Glossary of Terms
401(k): This qualified retirement plan allows eligible employees to contribute a certain amount of compensation on a pre-tax basis; earnings are tax deferred. Employers may match a stated percentage of employee contributions to the plan. In many cases, employees have general responsibilities for investment choices and enjoy the direct tax savings. The reduced cost and liability of 401(k) plans appeals to many employers.
401(k) Loan: A 401(k) loan is taken from a 401(k) retirement account. Certain plans allow an individual to withdraw a percentage of an account balance, with set minimum and maximum amounts allows. The loan is generally paid back, with interest, through payroll deductions. If an individual leaves an employer with an outstanding loan, the full amount of the loan is generally due. If the individual fails to repay the loan, it is considered a distribution, and ordinary income taxes are due. In addition, an early withdrawal tax penalty may apply for individuals under the age of 59½.
403(b): Similar to the 401(k), this type of qualified retirement plan is available to employees of nonprofit and government organizations.
Account Balance: An account balance is the net of credits and debits for an account at the end of a reporting period. For example, a credit card balance may show the amount you owe to the company as a result of your purchases, while a bank account balance may show the amount owed to you by the bank as a result of interest earned on your money.
Accounts Reconciliation: The beginning balance plus the sum of all entries on a ledger or in a checkbook register must equal the ending balance on an account statement. Deposits, interest received, and credits are added to the beginning balance. From this total amount, automatic withdrawals, checks outstanding, checks negotiated, and account charges are subtracted. When the resulting balance equals the ending balance on the account statement, the account is reconciled.
Active-Participant Status: This term applies to a person, or his or her spouse, who participates in an employer-sponsored retirement plan. The plans that qualify include the following: 1) a qualified pension, stock bonus, or profit sharing plan; 2) a qualified annuity plan; 3) a tax-sheltered annuity (TSA) plan; 4) a simplified employee pension plan (SEP); or 5) a local, state, county, or federally sponsored retirement plan.
Actuary: Insurance contracts and retirement plans require professional calculation of payments to be received and benefits to be paid. An actuary analyzes all probability and risk estimates based upon past experiences to confirm obligations are pragmatic and attainable.
Adjustable Rate Mortgage (ARM): Also called a variable rate mortgage, this mortgage has an interest rate that is adjusted periodically, usually at intervals of one, three, or five years, based on a measure or an index, such as the rate on US Treasury bills or the average national mortgage rate. In exchange for assuming some of the risk of a rise in interest rates, a borrower receives a lower rate at the beginning of an ARM than if he or she had taken out a fixed-rate mortgage.
Adjusted Gross Income (AGI): On a federal income tax return, AGI is the amount of income subject to federal income taxes. To determine AGI, subtract certain qualified deductions, such as unreimbursed business expenses or contributions to a traditional Individual Retirement Account (IRA), from gross income, which generally includes employment income, interest income, dividends, and capital gains.
Advance: A services company may establish a salary advance to assist new employees with initial cash flow problems or to help seasoned employees with emergency needs. The advance represents money received before it is actually earned. In addition, some businesses will establish an employee cash advance program to provide for business-related travel expenses.
Aggressive Growth Fund: This mutual fund has the objective of maximizing long-term capital growth, rather than dividend income, by investing in narrow market segments and small company stocks. Aggressive growth funds are designed for maximum capital appreciation and generally invest in companies with high growth rates.
Allocation Formula: Employers’ contributions to employee profit sharing plans are allocated to participants’ accounts based on an allocation formula. The formula also governs the reallocation of funds forfeited by employees who terminate from the plan.
Alternative Minimum Tax (AMT): This tax calculation adds certain tax preference items back into adjusted gross income in order to prevent taxpayers from escaping their fair share of tax liability by taking numerous tax breaks. If AMT liability is greater than regular tax liability, the taxpayer generally needs to pay the regular tax and the amount by which AMT exceeds regular tax.
American Stock Exchange (AMEX): Located in downtown Manhattan, AMEX has the third highest volume of trading of any stock exchange in the U.S. The bulk of trading on the AMEX consists of index options and shares of small to medium-sized companies.
Amortization: This process brings gradual extinction to a debt, loan, or mortgage over a specific span of time. It can also be used to deduct capital expenses over a period of time. Similar to depreciation, it is a method of measuring the consumption of the value of long-term assets like equipment or buildings.
Annual Percentage Rate (APR): The yearly cost of credit or a loan is expressed as a simple percentage number. This also includes any fees or additional costs associated with the agreement. The Federal Truth In Lending Act requires all consumer credit agreements and loans to disclose the APR to ensure the understanding of the real costs applicable to the transactions.
Annual Report: This yearly statement describes company management, operations, and financial reports. Annual Reports are sent to every shareholder and are available for public review. The Securities and Exchange Commission (SEC) requires an annual report published by any corporation issuing registered stock. A more exhaustive annual compilation of data is found in Form 10-K, which the SEC mandates from companies surpassing certain qualifications.
Annuitant: The person to whom an annuity is payable is called the annuitant.
Annuity: This long-term contract sold by life insurance companies guarantees payments (based on the claims-paying ability of the issuing insurer), fixed or variable, to the purchaser at regular intervals. Fixed annuities offer consistent, predictable returns, whereas variable annuities provide fluctuating returns based on the performance of an investment portfolio. Payments are usually scheduled to begin at a future time, such as retirement, but in certain cases, payment may begin immediately. Some annuities provide tax-deferred earnings, often as part of retirement plans.
Annuity Cash Refund: The contract for an annuity offering income for life may include a death benefit for the total premiums paid. When the annuitant dies, the annuity cash refund will be the net sum of premiums paid minus the amount received in annuity payments.
Annuity Certain: This option in an annuity contract allows the annuity owner to select a future level of income covering a specified number of years, generally ten years. If the annuitant dies before the expiration of the annuity payments, the remaining obligation is transferred to the designated beneficiary in the annuity contract.
Annuity Joint and Survivor: This annuity option provides for payments for two designated annuitants. Upon the death of the first annuitant, the surviving annuitant receives prearranged, continued payments for life, based on a percentage received by the first annuitant.
Annuity Joint Life: While two or more individuals may be named annuitants, payments cease at the death of the first annuitant in an annuity joint life contract.
Annuity Modified Refund: In a contributory retirement plan, the annuity beneficiary of a deceased retiree receives the accumulated balance of the pension fund, which is referred to as the annuity modified refund.
Annuity Payout Option: Payments from an annuity may be received in a variety of ways: as a fixed dollar amount, for a fixed period, or over the lifetime(s) of one or two annuitants. The annuitant chooses one of these alternatives as the payout option.
Application Fee: A lender may charge a fee to process a loan application. Paying this fee does not guarantee loan approval. Some lenders apply the cost of the application fee toward certain closing costs.
Appraisal: This assessment of a property’s value, performed by a qualified professional, is based on information from recent sales of similar properties.
Asset: An asset is any property with a cash value that is expected to provide future benefit, such as real estate, equipment, savings, and investments.
Asset Allocation: This process divides investments among different asset classes, such as stocks, bonds, and cash. The goal of asset allocation is to reduce portfolio risk through diversification.
Asset Class: An asset class is a specific category of assets or investments, such as cash, bonds, stocks, or real estate. Assets in the same category tend to share similar characteristics and behave similarly in the marketplace.
Assignment: An assignment is the legal transfer of the entire or partial ownership of an asset, such as an insurance policy, to another person or entity.
Automatic Reinvestment: This prearranged investment plan automatically deposits mutual fund dividends or capital gains back into the fund to purchase additional shares, allowing the owner to take advantage of compounding.
Balloon Mortgage: This mortgage type has a final payment that is considerably larger than the preceding payments. Balloon mortgages are typically used when borrowers anticipate receiving a large sum of extra cash to pay the balance or when they expect to refinance before the balloon payment comes due.
Bankruptcy: An inability to pay outstanding debt, in full or in part, or declaring insolvency may lead to bankruptcy. Bankruptcy is an expensive process and may adversely affect future credit opportunities. Some more recognizable bankruptcy applications include the following:
Chapter 7: A debtor (individual) is declared bankrupt, and a court appointed trustee initiates a liquidation process and a discharge of all eligible debts. The debtor has no financial sources to attempt a reorganization. A separate taxable entity is created.
Chapter 11: A debtor (business, individual, or partnership) is declared bankrupt but is allowed reorganization to attempt debt repayment. Creditor approval is required. A separate taxable entity is created.
Chapter 13: A debtor (individual or sole proprietor) is declared bankrupt but is allowed to retain estate-related assets and to restructure debt obligations for eventual payment. No creditor approval is required.
Basis: The original cost and any additional outlays represent the cost basis in equity investments or property. The Internal Revenue Service computes the taxable gain, profit, or appreciation on the difference between the basis and the actual amount of sale. Therefore, defining basis as original price, and not as total cost, may incorrectly result in an inflated tax liability.
Basis Point: Basis points measure the variation in financial instruments that often fluctuate in very small increments. One basis point is equal to .01%; therefore, 100 basis points are equal to 1%. For example, a yield that has increased from 5.46% to 5.58% has increased 12 basis points.
Bear Market: A bear market is characterized by an extended period of declining prices, usually by 20%, in the financial markets. A prolonged downturn of general economic activity is often the catalyst for a bear market in stocks, whereas rising interest rates are typically responsible for a bear market in bonds. The bear market is the opposite of a bull market.
Beneficiary: This person or entity named in a will, life insurance policy, a qualified retirement plan, or an annuity is eligible, by the terms of such a policy or plan, to receive benefits upon the death of the insured or the plan participant.
Beta: A beta is a measure of a security’s price fluctuations (volatility) relative to an appropriate market index. For example, the Standard & Poor’s 500 Stock Index (S&P 500) has a beta of 1. Stocks with betas greater than 1 are subject to more rapid and extreme price fluctuations than the market. Conversely, price fluctuations for stocks with betas less than 1 are less frequent and smaller than the market. Conservative investors generally seek securities with lower beta values, while aggressive investors seek those with higher beta values.
Blue-Chip Stock: A blue-chip stock is the common stock of a company with a reputation for quality products, services, and management, and a long history of earnings growth and dividend payments. Examples of blue-chip companies include General Electric, International Business Machines, and DuPont.
Bond: This debt security issued by a corporation, government, or governmental agency obligates the issuer to pay interest at pre-determined intervals and repay the principal at maturity. Every bond has a set face value, also known as a par value, which names the amount of money the bondholder will receive when the bond reaches the date of maturity. The face value will never change, but the market value of a bond may fluctuate. If a bondholder sells a bond before its date of maturity, he or she may receive more or less than the face value.
Budget: Projected income and expenses for a given period is called a budget. A surplus budget indicates profits are expected, a balanced budget anticipates that revenues will equal expenses, and a deficit budget suggests expenses will exceed expenses.
Bull Market: A bull market is characterized by an extended period of rising security prices, usually by 20% in financial markets. A high volume of trading often occurs in a bull market, which is the opposite of a bear market.
Business Succession: Business succession is the prearranged process that addresses the future orderly transfer of a business entity and plans for every alternative contingency that would affect any transfer. Business succession broadly involves legal, financial, tax, and family concerns.
Buy-and-Hold: This investment strategy advocates holding securities for the long term, while ignoring short-term price fluctuations in the market. Unlike market-timing investors, who actively buy and sell securities hoping to turn quick profits on short-term price fluctuations, investors who buy and hold securities hope for substantial gains over time.
Buy-Sell Agreement: This written, legal contract provides for the purchase of all outstanding shares from a business owner who wishes to sell, wants to terminate involvement, is permanently disabled, or has died. A buy-sell agreement generally allows for a different, future ownership structure. The agreement may be funded with life and disability income insurance, and it may contain specific purchase arrangements.
Cafeteria Employee Benefit Plan: Also known as flexible benefit plans, cafeteria plans offer a variety of benefit options from which individual employees may select, such as health insurance, life insurance, and retirement benefits. Depending on personal needs and finances, employees may voluntarily elect benefits of their choice.
Capital Gains Distribution: A capital gains distribution is a payment to shareholders of profits realized on the sale of an investment company’s securities.
Capital Gains Tax: This tax is levied on profits from the sale of securities or other assets, such as land, buildings, equipment, and furniture.
Capital Loss: A capital loss is a decrease in the value of an investment or a capital asset from its purchase price.
Cash Advance: This instant loan may be obtained from a line of credit or a credit card account. Issuers generally charge interest from the date the advance is made until it is repaid. They may also charge a transaction fee based on the amount of the advance.
Cash Basis: This accounting method recognizes cash inflows or outflows when they are actually expended or received. Accrual accounting, in contrast, recognizes income and expenses at the time revenue is earned (but not necessarily received) and liabilities are incurred (but not necessarily paid).
Cash Budget: A cash budget is used to quantify an immediate, short-term cash flow. Reviewing daily, weekly, and monthly receivables and expenditures is essential for a resolution to establish credit lines or invest short-term idle cash.
Cash Flow: This accounting statement shows the aggregate of all cash inflows and outflows. The total during any given specified time period may be expressed as positive cash flow or negative cash flow.
Cash Management: Cash management is the process of channeling available cash into expenditures that enhance productivity, directly or indirectly.
Cash Surrender Value: The cash surrender value is the amount the policy owner receives when voluntarily terminating a cash value life insurance or annuity contract before its maturity or before the insured event occurs. Computation of the cash surrender value is stated, by law, in the contract.
Casualty Loss: These usually sudden and unexpected losses are due to damage, destruction, fire, or theft. Generally, they are reimbursed either in full or in part by insurance contracts. Amounts of compensation listed for losses are not usually tax deductible if full restitution is made by the insurance carrier. However, claims denied or not covered are potentially tax deductible.
Certificate of Deposit (CD): A CD is an agreement with a commercial bank that promises a fixed interest rate on funds deposited for a specified period of time. Issued in denominations ranging from $100 to $100,000, with maturities ranging from a few weeks to several years, CDs typically earn compound interest and are insured by the Federal Deposit Insurance Corporation (FDIC) up to $100,000. There may be a penalty if funds are withdrawn before reaching maturity.
Check: This written, signed, and dated instrument allows for the transfer of money from a bank account to a payee.
Claim: A claim is a request for payment under the terms of an insurance policy.
Claims-Paying-Ability Rating: This figure provides an assessment of an insurance company’s ability to pay claims, relative to other insurance companies.
Closing: Closing can refer to the end of a trading session or the process of transferring real estate from a seller to a buyer.
Closing Costs: Also called settlement costs, these expenses include any costs (over and above the price of the property) involved in transferring real estate from a seller to a buyer. Typically included are fees or charges for loan origination, discount points, appraisal, property survey, title search, title insurance, deed filing, credit reports, taxes, and legal services. Closing costs do not include points and the cost of private mortgage insurance (PMI).
Cloud on Title: A cloud on title is an apparent or potential claim, lien, or right on real estate. When present, the title is not clean, and a quitclaim deed must be filed to resolve the potential hindrance. For instance, a paid loan with property secured may not have been recorded, or a deceased owner may not have been removed from the deed to a house or title of a car.
Combined Financial Statement: An individual or corporation may own more than one affiliated business enterprise. Each has a complete set of financial documents. To provide a financial overview of all affiliates, a combined financial statement will present side-by-side accountings of balance and net worth statements.
Commercial Loan: Businesses in need of short-term financing will frequently bolster immediate cash flow with a commercial loan. The loan will be based on the credit worthiness of the business and/or owner and the prime lending rate.
Commercial Paper: This unsecured, short-term debt instrument is used by corporations to fund short-term liabilities. Since firms must have high-quality debt ratings to secure this funding, commercial paper is usually considered a safe investment. Maturity on the investment is usually less than six months.
Commission: This fee is charged by an agent for his/her services in facilitating a transaction, such as buying or selling securities or real estate, based on the dollar amount of the trade, the transaction, or the number of shares involved.
Commitment: This written agreement specifies the terms and conditions under which a lender will loan and a borrower will borrow funds to finance a home.
Common Stock: This security represents partial ownership, also called equity, in a corporation. Common stock ownership entitles a shareholder to participate in stockholder meetings and to vote for the board of directors.
Compounding: This process applies investment growth not only to the original investment, but also to income and gains reinvested in prior periods. To illustrate, if you earn compound interest on savings, you earn interest on the principle amount and the accumulated interest, as it is earned. If you earn simple interest on savings, you earn interest based only on the principle amount.
Construction Loan Note: This short-term obligation, in the form of a note, is used to fund a construction project. In most cases, the note issuers will repay the note obligation using a long-term bond, the proceeds of which can pay back the note. As an example, a city might use a construction loan note to fund a housing project to meet the demands of its growing population.
Contingent Beneficiary: On most insurance applications, owners have the option to name a primary beneficiary and a contingent, or secondary, beneficiary. At the death of the insured, a death benefit may be payable to a beneficiary. If the primary beneficiary revokes, is ineligible, or is deceased, the contingent beneficiary receives the proceeds. When no individual is named, proceeds are usually payable to the deceased’s estate.
Contingent Liabilities: A contingent liability is the possibility of an obligation to pay certain sums on future events. It also refers to defined obligations for which the chances of payment are minimal.
Convertible Term Insurance: In contrast to nonconvertible term life insurance, convertible term insurance provides the policyholder with a voluntary right (as described in the policy) to convert the face amount coverage in term insurance to a guaranteed issued identical face amount of whole life insurance.
Corporate Bond: This debt security is issued by a corporation, as opposed to the government, and it obligates the issuer to pay interest periodically and repay the principal at maturity. Corporate bonds generally feature higher interest rates because of the possible default risk, and the interest earned is often taxable.
Corporation: State and federal laws permit a group of people to act jointly for business and tax purposes. Individuals who comprise the corporation are able to incur debt and realize profit without immediate legal or taxable liabilities. The corporate entity provides the advantages of attracting outside capital by selling shares of ownership, protecting owners from liability beyond their investment outlay, providing for continuity of operations beyond the lives of current shareholder owners, and allowing change of ownership through transfer of shares.
Correction: Correction is defined as reverse movement, usually downward, in the price of an individual stock, bond, commodity, or index, which brings it more in line with its underlying fundamental value. If prices have been rising on the market as a whole, then fall dramatically, this is known as correction with an upward trend.
Co-Signer: This individual adds his or her signature to a loan or a credit card agreement along with the principal applicant, thereby assuming responsibility for the outstanding balance if the applicant defaults.
Covenant not to Compete: A contract to sell a business, offer employment, or form a partnership often includes a clause that obligates a party to refrain from performing similar professional or business activities. The legal enforcement of a covenant not to compete depends on the wording, compensation, duration, and situation.
Coverdell Education Savings Account (Coverdell ESA): Formerly known as the Education IRA, this savings vehicle allows parents to accumulate tax-free savings on money earmarked for a child’s college education. There are limits on income eligibility and on how much may be set aside per year.
Credit History: A credit history is a record of how a party has paid past debts.
Credit Line: This revolving agreement allows a person to borrow any amount up to a preapproved limit for purchases or cash advances. As the outstanding balance is paid off, credit again becomes available to fund new purchases or cash advances.
Credit Rating: This formal assessment evaluates the ability of individuals and corporations to handle credit. The credit rating, which may be used by lending institutions when considering loan applications, is based on a party’s history of borrowing and repayment, as well as the availability of assets and the extent of liabilities.
Debit Card: A debit card is issued by a bank to allow an individual access to his or her funds without having to physically go to the bank. A debit card can be used to withdraw cash from an automated teller machine (ATM) or to make purchases at merchant locations. At the time of use, funds are immediately deducted from the checking or savings account linked to the card.
Debt: Debt is the legal obligation, written or oral, to deliver a product, service, or cash.
Debt-to-Equity Ratio: The ratio of total debt to total shareholder equity indicates the level of capability for repayment of outstanding creditors. In addition, long-term debt as a function of shareholder equity indicates the degree of leveraged money to improve shareholder rates of return.
Decreasing Term Insurance: This term insurance policy has a death benefit that decreases over time. Decreasing term insurance is often used in conjunction with a mortgage or other amortized debt. For example, a holder of a 30-year mortgage may also hold a 30-year decreasing term insurance policy to cover the mortgage if he or she dies before it is paid off.
Deed: This document identifies legal ownership of real estate, and it used to transfer ownership from a seller to a buyer.
Deferred Annuity: This type of annuity pays an income or lump sum at a future date, as specified in the terms of the contract.
Defined Benefit Plan: This employer-funded retirement plan is designed to pay a predetermined benefit based on an employee’s years of service and salary or wages. Employer contributions adjust annually on an actuarial basis, and the employer is responsible for all investment selections and decisions.
Defined Contribution Plan: Through this retirement plan, an employer sets aside a certain amount or percentage of salary each year for the benefit of employees. In contrast to defined benefit plans, the employer contribution is fixed, but the employee benefit is not. Some plans allow employees to make voluntary, individual contributions and to choose the investment mix of their individual monies.
Deflation: The opposite of inflation, deflation is the reduction in the price of goods and services. Deflation can be caused by a decrease in the supply of money or credit, or by a reduction in spending by individuals or the government.
Dependent: A dependent is a person who relies on another for financial support. A taxpayer who supports a dependent is allowed to claim dependent exemptions.
Deposit: A deposit is a portion of funds used as security or collateral for the delivery of a good. It is also defined as a transaction involving the transfer of funds to another party for safekeeping, such as money put into a bank account.
Depreciation: Depreciation is the decrease in value of a fixed asset during its projected life expectancy. The Internal Revenue Service permits several processes to calculate annual depreciation amounts over asset life expectancy, resulting in certain tax consequences. Depreciation can also refer to the decrease in value of one currency in relation to another.
Derivative: The characteristics and value of this financial instrument depend on the value of an underlying instrument or asset, typically a commodity, bond, equity, or currency. Examples include futures and options.
Direct Rollover: A direct rollover is the tax-free transfer of money or property from the trustee or custodian of one qualified retirement plan or account to another.
Disability-Income Insurance: This policy pays a portion of the insured’s income in the event that temporary or permanent total disability prevents the insured from working.
Discount Broker: A discount broker buys and sells securities at lower rates than a full service broker. Discount brokers generally do not offer all the services of full service brokers, such as research and advice.
Diversification: This investment strategy is designed to reduce the risk of investing in a single industry/market sector or a small number of companies by spreading the risk over several industries/market sectors or a larger number of companies. The operating assumption is that diversified investments are unlikely to all move in the same direction, allowing gains in one investment to offset the losses of another.
Dividend: A dividend is a distribution of earnings to a shareholder of a corporation or mutual fund, or to mutual life insurance policy owners, generally paid in the form of money or stock.
Dollar Cost Averaging: This method invests a fixed dollar amount in securities at set intervals, regardless of market prices. With this approach, an investor buys more shares when prices are low, and fewer shares when prices are high. This generally results in a lower average cost per share than if the investor had purchased a constant number of shares at the same periodic intervals. An investor should consider his or her financial ability to continue through all types of market conditions. Dollar cost averaging will not assure a profit or protect against loss in a down market.
Double Taxation: Double taxation is the result of tax laws that cause the same earnings to be taxed twice. Business profits and income of sole proprietors, partnerships, and S corporations receive taxation only at the individual taxpayer level. However, C corporations experience taxation at the corporate level, and shareholders pay taxes on dividends.
Dow Jones Industrial Average (DJIA): The Dow Jones Industrial Average is the price-weighted average of 30 actively traded blue chip stocks on the New York Stock Exchange (NYSE). The DJIA represents approximately 15% to 20% of the market value of NYSE stocks.
Early Withdrawal: An early withdrawal is the removal of funds from a fixed-rate investment before the maturity date or from a tax-deferred investment or retirement savings account before a pre-determined time. One example would be a distribution from an individual retirement account (IRA) taken before age 59½. Early withdrawals may be subject to a penalty.
Electronic Banking: Many banking institutions provide computerized network services that provide account holders access to their accounts by personal computer. Customers may make payments directly to stores, credit card accounts, mortgage companies, utility companies, and other creditors. Individuals having two or more bank accounts may also transfer cash between accounts.
Electronic Commerce: Electronic commerce, also called E-Commerce, refers to the use of the Internet by an individual or business to conduct business, buy or sell goods, or provide or purchase a service.
Electronic Funds Transfer System (EFTS): Funds may be electronically transferred between accounts of buyers, sellers, and other individuals. This service allows for direct deposits or withdrawals without processing written checks.
Employee Retirement Income Security Act (ERISA): Most pension and retirement plans became subject to government overview and the establishment of several federal limitations and practices under ERISA in 1974.
Employee Stock Ownership Plan (ESOP): This employer-sponsored program encourages employees to purchase shares of their companies, thereby aligning the interests of a company’s employees with those of its shareholders. An ESOP may be part of a bonus or retirement package, and it may allow employee-shareholders to participate in the management of the company.
Endowment: An endowment refers to any assets, funds, or property that is donated to an individual, organization, or group to be used as a source of income.
Equity: Equity can be defined as anything that represents ownership interests, such as stock in a company. Equity also generally refers to the difference between an asset’s current market value and the debt against it. For example, if you own a car valued at $15,000, but owe $10,000 on a car loan, your equity in the car is $5,000.
Equity Loan: This type of loan allows a homeowner to borrow against the accumulated equity in his or her home using the property to secure the debt. An equity loan may be structured as a line of credit the homeowner can access with a check or credit card.
Escrow: This independent third party agent or account assumes possession of a contract, a deed, or money from a grantor until completion of any outstanding obligations or commitments. Upon the satisfaction of all parties, the agent delivers the property held in escrow to the grantee.
Estate Planning: This process plans for the orderly administration and disposition of a person’s assets after he or she dies.
Estate Tax: These federal and/or state taxes are levied on the assets of a decedent (person who dies). Estate taxes are paid by the decedent’s estate rather than his or her heirs.
Excess Compensation: In a pension plan integrated with federal old-age, survivors, and disability insurance (OASDI), excess compensation is the amount above the specified amount upon which calculations for future benefits are based.
Executor: This person is named under a will to administer the distribution of the deceased’s assets as directed by the will. An executor is often a family member, a trusted friend, or a bank trust officer.
Family Limited Partnership (FLP): This partnership of family members can be a valuable tool for business and investment purposes. FLPs can help arrange for generational transfers, maintain control within the general partners, and reduce potential liability to the transferor and transferee. For financial planning purposes, FLPs may help preserve wealth, minimize taxation, protect against creditors, and facilitate estate planning.
Federal Reserve System (The Fed): This seven-member Board of Governors oversees Federal Reserve Banks, establishes monetary policy (interest rates, credit, etc.), and monitors the economic health of the country. Its members are appointed by the President, subject to Senate confirmation, and serve 14-year terms.
Fiduciary: A fiduciary is an individual who provides investment advice for a fee or who exercises discretionary authority or control in managing assets. Also, a fiduciary can refer to an individual, company, or association responsible for holding assets in trust and investing them wisely for the benefit of a trust’s beneficiary. Examples or fiduciaries include trustees, bankruptcy receivers, and executors of wills and estates.
Financial Aid: Financial aid refers to the financial support a student receives from federally and privately funded sources to attend college. Financial aid includes loans, grants, scholarships, and work-study programs.
Financial Statement: In terms of a business, a financial statement is a written record concerning the financial circumstances of a company, firm, or organization. Such a statement generally includes balance sheets, changes in retained earnings, profit and loss statements, cash flows, and other forms of financial analysis that are beneficial to management.
First-to-Die Life Insurance: This type of life insurance policy covering two or more people pays the death benefit when the first person dies.
Fixed Annuity: A fixed annuity is an investment contract sold by a life insurance company that guarantees regular payments to the purchaser for a specified period of time, or for life. The purchaser generally pays a premium either in a lump sum or in installments.
Fixed-Rate Mortgage: A fixed-rate mortgage has a set interest rate that will not vary for the life of the loan.
Floating Debt: Floating debt refers to the use of government Treasury bills or short-term corporate bonds, which, when continually renewed, pay off current liabilities or finance cash flow.
Flood Insurance: This insurance covers against losses that are a direct result of flood damage. Flood insurance is required by lenders if a property is located in a flood zone.
For Sale By Owner (FSBO): When the sale of a home is attempted directly by the owner, the owner assumes all fiduciary responsibilities involved with the execution of all legal contracts, documents, and transactions.
Foreclosure: A foreclosure is the legal procedure by which a mortgage holder, such as a bank, savings and loan, or private individual, can seize the property of a borrower who has not made timely payments on a mortgage. The lender must obtain a court order to seize the property, which it may then sell to satisfy the debt.
Forfeitures: Employees who terminate from an employer’s pension plan are forced to forfeit nonvested employer contributions. These forfeitures may be applied as credits to remaining employee accounts or used to offset future employer contributions, depending on the pension plan.
Franchise: A license may be granted by a business or company allowing a designee to sell and market its products or services in a fixed geographic area. Usually consummated with an initial cash requirement, the agreement may offer consultation, financing, promotional assistance, or other stated benefits on an arranged percentage of sales basis.
Fringe Benefits: Fringe benefits are opportunities and services offered beyond wages or salary in compensation for employment. They are not generally taxable to the employee, but they may have tax benefits to the employer. The employer contribution may be full payment, partial payment, or merely providing the opportunity for employee involvement. Some common fringe benefits may include paid holidays, sick days, paid vacation days, insurance coverage, or retirement plans. Other less common benefits are a company car, an expense account, and stock options. Fringe benefits are important in attracting and retaining key employees.
Front-End Load: This sales fee (load) is paid up-front by investors at the time they purchase an investment. The front-end load is deducted from the investment amount, thus lowering the size of the investment.
Futures: A future refers to an agreement to buy or sell a specific amount of a commodity or financial instrument at a set price on a specific future date.
General Ledger: The general ledger contains all the financial accounts and statements of a business, including its debits, credits, and balances.
General Partner: A general partner is presumed to be the authorized agent of the partnership and of all other partners for all purposes within the scope and objectives of the business. The term general partner refers to all the members of a general partnership, as well as all general partners of a limited partnership.
Gift: A gift is a voluntary transfer of assets or property from the transferor to the transferee with no compensation. The transferor cannot retain any incidence of ownership (e.g., control, possession, enjoyment, right to income, or power to designate persons who will receive benefits of ownership) after relinquishing control in the transferred gift.
Gift Tax: This tax is levied by the federal government, and some states, on assets transferred from one person to another. The tax rate increases with the value of the gift. The donor pays the tax, not the recipient.
Golden Boot: The golden boot refers to the offering of lucrative financial incentives or an extension of benefits usually to persuade an older employee to exercise the option for “early retirement.” This voluntary election by an employee helps avoid any conflict with age discrimination codes.
Golden Handcuffs: Additional benefits given to a valued and productive employee as an inducement to remain with the company are known as golden handcuffs.
Golden Parachute: A golden parachute refers to a benefits package secured by top executives if a layoff occurs due to a corporate buyout or takeover.
Government Bond: A government bond is a debt security issued by the US government. Two common types are savings bonds and marketable securities; both tend to have low default risk. Government savings bonds are not traded on any exchange; therefore, they are immune to market fluctuation. In contrast, “marketable” U.S. government securities, such as U.S. Treasury bills, Treasury notes, Treasury bonds, and Treasury Inflation-Protection Securities (TIPS), are commonly traded.
Grace Period: The grace period is the period of time after the due date of a payment during which the overdue payment may be made without penalty or lapse in contractual obligations.
Gross Estate: A person’s gross estate at the time of death is the total dollar value of his or her assets before taxes and other debts.
Gross Monthly Income: Gross monthly income is the total monthly income from all sources, before taxes and other expenses.
Group Life Insurance: This life insurance policy insures a group of people. Group life insurance is often provided by employers as an employee benefit, or by a professional association for its members.
Guardian: A guardian is an individual who has been given legal responsibility for a minor child or a legally incapacitated adult.
Health Savings Account (HSA): Commonly called HSAs, health savings accounts offer individuals covered by high deductible health plans (HDHPs) tax-favored opportunities to save for medical expenses.
Highly Compensated Employee (HCE): For benefit plan purposes, a highly compensated employee receives compensation in the top 20% of all employees, is a 5% owner of the business, and exceeds certain annual compensation levels. This category is used in performing nondiscrimination tests.
Home Equity: Home equity refers to the difference between a property’s current market value and the sum of all claims against it. For example, a homeowner with a house currently valued at $200,000, and carrying a $150,000 mortgage, has $50,000 in equity.
Hope Credit: This federal tax credit gives families a tuition credit per student per year for the first two years of post-secondary education.
Household Income: Household income is the combined income of all household members from all sources, including wages, commissions, bonuses, Social Security and other retirement benefits, unemployment compensation, disability, interest, and dividends.
Housing Ratio: Also called the front-end ratio or payment-to-income ratio, this ratio compares the monthly housing payment to total monthly income.
Income: Income is defined as the amount received from all sources, including wages, commissions, bonuses, Social Security and other retirement benefits, unemployment compensation, disability, interest, and dividends.
Index: An index is a hypothetical portfolio of securities that represents a particular market or portion of it. Indexes are used to measure the amount of change in a particular security by comparing it to the change of similar companies. Some well-known indexes are the New York Stock Exchange Index (NYSE), the American Stock Exchange Index (AMEX), the Standard & Poor’s 500 Index (S&P 500), the Russell 2000 Index, and the Value Line Index.
Individual Retirement Account (IRA): An IRA is a tax-deferred retirement savings account that allows individuals to contribute a limited amount per year. A traditional IRA may allow individuals, depending on their incomes and participation in employer-sponsored retirement plans, to deduct part or all of their contributions on their tax returns. Withdrawals made after age 59½ are taxed at the current tax rate. In contrast, Roth IRAs allow individuals to withdraw earnings tax free, provided they have owned the account for five years and are at least age 59½. Contributions are made with after-tax dollars.
Inflation: Inflation is the general rise in the price level of goods and services that occurs when demand increases relative to supply. Inflation is usually measured by the Consumer Price Index (CPI) and the Producer Price Index. As a result of inflation, the purchasing power of the dollar decreases. For example, if inflation occurs at 3% annually, $100 in one year would be worth only $97 in the next.
Initial Public Offering (IPO): IPO refers to a company’s first public offering of stock. Often, companies go public when their need for cash exceeds the amount private investors, such as venture capitalists, are willing or able to provide. Investment banks buy shares and then offer them to the public at an offering price. As the stock is traded, the market price may be more or less than the offering price.
Insufficient Funds: When a bank account does not contain enough money to cover a specific check, it is said to have insufficient funds.
Insurability: Insurability is defined as the ability of an insurance applicant to be accepted by an insurer, based on health, occupation, lifestyle, and finances.
Insurable Interest: Insurable interest refers to a potential beneficiary who has a vested financial interest in the life of another person and who might suffer loss upon their disability or death.
Insured: An insured is an individual who is covered by an insurance policy.
Intangible Asset: Intangible assets are nonphysical resources that provide gainful advantages in the marketplace. Copyrights, software, logos, patents, goodwill, and other intangible factors afford name recognition for products and services. They are all examples of intangible assets that may provide significant value to a business operation.
Integrated Plan: An employee pension plan may be included for benefit calculations with Federal Insurance Contribution Act (FICA) benefits, also known as Social Security, or with Old-Age, Survivorship, and Disability Insurance (OASDI) contributions.
Intellectual Capital: Intellectual capital is a representation of the financial value that human innovations, inventions, and intelligence bring to a business enterprise.
Interest: Interest is the cost of borrowed money. It may be the payment you receive from an investment, such as a bond, or the amount you pay for a loan, which is generally a percentage of the total amount borrowed. For example, if you take out a $5,000 loan for a year at 9% interest, the cost of taking the loan would be 9% of the total amount borrowed—$450. Also, interest can refer to a right or share in an asset or property.
Interest Rate: The cost of borrowed money expressed as a percentage for a given period of time, usually one year, is an interest rate. Interest rates are considered by many to be key economic indicators. The Federal Reserve (The Fed) regulates interest rates. The Fed may lower interest rates—making borrowing money less expensive—in an effort to stimulate growth in the economy, or it may raise them—making borrowing money more expensive—in an effort to slow economic growth.
Internal Rate of Return (IRR): The theorem of internal rate of return is, in effect, compounding interest in reverse, or discounting. In contemplating a current investment with a proposed investment, IRR is a most efficient evaluation. The rate of return on a proposed investment should be equal to the present value of all future benefits, including revenues, as well as the gross costs associated with the (current) property investment. IRR is important in planning capital outlays, as well as in evaluating rental real estate investments.
Investment Objective: An investment objective is a financial goal of an investment. Different investment vehicles have different objectives. For example, a fixed-income fund may have outlined in its prospectus an objective of providing current income by investing in fixed-income securities, whereas a capital growth fund looks to provide long-term capital gains and high potential future income. Individual investors also have personal investment objectives, based on their own time horizons and tolerance for risk.
Irrevocable Trust: This trust cannot be altered, stopped, or canceled without the permission of the beneficiary, or trustee. The grantor, who has transferred assets to the trust, gives up all ownership rights to the assets and to the trust. During circumstances where the trustee cannot interpret or carry out his or her specific duties, the court is then asked to make legal determinations.
Joint Tenancy: Also called joint tenancy with right of survivorship, this form of property ownership involves two or more people who own an undivided interest in a property. Upon the death of one joint owner, ownership automatically passes to the surviving joint owner(s) without a court proceeding. Joint tenancy applies to property with a title or other certificate of ownership, such as real estate, mortgages, securities, and bank and brokerage accounts.
Keogh Plan: A Keogh plan is a tax-deferred defined benefit or defined contribution plan that is established by a self-employed individual for him/herself and his/her employees.
Key Employee: A key employee is an employee who possesses valued skills, craft knowledge, or intellectual and organization abilities. He or she is considered crucial to the ongoing operation of the business or company and difficult to replace. Also, the term key employee is used in applying top heavy tests for qualified referral plans under the Internal Revenue Code (IRC) Section 416.
Key Person Insurance: Companies often have employees who possess craft or scientific knowledge, leadership, and valued skills. Hiring a replacement might alter business planning, profit, stability, and management. To address the financial aspect of replacing a key employee, the corporation becomes owner and beneficiary on an insurance policy that reimburses the company for untimely loss of a key employee.
Lapsed Policy: A lapsed policy is one that is canceled for nonpayment of premiums. The term also refers to a policy canceled before it has cash or surrender value.
Lease: A lease is a contract granting the use of real estate or a fixed asset, such as a vehicle or equipment, for a specific period in exchange for periodic payments.
Leaseback (sale and leaseback): A leaseback is an arrangement where a seller of an asset leases back that same asset from the purchaser. For example, a business owner may sell all or part of the property from which the business operates to raise cash for business operations. The business owner then may agree to lease the sold property for a term of years from the new owner. The leaseback offers security to the new owner because the seller becomes the tenant with business operations remaining at its present location on a potentially long-term basis.
Lease-Purchase Agreement: A lease-purchase agreement may state that a portion of each lease payment applies to a future purchase of the leased property or that the leaseholder possesses a right to buy the property during or at the conclusion of the lease term.
Lender: A lender is one who parts with something of value for specific compensation, for a stated or open duration of time.
Letters of Credit (by a Bank): The bank, as an issuer, may substitute its creditworthiness for a recipient customer and buyer in a single or series of sales transactions through a letter of credit. The seller has little risk in default of payment by the buyer because of the letter of credit. A significant variation on a letter of credit is a letter guaranteeing performance for completion of a contract.
Level Premium Term Insurance: Level premium term insurance refers to a life insurance policy for which premiums remain the same from year to year for a specified period.
Liability: A liability is something for which one is held liable, such as an obligation, responsibility, or debt. Business liabilities may include loans, mortgages, accounts payable, deferred revenues, and accrued expenses. Current liabilities are debts payable within one year, whereas long-term liabilities are payable over a longer period.
Life Annuity: This type of annuity provides income for life.
Life Cycle: The life cycle is the time period that measures from the beginning to the conclusion of an individual, product, or business. A corporate business entity frequently has a life cycle beyond its founder or current owners; therefore, small family businesses may compute life cycles in generational terms to plan an eventual transfer or liquidation.
Life Expectancy: Life expectancy refers to the average number of years individuals of a given age are expected to live, according to a mortality table based on factors such as gender, age, heredity, and health characteristics.
Life Insurance: Life insurance is a contract wherein a premium is paid to an insurance company in return for the insurance company’s promise to pay the beneficiary a defined amount upon the death of the insured. There are various types of life insurance available, including term life, whole life, and universal life.
Lifetime Learning Credit: The lifetime learning credit is a federal credit toward qualified higher education expenses, including tuition and/or other educational expenses, incurred to learn or improve job skills. This credit applies to undergraduate study, graduate school, and professional education pursuits.
Limited Liability Corporation (LLC): In contrast to the unlimited liability inherent in proprietorships as a form of business ownership, a limited liability corporation provides limited liability to each shareholder to the extent of invested capital.
Limited Partnership: A limited partnership is a financial affiliation, consisting of a general partner and limited partners, that invests in projects such as real estate, oil and gas, equipment, movies, etc. The general partner, in return for fees and a percentage of ownership, manages operations and is ultimately liable for any debt. Limited partners, who may receive income, capital gains, and tax benefits in return for their investment, have little involvement in management. They also have limited liability, which limits their maximum loss to the amount they invested.
Liquid Assets: Cash and short-term investment vehicles (e.g., commercial paper, checking accounts, account receivables, Treasury bills) are cash equivalents or liquid assets. Cash and cash equivalents maintain existing market values through the conversion period.
Liquidity: Liquidity refers to the ability to quickly and easily convert assets into cash without incurring a significant loss.
Liquidity Ratio: Liquidity ratios (cash asset ratio, current ratio, quick ratio) quantify a company’s ability to discharge debt obligations maturing within one year.
Living Trust: Also called an inter vivos trust, a living trust is established by a living person and allows that person to control the assets he or she contributes to the trust.
Living Will: Also called a health care proxy, a living will is a written document that allows an individual to designate a representative to make medical decisions in the event that he or she becomes incapacitated due to accident or illness. Often, a living will identifies specific medical treatments a person does or does not wish to have in the event life-sustaining treatment is necessary.
Locking-In: Locking-in refers to the process of assuring that an interest rate, such as on a mortgage, CD (certificate of deposit), or fixed-rate bond, has been set. In the case of a mortgage, there may be a fee for locking-in the rate.
Long-Term Care Insurance: Long-term care insurance covers the cost of long-term health care expenses, such as nursing home care, in-home assistance, assisted living, or adult day care.
Management Buyout: Management buyout occurs when managers or executives of a company purchase controlling interest in their company from existing shareholders. If management has existing funding sources to pay a premium over the existing fair market value of outstanding shares, the company becomes a private corporation without a majority of shares trading on the market. Motivation for management buyout may include preservation of present management positions, privacy in management operations, or potentially substantial capital gain with future expansion and anticipated profits.
Management Fee: A management fee is a charge against an investor’s assets for the fund manager’s services in overseeing the portfolio. The charge is calculated as a fixed percentage of the fund’s asset value, usually 1% or less, and terms of the fee should be disclosed in the fund’s prospectus.
Mandatory Employee Contribution: While participation in an employee benefit plan is voluntary, some plans, generally some defined benefit plans, require mandatory employee contributions in order to accrue benefits under the plan.
Market Risk: Also called systematic risk, market risk is the portion of a security’s risk common to all securities in the same asset class, and it cannot be eliminated through diversification. For example, a market risk associated with investment in stocks is the general tendency of share prices to decrease during an economic downturn.
Market Timing: An investor who practices market timing makes buy-sell decisions by attempting to predict market trends, such as the direction of stock prices, the direction of interest rates, or the condition of the economy. Unlike investors who buy and hold securities with the hope of substantial gains over an extended period of time, market-timing investors actively buy and sell securities, hoping to turn quick profits on short-term price fluctuations.
Maturity: The date of maturity is the date on which a debt becomes due for payment. For example, if a bond has a face value of $1,000 and a 30-year term of maturity, the bondholder should receive $1,000 in 30 years.
Medicaid: Medicaid is a federal program that covers medical expenses for individuals who are financially unable to afford health care.
Medicare: Medicare is a federal program that covers health care for individuals age 65 and over, or individuals with certain disabilities.
Medicare Part D: Medicare Part D is the prescription drug benefit program available to Medicare recipients.
Minimum Participation Requirements: Employer-sponsored retirement plans usually require minimum participation requirements. Generally, a participant must be a full-time employee, 21 years of age, and a one-year tenured employee in order to receive benefits. Employee welfare benefit plans may provide a separate criterion for employee participation.
Monthly Housing Expenses: Monthly housing expenses include the sum of the principal, interest, and taxes a borrower pays towards housing on a monthly basis. This figure is used to determine affordability in relation to total income.
Mortality Table: A mortality table is a statistical table showing the death rate of people at each age, usually expressed as the number of deaths per thousand.
Municipal Bond: This tax-exempt bond may be issued by a state government or agency, or by a town, county, or other political subdivision or district. Interest payments are generally not subject to federal taxes, and they may be exempt from state and local taxes if the bondholder is a resident of the state where the bond was issued.
National Association of Securities Dealers Automated Quotations (NASDAQ): NASDAQ is a computerized system that facilitates trading and provides current price quotes for the most actively traded over-the-counter (OTC) securities.
Net Income: Subtracting total costs, expenses, and taxes from total revenue results in the net income.
Net Worth: The amount of asset value exceeding total liabilities is referred to as net worth.
New York Stock Exchange (NYSE): Also called The Big Board and The Exchange, the NYSE is the oldest and largest stock exchange in the US, listing the country’s largest corporations. Memberships are sold to brokers, who buy and sell stocks on the floor of the exchange.
Noncontributory Retirement Plan: A noncontributory retirement plan is a pension plan that is funded only with employer contributions, requiring no employee contributions.
Nonforfeitable: Upon vesting, a benefit of an employee benefit plan becomes nonforfeitable and, thus, payable upon any occurrence listed in the employee contract. Some benefits may be conferred immediately or on a deferred basis.
Nonqualified Plan: A nonqualified plan is a retirement or employee benefit plan that does not meet the requirements of Section 401(a) under the Internal Revenue Code and, therefore, is not eligible for favorable tax treatment.
Notary Public: A notary public is an officer of the public that can authenticate signatories on documents and take depositions or oaths. A state or jurisdiction may authorize an applicant to certify specific documents usually for a term of years. Banks, insurance agencies, legal offices, and government buildings often have persons who are notaries public on staff.
Offering Price: In terms of investing, the offering price is the per-share price at which a stock or mutual fund is offered to the public. Companies going public for the first time will issue shares of stock at an offering price, as will companies who are issuing new shares. The market price, a security’s most recent price, may be more or less than the offering price. With no-load funds (mutual funds that do not charge sales commissions, the offering price is the same as the initial market price. With load funds (mutual funds that charge sales commissions), a sales charge is added to the market price to reach the offering price.
Old-Age, Survivors, and Disability Insurance (OASDI): OASDI, also known as Social Security, is a comprehensive federal benefits program that includes retirement benefits, disability income, veteran’s pension, public housing, and even the food stamp program. The Social Security tax, which is levied on all self-employed and employed workers, is used to fund the program.
Option: An option gives the buyer the right, but not the obligation, to buy or sell a security at a set price on or before a given date. Investors, not companies, issue options. Investors who purchase “call” options bet the security will be worth more than the price set by the option (the strike price), plus the price they paid for the option itself. Buyers of “put” options bet the security’s price will go down below the price set by the option.
*Options are not suitable for all investors, they involve significant risks and investors may sustain substantial losses in a short period.
Ordinary Income: Income is defined as ordinary if it is derived from normal business activities, such as wages and salary, as distinguished from capital gains earned from the sale of assets.
Over-The-Counter (OTC): A security is considered over-the-counter if it traded in some other context than on a formal exchange, such as the NYSE, TXS, AMEX, etc. Also, OTC refers to a market where transactions are conducted among security dealers over a network of telephone and computer lines, rather than on the floor of an exchange.
Paid-Up Additions: Paid-up additions refer to additional life insurance coverage that is typically purchased with policy dividends. Paid-up additions may have a cash value component in addition to a death benefit.
Par Value: The par value refers to the face value of a stock or bond when issued. The par value may bear little relationship to a security’s current market value.
Partnership: A partnership is a contractual association between two or more individuals who share in the management and profitability of a business venture. If the agreement specifically contracts for only an investment obligation, the investor is a limited partner. If responsibilities include management or supervision of operations, the holder of that responsibility is a general partner. Partnerships employ general partners, while limited partners associate through securities transactions.
Past Due: Most lenders allow a specified period after a due date during which payment can be made without penalty. Any amount owed that is not received by the end of this grace period is considered past due. When an account is past due, showing a balance that contains past due funds, the creditor may assess a late fee, or consider the account delinquent and report it to a credit reporting agency.
Patent: A patent is an official license granted by the Patent Office to issue exclusive right to an individual or business, for a specified period of time, for the production or sale of a specific invention, process, or design. The financial value of a patent is the future monetary returns from its economic worth.
Pension: A pension is an employer-provided qualified retirement plan. Examples of pension plans include defined benefit plans, profit sharing plans, bonus plans, employee stock ownership plans (ESOPs), thrift plans, target benefit plans, and money purchase plans.
Permanent Life Insurance: Permanent life insurance is a life insurance policy that does not expire and combines a death benefit with a savings portion. This saving portion can build cash value, which can be borrowed against or withdrawn for cash needs. The two main types of permanent life policies are whole life and universal life.
PITI: PITI refers to the components of a mortgage payment: principal, interest, property taxes, and insurance. Principal is the money used to pay down the balance of the loan, interest is the charge you pay for the opportunity to borrow the money, taxes are the property taxes you pay as a homeowner, and insurance refers to both your property insurance and your private mortgage insurance. Residential mortgage lenders usually require evidence that homeowners have property and casualty insurance if they do not fund the insurance as part of their monthly payment.
Plan Administrator: As designated in the insurance or retirement documents, plan administrators of employee benefit programs maintain government regulations and procedures, and confirm that all participating employees receive annual reports.
Plan Sponsor: A plan sponsor refers to an employer who establishes and perpetuates a qualified employee benefit pension plan. Although ultimately responsible for plan administration, plan sponsors often use outside consultants, corporations, government agencies, or labor organizations to confirm the implementation of Internal Revenue Code regulations and guidelines in plan administration.
Points: In terms of real estate mortgages, points quantify the initial fee charged by the lender, with each point being equal to 1% of the total principal of the loan. For example, on a $100,000 mortgage, four points would cost a borrower $4,000.
Policy: A policy is a legal written document that states the terms of an insurance contract.
Policy Dividend: A policy dividend refers to a refund of part of a life insurance premium that reflects the difference between the premium charged and the insurer’s actual cost of providing coverage, if lower than previously anticipated.
Policy Exclusion: A policy exclusion is an item specifically not covered by an insurance policy.
Policy Loan: A policy loan is a loan made by an insurance company, secured by the cash surrender value of a life insurance policy.
Policy Reserves: Policy reserves refer to the funds that a state requires an insurer to hold in order to cover all policy obligations.
Policy Rider: A policy rider is a provision that may be added to an insurance policy, at an additional cost, to increase or limit the benefits the policy otherwise provides.
Policyholder: The policyholder is the person or entity owning an insurance policy. The policyholder is usually the insured but may also be a spouse, business partner, partnership, or corporation.
Portability: Portability refers to the ability of an employee to keep benefits after employment ceases. With a mobile workforce in which employees move from one company to another, portability of employee benefits, especially insurance and retirement plans, is important. Concerns about pre-existing conditions or insurability, as well as vesting schedules of qualified pension plans, are critical factors to an employee who entertains a more lucrative employment opportunity elsewhere.
Portfolio: A portfolio is the combined security holdings of an individual investor or mutual fund. The objective of holding investments in a portfolio is to reduce risk through diversification.
Power of Attorney: This legal document, drafted in accordance with state law, grants a person full or limited powers to perform specified acts or make decisions for another person in the event the grantor is unable to act on his or her own. The power terminates upon the disability of the conveyor, unless it is a “durable” power.
Preferred Stock: Preferred stock is a security representing partial ownership, also called equity, in a corporation. Preferred stock does not confer voting rights, as does common stock, but takes precedence in claims against the company’s profits and assets.
Premature or Early Distributions: The Internal Revenue Code (IRC) levies penalties for certain distributions before the age of 59½ from qualified retirement plans. The IRC, however, provides some specific exceptions that qualify for premature or early distributions without penalty.
Premium: A premium is a periodic payment for an insurance policy.
Premium Loan: A premium loan is a loan made from an insurance policy to cover the premiums.
Prepayment: Prepayment is the ability to repay installment credit before it is due or to pay off a loan before its maturity date. Some loans, particularly mortgages, include prepayment clauses allowing you to repay them in advance of the regular schedule without a penalty.
Prepayment Penalty: On a loan without a prepayment clause, the fee a borrower pays for repaying all or part of the loan before it is due is a prepayment penalty.
Present Value: The present value is the amount a future sum of money is worth today given a specified rate of return. For example, an investment that earns 10% annually and can be redeemed for $1,000 in five years would have a present value of $620. In other words, $620 today will be worth $1,000 in five years at a 10% rate of return.
Price/Earnings Ratio (P/E): Also called the “multiple,” the P/E ratio is calculated as a stock’s price divided by its earnings per share. This ratio gives investors an idea of how much they are paying for a company’s current earnings. For example, a stock selling for $30 a share with earnings per share of $2 has a P/E ratio of 15. In other words, the investor paid $15 for each $1 of earnings. Faster growing, or higher risk, companies generally have higher P/E ratios than slower growing, or less risky, firms.
Primary Beneficiary: The primary beneficiary is the named beneficiary who receives the proceeds of an insurance policy or annuity contract when the insured or annuitant dies.
Prime Rate: The prime rate is a standardized short-term borrowing rate established by the Federal Reserve Board. Most banks use the prime rate and base a loan on the creditworthiness and collateral of bank customers (e.g., prime plus 1% or prime plus 2%).
Principal: The principal can refer to the original amount of money invested in a security, the face value of a bond, or the remaining amount owed on a loan, separate from interest. The term principal can also refer to the owner of a private company or the main party to a financial transaction.
Private Letter Ruling: Upon request, the Internal Revenue Service (IRS) may issue an interpretation of a tax situation in light of a particular individual’s circumstances with a private letter ruling judgment. Private letter rulings are nonbinding and not to be seen as a precedent for individuals with seemingly similar circumstances.
Private Mortgage Insurance (PMI): Private mortgage insurance protects the lender in case of default. Lenders typically require borrowers to purchase PMI when the loan-to-value ratio is greater than 80%.
Profit and Loss Statement: Also known as an income statement, the profit and loss statement summarizes the revenues, costs, and expenses incurred during a specific time period. These records show the ability of a company to generate profit by increasing revenue and reducing costs.
Profit-Sharing Plan: A profit-sharing plan is a defined contribution plan in which employers allow employees to share in company profits. The employer’s contribution, a percentage of profits generally based on an employee’s earnings, may vary from year to year with no minimum required. Funds generally accumulate on a tax-deferred basis until the employee leaves the company or retires. An employee’s retirement benefit depends on the amount in his or her account at retirement.
Prohibited Transaction: In terms of Individual Retirement Accounts (IRAs), a prohibited transaction is one forbidden by the Internal Revenue Code. Examples include borrowing against an IRA, using an IRA as collateral, and investing IRA funds in collectibles.
Property: Anything that has a value and is owned is termed property. It may be tangible or intangible (incorporeal), personal or public, or common.
Prospectus: A prospectus is an official document that must be provided (according to Securities and Exchange Commission (SEC) regulations) by the issuer to potential purchasers of a new securities issue. The reports within a prospectus provide information on the financial well being of the issuer and the specifics of the issue itself.
Qualified Plan: A qualified plan is a retirement plan that meets the requirements of Section 401(a) of the Internal Revenue Code, one that is, therefore, eligible for tax-favored treatment.
Quotation: The quotation refers to the highest bid and lowest offer (asked) price currently available for a security. For example, an investor requesting a price on XYZ Company might be quoted “40 to 40½.” This means that the best bid price (the highest price any buyer will pay) is currently $40 a share and the best offer price (the lowest price any seller will accept) is $40.50.
Rate of Return: The rate of return is the gain or loss of an investment over a specified period of time, expressed as a percentage increase over the original investment cost. For stocks, the rate of return is the dividend and capital appreciation. The yield is the rate of return on fixed-income securities. Analysts use the return on equity to compare the rates of return on differing investment vehicles. Accountants use internal rates of return when reviewing investment contracts, budgets, or investment opportunities.
Rated Policy: Also called an “extra risk” policy, a rated policy covers a higher risk for a higher-than-usual premium. For example, an insured person with a dangerous occupation or impaired health condition often has a “rated” policy that costs more to protect the insurer from added risk.
Real Estate Investment Trust (REIT): A REIT is a security that sells like a stock on the major exchanges and invests primarily in real estate through properties and mortgages.
Recapitalization: Recapitalization occurs when a company changes its capital structure by exchanging preferred stock for bonds to reduce taxes or to avoid or emerge from a bankruptcy. Often, new debt (e.g., reorganization bonds) is issued to replace existing debt.
Redemption: Redemption is the repayment of a debt security or preferred stock, either for par value at maturity or for a premium before maturity.
Required Minimum Distribution (RMD): The RMD is the legally required minimum annual amount that must be distributed from a retirement account to an IRA holder or qualified plan participant. RMDs, which are calculated by dividing the year-end account balance by the applicable distribution period or life expectancy, must begin by April 1 of the year following that during which the individual reaches age 70½.
Revenue: Revenue is the amount of money that a company receives during a given period from the sale of goods and services, before expenses and taxes.
Reverse Mortgage: This type of loan is used to turn home equity into cash. The lender makes regular tax-free payments to the homeowner (borrower), which are usually used to fund retirement needs.
Risk: Risk refers to the quantifiable likelihood of loss or less-than-expected returns. For example, U.S. savings bonds, which are backed by the full faith and credit of the federal government, are considered low risk, where as junk bonds, which are issued by companies with questionable credit, are generally considered high risk. Historic or average returns are often used to measure risk.
Risk Tolerance: Risk tolerance is the measurement of an investor’s willingness or ability to handle declines in the value of his or her investment portfolio. For many investors, risk tolerance is an important consideration when developing a diversification strategy for a portfolio.
Rollover: A rollover is a tax-free transfer of funds from one retirement plan to another.
Roth IRA: A Roth IRA is a type of Individual Retirement Account (IRA) in which contributions are nondeductible. Earnings grow tax deferred, and distributions are tax free, provided you have owned the account for five years and are at least age 59½.
Roth IRA Conversion: This refers to the process of converting an existing IRA into a Roth IRA. Roth conversions have specific income eligibility requirements (through 2009) and income tax consequences.
S Corporation (Subchapter S of the Code): An S corporation is an incorporated business that is a “pass-through” entity for tax purposes.
Salary Reduction Plan: A salary reduction plan is any qualified retirement program in which employees make tax advantaged contributions on a pre-tax basis.
Savings Account: A savings account is an account with a bank or savings and loan company that pays interest on money deposited.
Section 162 (Executive Bonus) Plan: Internal Revenue Code Section 162 provides employers a deduction for trade or business expenses. Through this executive bonus plan, the employee owns a life insurance policy for which the employer pays premiums. Premiums are taxable to the employee.
Secured Card: A secured card is a credit card guaranteed by a deposit in a savings account or certificate of deposit (CD). The credit line usually equals the deposit. If a cardholder defaults on payments, the issuer may apply the deposit toward the balance owed.
Securities and Exchange Commission (SEC): The SEC is the primary federal regulatory agency for the securities industry, whose responsibility is to promote full public disclosure and protect investors against fraudulent and manipulative practices. In addition to regulation and protection, it also monitors corporate takeovers in the US. The SEC is composed of five commissioners appointed by the president and approved by the Senate.
Security Deposit: A security deposit is a type of payment usually required of an individual wishing to secure a personal loan, a rental property, or a later purchase.
Self-Directed IRA (SDA): A self-directed IRA is an individual retirement arrangement that allows a holder a wider choice of investments, including stocks, bonds, mutual funds, and money market funds. SDAs may be opened at institutions with trust powers, state FDIC-insured institutions, federal credit unions, and federally chartered savings banks or savings and loans.
Self-Employment Tax: The self-employment tax is a Social Security tax imposed on self-employed individuals. The self employed need to file a special “Computation of Social Security Self-Employment Tax” (Schedule SE) with their annual Individual Income Tax Return Form 1040.
Seller Financing: Seller financing is a “creative financing” technique in which an owner sells property, usually real estate, directly to a buyer. This technique is often used if the market interest rates are too high for the buyer and the seller does not require principal from the sale. The title or deed transfers only at full payment of the loan, and any foreclosure results in the property reverting to the seller. Seller financing was very popular during the 1980s when real estate values escalated. Buyers used seller financing to arrange “no money down” purchases of real estate.
Settlement Costs: Also called closing costs, these are the expenses involved in transferring real estate to a buyer from a seller. Settlement costs typically include fees or charges for loan origination, discount points, appraisal, property survey, title search, title insurance, deed filing, credit reports, taxes, and legal services. Closing costs do not include points and the cost of private mortgage insurance (PMI).
Share: A share is a certificate representing one unit of ownership in a corporation, mutual fund, or limited partnership.
SIMPLE (Savings Incentive Match Plan for Employees) Plan: A SIMPLE Plan is a retirement plan, which can be set up as a 401(k) or IRA, that allows employee pre-tax contributions and mandatory employer matching contributions. All contributions are immediately vested in a SIMPLE plan.
Simplified Employee Pension Plan (SEP): A SEP is a retirement plan allowing both an employer and an employee to contribute to the employee’s Individual Retirement Account (IRA) on a discretionary basis, subject to special rules on eligibility and contributions.
Situs: The term situs refers to the location or position of a property. For intangible property, such as debt, the situs is generally the jurisdiction in which the debt obligation was issued.
Small Business Association (SBA): The SBA is a federal government organization that assists small businesses in providing programs and opportunities to hasten their potential growth and success.
Smart Card: Unlike a debit, charge, or AMT card, the smart card requires a prepayment of a specified amount for the future purchase of goods, services, or admissions. Smart card holders may use the card without debiting a checking account or adding balances to a charge card. Banks, hotels, recreational facilities, and other businesses provide smart card privileges to their customers and guests.
Social Security Tax: Since inception, the Social Security system has been funded by a Social Security Tax, which is paid by both employers and employees. These levies are deposited in trust funds for investment. At various optional retirement ages, employees may qualify for fixed-income payments based on marital status, quarters employed, and wages earned. The self-employed worker has a different contribution schedule, but he or she has equal treatment on all distributions at retirement or disability.
Split-Dollar Life Insurance: A split-dollar life insurance agreement is a contractual arrangement between employer and employee sharing obligations and benefits of a life insurance policy. The shared arrangement may govern the payment of premiums, death proceeds, cash values, dividends, or ownership.
Spousal IRA: A spousal IRA is an individual retirement arrangement for a nonworking spouse funded with contributions from the working spouse. The Internal Revenue Service sets a limit on the combined amount a married couple may contribute to a traditional and spousal IRA.
Standard & Poor’s 500 Index (S&P 500): The S&P 500 is an index of 500 of the most widely held common stocks on the New York Stock Exchange (NYSE). It is used as a measure to indicate the overall health of the US stock market.
Stock: A stock is a security representing partial ownership, also called equity, in a corporation. Each stock share represents a proportionate claim against the company’s profits and assets. Common stock entitles shareholders to participate in stockholder meetings and to vote for the board of directors. Preferred stock does not confer voting rights, but it takes precedence in claims against profits and assets.
Stock Certificate: This document substantiates the legal ownership of shares of stock in a corporation. Stock certificates are made out to the shareholder or the brokerage firm, and they identify the issuer, the number of shares, the par value, and the stock class. A stock certificate must be endorsed by the shareholder to sell the shares.
Stock Market: The stock market is a general term referring to the organized trading of securities in the various market exchanges and the over the counter (OTC) market.
Stock Purchase Plan: A stock purchase plan is a mechanism for employees to purchase company stock. Increasingly, companies are encouraging employee participation in ownership opportunities. Employees may purchase company stock in Employee Stock Ownership Plans (ESOPs), Dividend Reinvestment Plans (DRIPs), stock options, automatic investment plans, and other creative plans. In theory and practice, employees have the potential of becoming majority stockholders through participation in a stock purchase plan, assuming a viable role in corporate planning.
Stock Split: A stock split is a distribution of additional shares to each stockholder in proportion to the shares the individual already owns. A stock split has no immediate effect on a stockholder’s equity. For example, if a stock splits 2-for-1, a shareholder who owns one share with a $100 par value before the split, would own two shares, each with a $50 par value, after the split.
Straight-Term Mortgage: A straight-term mortgage is a mortgage in which the borrowed amount is due at the conclusion of a term, or maturity date.
Suitability: The appropriateness of a particular security for a client, based on the client’s financial situation, level of risk tolerance, and investment objectives.
Survivorship Life Insurance: Also called second-to-die or last-to-die insurance, survivorship life insurance covers the lives of two people and pays benefits when the second person dies. It is often used by couples to fund estate tax liability.
Tangible Asset: A tangible asset refers to anything that has a value and physically exists. Land, machines, equipment, automobiles, and even currencies are examples of tangible assets. On some financial statements, however, a nonmaterial item may often be listed as a tangible asset, such as, a payment to be made on products or goods already delivered.
Tax Credit: A tax credit reduces a taxpayer’s taxable amount due dollar-for-dollar. A $1,000 tax credit saves the taxpayer $1,000 in taxes. In many cases, tax credits offer incentive to support social change (e.g., renovation of historical property, jobs for the disadvantaged, research and development, and constructing low-income housing).
Tax Deduction: A tax deduction reduces tax liability by the percentage of the marginal tax bracket for the taxpayer. For example, a $1,000 tax deduction for a taxpayer in the 25% marginal tax bracket saves only $250 in tax (0.25 x $1,000). Allowable deductions include charitable contributions, state and local taxes, and some interest expense.
Tax Lien: A tax lien is a claim against property for unpaid taxes (including city, county, school, estate, income, payroll, property, or sales taxes). A tax lien, which lasts until the claim is satisfied or a statute of limitations takes effect, may make other creditors aware of a delinquent’s tax liability.
Tax-Exempt Bond: A tax-exempt bond is a bond issued by a municipal, county, or state government whose interest payments are not subject to tax from federal, state, or local authorities.
Tax-Sheltered Annuity: This type of annuity, often called a TSA, allows employees of government and nonprofit organizations to make pretax contributions to a retirement plan, up to a predefined annual limit.
Taxable Income: Taxable income is a taxpayer’s gross income less all allowable adjustments. Incorporated businesses derive net income before taxes after deducting total costs and expenses from gross sales.
Tenants by the Entirety: Spouses commonly use this form of ownership. Each spouse theoretically owns 100% of the property, but complete ownership will pass at the first death to the surviving spouse without tax and probate.
Tenants in Common: Two or more owners having undivided ownership (not necessarily equal) in property are referred to as tenants in common. This form of ownership does not have a “right of survivorship” in the event that one owner dies.
Term Certain: In terms of an annuity contract, the term certain is a payout option that provides income for a specified period of time.
Term Insurance: Term insurance is a type of life insurance that pays benefits only when the insured dies within a specific period. If the insured lives beyond the end of the period, no benefits are payable. Term insurance has no cash value, and premiums traditionally rise with age.
Time Horizon: The time horizon is the projected length of time for which an investor plans to hold investments.
Title: A title is a document that identifies legal ownership of property, and it is used to transfer ownership from a seller to a buyer.
Title Insurance: Title insurance is a form of insurance that protects against loss due to a defect in a real estate title, such as an ownership dispute or a lien against property. A mortgage lender generally stipulates that a borrower must purchase a title insurance policy.
Title Search: A title search is the inspection of city, town, or county records to determine the legal owner of real estate property, as well as any applicable liens, mortgages, or future interests.
Total Disability: For insurance purposes, this classification indicates that a worker cannot complete most job requirements based on a physical or mental disability. In some cases, total disability is immediate subsequent to the loss of sight or limbs. In other situations, an “elimination” period provides a passage of time to confirm the disability status before an individual receives benefits. Private disability plans, employer group disability benefits, and Social Security will provide a percentage replacement of lost income for gainfully employed workers who are experiencing a total disability.
Total Return: Total return is defined as the gross annual yield on an investment, including capital appreciation or distributions, interest, dividends, and personal taxes.
Transaction Fee: A transaction fee is a charge for various credit-related activities, such as receiving a cash advance or using an ATM.
Treasuries: Treasuries are negotiated debt obligations that the United States government regularly offers at public auction through the Federal Reserve Bank. Treasuries have varying maturities and yields. Treasury bills have maturities of less than one year, notes less than ten years, and bonds less than 30 years. Issued treasuries may be purchased in the public marketplace and reflect current yields to maturities.
Treasury Bill: Also called a T-bill, a treasury bill is a negotiable debt obligation, which is issued by the federal government and backed by its full faith and credit, has a maturity of one year or less, and is exempt from state and local taxes. Treasury bills have face values ranging from $10,000 to $1 million, and they sell at a discount based on current interest rates.
Triple Net Lease: A triple net lease is a lease in which the lessee assumes the payments of maintenance and upkeep, taxes, utilities, and insurance. The tenant bears the risks associated with these fluctuating expenses.
Trustee: A trustee is an individual or party responsible for managing a trust on behalf of a beneficiary or beneficiaries. Duties often include holding title to property, distributing assets, and overseeing investments and payments.
Underwriting: Underwriting is the process by which an insurance company determines whether, and on what basis, it can assume the risk of a specific life insurance policy. Also, underwriting is the business of investment bankers, who purchase new issues of securities from a company or government and then resell them to the public.
Unemployment: When a previously employed worker is “laid off” or involuntarily “not in gainful employment,” he or she is considered unemployed and possibly eligible for certain state and federal compensation and benefits.
Uniform Gift to Minors Act (UGMA): Also called Uniform Transfer to Minors Act (UTMA) in some states, these laws allow an adult to contribute to a custodial account in a minor’s name without having to establish a trust or name a legal guardian.
Uniform Transfer to Minors Act (UTMA): Also called Uniform Gift to Minors Act (UGMA) in some states, these laws allow an adult to contribute to a custodial account in a minor’s name without having to establish a trust or name a legal guardian.
Universal Life Insurance: Universal life insurance allows the holder to vary the amount and timing of premiums and to change the death benefit, based on the policyholder’s changing needs and circumstances. It is generally considered more flexible than traditional whole life insurance and includes a “cash value” savings feature that may allow certain premium funds the opportunity to earn tax-deferred interest.
Unsecured Debt: This type of debt is not guaranteed by collateral. If the borrower defaults, the issuer has no assets to back up the loan.
Variable Interest Rate: A variable interest rate is one that fluctuates with a measure or an index, such as current money market rates or the lender’s cost of funds. Often, variable interest rate loans have a fixed rate for several years and then become variable. The borrower is usually protected from dramatic increases in the loan rate by a “rate cap.”
Vesting: Vesting is the process leading to a future event at which time money or property held in trust belongs to a person, though it may not be available for distribution until a future date or occurrence. Vesting usually refers to the scheduled confirmation of ownership rights in qualified employee benefit retirement plans.
Volatility: Volatility refers to the relative rate at which the price of a security moves up and down, found by calculating the annualized standard deviation of daily change in price. The more volatile a security or mutual fund, the more it is subject to rapid and extreme price fluctuations relative to the market.
Voluntary Employee Contribution: An employee may be permitted to make voluntary contributions to a retirement plan, usually unmatched by the employer, in excess of mandatory contributions to his or her plan account. Voluntary employee contributions may be deposited on a pre-tax or post-tax basis that is pre-arranged.
Waiver of Premium: This insurance policy rider allows a policyholder to stop making premium payments if the insured suffers a permanent disability. Generally, there is an additional cost for this rider to become part of a policy.
Whole Life Insurance: Whole life insurance provides coverage for the insured’s entire life, provided the policyholder continues to pay the premiums. Premiums generally remain level for the life of the contract. In addition, there is also a cash value component that can be used to help supplement future financial needs.
Withholding: Withholding refers to the process by which an employer deducts a portion of employee wages, usually for income taxes. Employers base the withholding amounts on Form W-4, Employee’s Withholding Allowance Certificate, which employees submit when commencing employment. A Treasury account at a bank is the repository for withholding amounts and is a credit toward future tax liability for the calendar year.
Working Capital: During the business life cycle, working capital or money ensures that the business will be able to operate on a daily basis.
Yield: The yield of an investment is its annual gain or loss, generally expressed as a percent. To determine the yield on a bond, divide the amount of interest received from the bond by the amount paid for the bond. For example, suppose an individual paid $5,000 for a bond. At 5% interest, he/she would earn $250 annually in interest income. The yield, $5,000 divided by $250, would be 5%. Similarly, to determine the yield on stocks, divide the dividend received per share by the amount paid per share.
Yield To Maturity (YTM): The return an investor will receive if a long-term interest-bearing investment, such as a bond, is held until the date it becomes due and payable (maturity date). A calculation to determine the YTM of a bond, for example, would account for the interest rate, the payment schedule, the market value, the face value, and the length of the term.
Zero Coupon Bond: A zero coupon bond is a bond that makes no periodic interest payments, but rather sells at a deep discount from its face value. At the maturity date, the investor will receive the face value of the bond, plus the interest that has accrued over a fixed term.