BullBear Partners

In speaking with many people around me, I found that many are not aware of some of the more commonly used words in finance.

Here is a quick explanation of some popular investment terms to help you better understand investment opportunities and pitfalls.

List of Common Investing Terms

AGENT – This is the individual who manages an account for an investor, such as a stockbroker. An agent’s compensation may be paid as a sales charge or as commissions

BEAR MARKET – A market in which securities prices are declining and investors expect further price decreases. The opposite is a Bull Market.

BOND – A debt obligation issued by an individual, corporation or the government which uses the money raised to finance projects or provide ongoing income.

BONUS SHARES – Shares of stock that are issued in addition to dividends paid out on common shares. The bonus is not taxable until the holder cashes in the securities.

BROKER – A licensed individual who executes buy and sell orders for the general public. This is also known as a market maker.

COMMISSION – A fee paid to an agent or other individual for executing a securities purchase or sale.

CONSUMER PRICE INDEX (CPI) – A measure of inflation that examines changes in the cost of goods and services each month, including food, housing, transportation, health care and recreation. A CPI of 100 in 1982 would now be about 169.

COUPON RATE – The interest rate paid by a bond issuer as expressed as a percentage of the face value of the bond.

DERIVATIVE – A security with price that is based on or derived from another equity, bond or commodity. For example, options and future contracts are derivatives.

DOW JONES INDUSTRIAL AVERAGE – An average of 30 major industrial stocks that is a measure of the health of the U.S. economy and market activity.

FACE VALUE – The amount of money stated on the face of a bond or mortgage note, also known as par value.

FIXED INCOME – An investment, such as a bond or preferred stock, that provides a set income over a predetermined period of time.

FUTURES CONTRACT – A contract to buy or sell specific amounts of commodities or financial instruments at an agreed-upon future date and price.

GROWTH STOCKS – Stocks with earnings that are growing faster than the average.

HEDGE – A strategy used to limit the risk of an existing position in a security, commodity or currency by taking an offsetting position. Over-the-counter (OTC) options and futures contracts are examples of instruments that can be used as hedges.

INITIAL PUBLIC OFFERING (IPO) – The first offering of stock by a company to the public.

INTEREST – Money paid to a borrower (investor) by a lender (investment company) for the use of borrowed money, such as when buying bonds or borrowing from a bank to buy stocks. Also known as coupon rate, annual percentage rate (APR), effective yield and current yield.

INVESTMENT PERFORMANCE – Investment returns as measured by assets under management (AUM), net asset value or investment gain, minus operating expenses and taxes.

INVESTMENT PROFILE – Statement of an individual’s plans for his/her needs, objectives and financial resources and a statement of how those needs and objectives will be met through investing.

LEVERAGE – The use of credit to increase the potential return on an investment.

LIQUIDITY – The ability to convert an investment into cash at its current market value.

NON-QUALIFIED ANNUITY – A deferred annuity that does not qualify for special tax treatment under Internal Revenue Code Section 401(a). With a non-qualified annuity, gains are taxed upon withdrawal instead of while the money remains in the account.

ORDER OF REDEMPTION – The order in which classes of securities issued by an investment company or trust are redeemed to satisfy withdrawal requests.

OPTION – A contract that gives the buyer the right, but not the obligation, to buy (call option) or sell (put option) a security at a set price on or before a specified date.

OTHER PEOPLE’S MONEY (OPM) – Also known as margin, this is borrowed money used to purchase securities or commodities. For example, if you have $5,000 in a margin account and are buying securities worth $10,000 using 50% margin, then your broker will lend you the additional $5,000 in exchange for a margin agreement giving the broker a lien on the securities.

PAPER PROFIT – Profit or loss made from an investment that has been sold without being realized in cash. Paper profits and losses do not affect you until you have actually withdrawn funds from your account.

PENSION PLAN FUNDING ENTITY – The company that manages pension plan assets.

POOLED TRUST FUND – A trust fund operated by an investment company in which all investors are treated the same based on their respective contract or account value.

PROXY – A person authorized to act for another, especially one who casts a ballot in their absence at a stockholders’ or members’ meeting.

REDEMPTION FEE – A fee sometimes imposed by an investment company when withdrawing money from its accounts early. It is intended to cover transaction costs involved with selling securities before they mature so the money can be reinvested into new securities.

REINVESTMENT – The act of directing capital gains or interest income back into an investment account to purchase additional shares, bonds, mutual funds or other securities with the hope of generating more income.

RESERVE – A pool of money set aside for unplanned expenditures.

RESIDUAL INTEREST – A portion of a trust fund that remains after all beneficiaries have been paid.

RETAINED EARNINGS – The accumulated amount of net earnings less dividends declared since the date of incorporation or organization of an investment company, less any losses and undistributed capital gains.

RETURN ON INVESTMENT (ROI) – Also known as rate of return, this is the amount of gain or loss on an investment over a given period of time, expressed as a percentage.

SAVINGS ACCOUNT – A deposit account with a federally insured financial institution that pays interest and has restrictions on the number of withdrawals (six per year for regular savings accounts).

SHAREHOLDER OF RECORD – A person or organization on the books of an investment company who is entitled to receive dividends, income statements and other reports.

SHAREHOLDERS’ EQUITY – The difference between assets and liabilities of an investment company when every shareholder’s share in the net assets has been redeemed or retired.

SHORT SALE – An investment transaction in which the investor sells a security that he does not own in anticipation that it will decline in value. If so, he can acquire identical shares at a lower price than his original purchase price, keep the profit and not have to deliver any stock.

SIMPLE INTEREST ANNUITY – An annuity whose cash flow amount remains constant for each future period until the payments cease at the end of an assigned time period.

SOCIAL SECURITY – A federal insurance program in which employees, employers and self-employed people pay social security taxes to provide benefits for retirees, disabled workers, dependents and survivors upon their deaths.

SUBSCRIPTION RIGHT – A right given by an investment company that allows owners or certain designated family members to buy additional shares within a specified period at a set price.

T-BILL – A treasury bill with maturities of one year or less.

TREASURY BILL – Short term debt obligation traded between government agencies and large financial institutions, usually having maturities of less than one year.

UNREGISTERED SECURITIES – Those that are bought and sold on the secondary market by investors other than those who purchased them from an issuer.

VALUE LINE INVESTMENTS – The world’s largest independent investment advisory and brokerage firm, providing stock and fund recommendations to more than 3 million subscribers.

YIELD TO MATURITY (YTM) – The gain or loss expressed as a percentage gained or lost compounded semi-annually on a bond held until it matures.

ZERO COUPON BOND – A bond that does not pay interest but is issued at a deep discount from its face value with interest added to the redemption price at maturity. Also called accrual bond.

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