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(1) Entries are in alphabetical order. (2) If a word or phrase within a definition is CAPITALIZED, that means there's a separate Glossary entry for that word or phrase. (3) When two or more terms are used synonymously or similarly, the definition header line first presents the most common term and then lists synonymous terms within [BRACKETS].

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A form of investment management that has the goal of identifying securities that will provide higher TOTAL RETURN than the overall market within a diversified portfolio. Active managers believe they can identify and exploit market "inefficiencies", that is, circumstances where the true value of a security is not currently reflected in its price. These inefficiencies may result, for instance, from a dearth of information about a security among market participants or from investor over-reaction to news. Active managers will tend to have higher portfolio TURNOVER which may raise transaction and tax costs; they may also favor VALUE SECURITIES or smaller company securities since those may not be carefully followed by the community of analysts. The contrasting philosophy is PASSIVE INVESTING. #Top of Page


A derivative form of ownership representing a position in the negotiable securities of a foreign [non-U.S.] issuer. The underlying foreign securities are held on deposit by an overseas custodian, typically a foreign bank, which works with a U.S. correspondent bank to service the American Depository Receipts. ADRs are created to overcome difficulties that a domestic shareholder would face if he/she directly owned the foreign securities. Those difficulties include paying or being paid for the securities in foreign currency, receiving income in foreign currency, receiving shareholder information in a foreign language, and/or registering shareholder certificates in the issuer's foreign domicile country. By contrast, an ADR trades much like a domestic security, with all transactions and income flows settled in U.S. dollars, and with English translations of all issuer communications provided.  #Top of Page


The process of apportioning portfolio assets to different "classes" of investment securities. Commonly used classes are equities ["stocks"], debt securities, and cash/money market funds. Additional asset classes include real estate, precious metals, and commodities. Asset Allocation is part of a DIVERSIFICATION strategy that spreads portfolio assets over uncorrelated securities to lower the overall risk of ownership. #Top of Page


The monetary resources owned by a business so it can produce its products or services. Assets of large companies typically include such "tangible" items as cash, buildings, land, equipment, vehicles, inventory, raw materials, and receivables [money due to the company by customers for products or services already delivered]. There may also be "intangible" assets such as trademarks, patents, name recognition, and "goodwill" [the excess of cost over accounting value for an acquired company]. A company's Assets appear on its BALANCE SHEET.    #Top of Page


One of the fundamental accounting statements that a business maintains. The Balance Sheet shows all the business's ASSETS, LIABILITIES, and EQUITY at the close of business on a specific date [typically a month-, quarter- or year-end date]. The statement's name comes from the basic accounting rule that


That is, there must be a "balance" between these three quantities.   #Top of Page


A mandatory, partial or full, redemption of a bond issue prior to its maturity date at the option of the bond issuer. "Calls" are written into the bond's legal description [the "Indenture"] generally as a benefit to the issuer. Should bond market conditions or the issuer's financial condition make it favorable to close out the indebtedness position represented by the bond, the issuer can "call" the bond but is not required to do so. Sometimes, an Indenture states that called bonds must be redeemed at a "call price" that is higher than the face amount of the bond. This is a sweetener to induce lenders to buy the bonds despite the call provision. If a partial call is made, the issuer makes a random selection among all the outstanding units of the bond issue so that no particular lender is favored. An investor who does not deliver a called bond to its issuer will not receive his/her principal until the redemption is completed and will not receive any interest payments after the call date.   #Top of Page


A method for constructing a portfolio of bonds such that their maturities are staggered or "stepped" over a time period, like the steps of a ladder. This process provides a time-averaging of interest rates. #Top of Page


The change in value of a security from its purchase date to the present time or to a sale date. The value change is a consequence of market price fluctuations. Capital Gain/Loss is one component of a security's TOTAL RETURN. Example: An investor bought 100 shares of General Electric common stock for $70 each, paying a total cost of $7,000 [100 shares times $70 per share]. At today's close, suppose the shares were selling for $105 each so the position was worth $10,500. The investor then has a $3,500 Capital Gain [$10,500 less $7,000]. In this example the gain is "unrealized" or a "paper gain" because the shares haven't yet been sold. Had the shares been sold today, the investor would have a "realized" gain.    #Top of Page


(1) The full financial backing of a business... typically including equity [common and preferred stock], debt [bonds, notes] and retained profits from past operating periods.   #Top of Page

(2) When used in reference to a company's common stock, Capitalization means the current aggregate dollar value of the stock. This is computed by multiplying the Current Share Price in dollars by the Number of Outstanding Shares. Example:  If Microsoft shares are priced at $90 each and there are 5.0 billion shares outstanding, then Microsoft's Common Stock Capitalization is $450 billion.   #Top of Page


One of the fundamental FINANCIAL STATEMENTS that a business maintains. The Cash Flow Statement shows the cash sources, uses, and cash balance for the business over a period of time such as a month, quarter-year, or year. In computing Cash Flow, some non-cash charges such as depreciation are added to traditional cash sources such as product sales. Since a business must have enough cash to meet its obligations for salaries, taxes, raw material purchases, dividend payments, etc., a weak Cash Flow can be a serious impediment to the enterprise's financial health.  #Top of Page


A pooled asset security that offers a fixed number of shares to the public and doesn't redeem them. After their initial offering, the shares trade continuously on a Stock Exchange, much like corporate COMMON STOCK. The Fund's market price at any time may be greater than or less than its NET ASSET VALUE. One advantage of a Closed-End Fund is that its assets are isolated from share price volatility; that allows the manager of a Closed-End Fund to keep the portfolio intact during turbulent market conditions. This may be a stabilizing influence, especially if the fund's objective is to hold relatively illiquid securities such as foreign stocks or bonds. There can be a price "premium" or "discount" between a Closed-End Fund's share price and its NET ASSET VALUE because of positive or negative investor sentiment.   #Top of Page


A class of equity or ownership in a corporation. Common stock has a subordinate claim on ASSETS relative to PREFERRED STOCK's dividend claim and to all corporate creditor claims.   #Top of Page


A bond's legally committed annual rate of interest.   #Top of Page


A securities ORDER that's valid only to the end of the current trading day.   #Top of Page


A legal power granted by an asset owner to an Investment Advisor that allows the Advisor to act on the owner's behalf. If the Trading Authority is "Limited", the Advisor can commit the owner to the purchase or sale of securities just as if the owner had placed an order him/herself. This allows the Advisor to act expeditiously and efficiently. A "General" Trading Authority additionally grants the right to order a withdrawal or transfer of client assets... this can lead to financial chicanery and should only be used in unusual circumstances. Some Advisors do not accept "General" Trading Authority because the Advisor is then considered to "have custody" of client assets which deservedly triggers stronger regulatory oversight. #Top of Page


The process of investing assets in a collection of financially uncorrelated securities so that the risk of loss is reduced. On a larger scale, Diversification may take the form of ASSET ALLOCATION which spreads assets over unrelated classes of investment securities. On a smaller scale, Diversification may be achieved by buying a group of uncorrelated common stocks or purchasing shares of a MUTUAL FUND that is itself diversified. Another aspect of Diversification is balancing the capital amounts that are applied to each portfolio asset. For example, it is not a sufficient Diversification to own 25 unrelated common stocks if two of those positions command 75% of the assets allocated to the common stock class.  #Top of Page


An "effective life" measure of a bond. Duration is computed as the number of years required for the holder to receive the "present value" of all future interest and principal payments. Duration shows the sensitivity of a bond's price to market interest rate changes... a bond will fluctuate in value by a percentage equal to its Duration for each 1% shift in market interest rates.   #Top of Page


(1) In accounting, Equity is the amount of capital contributed by shareholders by their original purchase of common stock plus the accumulated RETAINED EARNINGS attributable to the common stock.   #Top of Page

(2) For investments, Equity is an ownership interest in a corporation which is acquired by buying COMMON STOCK or PREFERRED STOCK. As an owner, an equity holder assumes the risk that the company will fail to profit from its operations, but the equity holder also has the potential reward of increased stock value if the company succeeds.   #Top of Page


A set of basic accounting documents that give a complete financial picture of a business. Usually the Financial Statements consist of a BALANCE SHEET, INCOME STATEMENT, CASH FLOW STATEMENT, and Notes to these documents that explain the accounting assumptions used and any special methods employed to compute the financial status.   #Top of Page


A type of security analysis that focuses on a study of an issuer's investment posture and financial condition. A fundamental analyst focuses on all the data in a security issuer's FINANCIAL STATEMENTS and may attempt to predict the future value of a security by studying its earnings history, its regulatory filings, news releases, as well as by comparing the issuer to other firms in its industry. A major alternative to Fundamental Analysis is TECHNICAL ANALYSIS.   #Top of Page


A security whose issuer's revenues and/or profits are expected to grow at such a high rate that its current price is attractive. Often a Growth Stock issuer reinvests net profits back into the business for future expansion. A proven Growth Stock may not be "cheap" [see VALUE INVESTING] when its Sales, Earnings, or Accounting value are judged against its current share price, but Growth investors are counting on future, higher numbers to win CAPITAL GAINs.   #Top of Page


A type of securities ORDER that remains valid until it is cancelled by the originator or executed. The GTC designation may be added to a Limit or Stop ORDER since those have price restrictions and will not necessarily be executed when they're received in the marketplace.  Brokers may refuse to accept a GTC order on some securities because of the extra diligence the order demands. In practice, a brokerage house may limit the life of a GTC order to six or twelve months from its origination date to avoid a build-up of orders with a negligible chance of execution.   #Top of Page


One of the fundamental accounting statements that a business maintains. The Income Statement shows the Revenues received and the Expenses paid by the business over a specified period of time. Typically, an Income Statement is drawn for a monthly, quarter-year, or annual period.   #Top of Page


A specialized type of MUTUAL FUND or CLOSED-END FUND that has the goal of creating a securities portfolio whose TOTAL RETURN closely tracks the Total Return of a MARKET INDEX. Since most Indexes do not change their constituent assets very often, Index Funds are a tool commonly used in PASSIVE INVESTING.   #Top of Page


In accounting, the monetary obligations of a business. For a large company, liabilities would typically include long-term debt, short-term borrowing, accounts payable [money owed to suppliers for goods or services already delivered], salaries earned but not yet paid, and taxes incurred but not yet paid. A company's Liabilities appear on its BALANCE SHEET.   #Top of Page


A charge paid by a buyer to purchase MUTUAL FUND shares through a stockbroker. The Load is typically 3% to 6% of the gross amount of the purchase and is used to compensate the selling stockbroker and the selling brokerage firm for the research effort made to match the fund to the customer's needs and the selling effort made to convince the customer of the fund's merits. Some Loads are charged at the time of purchase ["Front End Loads"] while others are charged if the fund shares are sold before a specified future date ["Back End Loads"]. Load Funds are an alternative investment to NO-LOAD FUNDS.   #Top of Page


An investment position in which a security is purchased and held. This is by far the more common security ownership mode... its opposite is a SHORT POSITION. A Long Position holder expects to make a profit when the future price of her/his security rises above the purchase price. The maximum loss that a Long Buyer can incur is limited to the purchase price of the position.   #Top of Page


A computed number expressing the value of a collection of securities that are chosen to reflect the behavior of a securities market segment. The most frequently reported domestic Market Index is the Dow-Jones Industrial Average whose 30 common stocks purport to show the behavior of long-established companies trading on the New York Stock Exchange. Another, broader-based Market Index is the Standard & Poor's 500 Stock Index which includes the 500 domestically-traded common stocks with the highest market CAPITALIZATION. There are also Market Indexes of all the common stocks trading, respectively, on the New York Stock Exchange, the American Stock Exchanges, and the Nasdaq OVER-THE-COUNTER market. All of these indexes (but not the "Dow") weight each component stock according to its CAPITALIZATION. The Value Line Stock Index (Geometric) is one of the few Market Indexes that weights each component stock equally; it includes approximately 1700 of the most widely held domestic common stocks. Market Indexes are also computed for segments of the domestic debt securities market, for common stocks in specific market sectors, for foreign stock and debt markets, and for a composite of all major stock markets in the world.  Two caveats to keep in mind when using Market Indexes: (1) A capitalization-weighted index can be a confusing "yardstick" because it's primarily moved by the action of a small number of its highest capitalization components; (2) The Dow Jones Industrial Average is computed by simply adding the current prices of the 30 component stocks and dividing by a "Dow divisor" [which started out as the number 30 but because of stock splits and corporate mergers is now about 0.3!] This Average is heavily influenced by the highest price components since those change by a larger number of dollars for a given price percentage change.   #Top of Page


A pooled security that can continuously issue new shares and redeem shares to meet investor demand. A Mutual Fund is supervised by a Board of Directors that hires the Investment Manager and an Auditor, arranges for a Custodian of Assets and for a Registrar of Shareholders. The fund manager builds a portfolio of underlying securities intended to satisfy the investment objective of the Fund. Mutual Fund shares can only be purchased or sold through the Fund's Distributor, at a fixed price determined at the end of each trading day [adjusted for any "Sales LOADs" that apply]. A Mutual Fund may be a LOAD FUND or a NO-LOAD FUND;  it may be Diversified [if it limits the amount of capital committed to any one security issue] or Non-Diversified [see DIVERSIFICATION]. One potential drawback of mutual funds is that a high level of redemption requests can force the Manager to liquidate portfolio assets when market prices are low. Another drawback is the requirement that a Mutual Fund pay its net Realized CAPITAL GAIN to shareholders annually. Current Mutual Fund buyers may also be purchasing the tax liability of UNrealized Capital Gains achieved before their purchase.    #Top of Page


For MUTUAL FUNDS and CLOSED-END FUNDS, the per-share market value of all assets in the fund portfolio at the day's close of trading. NAV is calculated by multiplying the price of each portfolio asset by the quantity of that asset held; summing over all assets in the fund; then dividing that sum by the number of outstanding fund shares.   #Top of Page


A type of MUTUAL FUND that does not levy a selling charge [see LOAD FUND] because no financial professional or brokerage firm is helping the buyer find the fund or convincing the buyer of the merits of purchase. Investors buy and sell No-Load Fund shares at their NET ASSET VALUE. No-Load Funds usually deduct their marketing expenses ["12b(1) Fees"] from the portfolio gains; these fees are typically less than 1% of portfolio assets but they're charged every year.   #Top of Page


The three most common types of Transaction Orders are Market, Limit and Stop Orders. A Market Order instructs a securities broker to buy or sell a security immediately at whatever price is offered in the marketplace when the order arrives. A Market Order has the virtue that it will virtually always be executed but the price of execution is uncertain. Limit Orders instruct a broker to buy or sell a security only if the market price is equal to or better than the Price Limit specified.  In this case, the price at which the Order will be fulfilled is entirely determined, but the Order may not be executed at all if the security's market price never comes to the Price Limit. Finally, a Stop Order instructs a broker to sell or buy a security when its price reaches or passes through a specified "trigger" or "stop price". Attainment of the stop price by a security converts the Stop Order to a Market Order. A Stop Order can be used to attempt to "stop" CAPITAL LOSSes or capture CAPITAL GAINs by setting a stop price that's below the current market price. However, since the Stop Order converts to a Market Order when the stop price is reached, there is no guarantee that the transaction will be executed just at that stop price. All these types of orders may be time limited as DAY ORDERs or GTC orders. Brokers may refuse to accept Limit or Stop Orders on certain volatile securities.   #Top of Page


A transaction system in which firms qualifying as "market makers" or "dealers" in a particular security electronically post the prices at which they're willing to buy or sell on a network that's accessible to stockbrokers around the country. [Some infrequently traded OTC securities are priced only by telephone communication between dealers and brokers.] Contrast this dispersed, electronic Over-The-Counter Stock Market with the Stock Exchanges where all trading is done in one physical location using an "open auction"  between "floor brokers" representing buyers and sellers. Thousands of common stocks trade on the Over-The-Counter Stock Market, as do most government, municipal and corporate bonds. #Top of Page


A form of investment management that has the goal of keeping a diversified portfolio as little changed as possible over long time periods. Exponents of this technique generally believe that markets "efficiently" reflect the value of securities almost all the time so it is pointless to seek the "best performing" securities. Passive Investing has the advantage that transaction and investment tax costs tend to be low. One common form of Passive Investing is the use of INDEX FUNDS. A contrasting philosophy is ACTIVE INVESTING.    #Top of Page


A class of EQUITY or ownership in a corporation that has a superior claim to dividends than the COMMON STOCK. Most Preferred Stocks pay a fixed rate of interest, usually higher than is paid to the Common Stock holders, and they tend to trade like bonds based on their dividend income stream. Additionally, some Preferred Stocks are "convertible" to common stock of the same issuer in a ratio that's fixed at their issuance. If the issuer's common stock price increases sufficiently over time, the "conversion value" of a Preferred Stock may drive its market price behavior. Preferred Stock may also be callable [see BOND CALL] which can limit their price appreciation potential.   #Top of Page


A ballot used by shareholders who are entitled to vote at a Corporation's Annual Meeting or at a Special Meeting but who will not be physically present at the place and time of the balloting.  A Proxy is used for the same purpose as an "Absentee Ballot" in general public elections.    #Top of Page


An Investment Advisor [Corporation, Partnership or Sole Practitioner] who is properly registered with the U. S. Securities and Exchange Commission or, for smaller entities,  registered with a State Securities Department. Registration may require: the passage of legally designated tests, the proper completion of public disclosure documents, the submission of fingerprint and financial disciplinary history documents, and/or the payment of initial and annual fees. Most Investment Advisor registrations are supervised under regulations flowing from the U.S. Investment Advisor Act of 1940 and subsequent amendatory legislation. After registration, Investment Advisors are subject to auditing of their operations, advertising, recordkeeping, disclosure documents, etc. by Federal and/or State authorities.   #Top of Page


An investment position in which a borrowed security has been sold but not yet returned to the lender. The intention of a Short seller is to profit from a future price decline in the sold security. Then the borrowed, already sold, security can be purchased at a lower price than its sale price.  Conversely, a Short seller loses money if the sold security subsequently rises in price. A Short Sale involves loan payments for the entire time that the short position remains open; the Short seller must also have creditworthiness before receiving a loan of stock. SHORT POSITIONS can present exceptionally high risk because their CAPITAL LOSS can increase precipitously [in theory, the loss is unlimited!] if the shorted stock rallies to a much higher price.   #Top of Page


An incentive program in the securities industry under which firms earn credits toward the delivery of "rewards" for bringing transactions or assets to a brokerage house or custodian. The rewards may include subscriptions to investment publications, receipt of free or discounted business equipment, and/or access to financial industry research materials at no cost or reduced cost.  "Soft dollar" concessions are generally legal so long as they don't sway a financial professional or firm to make decisions that aren't in the best interest of their clients, and so long as the "rewards" help the professional or firm better serve the needs of their clients.   #Top of Page


A type of security analysis that focuses on the study of a security's price and trading "volume" [number of shares traded] history. The technical analyst typically examines charts of a security's price history and  seeks patterns of behavior that suggest future price movement. Those patterns may include rising or falling Trend Lines, the relation between the current price and "Moving Averages" of past prices, the prices at which high or low trading volume were experienced, and price "Floors" and "Ceilings". In its purest form, Technical Analysis is unconcerned with the financial condition of the security issuer's business... a strong contrast to the methods of FUNDAMENTAL ANALYSIS.    #Top of Page


A measure of a security's productivity that combines the CAPITAL GAIN/ LOSS [determined by the price change of the security] with the income provided by the security through the payment of interest or dividends. Example: A stock begins the year at $32 per share and closes the year at $37. It pays quarterly dividends of $0.25 per share. For the year, each share appreciated $5 and paid $1 in dividends, for a total $6 Return on the $32 initial share price. Total Return in percent is 100 ($6 / $32) = 18.75%. #Top of Page


A measure of the frequency with which the assets in a portfolio are replaced, usually computed for a one-year time period. Turnover is commonly quoted as a percentage of the portfolio's total worth.  For example, an annual Portfolio Turnover of 50% would mean that the total value of transactions made during the year were equal to half the average value of the full portfolio. This Turnover does NOT mean that half the assets in the portfolio were replaced during the year, however. It could be that positions representing just 10% of the assets were replaced during the year, but that the replacement effectively occurred five times. In other words, a small portion of the portfolio might have seen a lot of replacement action while the bulk of the assets were held intact. Equity MUTUAL FUNDS that practice ACTIVE MANAGEMENT often report annual Turnover greater than 100%. In contract, funds that practice PASSIVE MANAGEMENT may show a 5% Turnover.   #Top of Page


An UNmanaged pool of securities that is organized as a Trust and sold to the public in "units", typically valued at $1,000 each at their initial offering. Any security in a Unit Trust's portfolio that matures or is retired leads to a proportionate distribution of the capital proceeds to the Unitholders. Over time, typical Unit Trusts return all their invested capital to Unitholders, since no reinvestment is provided, and then terminate. There is often a 3% to 5% Sales Load [see LOAD FUNDS] on the initial offering of Trust Units to the public. There is no public market for Unit Trusts but the issuer often provides a secondary market facility.   #Top of Page


A security whose price is judged to be lower than its "worth". The determination of "worth" is subjective and may involve a FUNDAMENTAL ANALYSIS or TECHNICAL ANALYSIS of the security. Common justifications cited for a Value Stock designation include: the stock's price is low compared to company Sales, Earnings or Accounting value; companies in the same industry are selling at higher valuations; or, the company owns an ASSET whose worth isn't fully appreciated by investors. The Value Security label is often contrasted with GROWTH SECURITY.   #Top of Page


A compound annual bond yield that takes into account both a bond's COUPON RATE of interest and the change in the bond's market price between the purchase date and the maturity date.  #Top of Page

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