Accelerated death benefit
If your life insurance policy has an accelerated death benefit (ADB), you may qualify to use a portion of the death benefit to pay for certain healthcare expenses, such as the costs of a terminal illness or long-term care, while you’re still alive.Using the ADB, you take cash advances from the policy, reducing the death benefit by up to a fixed percentage. The balance is paid to your beneficiaries on your death. While an accelerated death benefit can help ease current financial burdens, including this option in your policy increases the cost of coverage. And, if you do take money out, it reduces what your beneficiaries receive.
Account balance
Your account balance is the amount of money you have in one of your financial accounts. For example, your bank account balance refers to the amount of money in your bank accounts. Your account balance can also be the amount of money outstanding on one of your financial accounts. Your credit card balance, for example, refers to the amount of money you owe a credit card company.With your 401(k), your account balance, also called your accrued benefit, is the amount your 401(k) account is worth on a date that it's valued. For example, if the value of your account on December 31 is $250,000, that's your account balance.You use your 401(k) account balance to figure how much you must withdraw from your plan each year, once you start taking required distributions after you turn 70 1/2. Specifically, you divide the account balance at the end of your plan's fiscal year by a divisor based on your life expectancy to determine the amount you must take during the next fiscal year.
Accredited investor
An accredited investor is a person or institution that the Securities and Exchange Commission (SEC) defines as being qualified to invest in unregistered securities, such as privately held corporations, private equity investments, and hedge funds.The qualification is based on the value of the investor’s assets, or in the case of an individual, annual income. Specifically, to be an accredited investor you must have a net worth of at least $1 million or a current annual income of at least $200,000 with the anticipation you’ll earn at least that much next year. If you’re married, that amount is increased to $300,000.Institutions are required to have assets worth $5 million to qualify as accredited investors. The underlying principal is that investors with these assets have the sophistication to understand the risks involved in the investment and can afford to lose the money should the investment fail.
Accrued interest
Accrued interest is the interest that accumulates on a fixed-income security between one interest payment and the next. The amount is calculated by multiplying the coupon rate, also called the nominal interest rate, times the number of days since the previous interest payment.Interest on most bonds and fixed-income securities is paid twice a year. On corporate and municipal bonds, interest is calculated on 30-day months and a 360-day year. For government bonds, interest is calculated on actual days and a 365-day year.When you buy a bond or other fixed-income security, you pay the bond’s price plus the accrued interest and receive the full amount of the next interest payment, which reimburses you for the accrued interest payment you made when you purchased the bond. Similarly, when you sell a bond, you receive the price of the bond, plus the amount of interest that has accrued since you received the last interest payment.On a zero-coupon bond, interest accrues over the term of the bond but is paid in a lump sum when you redeem the bond for face value. However, unless you hold the bond in a tax-deferred or tax-exempt account, you owe income tax each year on the amount of interest that the government calculates you would have received, had it been paid.
Accumulation period
The accumulation period refers to the time during which your retirement savings accumulate in a deferred annuity. Because annuities are federal income tax deferred, all earnings are reinvested to increase the base on which future earnings accumulate, so you have the benefit of compounding.When you buy a deferred fixed annuity contract, the company issuing the contract promises a fixed rate of return during the accumulation period regardless of whether market interest rates move up or down.With a deferred variable annuity, the amount you accumulate depends on the performance of the investment alternatives, known as subaccounts or separate account funds, which you select from among those offered in the contract.At the end of the accumulation period, you can choose to annuitize, agree to some other method of receiving income, or roll over your account value into an immediate annuity. The years in which you receive annuity income are sometimes called the distribution period.
Accumulation unit
Accumulation units are the shares you own in the separate account funds of a variable annuity during the period you're putting money into your annuity. If you own the annuity in a 401(k) plan, each time you make a contribution, that amount is added to one or more of the separate account funds to buy additional accumulation units.The value of your annuity is figured by multiplying the number of units you own by the dollar value of each unit. During the accumulation phase, that value changes to reflect the changing performance of the underlying investments in the separate account funds.
Acquisition
If a company buys another company outright, or accumulates enough shares to take a controlling interest, the deal is described as an acquisition. The acquiring company's motive may be to expand the scope of its products and services, to make itself a major player in its sector, or to fend off being taken over itself.To complete the deal, the acquirer may be willing to pay a higher price per share than the price at which the stock is currently trading. That means shareholders of the target company may realize a substantial gain, so some investors are always on the lookout for companies that seem ripe for acquisition.Sometimes acquisitions are described, more bluntly, as takeovers and other times, more diplomatically, as mergers. Collectively, these activities are referred to as mergers and acquisitions, or M&A, to those in the business.
Actively managed fund
Managers of actively managed mutual funds buy and sell investments to achieve a particular goal, such as providing a certain level of return or beating a relevant benchmark. As a result, they generally trade much more frequently than managers of passively managed funds whose goal is to mirror the performance of the index the fund tracks. While actively managed funds may provide stronger returns than index funds, they often have higher management fees and provide more taxable income.
Activities of daily living
To live independently, you must be able to handle certain essential functions, called activities of daily living (ADLs). These standard activities include eating, dressing, bathing, moving from a sitting to a standing position, taking medication, and using the bathroom. If you are unable to perform two or more these ADLs, you generally qualify to begin receiving benefits from your long-term care insurance policy. Each insurer’s list of ADLs may vary slightly, but should always include bathing, as that is often the first activity that a person struggles with.Cognitive impairments, such as those that result from Alzheimer’s disease, are not considered ADLs. A comprehensive long-term care policy will use a different test to determine when policyholders suffering from these impairments qualify to collect benefits.
Adjustable rate mortgage (ARM)
An adjustable rate mortgage is a long-term loan you use to finance a real estate purchase, typically a home. Unlike a fixed-rate mortgage, where the interest rate remains the same for the term of the loan, the interest rate on an ARM is adjusted, or changed, during its term.The initial rate on an ARM is usually lower than the rate on a fixed-rate mortgage for the same term, which means it may be easier to qualify for an ARM. You take the risk, however, that interest rates may rise, increasing the cost of your mortgage. Of course, it's also possible that the rates may drop, decreasing your payments.The rate adjustments, which are based on changes in one of the publicly reported indexes that reflect market rates, occur at preset times, usually once a year but sometimes less often. Typically, rate changes on ARMs are capped both annually and over the term of the loan, which helps protect you in the case of a rapid or sustained increase in market rates. However, certain ARMs allow negative amortization, which means additional interest could accumulate on the outstanding balance if market rates rose higher than the cap. That interest would be due when the loan matured or if you want to prepay.
Adjusted gross income (AGI)
Your AGI is your gross, or total, income from taxable sources minus certain deductions.Income includes salary and other employment income, interest and dividends, and long- and short-term capital gains and losses. Deductions include unreimbursed business and medical expenses, contributions to a deductible individual retirement account (IRA), and alimony you pay.You figure your AGI on page one of your federal tax return, and it serves as the basis for calculating the income tax you owe. Your modified AGI is used to establish your eligibility for certain tax or financial benefits, such as deducting your IRA contribution or qualifying for certain tax credits.
Advance-decline (A-D) line
The advance-decline line graphs the ratio of stocks that have risen in value — the advancers — to stocks that have fallen in value — the decliners — over a particular trading period. The direction and steepness of the A-D line gives you a general idea of the direction of the market. For example, a noticeable upward trend, which is created when there are more advancers than decliners, indicates a growing market. A downward slope indicates a market in retreat. At times, however, there may be no clear trend in either direction.
Advancer
Stocks that have gained, or increased, in value over a particular period are described as advancers. If more stocks advance than decline — or lose value — over the course of a trading day, the financial press reports that advancers led decliners. When that occurs over a period of time, it's considered an indication that the stock market is healthy.
Affinity fraud
Affinity fraud occurs when a dishonest person plays on your affiliation with a group — such as a house of worship, social club, support group, charity, or veterans’ group — as a way to win your confidence in order to sell you something worthless or trick you into handing over cash. The scammer may actually be a member of the group or may just pretend to be.Affinity fraud is one the most difficult scams to protect yourself against because being suspicious of colleagues can undermine the reason you belong to a group.
After-hours market
Securities, such as stocks and bonds, may change hands on organized markets and exchanges after regular business hours, in what is known as the after-hours market. These electronic transactions explain why a security may open for trading at a different price from the one it closed at the day before.There's also trading in benchmark indexes such as Standard & Poor's 500-stock Index (S&P 500) and the Dow Jones Industrial Average (DJIA) before US stock markets open. The level of activity and the direction the trading — up or down — is widely interpreted as an early indicator of what's likely to happen in the market during the day.
After-tax contribution
An after-tax contribution, or excess deferral, is money you put into your 401(k) or other employer sponsored retirement savings plan in addition to your pretax contribution. You might make an after-tax contribution if you've added the maximum pretax amount permitted for the year, but haven't reached the ceiling that your employer allows. The advantage of making an additional contribution is that any earnings on the after-tax amount accumulate tax deferred. The disadvantage is that figuring the tax that's due on your required distributions may be more complicated than if you had made only pretax contributions.
After-tax income
After-tax income, sometimes called post-tax dollars, is the amount of income you have left after federal income taxes (plus state and local income taxes, if they apply) have been withheld. If you contribute to a nondeductible individual retirement account (IRA), a Roth IRA, or a 529 college savings plan, purchase an annuity, or invest in a taxable account, you are using after-tax income. In contrast, if you contribute money to an employer sponsored retirement plan or flexible spending account, you are investing pretax income.
Agency bond
Some federal agencies, including Ginnie Mae (GNMA) and the Tennessee Valley Authority (TVA), raise money by issuing bonds and short-term discount notes for sale to investors. The money raised by selling these debt securities is typically used to make reduced-cost loans available to specific groups, including home buyers, students, or farmers. Interest paid on the securities is generally higher than you’d earn on Treasury issues, and the bonds are considered nearly as safe from default. In addition, the interest on some — but not all — of these securities is exempt from certain income taxes. Securities issued by former federal agencies that are now public corporations, including mortgage-buyers Fannie Mae and Freddie Mac, are also sometimes described as agency bonds.
Agent
An agent is a person who acts on behalf of another person or institution in a transaction. For example, when you direct your stockbroker to buy or sell shares in your account, he or she is acting as your agent in the trade.Agents work for either a set fee or a commission based on the size of the transaction and the type of product, or sometimes a combination of fee and commission.Depending on the work a particular agent does, he or she may need to be certified, licensed, or registered by industry bodies or government regulators. For instance, insurance agents must be licensed in the state where they do business, and stockbrokers must pass licensing exams and be registered with NASD.In a real estate transaction, a real estate agent represents the seller. That person may also be called a real estate broker or a Realtor if he or she is a member of the National Association of Realtors. A buyer may be represented by a buyer’s agent.
Aggressive-growth fund
Aggressive-growth mutual funds buy stock in companies that show rapid growth potential, including start-up companies and those in hot sectors. While these funds and the companies they invest in can increase significantly in value, they are also among the most volatile. Their values may rise much higher — and fall much lower — than the overall stock market or the mutual funds that invest in the broader market.
All or none order (AON)
When a trading order is marked AON, the broker who is handling the order must either fill the whole order or not fill it at all. For example, if you want to buy 1,500 shares at $20 a share and only 1,000 are available at that price, your order won’t be filled. However, the order will remain active until you cancel it, and so may be filled at some point in the future.
Alpha
A stock's alpha is an analyst's estimate of its potential price increase based on the rate at which the company's earnings are growing and other aspects of the company's current performance. For example, if a stock has an alpha of 1.15, that means the analyst expects a 15% price increase in a year when stock prices in general are flatOne investment strategy is to look for stocks whose alphas are high, which means the stocks are undervalued and have the potential to provide a strong return. A stock's alpha is different from its beta, which estimates its price volatility in relation to the market as a whole.
Alternative minimum tax (AMT)
The alternative minimum tax (AMT) was designed to ensure that all taxpayers pay at least the minimum federal income tax for their income level, no matter how many deductions or credits they claim. The AMT is actually an extra tax, calculated separately and added to the amount the taxpayer owes in regular income tax. Some items that are usually tax exempt become taxable and special tax rates apply. For example, income on certain tax-free bonds is taxable. Increasing numbers of taxpayers trigger the AMT if they deduct high state and local taxes or mortgage interest expenses, exercise a large number of stock options, or have significant tax-exempt interest.
American Association of Individual Investors (AAII)
The goal of this independent, nonprofit organization is teaching individual investors how to manage their assets effectively. Headquartered in Chicago, the AAII offers publications, seminars, educational programs, software and videos, and other services and products to its members. The AAII website (www.aaii.org) also provides a wide range of information about investing and personal finance.
American depositary receipt (ADR)
Shares of hundreds of major overseas-based companies, including names such as British Petroleum, Sony, and Toyota, are traded as ADRs on US stock markets in US dollars. ADRs are actually receipts issued by US banks that hold actual shares of the companies' stocks. They let you diversify into international markets without having to purchase shares on overseas exchanges or through mutual funds.
American depositary share (ADS)
When a company based overseas wants to sell its shares in the US markets, it can offer them through a US bank, which is known as the depositary. The depositary bank holds the issuing company's shares, known as American depositary shares (ADSs), and offers them to investors as certificates known as American depositary receipts (ADRs). Each ADR represents a specific number of ADSs.ADRs are quoted in US dollars and trade on US markets just like ordinary shares. While hundreds are listed on the major exchanges, the majority are traded over the counter, usually because they’re too small to meet exchange listing requirements.
American Stock Exchange (AMEX)
The AMEX is the second-largest floor-based stock exchange in the US after the New York Stock Exchange (NYSE).It operates an auction market in stocks (including overseas stocks), exchange traded funds, and derivatives, including options on many NYSE-traded and over-the-counter (OTC) stocks.
American-style option
A listed option that you can exercise at any point between the day you purchase it and its expiration date is called an American style option. All equity options are American style, no matter where the exchange on which they trade is located. In contrast, you can exercise European style options only on the last trading day before the expiration date, not before. Index options listed on various US exchanges may be either American- or European-style options.
Amortization
Amortization is the gradual repayment of a debt over a period of time, such as monthly payments on a mortgage loan or credit card balance. To amortize a loan, your payments must be large enough to pay not only the interest that has accrued but also to reduce the principal you owe. The word amortize itself tells the story, since it means "to bring to death."
Analyst
A financial analyst tracks the performance of companies and industries, evaluates their potential value as investments, and makes recommendations on specific securities. When the most highly respected analysts express a strong opinion about a stock, there is often an immediate impact on that stock's price as investors rush to follow the advice.Some analysts work for financial institutions, such as mutual fund companies, brokerage firms, and banks. Others work for analytical services, such as Value Line, Inc., Morningstar, Inc., Standard & Poor's, or Moody's Investors Service, or as independent evaluators. Analysts' commentaries also appear regularly in the financial press, and on radio, television, and the Internet.
Annual percentage rate (APR)
A loan's annual percentage rate, or APR, is what credit costs you each year, expressed as a percentage of the loan amount. The APR, which is usually higher than the nominal, or named, rate you're quoted for a loan, includes most of a loan's up-front fees as well as the annual interest rate.You should use APR, which is a more accurate picture of the cost of borrowing than the interest rate alone, to compare various loans you’re considering.
Annual percentage yield (APY)
Annual percentage yield is the amount you earn on an interest-bearing investment in a year, expressed as a percentage. For example, if you earn $60 on a $1,000 certificate of deposit (CD) between January 1 and December 31, your APY is 6%.When the APY is the same as the interest rate that is being paid on an investment, you are earning simple interest. But when the APY is higher than the interest rate, the interest is being compounded, which means you are earning interest on your accumulating interest.
Annual renewable term insurance
If your term life insurance is an annual renewable policy, you can renew your coverage each year without filling out a new application or passing a physical exam. However, the premium, or the amount you pay for the policy, isn't fixed, and goes up each time you renew. Policies with five- or ten-year terms may also be renewable, with comparable increases in their premiums.
Annual report
By law, each publicly held corporation must provide its shareholders with an annual report showing its income and balance sheet. In most cases, it contains not only financial details but also a message from the chairman, a description of the company's operations, and an overview of its achievements.Most annual reports are glossy affairs that also serve as marketing pieces. Copies are generally available from the company's investor relations office, and annual reports may even appear on the company's website. The company's 10-K report is a more comprehensive look at its finances.
Annuitant
An annuitant is a person who receives income from an annuity. If you receive a distribution from an annuity that you or your employer buys with your 401(k) assets, you're the annuitant.Similarly, you're the annuitant if you take distributions from an individual retirement annuity (IRA) or from an individual annuity you buy with after-tax income. If your beneficiary receives annuity income after your death, he or she becomes the annuitant. It's also possible to buy an annuity naming someone other than the buyer — a disabled child, for example — as annuitant.
Annuitization
Annuitization means that you convert part or all of the money in a qualified retirement plan or nonqualified annuity contract into a stream of regular income payments, either for your lifetime or the lifetimes of you and your joint annuitant. Once you choose to annuitize, the payment schedule and the amount is generally fixed and can’t be altered.If you have a qualified retirement plan, such as a 401(k), you generally have three major options when you retire. You can annuitize, roll over the account balance to an IRA, or take the money all at once as a lump sum distribution.If you have a nonqualified deferred annuity, you have a choice of annuitizing, taking a lump sum, setting up a systematic withdrawal plan, or arranging some other payout method that the contract allows.
Annuitize
When you annuitize, you choose to convert the assets in your deferred annuity or other retirement savings account into a stream of regular income payments that are guaranteed to last for your lifetime or the combined lifetimes of yourself and another person, called your joint annuitant. You typically annuitize when you retire. But, if you own a nonqualified annuity, you may begin receiving income at 59 1/2 without risking an early withdrawal penalty, or you can postpone the decision to annuitize well beyond normal retirement age.One reason people may give for choosing not to annuitize is that they're afraid if they die shortly after they begin receiving payments, they will forfeit a large portion of the annuity’s value. To avoid that situation, some people choose to annuitize with what’s called a period certain payout, guaranteeing that they or their beneficiaries will receive income for at least a minimum period, typically 5, 10, or 20 years.You should be aware that the promise to pay lifetime income is contingent on the claims-paying ability of the company providing the annuity contract. That’s why you’ll want to check the ratings that independent analysts give your annuity company before you annuitize your contract.
Annuity
Originally, an annuity simply meant an annual payment. That’s why the retirement income you receive from a defined benefit plan each year, usually in monthly installments, is called a pension annuity. But an annuity is also an insurance company product that’s designed to allow you to accumulate tax-deferred assets that can be converted to a source of lifetime annual income.When a deferred annuity is offered as part of a qualified plan, such as a traditional 401(k), 403(b), or tax-deferred annuity (TDA), you can contribute up to the annual limit and typically begin to take income from the annuity when you retire. You can also buy a nonqualified deferred annuity contract on your own. With nonqualified annuities, there are no federal limits on annual contributions and no required withdrawals, though you may begin receiving income without penalty when you turn 59 1/2.An immediate annuity, in contrast, is one you purchase with a lump sum when you are ready to begin receiving income, usually when you retire. The payouts begin right away and the annuity company promises the income will last your lifetime.With all types of annuities, the guarantee of lifetime annuity income depends on the claims-paying ability of the company that sells the annuity contract.
Annuity principal
The annuity principal is the sum of money you use to buy an annuity and the base on which annuity earnings accumulate. If you’re buying a deferred annuity, you may make a one-time — or single premium — purchase, or you may build your annuity principal with a series of regular or intermittent payments.For example, if you own an annuity in an employer-sponsored retirement plan, you add to your principal each time you defer some of your income into your account — typically every time you’re paid. When you buy an immediate annuity, you commit your annuity principal as a lump sum, and that amount is one of the key factors that determines the amount of your annuity income.
Annuity unit
Annuity units are the shares you own in variable annuity subaccounts, also called annuity funds or separate account funds, during the period you're receiving income from the annuity. The number of your annuity units is fixed at the time that you buy the income annuity contract, or when you annuitize your deferred variable annuity.While the number of units does not change, the value of each unit fluctuates to reflect the performance of the underlying investments in the subaccount. That's why the income you receive from a variable annuity may differ from month to month.
Appreciation
When an asset such as stock, real estate, or personal property increases in value without any improvements or modification having been made to it, that’s called appreciation. Some personal assets, such as fine art or antiques, may appreciate over time, while others — such as electronic equipment — usually lose value, or depreciate.Certain investments also have the potential to appreciate. A number of factors can cause an asset to appreciate, among them inflation, uniqueness, or increased demand.
Approved charge
With traditional fee-for-service health insurance, the insurance company sets an approved or allowable amount for each medical procedure or office visit. If your bill exceeds the approved charge, the difference between the approved charge and the claim that's submitted to the insurance company for reimbursement is considered an excess charge. You are responsible for that amount in addition to a percentage of the approved charge.Medicare establishes approved charges for medical procedures and office visits. If you participate in Original Medicare, there's a legal limit on what a doctor, laboratory, or other medical provider can charge in excess of the approved amount.
Arbitrage
Arbitrage is the technique of simultaneously buying at a lower price in one market and selling at a higher price in another market to make a profit on the spread between the prices. Although the price difference may be very small, arbitrageurs, or arbs, typically trade regularly and in huge volume, so they can make sizable profits. But the strategy, which depends on split-second timing, can also backfire if interest rates, prices, currency exchange rates, or other factors move in ways the arbitrageurs don’t anticipate.
Arbitration
Arbitration is a way to resolve conflicts between parties or individuals, and may be considered middle ground between the more cooperative, informal nature of mediation and the more expensive, involved, and lengthy process of litigation. Usually, when you open a brokerage account, you sign an agreement to use arbitration to resolve possible conflicts with the firm and waive the right to sue for damages in court. Arbitration is binding, which means you can’t appeal the decision or try for a different result by going to court. Most investment-related arbitration claims are handled by either NASD, the main self-regulatory body that supervises brokers, or the New York Stock Exchange (NYSE).In arbitration, a trained impartial arbitrator or panel of arbitrators reviews the evidence, decides on the outcome, and sets any award. While arbitration is usually less expensive than litigation, arbitration and attorney fees make it a more expensive option than mediation.
Arithmetic index
An arithmetic index gives equal weight to the percentage price change of each stock that's included in the index. In computing the index, the percentage changes of all the stocks are added, and the total is divided by the number of stocks. The percentage price changes of large companies aren't counted more heavily, as they are in a market-capitalization weighted index. An arithmetic index is a more accurate measure of total stock market performance than an index that stresses relatively few high-priced or large-company stocks. However, some analysts point out that it may also produce higher total return figures than other indexing methods. The best known arithmetic index in the US is the one computed by Value Line, Inc., which tracks the approximately 1,700 stocks the company analyzes regularly. Standard & Poor's also calculates an arithmetic version of the S&P 500 index.
Ask
The ask price (a shortening of asked price) is the price at which a market maker or broker offers to sell a security or commodity. The price another market maker or broker is willing to pay for that security is called the bid price, and the difference between the two prices is called the spread.Bid and ask prices are typically reported to the media for commodities and over-the-counter (OTC) transactions. In contrast, last, or closing, prices are reported for exchange-traded and national market securities. With open-end mutual funds, the ask price is the net asset value (NAV), or the price you get if you sell, plus the sales charge, if one applies.
Asset
Assets are everything you own that has any monetary value, plus any money you are owed. They include money in bank accounts, stocks, bonds, mutual funds, equity in real estate, the value of your life insurance policy, and any personal property that people would pay to own.When you figure your net worth, you subtract the amount you owe, or your liabilities, from your assets. Similarly, a company's assets include the value of its physical plant, its inventory, and less tangible elements, such as its reputation.
Asset allocation
Asset allocation is a strategy, advocated by modern portfolio theory, for reducing risk in your investment portfolio in order to maximize return. Specifically, asset allocation means dividing your assets among different broad categories of investments, called asset classes. Stock, bonds, and cash are examples of asset classes, as are real estate and derivatives such as options and futures contracts.Most financial services firms suggest particular asset allocations for specific groups of clients and fine-tune those allocations for individual investors. The asset allocation model — specifically the percentages of your investment principal allocated to each investment category you’re using — that’s appropriate for you at any given time depends on many factors, such as the goals you’re investing to achieve, how much time you have to invest, your tolerance for risk, the direction of interest rates, and the market outlook.Ideally, you adjust or rebalance your portfolio from time to time to bring the allocation back in line with the model you’ve selected. Or, you might realign your model as your financial goals, your time frame, or the market situation changes.
Asset class
Different categories of investments are described as asset classes. Stock, bonds, and cash — including cash equivalents — are major asset classes. So are real estate, derivative investments, such as options and futures contracts, and precious metals.When you allocate the assets in your investment portfolio, you decide what proportion of its total value will be invested in each of the different asset classes you’re including.
Asset management account (AMA)
All-in-one asset management accounts provide the financial advantages of an investment account combined with the convenience of an interest-bearing checking account. AMAs generally offer check-writing and ATM privileges, credit cards, direct deposit, and automatic transfer between accounts, as well as access to reduced-rate loans and other perks. There are usually annual fees and minimum account requirements.AMAs are offered by many brokerage firms and mutual fund companies, and are also known as central asset accounts (CAAs) or cash management accounts (CMAs).
Asset-backed bond
Asset-backed bonds, also known as asset-backed securities, are secured by loans or by money owed to a company for merchandise or services purchased on credit. For example, an asset-backed bond is created when a securities firm bundles debt, such as credit card or car loans, and sells investors the right to receive the payments made on those loans.
Assignment
Assignment occurs when someone who has written, or sold, a listed option receives a notice that the option has been exercised and he or she must fulfill the terms of the contract by buying the underlying instrument if the option was a put or selling the underlying instrument if the option was a call.Making the assignment is a two-step process. When an option listed on a US exchange is exercised, the Options Clearing Corporation (OCC) notifies a member broker-dealer firm with clients who have sold options in that series that one of those clients must meet the obligation to buy or sell. The firm, in turn, selects an individual client following its particular methodology, such as chronological order of sale or random choice.As the writer of an in-the-money option, you should expect assignment, unless you close out your position with an offsetting contract. However, there is no guarantee that you will realize a profit or avoid a loss.Assignment also means transferring property you own, such as stock and real estate, to someone else by using the document that’s appropriate to the type of property. Similarly, property of a financially troubled entity can be assigned, or transferred, to a creditor and sold to offset losses.
At-the-money
At-the-money is another way of saying at the current price. Options whose exercise price is the same or almost the same as the current market price of the underlying stock or futures contract are considered at-the-money.
Auction market
Auction market trading, sometimes known as open outcry, is the way the major exchanges, such as the New York Stock Exchange (NYSE) and the Chicago Mercantile Exchange (CME), have traditionally handled buying and selling. Brokers acting for buyers compete against each other on the exchange floor, as brokers acting for sellers do, to get the best price. While the trading can be quite intense it is orderly because the participants adhere to exchange rules.
Audit
An audit is a professional, independent examination of a company's financial statements and accounting documents following generally accepted accounting principles (GAAP). An IRS audit, in contrast, is an examination of a taxpayer's return, usually to question the accuracy or acceptability of the information the return reports.
Audit committee
The corporate audit committee is the liaison between the company’s management, the board of directors, internal and external auditors, and any other accounting experts advising the company on audit issues.In particular, the audit committee is responsible for hiring and managing external auditors. Since 2002, when Congress passed the Sarbanes-Oxley Act, implementing stringent financial oversight regulations, the role of the audit committee has become increasingly important.An audit committee is composed of a sub-group from the corporation’s board of directors. Members of the audit committee must be independent, which means they have no ties to the company’s management team. In general they cannot receive any compensation, such as consulting or advisory fees, except for a board of director’s fee. They may not be able to own shares in the company, or be affiliated in any other way with the company. Nor can they be affiliated with or have an interest in the external auditing company.
Automatic enrollment
Your employer has the right to sign you up for your company's 401(k) plan, in what's known as an automatic enrollment. If you don't want to participate, you must refuse, in writing, to be part of the plan.In an automatic enrollment, the company determines the percentage of earnings you contribute and how your contribution is invested, choosing among a number of potential alternatives. You have the right to change either or both of those choices if you stay in the plan.
Automatic exercise
If you hold a call option, automatic exercise may occur if the contract is in-the-money by a certain amount. In this case, an in-the-money contract is one where the strike price — the price at which you would purchase the underlying instrument if the contract were exercised — is lower than the market price of that instrument. Generally speaking, exercising your option in this situation would produce a profit on the transaction.Certain options may be subject to automatic exercise authorized by the Options Clearing Corporation (OCC) unless you instruct them otherwise. Your brokerage firm may also have an automatic exercise policy.
Average
A stock market average is a mathematical way of reporting the composite change in prices of the stocks that the average includes. Each average is designed to reflect the general movement of the broad market or a certain segment of the market and often serves as a benchmark for the performance of individual stocks in its sphere. A true average adds the prices of the stocks it covers and divides that amount by the number of stocks. However, many averages are weighted, which usually means they count stocks with the largest market capitalizations more heavily than they do others. Weighting reflects the impact that the stocks of the biggest companies have on the markets and on the economy in general. The Dow Jones Industrial Average (DJIA), which tracks the performance of 30 large-company stocks, is the most widely followed average in the United States.
Average annual yield
Average annual yield is the average yearly income on an investment, expressed as a percentage. You can calculate the average annual yield by adding all the income you received on an investment and dividing that amount by the number of years the money was invested. So if you receive $60 interest on a $1,000 bond each year for ten years, the average annual yield is 6% ($600 ÷ $1,000 = 0.06 or 6%).
Average daily balance
The average daily balance method is one of the ways that the finance charge on your credit card may be calculated. The credit card company issuer divides the balance you owe each day by the number of days in your billing cycle and multiplies the result by the interest rate to find the finance charge for each day in the period. If this is the method your creditor uses, the larger the payment you make and the earlier in the cycle you make it, the smaller your finance charge will be.
If your life insurance policy has an accelerated death benefit (ADB), you may qualify to use a portion of the death benefit to pay for certain healthcare expenses, such as the costs of a terminal illness or long-term care, while you’re still alive.Using the ADB, you take cash advances from the policy, reducing the death benefit by up to a fixed percentage. The balance is paid to your beneficiaries on your death. While an accelerated death benefit can help ease current financial burdens, including this option in your policy increases the cost of coverage. And, if you do take money out, it reduces what your beneficiaries receive.
Account balance
Your account balance is the amount of money you have in one of your financial accounts. For example, your bank account balance refers to the amount of money in your bank accounts. Your account balance can also be the amount of money outstanding on one of your financial accounts. Your credit card balance, for example, refers to the amount of money you owe a credit card company.With your 401(k), your account balance, also called your accrued benefit, is the amount your 401(k) account is worth on a date that it's valued. For example, if the value of your account on December 31 is $250,000, that's your account balance.You use your 401(k) account balance to figure how much you must withdraw from your plan each year, once you start taking required distributions after you turn 70 1/2. Specifically, you divide the account balance at the end of your plan's fiscal year by a divisor based on your life expectancy to determine the amount you must take during the next fiscal year.
Accredited investor
An accredited investor is a person or institution that the Securities and Exchange Commission (SEC) defines as being qualified to invest in unregistered securities, such as privately held corporations, private equity investments, and hedge funds.The qualification is based on the value of the investor’s assets, or in the case of an individual, annual income. Specifically, to be an accredited investor you must have a net worth of at least $1 million or a current annual income of at least $200,000 with the anticipation you’ll earn at least that much next year. If you’re married, that amount is increased to $300,000.Institutions are required to have assets worth $5 million to qualify as accredited investors. The underlying principal is that investors with these assets have the sophistication to understand the risks involved in the investment and can afford to lose the money should the investment fail.
Accrued interest
Accrued interest is the interest that accumulates on a fixed-income security between one interest payment and the next. The amount is calculated by multiplying the coupon rate, also called the nominal interest rate, times the number of days since the previous interest payment.Interest on most bonds and fixed-income securities is paid twice a year. On corporate and municipal bonds, interest is calculated on 30-day months and a 360-day year. For government bonds, interest is calculated on actual days and a 365-day year.When you buy a bond or other fixed-income security, you pay the bond’s price plus the accrued interest and receive the full amount of the next interest payment, which reimburses you for the accrued interest payment you made when you purchased the bond. Similarly, when you sell a bond, you receive the price of the bond, plus the amount of interest that has accrued since you received the last interest payment.On a zero-coupon bond, interest accrues over the term of the bond but is paid in a lump sum when you redeem the bond for face value. However, unless you hold the bond in a tax-deferred or tax-exempt account, you owe income tax each year on the amount of interest that the government calculates you would have received, had it been paid.
Accumulation period
The accumulation period refers to the time during which your retirement savings accumulate in a deferred annuity. Because annuities are federal income tax deferred, all earnings are reinvested to increase the base on which future earnings accumulate, so you have the benefit of compounding.When you buy a deferred fixed annuity contract, the company issuing the contract promises a fixed rate of return during the accumulation period regardless of whether market interest rates move up or down.With a deferred variable annuity, the amount you accumulate depends on the performance of the investment alternatives, known as subaccounts or separate account funds, which you select from among those offered in the contract.At the end of the accumulation period, you can choose to annuitize, agree to some other method of receiving income, or roll over your account value into an immediate annuity. The years in which you receive annuity income are sometimes called the distribution period.
Accumulation unit
Accumulation units are the shares you own in the separate account funds of a variable annuity during the period you're putting money into your annuity. If you own the annuity in a 401(k) plan, each time you make a contribution, that amount is added to one or more of the separate account funds to buy additional accumulation units.The value of your annuity is figured by multiplying the number of units you own by the dollar value of each unit. During the accumulation phase, that value changes to reflect the changing performance of the underlying investments in the separate account funds.
Acquisition
If a company buys another company outright, or accumulates enough shares to take a controlling interest, the deal is described as an acquisition. The acquiring company's motive may be to expand the scope of its products and services, to make itself a major player in its sector, or to fend off being taken over itself.To complete the deal, the acquirer may be willing to pay a higher price per share than the price at which the stock is currently trading. That means shareholders of the target company may realize a substantial gain, so some investors are always on the lookout for companies that seem ripe for acquisition.Sometimes acquisitions are described, more bluntly, as takeovers and other times, more diplomatically, as mergers. Collectively, these activities are referred to as mergers and acquisitions, or M&A, to those in the business.
Actively managed fund
Managers of actively managed mutual funds buy and sell investments to achieve a particular goal, such as providing a certain level of return or beating a relevant benchmark. As a result, they generally trade much more frequently than managers of passively managed funds whose goal is to mirror the performance of the index the fund tracks. While actively managed funds may provide stronger returns than index funds, they often have higher management fees and provide more taxable income.
Activities of daily living
To live independently, you must be able to handle certain essential functions, called activities of daily living (ADLs). These standard activities include eating, dressing, bathing, moving from a sitting to a standing position, taking medication, and using the bathroom. If you are unable to perform two or more these ADLs, you generally qualify to begin receiving benefits from your long-term care insurance policy. Each insurer’s list of ADLs may vary slightly, but should always include bathing, as that is often the first activity that a person struggles with.Cognitive impairments, such as those that result from Alzheimer’s disease, are not considered ADLs. A comprehensive long-term care policy will use a different test to determine when policyholders suffering from these impairments qualify to collect benefits.
Adjustable rate mortgage (ARM)
An adjustable rate mortgage is a long-term loan you use to finance a real estate purchase, typically a home. Unlike a fixed-rate mortgage, where the interest rate remains the same for the term of the loan, the interest rate on an ARM is adjusted, or changed, during its term.The initial rate on an ARM is usually lower than the rate on a fixed-rate mortgage for the same term, which means it may be easier to qualify for an ARM. You take the risk, however, that interest rates may rise, increasing the cost of your mortgage. Of course, it's also possible that the rates may drop, decreasing your payments.The rate adjustments, which are based on changes in one of the publicly reported indexes that reflect market rates, occur at preset times, usually once a year but sometimes less often. Typically, rate changes on ARMs are capped both annually and over the term of the loan, which helps protect you in the case of a rapid or sustained increase in market rates. However, certain ARMs allow negative amortization, which means additional interest could accumulate on the outstanding balance if market rates rose higher than the cap. That interest would be due when the loan matured or if you want to prepay.
Adjusted gross income (AGI)
Your AGI is your gross, or total, income from taxable sources minus certain deductions.Income includes salary and other employment income, interest and dividends, and long- and short-term capital gains and losses. Deductions include unreimbursed business and medical expenses, contributions to a deductible individual retirement account (IRA), and alimony you pay.You figure your AGI on page one of your federal tax return, and it serves as the basis for calculating the income tax you owe. Your modified AGI is used to establish your eligibility for certain tax or financial benefits, such as deducting your IRA contribution or qualifying for certain tax credits.
Advance-decline (A-D) line
The advance-decline line graphs the ratio of stocks that have risen in value — the advancers — to stocks that have fallen in value — the decliners — over a particular trading period. The direction and steepness of the A-D line gives you a general idea of the direction of the market. For example, a noticeable upward trend, which is created when there are more advancers than decliners, indicates a growing market. A downward slope indicates a market in retreat. At times, however, there may be no clear trend in either direction.
Advancer
Stocks that have gained, or increased, in value over a particular period are described as advancers. If more stocks advance than decline — or lose value — over the course of a trading day, the financial press reports that advancers led decliners. When that occurs over a period of time, it's considered an indication that the stock market is healthy.
Affinity fraud
Affinity fraud occurs when a dishonest person plays on your affiliation with a group — such as a house of worship, social club, support group, charity, or veterans’ group — as a way to win your confidence in order to sell you something worthless or trick you into handing over cash. The scammer may actually be a member of the group or may just pretend to be.Affinity fraud is one the most difficult scams to protect yourself against because being suspicious of colleagues can undermine the reason you belong to a group.
After-hours market
Securities, such as stocks and bonds, may change hands on organized markets and exchanges after regular business hours, in what is known as the after-hours market. These electronic transactions explain why a security may open for trading at a different price from the one it closed at the day before.There's also trading in benchmark indexes such as Standard & Poor's 500-stock Index (S&P 500) and the Dow Jones Industrial Average (DJIA) before US stock markets open. The level of activity and the direction the trading — up or down — is widely interpreted as an early indicator of what's likely to happen in the market during the day.
After-tax contribution
An after-tax contribution, or excess deferral, is money you put into your 401(k) or other employer sponsored retirement savings plan in addition to your pretax contribution. You might make an after-tax contribution if you've added the maximum pretax amount permitted for the year, but haven't reached the ceiling that your employer allows. The advantage of making an additional contribution is that any earnings on the after-tax amount accumulate tax deferred. The disadvantage is that figuring the tax that's due on your required distributions may be more complicated than if you had made only pretax contributions.
After-tax income
After-tax income, sometimes called post-tax dollars, is the amount of income you have left after federal income taxes (plus state and local income taxes, if they apply) have been withheld. If you contribute to a nondeductible individual retirement account (IRA), a Roth IRA, or a 529 college savings plan, purchase an annuity, or invest in a taxable account, you are using after-tax income. In contrast, if you contribute money to an employer sponsored retirement plan or flexible spending account, you are investing pretax income.
Agency bond
Some federal agencies, including Ginnie Mae (GNMA) and the Tennessee Valley Authority (TVA), raise money by issuing bonds and short-term discount notes for sale to investors. The money raised by selling these debt securities is typically used to make reduced-cost loans available to specific groups, including home buyers, students, or farmers. Interest paid on the securities is generally higher than you’d earn on Treasury issues, and the bonds are considered nearly as safe from default. In addition, the interest on some — but not all — of these securities is exempt from certain income taxes. Securities issued by former federal agencies that are now public corporations, including mortgage-buyers Fannie Mae and Freddie Mac, are also sometimes described as agency bonds.
Agent
An agent is a person who acts on behalf of another person or institution in a transaction. For example, when you direct your stockbroker to buy or sell shares in your account, he or she is acting as your agent in the trade.Agents work for either a set fee or a commission based on the size of the transaction and the type of product, or sometimes a combination of fee and commission.Depending on the work a particular agent does, he or she may need to be certified, licensed, or registered by industry bodies or government regulators. For instance, insurance agents must be licensed in the state where they do business, and stockbrokers must pass licensing exams and be registered with NASD.In a real estate transaction, a real estate agent represents the seller. That person may also be called a real estate broker or a Realtor if he or she is a member of the National Association of Realtors. A buyer may be represented by a buyer’s agent.
Aggressive-growth fund
Aggressive-growth mutual funds buy stock in companies that show rapid growth potential, including start-up companies and those in hot sectors. While these funds and the companies they invest in can increase significantly in value, they are also among the most volatile. Their values may rise much higher — and fall much lower — than the overall stock market or the mutual funds that invest in the broader market.
All or none order (AON)
When a trading order is marked AON, the broker who is handling the order must either fill the whole order or not fill it at all. For example, if you want to buy 1,500 shares at $20 a share and only 1,000 are available at that price, your order won’t be filled. However, the order will remain active until you cancel it, and so may be filled at some point in the future.
Alpha
A stock's alpha is an analyst's estimate of its potential price increase based on the rate at which the company's earnings are growing and other aspects of the company's current performance. For example, if a stock has an alpha of 1.15, that means the analyst expects a 15% price increase in a year when stock prices in general are flatOne investment strategy is to look for stocks whose alphas are high, which means the stocks are undervalued and have the potential to provide a strong return. A stock's alpha is different from its beta, which estimates its price volatility in relation to the market as a whole.
Alternative minimum tax (AMT)
The alternative minimum tax (AMT) was designed to ensure that all taxpayers pay at least the minimum federal income tax for their income level, no matter how many deductions or credits they claim. The AMT is actually an extra tax, calculated separately and added to the amount the taxpayer owes in regular income tax. Some items that are usually tax exempt become taxable and special tax rates apply. For example, income on certain tax-free bonds is taxable. Increasing numbers of taxpayers trigger the AMT if they deduct high state and local taxes or mortgage interest expenses, exercise a large number of stock options, or have significant tax-exempt interest.
American Association of Individual Investors (AAII)
The goal of this independent, nonprofit organization is teaching individual investors how to manage their assets effectively. Headquartered in Chicago, the AAII offers publications, seminars, educational programs, software and videos, and other services and products to its members. The AAII website (www.aaii.org) also provides a wide range of information about investing and personal finance.
American depositary receipt (ADR)
Shares of hundreds of major overseas-based companies, including names such as British Petroleum, Sony, and Toyota, are traded as ADRs on US stock markets in US dollars. ADRs are actually receipts issued by US banks that hold actual shares of the companies' stocks. They let you diversify into international markets without having to purchase shares on overseas exchanges or through mutual funds.
American depositary share (ADS)
When a company based overseas wants to sell its shares in the US markets, it can offer them through a US bank, which is known as the depositary. The depositary bank holds the issuing company's shares, known as American depositary shares (ADSs), and offers them to investors as certificates known as American depositary receipts (ADRs). Each ADR represents a specific number of ADSs.ADRs are quoted in US dollars and trade on US markets just like ordinary shares. While hundreds are listed on the major exchanges, the majority are traded over the counter, usually because they’re too small to meet exchange listing requirements.
American Stock Exchange (AMEX)
The AMEX is the second-largest floor-based stock exchange in the US after the New York Stock Exchange (NYSE).It operates an auction market in stocks (including overseas stocks), exchange traded funds, and derivatives, including options on many NYSE-traded and over-the-counter (OTC) stocks.
American-style option
A listed option that you can exercise at any point between the day you purchase it and its expiration date is called an American style option. All equity options are American style, no matter where the exchange on which they trade is located. In contrast, you can exercise European style options only on the last trading day before the expiration date, not before. Index options listed on various US exchanges may be either American- or European-style options.
Amortization
Amortization is the gradual repayment of a debt over a period of time, such as monthly payments on a mortgage loan or credit card balance. To amortize a loan, your payments must be large enough to pay not only the interest that has accrued but also to reduce the principal you owe. The word amortize itself tells the story, since it means "to bring to death."
Analyst
A financial analyst tracks the performance of companies and industries, evaluates their potential value as investments, and makes recommendations on specific securities. When the most highly respected analysts express a strong opinion about a stock, there is often an immediate impact on that stock's price as investors rush to follow the advice.Some analysts work for financial institutions, such as mutual fund companies, brokerage firms, and banks. Others work for analytical services, such as Value Line, Inc., Morningstar, Inc., Standard & Poor's, or Moody's Investors Service, or as independent evaluators. Analysts' commentaries also appear regularly in the financial press, and on radio, television, and the Internet.
Annual percentage rate (APR)
A loan's annual percentage rate, or APR, is what credit costs you each year, expressed as a percentage of the loan amount. The APR, which is usually higher than the nominal, or named, rate you're quoted for a loan, includes most of a loan's up-front fees as well as the annual interest rate.You should use APR, which is a more accurate picture of the cost of borrowing than the interest rate alone, to compare various loans you’re considering.
Annual percentage yield (APY)
Annual percentage yield is the amount you earn on an interest-bearing investment in a year, expressed as a percentage. For example, if you earn $60 on a $1,000 certificate of deposit (CD) between January 1 and December 31, your APY is 6%.When the APY is the same as the interest rate that is being paid on an investment, you are earning simple interest. But when the APY is higher than the interest rate, the interest is being compounded, which means you are earning interest on your accumulating interest.
Annual renewable term insurance
If your term life insurance is an annual renewable policy, you can renew your coverage each year without filling out a new application or passing a physical exam. However, the premium, or the amount you pay for the policy, isn't fixed, and goes up each time you renew. Policies with five- or ten-year terms may also be renewable, with comparable increases in their premiums.
Annual report
By law, each publicly held corporation must provide its shareholders with an annual report showing its income and balance sheet. In most cases, it contains not only financial details but also a message from the chairman, a description of the company's operations, and an overview of its achievements.Most annual reports are glossy affairs that also serve as marketing pieces. Copies are generally available from the company's investor relations office, and annual reports may even appear on the company's website. The company's 10-K report is a more comprehensive look at its finances.
Annuitant
An annuitant is a person who receives income from an annuity. If you receive a distribution from an annuity that you or your employer buys with your 401(k) assets, you're the annuitant.Similarly, you're the annuitant if you take distributions from an individual retirement annuity (IRA) or from an individual annuity you buy with after-tax income. If your beneficiary receives annuity income after your death, he or she becomes the annuitant. It's also possible to buy an annuity naming someone other than the buyer — a disabled child, for example — as annuitant.
Annuitization
Annuitization means that you convert part or all of the money in a qualified retirement plan or nonqualified annuity contract into a stream of regular income payments, either for your lifetime or the lifetimes of you and your joint annuitant. Once you choose to annuitize, the payment schedule and the amount is generally fixed and can’t be altered.If you have a qualified retirement plan, such as a 401(k), you generally have three major options when you retire. You can annuitize, roll over the account balance to an IRA, or take the money all at once as a lump sum distribution.If you have a nonqualified deferred annuity, you have a choice of annuitizing, taking a lump sum, setting up a systematic withdrawal plan, or arranging some other payout method that the contract allows.
Annuitize
When you annuitize, you choose to convert the assets in your deferred annuity or other retirement savings account into a stream of regular income payments that are guaranteed to last for your lifetime or the combined lifetimes of yourself and another person, called your joint annuitant. You typically annuitize when you retire. But, if you own a nonqualified annuity, you may begin receiving income at 59 1/2 without risking an early withdrawal penalty, or you can postpone the decision to annuitize well beyond normal retirement age.One reason people may give for choosing not to annuitize is that they're afraid if they die shortly after they begin receiving payments, they will forfeit a large portion of the annuity’s value. To avoid that situation, some people choose to annuitize with what’s called a period certain payout, guaranteeing that they or their beneficiaries will receive income for at least a minimum period, typically 5, 10, or 20 years.You should be aware that the promise to pay lifetime income is contingent on the claims-paying ability of the company providing the annuity contract. That’s why you’ll want to check the ratings that independent analysts give your annuity company before you annuitize your contract.
Annuity
Originally, an annuity simply meant an annual payment. That’s why the retirement income you receive from a defined benefit plan each year, usually in monthly installments, is called a pension annuity. But an annuity is also an insurance company product that’s designed to allow you to accumulate tax-deferred assets that can be converted to a source of lifetime annual income.When a deferred annuity is offered as part of a qualified plan, such as a traditional 401(k), 403(b), or tax-deferred annuity (TDA), you can contribute up to the annual limit and typically begin to take income from the annuity when you retire. You can also buy a nonqualified deferred annuity contract on your own. With nonqualified annuities, there are no federal limits on annual contributions and no required withdrawals, though you may begin receiving income without penalty when you turn 59 1/2.An immediate annuity, in contrast, is one you purchase with a lump sum when you are ready to begin receiving income, usually when you retire. The payouts begin right away and the annuity company promises the income will last your lifetime.With all types of annuities, the guarantee of lifetime annuity income depends on the claims-paying ability of the company that sells the annuity contract.
Annuity principal
The annuity principal is the sum of money you use to buy an annuity and the base on which annuity earnings accumulate. If you’re buying a deferred annuity, you may make a one-time — or single premium — purchase, or you may build your annuity principal with a series of regular or intermittent payments.For example, if you own an annuity in an employer-sponsored retirement plan, you add to your principal each time you defer some of your income into your account — typically every time you’re paid. When you buy an immediate annuity, you commit your annuity principal as a lump sum, and that amount is one of the key factors that determines the amount of your annuity income.
Annuity unit
Annuity units are the shares you own in variable annuity subaccounts, also called annuity funds or separate account funds, during the period you're receiving income from the annuity. The number of your annuity units is fixed at the time that you buy the income annuity contract, or when you annuitize your deferred variable annuity.While the number of units does not change, the value of each unit fluctuates to reflect the performance of the underlying investments in the subaccount. That's why the income you receive from a variable annuity may differ from month to month.
Appreciation
When an asset such as stock, real estate, or personal property increases in value without any improvements or modification having been made to it, that’s called appreciation. Some personal assets, such as fine art or antiques, may appreciate over time, while others — such as electronic equipment — usually lose value, or depreciate.Certain investments also have the potential to appreciate. A number of factors can cause an asset to appreciate, among them inflation, uniqueness, or increased demand.
Approved charge
With traditional fee-for-service health insurance, the insurance company sets an approved or allowable amount for each medical procedure or office visit. If your bill exceeds the approved charge, the difference between the approved charge and the claim that's submitted to the insurance company for reimbursement is considered an excess charge. You are responsible for that amount in addition to a percentage of the approved charge.Medicare establishes approved charges for medical procedures and office visits. If you participate in Original Medicare, there's a legal limit on what a doctor, laboratory, or other medical provider can charge in excess of the approved amount.
Arbitrage
Arbitrage is the technique of simultaneously buying at a lower price in one market and selling at a higher price in another market to make a profit on the spread between the prices. Although the price difference may be very small, arbitrageurs, or arbs, typically trade regularly and in huge volume, so they can make sizable profits. But the strategy, which depends on split-second timing, can also backfire if interest rates, prices, currency exchange rates, or other factors move in ways the arbitrageurs don’t anticipate.
Arbitration
Arbitration is a way to resolve conflicts between parties or individuals, and may be considered middle ground between the more cooperative, informal nature of mediation and the more expensive, involved, and lengthy process of litigation. Usually, when you open a brokerage account, you sign an agreement to use arbitration to resolve possible conflicts with the firm and waive the right to sue for damages in court. Arbitration is binding, which means you can’t appeal the decision or try for a different result by going to court. Most investment-related arbitration claims are handled by either NASD, the main self-regulatory body that supervises brokers, or the New York Stock Exchange (NYSE).In arbitration, a trained impartial arbitrator or panel of arbitrators reviews the evidence, decides on the outcome, and sets any award. While arbitration is usually less expensive than litigation, arbitration and attorney fees make it a more expensive option than mediation.
Arithmetic index
An arithmetic index gives equal weight to the percentage price change of each stock that's included in the index. In computing the index, the percentage changes of all the stocks are added, and the total is divided by the number of stocks. The percentage price changes of large companies aren't counted more heavily, as they are in a market-capitalization weighted index. An arithmetic index is a more accurate measure of total stock market performance than an index that stresses relatively few high-priced or large-company stocks. However, some analysts point out that it may also produce higher total return figures than other indexing methods. The best known arithmetic index in the US is the one computed by Value Line, Inc., which tracks the approximately 1,700 stocks the company analyzes regularly. Standard & Poor's also calculates an arithmetic version of the S&P 500 index.
Ask
The ask price (a shortening of asked price) is the price at which a market maker or broker offers to sell a security or commodity. The price another market maker or broker is willing to pay for that security is called the bid price, and the difference between the two prices is called the spread.Bid and ask prices are typically reported to the media for commodities and over-the-counter (OTC) transactions. In contrast, last, or closing, prices are reported for exchange-traded and national market securities. With open-end mutual funds, the ask price is the net asset value (NAV), or the price you get if you sell, plus the sales charge, if one applies.
Asset
Assets are everything you own that has any monetary value, plus any money you are owed. They include money in bank accounts, stocks, bonds, mutual funds, equity in real estate, the value of your life insurance policy, and any personal property that people would pay to own.When you figure your net worth, you subtract the amount you owe, or your liabilities, from your assets. Similarly, a company's assets include the value of its physical plant, its inventory, and less tangible elements, such as its reputation.
Asset allocation
Asset allocation is a strategy, advocated by modern portfolio theory, for reducing risk in your investment portfolio in order to maximize return. Specifically, asset allocation means dividing your assets among different broad categories of investments, called asset classes. Stock, bonds, and cash are examples of asset classes, as are real estate and derivatives such as options and futures contracts.Most financial services firms suggest particular asset allocations for specific groups of clients and fine-tune those allocations for individual investors. The asset allocation model — specifically the percentages of your investment principal allocated to each investment category you’re using — that’s appropriate for you at any given time depends on many factors, such as the goals you’re investing to achieve, how much time you have to invest, your tolerance for risk, the direction of interest rates, and the market outlook.Ideally, you adjust or rebalance your portfolio from time to time to bring the allocation back in line with the model you’ve selected. Or, you might realign your model as your financial goals, your time frame, or the market situation changes.
Asset class
Different categories of investments are described as asset classes. Stock, bonds, and cash — including cash equivalents — are major asset classes. So are real estate, derivative investments, such as options and futures contracts, and precious metals.When you allocate the assets in your investment portfolio, you decide what proportion of its total value will be invested in each of the different asset classes you’re including.
Asset management account (AMA)
All-in-one asset management accounts provide the financial advantages of an investment account combined with the convenience of an interest-bearing checking account. AMAs generally offer check-writing and ATM privileges, credit cards, direct deposit, and automatic transfer between accounts, as well as access to reduced-rate loans and other perks. There are usually annual fees and minimum account requirements.AMAs are offered by many brokerage firms and mutual fund companies, and are also known as central asset accounts (CAAs) or cash management accounts (CMAs).
Asset-backed bond
Asset-backed bonds, also known as asset-backed securities, are secured by loans or by money owed to a company for merchandise or services purchased on credit. For example, an asset-backed bond is created when a securities firm bundles debt, such as credit card or car loans, and sells investors the right to receive the payments made on those loans.
Assignment
Assignment occurs when someone who has written, or sold, a listed option receives a notice that the option has been exercised and he or she must fulfill the terms of the contract by buying the underlying instrument if the option was a put or selling the underlying instrument if the option was a call.Making the assignment is a two-step process. When an option listed on a US exchange is exercised, the Options Clearing Corporation (OCC) notifies a member broker-dealer firm with clients who have sold options in that series that one of those clients must meet the obligation to buy or sell. The firm, in turn, selects an individual client following its particular methodology, such as chronological order of sale or random choice.As the writer of an in-the-money option, you should expect assignment, unless you close out your position with an offsetting contract. However, there is no guarantee that you will realize a profit or avoid a loss.Assignment also means transferring property you own, such as stock and real estate, to someone else by using the document that’s appropriate to the type of property. Similarly, property of a financially troubled entity can be assigned, or transferred, to a creditor and sold to offset losses.
At-the-money
At-the-money is another way of saying at the current price. Options whose exercise price is the same or almost the same as the current market price of the underlying stock or futures contract are considered at-the-money.
Auction market
Auction market trading, sometimes known as open outcry, is the way the major exchanges, such as the New York Stock Exchange (NYSE) and the Chicago Mercantile Exchange (CME), have traditionally handled buying and selling. Brokers acting for buyers compete against each other on the exchange floor, as brokers acting for sellers do, to get the best price. While the trading can be quite intense it is orderly because the participants adhere to exchange rules.
Audit
An audit is a professional, independent examination of a company's financial statements and accounting documents following generally accepted accounting principles (GAAP). An IRS audit, in contrast, is an examination of a taxpayer's return, usually to question the accuracy or acceptability of the information the return reports.
Audit committee
The corporate audit committee is the liaison between the company’s management, the board of directors, internal and external auditors, and any other accounting experts advising the company on audit issues.In particular, the audit committee is responsible for hiring and managing external auditors. Since 2002, when Congress passed the Sarbanes-Oxley Act, implementing stringent financial oversight regulations, the role of the audit committee has become increasingly important.An audit committee is composed of a sub-group from the corporation’s board of directors. Members of the audit committee must be independent, which means they have no ties to the company’s management team. In general they cannot receive any compensation, such as consulting or advisory fees, except for a board of director’s fee. They may not be able to own shares in the company, or be affiliated in any other way with the company. Nor can they be affiliated with or have an interest in the external auditing company.
Automatic enrollment
Your employer has the right to sign you up for your company's 401(k) plan, in what's known as an automatic enrollment. If you don't want to participate, you must refuse, in writing, to be part of the plan.In an automatic enrollment, the company determines the percentage of earnings you contribute and how your contribution is invested, choosing among a number of potential alternatives. You have the right to change either or both of those choices if you stay in the plan.
Automatic exercise
If you hold a call option, automatic exercise may occur if the contract is in-the-money by a certain amount. In this case, an in-the-money contract is one where the strike price — the price at which you would purchase the underlying instrument if the contract were exercised — is lower than the market price of that instrument. Generally speaking, exercising your option in this situation would produce a profit on the transaction.Certain options may be subject to automatic exercise authorized by the Options Clearing Corporation (OCC) unless you instruct them otherwise. Your brokerage firm may also have an automatic exercise policy.
Average
A stock market average is a mathematical way of reporting the composite change in prices of the stocks that the average includes. Each average is designed to reflect the general movement of the broad market or a certain segment of the market and often serves as a benchmark for the performance of individual stocks in its sphere. A true average adds the prices of the stocks it covers and divides that amount by the number of stocks. However, many averages are weighted, which usually means they count stocks with the largest market capitalizations more heavily than they do others. Weighting reflects the impact that the stocks of the biggest companies have on the markets and on the economy in general. The Dow Jones Industrial Average (DJIA), which tracks the performance of 30 large-company stocks, is the most widely followed average in the United States.
Average annual yield
Average annual yield is the average yearly income on an investment, expressed as a percentage. You can calculate the average annual yield by adding all the income you received on an investment and dividing that amount by the number of years the money was invested. So if you receive $60 interest on a $1,000 bond each year for ten years, the average annual yield is 6% ($600 ÷ $1,000 = 0.06 or 6%).
Average daily balance
The average daily balance method is one of the ways that the finance charge on your credit card may be calculated. The credit card company issuer divides the balance you owe each day by the number of days in your billing cycle and multiplies the result by the interest rate to find the finance charge for each day in the period. If this is the method your creditor uses, the larger the payment you make and the earlier in the cycle you make it, the smaller your finance charge will be.
