dumbest things you could possibly do. At least do a will.

INVESTMENT ADVISER: An individual or organization that advises or manages assets- most normally associated with securities. Must either be registered with the SEC or the particular state. And for heaven's sake, get the info and read it before you invest.

INVESTMENT GRADE SECURITY: Standard and Poors rate securities relative to their perceived risk. Securities rated BBB and above are investment grade. Those below BBB are called less than investment grade quality- but more euphemistically called "junk" bonds. That's not really fair since BB rated bonds are not in imminent difficulty or subject to default- they just are not as credit worthy.

IRREVOCABLE BENEFICIARY: A beneficiary designation that cannot be changed without the beneficiary's consent.

IRREVOCABLE TRUST: Normally associated with life insurance and estate planning, it reflects putting an asset into a trust where the grantor loses all control. Therefore it need not be subsequently included in the taxable estate upon death. See other section on Estate Planning.




JOINT LIFE ANNUITY: Income paid as long as either of two individuals is alive. However, the percentages do not have to be the same. For example, when an annuitant dies, the survivor could get the same payments or 75%, 66%, 50%, etc.

JOINT TENANCY WITH RIGHT OF SURVIVORSHIP: A undivided interest of ownership of a property by two or more people in which the survivor(s) automatically assume ownership of a decedent's interest.

JUNK BONDS: A bond that has a rating of BBB and above (Standard and Poors) is called Investment Grade. Bonds rate under BBB are euphemistically called junk bonds. Bonds rated B and BB might still be considered reasonably decent companies in terms of risk since any exposure to default should be a ways off. Bonds rated in the C category have a greater concern to default on payments. In good economic climates lower rated securities may provide the highest return since, if the company's capabilities and financial prospects are enhanced, the ratings and value of the bonds will increase accordingly- more so than more highly rated bonds. Some analysts say that using lower rated bonds is more akin to investing in small cap stock since the risk and returns are similar. That's why in a strong market, some lower quality bonds do very well. The company rating might go up. Additionally, interest rates might be stable or dropping. Just remember, the opposite can happen

They have had some real problems during the past 10 years with the likes of Boesky, Milken and new laws requiring banks to divest themselves of lower rated bonds. The thinly traded market, in particular, hurts marketability if the bonds need to be liquidated in a short period of time. Interestingly though, defaults are not that extensive. Yields are higher than more conservatively rated bonds (normal) and are valid for many investors. Investors buying individual junk bonds should be fairly sophisticated. Most investors would prefer using the expertise of a mutual fund and its professional manager. But, as described in asset allocation, you should not put all your money in just this one area and must diversify the portfolio to limit risk exposure..



KEOGH PLAN: A retirement plan for the self-employed. Keogh plans allow tax-deductible contributions Rather complicated- many businesses may opt for simpler plans- SEP's for example. Do your homework well before using these or any other plans.

(See tax section for updated numbers)

KEY PERSON INSURANCE: Used in a business to cover the loss of business income in case a key person were to die. Also to cover costs or retraining a new person to take over position.

KURTOSIS: a measure of whether the data are peaked or flat relative to a normal distribution. That is, data sets with high kurtosis tend to have a distinct peak near the mean, decline rather rapidly, and have heavy tails. Data sets with low kurtosis tend to have a flat top near the mean rather than a sharp peak. A uniform distribution would be the extreme case.



LADDERED PORTFOLIO: Normally associated with bonds and Treasury instruments, it means the selection of different maturities of interest bearing securities for a portfolio and simply replacing as they mature. For example, $100,000 portfolio may consist of $20,000 in one year maturity bonds, $20,000 in five year, $20,000 in seven year, $20,000 in 10 year and $20,000 in 15 year maturities. Any type of laddering may be utilized depending on the needs, time horizons and risks of the investor.

LAPSED POLICY: Where a policy has been terminated for nonpayment of premiums. Remember the tax implications- previous loans may become taxable.

LEADING ECONOMIC INDICATORS: The Index of Economic Leading Indicators consists of 11 equally weighted indicators:

Average Workweek/Manufacturing: the number of hours manufacturing employees are working

Unemployment Claims: a rise could mean an increase in unemployment

New Consumer Goods Orders: gives an indication of the future pace of consumer spending

Vendor Performance: slow deliveries can indicate an inability to keep up with increasing orders in a strong economy

Plant and Equipment Orders: new orders reflect current business spending on capital equipment

Changes in Unfilled Orders for Durables: an increase can reflect a strong economy

Building Permits: suggests future housing activities

Interest Rate Spread: the 10-year Treasury yield minus the federal funds rate. The smaller the spread, the more restrictive the economic policy

S&P 500: changes reflect investors' perceptions of earnings and profitability for large corporations

Real M2 (broad money adjusted for inflation): indicates liquidity, where higher liquidity relates to increased economic activity

Consumer Expectations: reflects consumer sentiment about the economy

LEGISLATIVE RISK: The risk that local or national government will change certain laws- tax law for example- and effect the value of an investment. For example, the tax law changes of 1986 decimated real estate.

LETTER OF INTENT: Used in conjunction with a breakpoint sale. Assume that the sales charge charges are 7% up to $9,999 and 5% starting at the $10,000 breakpoint. However, you only have enough money to put in $7,000. Also assume that, perhaps in the next 13 months you might have enough money to put in another $3,000. If you sign a letter of intent at the time of the initial sale or at least within 90 days thereafter, the fund will charge the smaller commission on the $7,000 NOW and the $3,000 later. If you don't put in the extra money by the 13th month, the commission simply reverts to the higher percentage on the $7,000. This is truly a free lunch- no strings, no gimmicks. You have nothing to lose by signing it so if you have any idea of putting more money in the near future, go ahead and sign.

LEVEL PREMIUM LIFE INSURANCE: There are two types for review. A level term policy- say 15 years- costs the same amount each year. At the end of the term the policy terminates, though, with most, you may be able to continue the policy but at different (normally higher) rates

With a level term whole life policy, you pay level premiums for the entire term. Premiums made in the early years are in excess of the amount needed for coverage. The "excess" goes into a reserve that grows. As the cost of insurance increases in later years, the reserves, along with continued payments, help meet the higher cost of insurance. Most policies "suggest" much greater premiums than necessary to meet this cost in an attempt to build up a retirement kitty. I'd "suggest" a lot of review before doing so.

LEVERAGE: The amount of borrowing or debt a company, individual, government, etc. may have taken on as compared to the total equity. Different ratios cover different industries but high leverage may indicate problems. Some statistics show a high ratio as 3:1 or greater; moderate at 0.5:1 to 3:1; low leverage of 0.10:1 to 0.5:1; all cash at 0:1 to 0.10:1. Rate of return on investment should exceed cost of borrowing.

LIABILITY: A debt owed by one party to another. In the investment business, the best evidence is a bond. It is a liability by the corporation to pay an investors $x plus interest at a maturity date as specified in the liability contract.

LIBOR: London Interbank Offering Rate is an international interest rate on which other rates- even U.S. rates- may be pegged. It has even been used in past years for U.S. real estate mortgages.

LIFE EXPECTANCY: The average number of years of life that a group of "average" people might expect to live upon reaching that age. Life expectancy- for most countries has been increasing. For that reason, you need to be sure you are looking at the most recent mortality tables.

LIMITED PARTNERSHIP: A form of ownership of an asset where limited partners, liable primarily only to their investment should something go wrong, invested most of the monies for purchase of an asset and a separate general partner managed the investment(s). Used extensively in the mid 80's as a vehicle to shelter taxes since there was a passthrough of partnership losses to individual investors. The 1986 tax act changed many features and, due to the overbuilding of real estate, many partnerships were no longer financially viable. Many were sold with bad management, poor financial outlook, because of the large commissions generated to brokers- maybe all the above. Major problem both then and now is the illiquidity of the partnership interests. If you can sell, large discounts may apply. For all the reasons, thousand of investors lost millions and millions. Current partnerships are based on financial fundamentals and may be viable, but the illiquidity is still an item of contention.

You do NOT buy partnerships before you have purchased more conservative investments. Further, they should not encompass more than 10% to 15% of an entire portfolio and then in two or more different type partnerships.

LIMIT ORDER: An order to buy or sell a security at a certain price. For example, assume you wanted to buy IBM at 100 and it was currently at 102. The order is placed and should it drop to 100, you MIGHT get your purchase. The reason you might not be successful is if there were other order in front of you and the market changed before your order was completed.

LIQUIDITY: The ability to cash in the investment quickly with the ability to trade quickly at prices that reflect current market demand and supply conditions. Real estate is an illiquid asset while stocks and mutual funds may be liquidated with a phone call and monies sent normally within one week. This is not the same as marketability. See below.

LIVING WILL: Better known as a Power of Attorney for Health Care and Physician's Directive. In the event of your disability, you designate a person with the Power of Attorney, who will make any medical decisions necessary for your benefit and your care. In addition it enables you to accept or decline artificial life support in advance of any medical emergency.   See section on estate planning.

LONG POSITION: When reviewing brokerage company statements- long means you own the security; short means that you owe (have borrowed) the security. If you are long 100 shares of Digital, you own the stock (though that's not saying much). If you are short 100 Shares of Digital, it means you borrowed the stock to sell short and need to replace it some time later.

LONG TERM GAIN OR LOSS: See capital gain, capital loss and capital netting

LUMP SUM PAYMENT: Disability, annuity, insurance, pension plans, etc. may have the ability to pay out a lump sum to policy owners instead of payments over life or other period. If available, it may be of major value since the sums can be invested and used as needed. Remember this- it is a lot more important to have more access to money AFTER you retire than BEFORE because "Stuff Happens". Probably one of the greatest errors the elderly can do is put all their money into an annuity without recognizing the financial emergencies that will invariably happen later on.



MALE EGO: A genetic mutation that flourished. Responsible for more bad investments and bad investment decisions than any tax law changes by Congress. Though usually noted in the male species, females are also prone to its insidious faults- lack of reading and adequate research followed by defective decision making based on insufferable narcissism and the rationalization it was someone else's fault when the investment tanks. Used a lot by stupid people or intelligent people acting stupid. Caution advised when using this as the main rationale for investing. (I'm NOT kidding.)

MALKEIL, BURTON: Author of "A Random Walk Down Wall Street" and a proponent of index funds. Must reading for astute investors.

MARGIN: A margin account allows a stockholder to leverage his money to purchase more shares. The margin is currently at 50% but may vary between brokerage houses or by the FEDs. In simplistic terms, if you had $5000 and wished to buy securities, you could purchase up to $10,000. If the stock goes up, you have obviously leveraged your profits. By the same token, if the stock drops below a certain level, you will be called to add funds to your account to maintain certain minimum limits. Margin accounts should only be used by sophisticated investors- of which there are relatively few. A sophisticated investor knows "how many stock must you have in a portfolio in order to insulate it due to unsystematic risk". If you know this, you might be able to do a margin account because of your knowledge. If you don't know this, you do not have an understanding of the fundamentals of investing and are probably out of your league.

MARKDOWN AND MARKUP: A markdown is a charge that is subtracted from the net selling price of a security that a customer is selling to a broker/dealer for the B/D's own account. The broker/dealer adds a markup to the price when it sells a security to a customer from its own account. The markdown or markup are the equivalent of a commission on the sale though it may not be identified at all on the statements and therefore difficult to determine.

MARKETABILITY: The ability to sell the asset at its "appraised" value. Most stocks are both marketable and liquid since an investor can see the price on the stock and sell it in the open market immediately at that price- or close to. However, real estate may be valued at a price that is not liquid. For example, if a property is worth $500,000 and marketable in a "normal" fashion where it takes three months to sell, it is not instantaneously liquid at that price. It could be immediately liquid at $50.00. This latter scenario is also applicable on thinly traded (illiquid) over the counter stocks and some high yield bonds. If the manager needs instant liquidity, then he/she tends to lose marketability (price) and must sell for something less. Do not confuse marketability and liquidity.


MARKET RISK: Also known as systematic risk- the risk of simply being in the stock market. The basic level of market risk is usually relative to the S&P 500. This risk cannot be eliminated by diversification.

MARKET TIMING: An attempt using charts, intuition, Ouija boards or other analysis to determine the highs and lows of the market in order to buy and sell stocks at these peaks and valleys. Yes, it IS possible to conceivably time the market for a short period. What market timers suggest is that it is possible to profitably do it for all times. Statistically shown to be next to impossible- particularly when the costs of commissions are subtracted from any gains. One example of "bad timing" involves an old fund called the Lowry Market Timing Fund which was introduced in the 80's and was going to use a timing service exclusively. The fund sales literature included an analysis by a prestigious business school that commented that had a fund used this timing services over the past "x" years, it would have outproduced the market by 2 .5times. Unfortunately it LOST money in the late 80's (tough to do) when everything else was dong well. It went out of business. That's not to say you don't rebalance every so often to take note of current economics or changing risk profiles, but trying to hit peaks and valleys is normally a fool's game.

MASTERS OF SCIENCE IN FINANCIAL PLANNING: There are several schools across the U.S. that offer a MS in Financial Planning or Financial Services. The specialities may be in estate planning, investments, retirement planning, etc. and provide the best knowledge base to date in financial planning- at least 50% to 75% more extensive than any designation including the CFP and ChFC. If you are seeking a highly qualified individual to review all areas of your financial existence, call the College for Financial Planning in Denver or the American College in Bryn Mawr, PA. Also check state universities. There is no sense in using people with less skills. Further, the costs are normally no greater than using anyone else- including commissionable brokers and even those for a fee since, in the long run, they may be cheaper overall because they probably won't screw up as much or put you in dumb investments.

MATURITY DATE: The date on which a bond becomes due and payable (normally) and principal must be repaid to the investor. Call dates supersede the final maturity date. For example, a bond may be due in 2010. But call provisions may allow the entity to pay off the bond in full several times before that- normally due to a reduction in economic interest rates.

MEDIATION: An informal, voluntary process used in many types of disputes (divorce, securities, real estate) where a mediator helps to negotiate a mutually-acceptable resolution. It is not legally binding such as arbitration or litigation, and if an agreement is not reached, they may proceed through the legal maze. However, it is faster and cheaper than either method and is certainly worth consideration for rational parties.

MEDICAID: A federally funded benefits program that is administered by individual states help pay some medical costs for those that meet certain income and other eligibility requirements. Medicaid pays the bulk of long term care for the elderly

MEDICAL UNDERWRITING: Where an insurance company reviews the applicants past medical history before assuming the risk of the proposed insured. See also APS.

MINIMUM DISTRIBUTION: The amount required by federal law to be paid from most tax-favored retirement plans (IRA's, KEOGH's), generally beginning by April 1 of the calendar year following the year in which the participant turns 70 ½. New laws don't require distribution from pension plans if you are still working after 70 ½- though you still must take distributions from IRA's. These distributions can vary over one lifetime, that of a beneficiary, recalculated, etc. Very difficult to figure. Don't do this by yourself. Find an expert to advise.

(See tax section for updated numbers)

MODERN PORTFOLIO THEORY: MPT is the philosophical opposite of traditional stock picking. It is the creation of economists, who try to understand the market as a whole, rather than business analysts, who look for what makes each investment opportunity unique. Investments are described statistically, in terms of their expected long-term return rate and their expected short-term volatility. The volatility is equated with "risk", measuring how much worse than average an investment's bad years are likely to be. The goal is to identify your acceptable level of risk tolerance, and then to find a portfolio with the maximum expected return for that level of risk. Click for article

MONETARY POLICY: The Federal Reserve Board's plan for regulating the money supply by determining reserve requirements for banks, as well as interest rates and credit policies. Some say it works, others think it is a joke. In past years, probably a problem. But the focus by Volcker and Greenspan since the 80's has led to low inflation and good growth.

MONEY MARKET INSTRUMENTS AND FUNDS: These specialize in short term investments of Treasury instruments, banker's acceptances, certificates of deposit, commercial paper and other similar assets with less than one year to maturity. Almost all are no load (though expenses still apply as in all funds) and offer check writing privileges and low opening investments. Almost all are conservatively run, but in 1994 some funds used derivatives to enhance yield. When interest rates kept climbing, many had huge losses. However, only one small fund "broke the buck"- could not pay back $1.00 per share. The rest paid back any losses to the fund. The current risk is lower since derivatives are now not commonly used in that capacity, but risks still remain. It is necessary that investors check the prospectus to verify what the fund is doing.

MONEY PURCHASE PLAN: A qualified retirement plan that specifies the percentage (0% to 25%) of an employees salary that will be contributed by the employer each year.

MORAL HAZARD: Describes any situation, though usually a financial one, in which risky behavior is encouraged because risk takers believe they will be bailed out of mistakes by a third party.

MORTALITY RATE: The frequency of death for a defined group of people.

MORTALITY TABLE: A statistical table showing the death rate at each age and is expressed as "X" number per thousand.

MORTGAGE BACKED SECURITIES: See FNMA and GNMA. These are groupings of mortgages, normally on residential homes of the same yield, that are packaged and sold to investors. A slight fee is charged for servicing and the rest is passed through to investors. Good returns in stable interest rate environments- unknown and volatile values in changing interest rate environment.

MUNICIPAL BONDS: A debt security by a state, municipality or other tax exempt entity (school, sewer or water district, etc.) issued to provide capital expenditures to its citizenry. Payments to purchasers are usually tax exempt at the federal level. Ratings on the debt is provided by a number of firms (S&P, Moody's, Duffs and Phelps, etc) and other firms (MBIA) will insure the principal (but not the payments) against default. Interest is usually paid semi annually and the rate is normally less than corporate bonds due to the lower risk and tax advantages. If the investor also lives in the state of issuance, the bond is probably exempt from state taxes as well. For example, a California bond is exempt at both the state and federal level. As with most other investments, the mutual funds have generated at lot of activity with these- particularly in the states with high state income tax.

Most are callable but usually have some call protection. Investors need to compare the tax free rate to the effective corporate rate to see which might be better, everything else being equal. To do so, take the tax free yield and divide it by one minus the investor's tax bracket. For example, if the yield was 5% and the investor was in the 28% bracket, the effective taxable yield would be .05/(1-.28) = 6.94%. Investors in the low tax brackets of 15% should never buy or be sold tax free instruments. Taxable returns would invariably be better.

MUTUAL FUND: Better defined as an open end managed investment company and now includes over 8,000 funds. They provide a diversified portfolio (over 10 to 15 stocks in each portfolio/fund), professional management (notice I said professional, not necessarily good) and the willingness to buy back shares at any time from investors at the net asset value. Some have front end loads, back end loads and/or 12 b-1 fees; others have no excess charges for buying shares at all (no loads). However investors need to recognize that all funds have expenses in running the fund and these vary- see expenses above. Risk factors vary as does longevity of the fund as well as the management. Investors need to read a prospectus carefully in order to determine risks and suitability. The SEC is trying to provide better risk statements for funds, but many analysts (myself included) are not impressed.

Minimum purchases are as low as $100 and $50 per month to as high as $100,000 or more. Most funds have low opening amounts for IRA's, 401(k) plans and other retirement vehicles.

MUTUAL LIFE COMPANY: An insurance company owned by its policyholders rather than by separate stockholders.



NASDAQ: The NASD-owned computer system that provides brokers and dealers with price quotes for stocks sold Over-the-Counter. (National Association of Securities Dealers Automatic Quotation System)

NATIONAL ASSOCIATION OF SECURITY DEALERS: This is a self regulating organization that oversees the over the counter security market. Responsible for seeing that brokers are adequately trained and for monitoring the activities of brokers to assure compliance with laws. Has been exceptionally deficient on the training.

NET ASSET VALUE per SHARE: (NAV) The NAV of a fund is determined by valuing all the assets at the end of the day and subtracting any liabilities. The NAV is then divided by the number of shares outstanding to determine the NAV per share which is normally quoted in the newspaper the next day.

NET INVESTMENT INCOME: The total of dividends, interest rents and royalties and short term gains minus any expenses. If used with real estate, the deductions can include depreciation.

NET WORTH: The total value of everything owned by a person (corporation or other entity) normally determined by valuing all assets (cash, investments, real estate, etc.) and subtracting all liens and other debts (mortgages, auto loans). Used as a guideline to indicate credit worthiness

NO LOAD FUND: A fund that charges no front end or back end load. Important to note however that under the law, a fund may charge up to a .25% 12b-1 fee and still be allowed to use the "no load" terminology. Just remember, expenses to run the fund still apply. Investors must clearly read a prospectus.

NOMINAL YIELD: See coupon rate

NONCANCELLABLE: This is a policy where neither the terms NOR the premium may be changed by the company after the issue date of the policy, assuming the insured pays the premiums on time. Many disability companies have changed to guaranteed insurable/ guaranteed renewable which allow premiums to increase.

NON DIVERSIFIED MUTUAL FUND: Most mutual funds are restricted from concentrating too much money in any one company because they have decided to conform to the "diversified" definition for mutual funds (described elsewhere). A non diversified fund can take on extra risk by being allowed to concentrate the monies in fewer companies. Again, you must read the prospectus.

NON-QUALIFIED PLAN: A pension/retirement plan that does not meet the requirements for preferential tax treatment (deferral of tax on interest/dividends).



OFFERING PRICE: Consistent with mutual funds, it is the price an investor will pay per share. It includes the NAV plus any sales charges, if any. Many funds will waive front end and back end loads for retirement plans since they feel comfortable that the individual will maintain the fund and fund family probably till retirement. However, the insidious 12b-1 fees may be exceptionally high in order to offset the waivers.


OPTION: An option is a contract based (usually) on a stock where the investor /buyer/owner hopes the underlying stock, index or value of another asset will either appreciate (call option) or depreciate (put option). At such time the investor/holder of the option can force the seller of the option to either sell the stock at a certain price (call options) or buy the stock at a certain price (put option). Options may be used as income vehicles by investors (and mutual fund managers) or as hedging devices in case the market or interest rates might move against them. The latter is usually considered conservative investing.

ORIGINAL ISSUE DISCOUNT: (OID): The type of bond discount that occurs when a bond is issued for a price less than its face amount or principal amount. The OID is the difference between the principal amount and the issue price. See also market discount.

OVER THE COUNTER: The over the counter market includes the bulk of the market- perhaps 40,000 stocks versus only about 1,800 on the New York Stock Exchange. OTC represent those companies that do not trade on a listed exchange. The companies tend to be smaller and less active than big board stock.

OWN OCCUPATION: Under a disability policy/contract, it provides coverage where a policyholder is unable to preform the function of his/her own previous occupation versus a more open definition of any occupation. Due to the numerous claims of the last five years through 1997, many policies will not write this coverage or it may be offered for a term not longer than two years.



PAID UP INSURANCE: Insurance where all premium payments have been satisfied. The term is also used under a nonforfeiture option for reduced paid up insurance.

PAR: The principal amount of a bond or mortgage valued at 100%- no premiums or discounts apply.

PARTIAL DISABILITY: Under disability policies, it is the provision where a policy will pay for partial disability of the insured as defined under the contract. However some policies may require that one be permanently disabled for some time before partial disability allowed. This is a waste of money. Consider rheumatoid arthritis- you might never be permanently disabled and therefore never able to collect. Disability policies are tough to analyze and VERY expensive. Find someone that knows what they are doing before purchase.

PARTICIPATING POLICIES: A whole life policy where the insurance company agrees to distribute to policyholders the part of the surplus which the company determines is not needed. Such a distribution reduces the premium by the policyholder.

PERMANENT LIFE INSURANCE: Insurance that covers an insured for life. Term insurance is not included under this definition.

POINTS: Normally used in real estate, it reflects 1% of the value of something. 3 points on a loan means it will cost the borrower 3% of the loan amount. One point equals 100 basis points.

POLICYHOLDER OR POLICY OWNER: The person who owns the contract that may also be the insured- but maybe owned by friends, children, corporation, etc.

POLICY LOAN: The right to borrow from an insurance policy. Loans reduce the total value that is paid to a policy owner upon death of an insured.

PORTFOLIO: A group of investments managed by an investor or outside manager/firm. It generally denotes at least a mixture of stocks and bonds but may include hard assets, real estate and other investments.

PONZI SCHEME: A great scam played on everyone. It involves a scam operator offering huge returns (usually 50% or more) in a short period of time (one to six months). Initially it works for the first to invest since the operator takes the new money coming in to pay off old investors. These investors are ecstatic over these huge gains and tell more and more people to invest. It goes on and on till there are no more new investors and the operator simply skips with bundles of money. Involves greedy and lazy people of all walks of life. After all, a 50% return? In just a few months? Maybe Ted Turner can do it, but the rest of us peons will have to invest knowledgeably. CAVEAT EMPTOR

POWER OF ATTORNEY: A right one person can grant to another person to act on their behalf on whatever the power of attorney states. A power of attorney may be limited or very comprehensive. There are many types- Durable Power of Attorney for example- and you must be very careful to who you give these to.

PRE-EXISTING CONDITIONS: Mental and/or physical conditions that existed before a health insurance policy was issued that may require a period of time before they are covered- if at all. You need to carefully review the policy. Some states do not allow pre existing clauses in a policy.

PREFERRED RISK: Generally the highest rating given to an insured. Those in this category pay the lowest premiums all other things being equal (occupation, etc.)

PREFERRED STOCK: Actually, this acts more like a bond since there is a dividend projected to be paid on the stock. The dividend must still be voted on by the Board of Directors. Any available cash must first be paid to the regular bondholders. Dividend will normally be higher than bond interest rates.

PREMIUM: The amount which exceeds a securities face or par value. May be due to extraneous factors in the marketplace or as part of the contract. For example, if you hold a bond and interest rates in the economy have gone down, your bond could be worth more since it pays a higher interest. The marketplace will apply a premium as compensation for having a better yield. Also, some bonds will pay a premium- as stated in the original agreement for purchase- if the bond is called early. The premium is an inducement to buy the bond initially.

PRE REFUNDED BONDS: These are high interest rates bonds that have been refinanced by the issue of a second bond issue. Proceeds of the second issue are held in an escrow account- usually in Treasury instruments- and are used to pay off the first bond, which was callable, so that the corporate or municipality can reduce overall interest payments. See Risk of Reinvestment

PRESENT VALUE; The value today of some future dollar amount after it has been discounted at some rate (discount rate can include inflation, current return on investments, etc.) You need an HP12C financial calculator or similar. Do you have one? Does your adviser have one? No??!! Then you CANNOT do investments properly.

PRECIOUS METALS FUNDS: Seek capital appreciation by investing in gold, diamonds, silver, platinum. Extremely high risk. You can't invest in these unless you absolutely understand the proper definition for diversification. That leaves just three people in the U.S. and you ain't one of them.

PRICE EARNINGS RATIO: Used extensively by market analysts as an indicator as to whether the market (or stock) is, theoretically, oversold or has room to grow. It is the ratio of current market value of the stock divided by the annual earnings per share. Historically the P/E ratio of the stock market is around 14. If the P/E ratio is much lower than this, it might indicate time for growth back to historical levels. By the same token, when stock prices are very high, or dividend yields are very low, or both, market analysts may project a bear market back to more normal ratios. But the "fun part" is that not all analysts determine or interpret dividend yields the same way so in times of controversy, it may be anyone's guess as to what the real or projected P/E of the market really is.

PRICE SALES RATIO: (PSR) Similar to the P/E ratio, it measures the price of a company against annual sales instead of earnings. Investors buy low PSR stock because they think they are getting a bargain. A very good statistical measure for future worth.

PRIME RATE: Supposedly the best rate offered by a bank to its most credit worthy commercial clients. Can vary considerably bank to bank and from customer to customer.

PROBATE: The process by which an executor/administrator must go through the court's for the distribution of property/assets either through a will or by state statutes if there is not will (dying intestate). This is not always bad- particularly on small estates where fees may be minimal or nil. Also used to give creditor's formal notice. But on larger estates, the fees can be excessive and the time lengthy. Further, if there are assets in other states, you must do probate in each under a will. If something is going to go wrong, it will go wgron here. Do some homework.

PRODUCER PRICE INDEX:  The PPI measures average changes in prices received by domestic producers of commodities in all stages of processing. The PPI is available for more than 10,000 products or groups of products, categorized by industry or stage of processing. It includes the prices of exported goods.

PROFIT SHARING PLAN: A pension plan funded by the employer but based upon the company profits. The difference between this and most other plans is that the ER is not forced to make contributions if there are no profits or they do not exceed a specified level. Normally limited to lesser of 15% of total compensation or $30,000

(See tax section for updated numbers)

PROSPECTUS: The legal document that must be given to all purchasers either at the time of sale or attempt to sell or with the confirmation of the transaction. In a mutual fund purchase, the prospectus has been and is going through major changes since just about everyone (apparently except defense attorneys) know that nobody hardly ever reads these things. The SEC has developed a short form prospectus to supposedly make it easier to comprehend the risks of investing, but all investors will be well served not only to reasonably review the prospects but also get the Statement of Additional Information from the fund which really provides some good added info. Realistically however, no one ever asks for that including brokers or advisers.

PRUDENT MAN RULE: A legal requirement of brokers and others with a fiduciary or semi-fiduciary obligation to a client. It means that they will be held to the standards of what a reasonable man would have done (invested in ) given the same circumstance of the client's background and risk capabilities. These rules vary state to state. If they possess other more significant background (CFP, etc.) or PERCEIVED background (such as a title as Vice President), then they should/will be held to a higher standard.

Some states limit the securities that may be used in certain situations such as when acting as a trustee on trust funds. Other standards suggest investments given a probability of income and a limited risk to loss. Speculation is not normally allowed.

PUBLIC OFFERING PRICE: The price the public will pay for a mutual fund. If the fund is a no load, it represents the NAV or Net Asset Value. If a loaded fund, it represents the NAV plus any applicable sales charge.

PYRAMID OF FUNDS and THE PYRAMID OF INVESTMENTS: Literally every type of investments has certain risk reward characteristics unique to it. Within some reasonable analysis, one can determine if the risk is at the top end of the pyramid- meaning high risk and potential of loss (precious stones) down to the most conservative of investments (FDIC backed Certificate of Deposits- though CD's are not truly defined as investments, just storage of money). The main point is- and write this down- you do NOT buy into the top range of risk until you have satisfied the more basic and conservative investment strategies first. Yes, you can vary the amount depending on age, dependents, budget, amount of discretionary funds, correlation (you have to know correlation), etc. but it takes time and effort to do it correctly. Almost all losses I have seen all types of investors face were due to people buying assets where the risk level was far greater than they could accept. Either you or your adviser has to know the pyramid of investing "cold". Look at the simple pyramids I have provided and study them well.


QUALIFICATION PERIOD: Generally synonymous with elimination period and means the period of time in a disability or long term care policy where the insured must make payments for their own care before becoming eligible for payments under the contract.

QUALIFIED PLAN: Plans that conform to IRC laws under IRA's, 401(k), 501(c)3, etc., may allow employers to deduct pension costs as a business expense and defer current income tax on its earnings, and allows employees to defer income tax on the employer's (and employees) contributions and earnings.

QUICK RATIO:  An indicator of a company's financial strength (or weakness). Calculated by taking current assets less inventories, divided by current liabilities. This ratio provides information regarding the firm's liquidity and ability to meet its obligations. Also called the Acid Test ratio.

My question is, why are you dealing with this? The point is that if you do not know what diversification is by the numbers, it is generally a fruitles exercise to think you have the insight to work with the quick ratio.



R COEFFICIENT/R SQUARED: A statistical number that reflects correlation and how closely the movement of a security- such as a mutual fund- is to an index, normally the S&P 500 index. If it's 77, it can mean that approximately 77% of its movement was due to the overall market influences similar to what happened to the index it is being compared against. Once the R squared drop below about 70%- 75%, the comparison may not be justified.

RANDOM WALK: A theory which states that the movements of the stock market are completely random and there are no predictable patterns where one would spot an advantage in trading. Been proven to be, at least in part, invalid. The December/January and Friday/Monday patterns have been proven to exist- though the costs of analysis and commissions may still not make the trading profitable. Other more recent analysis shows that the market is NOT random and that certain types of investing provides consistent returns- both good and bad.

RATED POLICIES: Under insurance policies where the insured is in a higher risk category due to some medical or occupational risk.

RATE OF RETURN: See compounded return, IRR and HP12C

RATINGS: see bond ratings

REAL RATE OF RETURN: The return on an investment after subtracting inflation. For example, a 7% return on an investment where inflation is 5% yield only a 2% real rate of return. And if the investment is not in a tax sheltered account, the after tax return may be negative, 7% x 33% tax bracket = 2.31% additional loss for a negative .31% return.

REAL ESTATE INVESTMENT TRUST: (REIT) A form of ownership of real estate which is required to pay out most of its income to investors each year. Unlike limited partnerships, these are liquid assets and may be bought and sold readily on the exchange. Most diversify in regards to the number of properties held- but possibly not to type (apartments, commercial, etc,). Some mutual funds buy many REIT's in an attempt for greater diversification of property types and locations. Real estate also does not have direct correlation with the stock market and therefore the use of REIT's or mutual funds REIT's might be considered good asset allocation.

REAL RATE OF RETURN: The rate of return on an investment after adjusting for inflation and taxes.

REBALANCING: This refers to adjusting an investor's asset allocation on a set time period to account for changes in values. For example, an initial portfolio might consist of 40% stocks, 40% bonds and 20% T-bills. Obviously, over time, these ratios will change due to growth and losses to, say, 63% stocks, 30% bonds and only 7% cash. If his/her risk scenario is to remain the same, the investor would sell stocks to purchase more bonds and cash. Or adjust the mix to reflect a new risk scenario. Rebalancing is not an attempt to make frequent adjustments like market timing to pick the perceived highs and low of the market. It may only be done once a year, but it is crucial to long term understanding of risk and reward.  

RECESSION: A moderate downturn in business and economic activity. May be partially identified by increase unemployment, lower consumer demand- at least of big ticket items- concern about inflation and interest rates, etc.

REDEMPTION CHARGE: More commonly referred to back end load or charge defined previously.

REFINANCING: The repayment of a debt from the financing of a new debt issue using the same or different property as collateral.

REGISTERED INVESTMENT ADVISER: A requirement by the SEC and most states that an individual or other entity that sells investment advice for a fee register their background and supposed capabilities with the state and SEC and be willing to a review of records whenever either entity demands. All registered investment advisers must agree to provide clients a copy of their background, capabilities, fee schedule, any conflict of interests, etc., so that clients can review. However, becoming a registered investment adviser represents filing ONLY. It does NOT represent any level of competency whatsoever. No licensing exam or continuing education requirements. One never has had to have any securities license, degree, designation, experience or exceptional qualification of any type. New laws in 1997 may require small advisers to only register with their respective state.

REGISTERED PRINCIPAL: The individual that has taken additional exams in order to become a supervisor of registered representatives. Unfortunately, the major issue for registered representative problems- suitability- is not even touched upon in the licensing training- nor tested. Therefore major difficulties will continue to exist in the ethical capabilities and performance of brokers. Continuing education for all securities representatives commenced in 1995.


REGRESSION/REVERSION TO THE MEAN: In the analysis of statistical evidence, one can use various analyses to generate estimates where a stock, fund, market, etc. will be in the future. A regression analysis looks at past history to examine the numbers for use as probable indicators for the future. A mean is the average or normal return of the asset, market, etc. Reversion to the mean means that if a return, index, yield, etc. is either higher or lower than the normal number, future returns will adjust themselves to reflect the overall average.

So what was that all about? Assume the stock market has generated a return for the past 50 years of 10%. But the past 10 years has seen returns posted at around 11.5%. If one agrees with reversion to the mean, then future performance of the market will be lower in order to fall in line with past results. Therefore investors should see a reduction in overall returns. When will it happen is the tricky question.

RESIDUAL DISABILITY BENEFIT: Under a disability policy, it pays the insured a portion of the total disability if the insured is able to go back to work, but not at the previous level.

REVENUE BONDS: Generally used in the description of municipal obligations, it refers to the security for payment of interest and repayment of debt. The greatest security is the General obligation (GO) bond which allows for the taxation of property to provide the monies. In revenue bonds, the return is based on the ability of the asset- toll road for example- in paying off the debt. If few people use the facility, payments are suspect. Revenue bonds tend to have lower rating- hence higher required yields- than GO bonds.

RIGHT OF ACCUMULATION: Assume you put in $7,000 in a mutual fund many years ago. It has now grown to $9,000. The breakpoint for a lower commission starts at $10,000. How much would you have to put in in order to get the lower commission on your next trade?- $3,000 or $1,000? If your mutual fund allows right of accumulation, the appreciation is added to your original contribution so that you only need to put in $1,000 in order to be charged the lower commission ON JUST THE $1,000. No reduction is allowed on any commission previously paid.

RISK: This definition varies from book to book, mutual fund to mutual fund, but, for the purposes herein a high risk almost invariably exists if one uses a non diversified portfolio (consisting of just one , two or three stock) to probably less risk with a diversified mutual funds (at least 10 to 15 stocks) and probably less risk still with the use of asset allocation (around 5 to 8 different mutual funds). The reason the word "probably" is used is that you can still buy rotten investments and funds if you try to diversify without doing adequate homework. Each individual and situation contains different risk elements so it is not possible to define exactly what risk you could or should take at any particular age or situation. Other types of risk are inflation, interest rates, political, tax and on and on. See other sections for more definitive descriptions.

RISK OF REINVESTMENT: A very major risk element that must be understood by all investors in bonds and GNMA's. Most bond purchasers today are faced with the ability of the state or municipality to call the bond prior to its final maturity date. At such times(s), the entity can pay the bondholder off in full and the bondholder is now left to find another investment paying a comparable rate or return. In most situations, there is a higher risk to get the same yields. That is best identified by the following example. Assume a bondholder bought a bond paying 8%- but the issuer indicates that it could be called and paid off starting in three years. If rates should decline in the interim to, say, 5%, the issuer will pay off the old 8% bonds so that they can issue new 5% bonds. Current bondholders are paid per the terms of the bond (might be a slight premium). Unfortunately for the bonds holders, they now get back their $1,000 but inevitably must increase their risk to find another investment currently yielding 8%.

GNMA's essentially work the same way. Government National Mortgage Association buy mortgages from homeowners and passes the mortgage payments through to investors who purchased blocks of these mortgages. However, in addition to interest payments, principal payments are also paid to investors. So they get back both interest and principal and must reinvest the money elsewhere. And if interest rates are going down in the economy, refinancing will cause more principal to be returned to GNMA (and FNMA and Freddie Mac mortgage holders as well) holders to invest in a lower interest rate environment.

RISK PREMIUM: A premium added to an investment to compensate for the real or perceived additional financial risk over that of a guaranteed investment (Treasury instruments). Each investor needs to analyze the premium to see not only whether they agree with the amount, but also if the investment falls within their risk tolerance.

ROLLOVER:  Generally defined as taking assets from an existing IRA or 401(k)/501(c)3 accounts (there are others), receiving them personally but then putting them into a new IRA. If they come from an existing IRA, you have 60 days to put the money back in without incurring taxes or penalties on the sums received. If the funds should come from a pension plan, other tax laws apply. The employer is required to withhold 20% of the funds from distribution. Therefore, even if you did put the 80% of the received funds into a rollover IRA in 60 days, you still incur taxes and potential penalties on the other 20% (the employer sends you the other 20% in the subsequent tax year - but then its too late to comply with the law). Employees should NOT take personal control of the money but do a direct trustee to trustee transfer. In such cases, you receive NONE of the money directly and 100% can be rolled over without taxes.

ROTH IRA: An IRA introduced in 1998 that, though it does not provide a current tax deduction, has the unique ability to grow tax "free" (not jsut tax deferred) since there is no tax on any of the assets upon retirement. Further, and a major planning incentive, is the fact that distributions are NOT required at 70 1/2.



SALES CHARGE: Normally referred to as the front end load on a mutual fund which can be as high as 8.5% but is more traditionally around 4.5% in today's marketplace. It is the compensation/commission paid to the broker for the advice to purchase. Other charges may include a back end sales charges may be levied when the investment is subsequently sold. Ongoing sales charges are known as 12b-1 fees.  Funds may utilize any or all of these on a single fund in any combination. For example, a front end load plus a 12b-1. Or a backend load with a higher 12b-1 fee. Or a very high12b-1 fee that can convert to another fee structure after 5 years. Very confusing. You end up spending more time figuring out the load structure than you do the investment itself.  Better know how all these work before investing or you are almost guaranteed to screw up.

SEASONAL STOCKS: These stocks vary in value according to the specific time of the year- Christmas, beginning of school, special holidays, etc.

SECONDARY MARKET: After stocks and bonds are first issued by a company, municipality or federal government, they are then traded on the secondary market between investors via an exchange or over the counter. Price is determined by supply and demand and extraneous factors entering the market- economics, business cycles, international activities, etc.

SECTOR FUND: A fund that , by law, must invest at least 25% of its assets in the areas designated. For example, a computer fund must invest at least 25% of its monies in computer stocks. Unfortunately, comparing one computer fund to another is not simple in that once the 25% limit is reached, one computer fund could put all the remaining 75% in cash (admittedly doubtful) while the other could have the whole 100% in computer stock. You would need to read the prospectus, the statement of additional information and possibly the annual report to know what each fund is doing. If you don't do this, you are not an astute investor.

SECURITIES EXCHANGE COMMISSION: The primary federal regulatory agency overseeing the securities industry to protect consumers. Considering the almost total lack of fundamental training required for brokers, it ends up where they are trying to close the barn door after all the cows have left. Enforcement after the fact rarely works that well. They need to beef up training but the firms don't want it to happen. Congress is also trying to reduce the SEC budget.

SECURITIES INVESTOR PROTECTION CORPORATION: (SIPC) An independent agency which provides investors of most brokerage firms with protection due to loss or theft of securities to the amount of $500,000-- though no more than $100,000 of cash per account. Many firms have separate agreement covering far greater amounts. This does not cover loss of value due to market fluctuations.

SEPARATE ACCOUNT: Generally used in variable accounts, it is the account where the insurance company places the portion of the premium that is used for investment purposes.

SERIAL CORRELATION: - this means that the next event may be closely related to the previous event. For example, if inflation was 3% last year, there is a tendency for the following year's inflation to be close to that amount. A non serial correlated example is like flipping coins. You may flip 7 heads in a row but the next flip is simply an event in and of itself without any correlation to past events.

SETTLEMENT DATE: This represents the time you have to pay for a sale or purchase of a security- three days from the trade date.

SETTLEMENT OPTIONS: The options available to a survivor as a beneficiary in a life insurance policy as to how to receive the benefits. They may be offered as interest only, a period of time, lump sum and others. Beneficiaries should carefully review payment options where they lose control of the principle. Guaranteed payments may not provide adequate returns and the beneficiary may lose access to principle just when most needed.

SHARPE, BILL : 1990 Economics Nobel award winning professor on securities analysis. You must at least know his name if you say you have an understanding of investment risk and reward. Has a page on the Internet where you can read/download some of his recent commentary and analysis (click his name to get to his page).

SHARPE RATIO: This involves standard deviation and the return of an investment. You divide the return minus the risk free rate of return by the standard deviation and compare this number against similar numbers of other investments. Gives you an idea of how much return for the risk assumed. Unfortunately, not available as an indicator with many services so you'll have to do these yourself- assuming standard deviation is even noted.

SHARE REPURCHASE: Where a corporation buys back its own stock in the open market where it perceives the stock is undervalued. It reduces the amount of stock outstanding and, since the earnings remain constant, the value of the shares can increase. May also be used to thwart a takeover.

SHORT: When noted on a brokerage statement for individuals, it references stocks that have been borrowed and sold and that need to be replaced at a later time.

SHORT SALE: Primarily used to make money when a stock goes DOWN. Stock is borrowed into a margin account and sold- say 100 shares at a current price of $50/share for a total of $5,000.

Borrower is required to replace SHARES at a later time. If the stock goes down to, say, $1 per share, borrower pays $1,000 to replace the 100 shares. Borrower has received gain of $5,000 from initial sale minus $1,000 in subsequent purchase.

SKEWNESS: a measure of symmetry, or more precisely, the lack of symmetry. A distribution, or data set, is symmetric if it looks the same to the left and right of the center point.

SOCIAL SECURITY OFFSET: A little understood issue with disability and pension plans and can mean incorrect retirement planning in particular. For example, assume a company offered a $1,000/month pension. But since the company has paid half the social security payments while as an employee, and assuming social security does provide payments to the retiree, then the company will reduce payments by that amount. So if the SS payments were $300/month, then the company offsets their payments to $700/month.

SPREAD -- The bid and ask price is the difference between the price at which a Market Maker is willing to buy a security (bid), and the price at which the firm is willing to sell it (ask). The spread narrows or widens according to the supply and demand (activity) for the security.

STANDARD DEVIATION: This is mandatory to understanding the risks of investing. Best explained by a bell shaped curve described more fully in various texts. The main element is the width of the curve. The wider the curve, the greater the risk, everything else being equal. The term standard deviation refers to the volatility of an investment in 68% of the time and is statistically ONE standard deviation. As an example, assume an investment has an average return over many years of 10% BUT had a standard deviation of 20% (means 10% + or - 20%). This means that in a given year, the return would range from a -10% to as high as 30% in 68% of the time. Another investment might show a 7% return but with a smaller standard deviation of 10%- meaning a one year range of -3% to 17%. Which is better? There is no definitive statement since they represent two entirely different investment risks that are undoubtedly viewed differently by different investors.

Standard deviation is a valid measure of risk for a properly diversified portfolio. The Sharpe ratio takes standard deviation and incorporates the rewards per risk taken.

STANDARD AND POOR'S RATING: A classification of bonds according to perceived risk. S & P's top four grades, "AAA," "AA," "A," and "BBB," are called Investment Grade. Bonds below BBB are euphemistically called junk bonds- meaning less than investment grade. S&P also evaluates insurance companies according to their ability to pay claims.

STEP UP IN BASIS: An important item for those considering to give stocks or other appreciated assets to non spousal beneficiaries now or at death. Assume you have stocks that have a basis of $25,000 with a current value of $125,000. If you were to gift them to your daughter now, she gets the same current basis- $25,000. So if she sells the stock, she will be taxed on the appreciation of $100,000. But if you should die and she gets the stock through a will, the basis is STEPPED UP TO THE VALUE AT THE DATE OF DEATH (some caveats apply). In other words, the basis becomes $125,000. Your daughter now sells the stock and there is NO appreciation taxed at all. There are many applications of this that need to be considered in retirement planning and further in depth analysis should be done to lower or reduce taxes. For example, annuities, IRA's, 401(k)'s, pension funds and other similar assets do NOT get a step up in basis. Using the same numbers above at death, the daughter would be taxed on the $100,000 of appreciation and at ordinary income tax rates. Therefore, leaving the wrong assets to beneficiaries can cause major tax ramifications. If you or your adviser does not have a practical understanding of basis, you almost assuredly will screw up retirement, estate and most other aspects of financial planning.

SETTLEMENT DATE: The time in which an investor must deliver a stock for sale or the time to present payment for a purchase. It was changed in 1995 to 3 business days.

SOPHISTICATED INVESTOR: Used a lot in arbitrations to show the investor was of such knowledge and "sophistication" that they understood the risks and merits of the investment purchased. My definition is simply this- if the investor can give the full definition of "how many stocks are required to insulate a portfolio due to unsystematic risk", then you have a sophisticated investor. Further, almost all investors using a broker are NOT sophisticated.

SPECULATION: investing in high risk investments where the entire loss of the investment is a definite risk. May include such investments as limited partnerships, gold, precious stones- though the definition can incorporate just about any investment if used incorrectly.

SRO: A securities self regulating organization which is accountable to the SEC for enforcement of securities laws. One major SRO is the National Association of Securities Dealers which oversee the over the counter market (non exchange listed securities). Also has responsible for the conduct of registered representatives. Not doing a very good job.

STANDARD AND POORS 500: The major market index which consists of 400 industrial stocks, 20 transportation stocks, 40 financial stocks and 40 public utility stocks. It represents about 80% of market value traded on the NYSE. Many stocks or funds will be compared to this index- though it most accurately reflects the movement of a few large firms.

STOCK SPLIT:  Generally a change in the number of shares to make the stock look more marketable to the public by reducing the price. For example, a stock may have increased in price to $200 per share and there are 1,000,000 outstanding ($200,000,000 capitalization) The company decides to do a 2:1 stock split (though other variations are acceptable) and gives the owners 2 shares for every 1 previously held. However, the value of each share drops to $100 per share. Total capitalization remains the same but the perception is "more" value. Further, it is perceived that more investors would buy. It's a game that works well on the public.

 Under a reverse stock split, the opposite is true and may be done to "up" the price so the company looks more valuable. If someone owned 100 shares of a $5.00 per share stock under a 1:2 reverse split, they would end up 50 shares worth $10 per share.

STOP-LOSS ORDER: Similar to a limit order, it is the attempt to sell shares if the price drops too low. For example, if you won IBM at 110 and want to automatically sell it at 102, the stop loss order is entered when the stock drops below that level and is sold at whatever price is attainable after that. It could be $101- but also $103 if the stock rebounded in the interim before the ordered could be executed.

SUITABLE INVESTMENT/SUITABILITY: By law, every investment sale must be suitable for an investor given their risk level.  Suitability and risk fundamentals have never been taught at any level of licensing training and that is why some sales of investments are clearly unsuitable.

SURETY BOND ( Mike Neschke) It is a credit relationship between three parties, the PRINCIPAL, OBLIGEE and SURETY, wherein the SURETY guarantees the PRINCIPALS performance and payment under the terms of a specific contract to the OBLIGEE

Who are the parties involved in Surety Bonding? - There are three parties to any bond, the PRINCIPAL, the OBLIGEE and the SURETY: 1) The PRINCIPAL is the entity that secures the Surety Bond from the SURETY2) The OBLIGEE is the entity that requires the Surety Bond and 3) The SURETY is the company that issues and backs the Surety Bond

What DOES a Surety Bond do? - A Surety Bond is a protective measure for the OBLIGEE. It provides the OBLIGEE an avenue to get a project completed in the case of default by the PRINCIPAL.

What DOESN’T a Surety Bond do? - A Surety Bond is NOT an insurance policy. It is NOT a substitute for inadequate insurance coverage, either liability or property damage. A bond will NOT be liable for personal injuries or for property damage that results from a PRINCIPALS negligence. A bond is in NO WAY to be construed as a financial resource for the PRINCIPAL. A bond will not protect the OBLIGEE from valid claims by the PRINCIPAL.

While Surety Bonds are sold and backed by insurance companies, they are not an insurance product. The common misconception is that bonds are insurance and carry the same or similar types of coverages. The fact is that bonds are a 3 party credit relationship, wherein the surety extends their credit on behalf of the principal to the obligee for a nominal fee to the principal. The ideology behind the fee is that through thorough underwriting, the surety should incur no losses and the fee is a charge for underwriting expenses. This is the major difference between insurance and bonds, since the ideology behind insurance is to pool risks of like kind, anticipating losses.

SURRENDER VALUE: The amount that a policyholder will receive per contract if the policy is surrendered/terminated.

SURVIVORSHIP LIFE: Also known as second to die insurance, it pays when the last survivor dies. The premiums are based on the joint lives of two insureds and is used primarily for estate tax purposes. May often represent poor estate planning and the sale of expensive insurance policies.

SYSTEMATIC RISK: Also known as market risk that cannot be diversified away. A single portfolio consisting of at least 10 to 15 randomly correlated securities is required in order to limit the unsystematic risk to approximate that of market risk.

New for 2000- Up to 40 to 50 stocks now necessary due to higher individual correlations. University of Nevada says up to 350.

Be very careful buying individual securities. Actually, you probably won't have a clue to this extremely difficult area.




TAX CREDIT: A credit is a dollar for dollar offset of taxes owed. A deduction, on the other hand, reduces the amount of income on which taxes are levied. Everything else being equal, a credit is far better. By the same token, they are very difficult to legitimately receive.

TAX DEFERRED/SHELTERED: Regular individual accounts investing in stocks and mutual funds require the taxation of dividends, capital gains and other and other distributions on an annual basis.

Certain accounts, as defined by tax code, allow these distributions to grow tax deferred and avoid current taxation. Therefore more money is compounded and will yield higher lump sums than those of taxable accounts. These accounts include both fixed and variable annuities and life insurance. Monies initially put into such accounts, however, have already been taxed and each account will have its own basis.

Other accounts not only avoid current taxation but allow a possible tax reduction of the initial amount invested. These include IRA's, 401(k)'s, Keoghs and other defined contribution plans. In such cases the amount for investing is greater still and will amount to more money than through any funds that were taxable.

In most cases, try to use the tax advantages. That said, it is also mandatory that you or your adviser completely  understand BASIS and the fact that none of these assets will get a step up in basis at the date of death (life insurance excluded). Therefore if left to beneficiaries, such assets can yield lower net benefits than had the assets been put into taxable accounts. Rarely addressed by most insurance, investment or financial planning agents so you need to do more homework- particularly as you get closer to retirement.

TAX FREE EXCHANGE: A method of exchanging  an annuity or life insurance contract from one carrier to another. Code section is 1035. Also defined as the exchange of one real property held for investment for another "like kind" real property without current tax. Code section 1031.

TECHNICAL ANALYSIS: This form of analysis assumes that everything that is needed to know about the marketplace is already contained in past movements. By charting current movements, it is therefore supposedly possible to find similar positions in past records to project future movements. Probably has some minor validity, but most advisers put major focus and study on fundamental analysis.

TENANCY BY THE ENTIRETY: Property owned jointly by a husband and wife where survivorship rights may be terminated by mutual consent of the parties. May own unequal assets that may need to be adjusted for proper estate planning.

TENANTS IN COMMON: A form of ownership by two or more people, each owning an undivided interest in the property in various percentages- 8% 13% 29%, etc. Unlike joint tenancy, property interests may be sold, exchanged, gifted, etc.

TERM INSURANCE: The simplest and least expensive kind of life insurance that is designed to pay benefits for a set period of time- 1 year, 5 years, 10 years, 30 years, etc. There is no cash value. Should not be used for extensive long term planning due to huge increases in rates at new attained age.

THINLY TRADED: Where the security volume is minimal and the bid and asked prices are far apart and the liquidity is low. The problem arises where investors (or a fund) has used lots of thinly traded issues and must quickly cash in the investments. If the security MUST be sold to pay investors, large discounts might apply. That's why some high yield funds (and others) can lose so much money in a short time in a bad market.

TOTAL DISABILITY: Under disability policies, it is where the insured is unable to perform the duties of their (or any ) occupation as defined under the contract.

TOTAL RETURN: A combination of the yield on an investment PLUS any appreciation (or loss) sustained by the investment during the last year (normally). For example, a bond might have provided $60 in interest payments that year- this return is therefore 6%. But the bond might also have increased in value (due to a drop in economic interest rates) by $50.00. (Bond does NOT have to be sold to use total return). The combination of the two (6% + 5% = 11%) reflects the total return for the bond that year. Same scenario is used for stocks.

TREASURY INSTRUMENTS: The government finances our debts through the use of Treasury Bills, Notes and Bonds. Bills are short term offerings of 3, 6 or 12 months that are sold at a discount- say $9,233 for a bill that would mature in 12 months. Notes have maturities of from 1 to 10 years and pay interest. Bonds have maturities from 10 to 30 years and pay interest semi annually. Bonds and notes are purchased in $1,000 denominations; bills have minimum denominations of $10,000 and in $1,000 subsequent increments. They may be bought directly at FED banks.

TREYNOR'S MEASURE: This is similar to the Sharpe ratio but uses just the systematic risk (market) instead of total risk. Why has this been included? Because the SEC recently thought it possibly should be included as a risk statistic in ALL prospectuses. Sooner or later, you're going to see this.

TRIPLE NET LEASE: This real estate lease requires the tenant to pay is pro rata share of maintenace and operating costs such as utilities, property taxes, insurance, maintenance, etc.

TRUST: Someone who you believe has your best interests at heart. However, it is NOT synonymous with competency or knowledge and therefore the major reason why people lose money. See Who Can You Trust at this site.



UNEARNED INCOME: Interest, dividends capital gains and other income not earned through wages and salaries. Cannot be used to fund an IRA.

UNIVERSAL LIFE INSURANCE: A variance of the typical whole life policy wherein the items of the policy- insurance, mortality and expenses- are outlined separately. The policyholder is therefore provided flexibility in making payments depending on the cash value within the policy.

UNDERWRITING: The formal processing of an applicant to determine the risk that the company may accept.

UNIFIED CREDIT: A onetime credit that exempts the first $675,000 (up to full exemption by 2010) of a person's estate from estate taxes. It may also be applied against gifts made during one's lifetime. Available only if used- meaning that under the unlimited marital all can go to survivor. But survivor only gets their own exemption upon death.

UNIFORM TRANSFERS TO MINORS ACT: (UTMA) One of the laws governing gifts to minors. (Uniform Gifts to Minors is more restrictive and the UTMA has been used by many states). Money or securities are generally transferred because the interest may be taxed at a lower rate than the parents. However this can severely backfire if used for college due to larger recapture by the college of assets owned by the student than the parent. Do a LOT of homework before using.

Also, assets ARE the childs and ARE transferred later where they can do ANYTHING they want with the money. Is that what you want to happen?

UNIVERSAL LIFE INSURANCE: A form of life insurance that splits out the cost of insurance, company costs and the interest element to the insurer. It essentially does the same thing as whole life insurance if left alone, but one key is the ability to stop payments once the cash value gets large enough to potentially earn the recurring and higher insurance charges. The cash value of such insurance may be available for tax free policyholder loans and can remain such as such as long as policy stays intact. If policy lapses or surrenders, substantial income tax may be due on growth above basis. In essence, once purchased, you should keep for life.

UNSYSTEMATIC RISK: Also known as unique, firm specific or diversifiable risk, it is the risk associated with owning just a few stocks or bonds. Risk is easily over 60% in the ownership of just one stock but is quickly reduced by having from 10 to 15 different stocks to approximate the risk of the market itself (systematic risk). Illogical to have just a few stocks since the market does not provide extra return for the higher risk. Anyone using individual stock- including brokers- must have a firm grasp of this fundamental otherwise they do NOT understand the basic risk of investing.

New for 2000- due to a higher correlation, you need at least 40 to 50 stocks in order to be properly diversified.



VANISHING PREMIUM: Actually a misnomer since premiums never vanish. It is used to indicate the time at which the cash value earnings inside the policy may be sufficient to make the annual premiums.

VARIABLE ANNUITY: Regular annuities generate fixed returns from the return of the general account of the insurance company. Absent bankruptcy, a minimum return is guaranteed by the insurance company. With variables annuities, mutual funds are substituted for the fixed return and the investor can select which fund he/she believes will produce the best return . These returns are NOT guaranteed. Most other features of an annuity apply- tax deferral, surrender charges. Variable annuities have higher expense costs of running the annuity and they must be analyzed before purchase. There is NO step up in basis at the date of death- the same for regular annuities.

VARIABLE LIFE INSURANCE: A policy designed for the growth of mutual funds within a life insurance policy. Funds grow tax deferred. Not really designed for insurance coverage since so little purchased per premium dollar. Loans are available later on that are tax free, but estate tax implication must be addressed. These canNOT be sold as investments. They must be sold as insurance coverage (and we all know they rarely are). I have analyzed several policies and you can do much better by purchasing inexpensive policies and investing the difference in index funds. I'd suggest you do not buy one without someone having the ability with the HP12C.

VICE PRESIDENT: VP and Senior vice presidents along with the monikers of financial advisor et. al. may simply have been bestowed on a broker because of the amount of his sales/commissions, not the amount of knowledge in investments or anything else. CAVEAT EMPTOR



WARRANT: These are usually known as "sweeteners" since they are issued along with the stock and gives the right to the holder to purchase a share of the stock in the future at a predetermined price. For example, you bought ABC stock at $20 but it had a warrant that said you could buy another share at $30 within five years. Obviously if the stock did trade above $30 in that time frame- say $40- you could make a profit. The warrants may be sold and traded separately.

WASH SALE: The rule allows one to sell a security and take a loss as long as you don't but don't buy a substantially identical security or a put or a call within 30 days of the sale.  The wash sale period is 61 days running from 30 days before to 30 days after the sale.

WHOLE LIFE INSURANCE: A type of cash value policy structure for premium payments over the insured's life. Extra payments are made during the early years which are put into a reserve that grows to pay the extra costs of the insured as he/she gets older. Loans are normally available on a tax free basis later on. As with may insurance policies, next to impossible to figure out the actual return, whether or not the entire policy is viable, etc. Suggest the use of an agent that can work with the Insurance Questionnaire or Replacement Questionnaire available from the American College in Bryn Mawr, Pennsylvania. I categorically suggest that one buy insurance from those having at least a minimum of the CLU- preferably greater.

WILSHIRE 5000 INDEX: A value weighted index that includes 5,000 common stocks- all those on the NYSE, AMEX and the most active OTC stocks. It is the broadest index and is the most reflective of the entire market.

WIRE HOUSES: Usually known as the larger national brokerage firms.

WRAP ACCOUNTS: Over the years, consumers have had an increasing aversion to the commissions paid on stock transactions. Though some commissions have been discounted, it wasn't necessarily enough to stop investor business from going elsewhere. Some of the major wire houses decided to offer investors the use of special fund mangers, selected by the brokerage firm, to manage assets for an overall fee per year- irrespective of how many trades were actually transacted. For this flat fee- 3% for small accounts dropping to, say, 1% for accounts over a million, investors would be offered professional management. Part of the fee goes to the mangers, part to the firm and part to the broker. However, the SEC found difficulties in wrap accounting reports since they have not been as extensive as that of mutual funds. Additionally, many investors have not been offered true individual service. Those issues aside, the real problem may be that the investors are not practicing asset allocation since they may have all funds invested with just one manager doing just one thing. Putting all your eggs in one basket- no matter who manages- is anathema to all basic investment teachings.




YIELD CURVE: A graphical description of the interest rates showing how the yields of various instruments relate to their corresponding maturities.

YIELD TO CALL: Yields on bonds quoted to potential investors must include the lowest return which, in many cases, will be the yield to the shortest time frame that the bond will be held- the first call date. Of course there may be other call dates, some with premiums and the bond may actually be held to maturity. The calculation is based on coupon rate, length of time to call and the market price of the bond.

YIELD TO MATURITY: This yield reflects the coupon rate, time to maturity and market price of the bond. It assumes that the interest paid over the life of the bond will be reinvested at the same rate.



ZERO COUPON: Most bonds are purchased at par directly from the issuer or on the open market where the price varies upon various factors- most notably how economic interest rates have impacted the value. Further they pay interest semi annually. Zero coupon bonds pay NO interest until maturity. As a result, their initial purchase price is discounted by the amount of interest to be earned and accrued and the time to maturity. For example, if a $1,000 zero coupon bond is to earn 6% and the maturity date is 10 years in the future, the discounted value is currently $553.68. That's the same as putting $553.68 in a bank that pays 6% semi annually for 10 years. What would the value then be? $1,000. (Remember the importance of the HP12C financial calculator. It's mandatory that you or your adviser be able to do these calculations "without thinking").

There are two other aspects to zero coupons. Since there is no interest paid, investors take more risks. If interest rates were to increase in the economy, zero coupon bonds are impacted much more dramatically than regular interest paying bonds and will drop in value far faster and greater. By the same token, they increase faster when rates are dropping.

Secondly, unless a zero coupon is a tax free instrument or in a tax sheltered account, INTEREST THAT IS ACCRUING ON THE BOND BUT NOT BEING PAID OUT IS A TAXABLE EVENT so investor will need to come up with money out of pocket to pay any taxes owed.

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