Glossary wiki Capital gains tax (CGT)

Cafeteria plan
Some employers offer cafeteria plans, more formally known as flexible spending plans, which give you the option of participating in a range of tax-saving benefit programs. If you enroll in the plan, you choose the percentage of your pretax income to be withheld from your paycheck, up to the limit the plan allows. You allocate your money to the parts of the plan you want to participate in.For example, you can set aside money to pay for medical expenses that aren't covered by insurance, for child care, or for additional life insurance coverage. As you incur these kinds of expenses, you are reimbursed from the amount you have put into the plan.Since you owe no income tax on the money you contribute, you actually have more cash available for these expenses than if you were spending after-tax dollars. However, you must estimate the amount you're going to contribute before the tax year begins, and you forfeit any money you've set aside but don't spend. For example, if you've set aside $1,500 for medical expenses but spend only $1,400, you lose the $100.In some plans the deadline for spending the money in your flexible spending account is December 31. Other plans provide up to a three-month expension.

Call
In the bond markets, a call is an issuer's right to redeem bonds it has sold before the date they mature. With preferred stocks, the issuer may call the stock to retire it, or remove it from the marketplace. In either case, it may be a full call, redeeming the entire issue, or a partial call, redeeming only a portion of the issue.When a bank makes a secured loan, it reserves the right to demand full repayment of the loan — referred to as calling the loan — should the borrower default on interest payments. Finally, when the term refers to options contacts, holding a call gives you the right to buy the underlying instrument at a specific price by a specific date. Selling a call obligates you to deliver the underlying instrument if the call is exercised and you're assigned to meet the call.

Call option
Buying a call option gives you, as owner, the right to buy a fixed quantity of the underlying product at a specified price, called the strike price, within a specified time period. For example, you might purchase a call option on 100 shares of a stock if you expect the stock price to increase but prefer not to tie up your investment principal by investing in the stock. If the price of the stock does go up, the call option will increase in value. You might choose to sell your option at a profit or exercise the option and buy the shares at the strike price. But if the stock price at expiration is less than the strike price the option will be worthless. The amount you lose, in that case, is the premium you paid to buy the option plus any brokerage fees. In contrast, you can sell a call option, which is known as writing a call. That gives the buyer the right to buy the underlying investment from you at the strike price before the option expires. If you write a call, you are obliged to sell if the option is exercised and you are assigned to meet the call.

Callable bond
A callable bond can be redeemed by the issuer before it matures if that provision is included in the terms of the bond agreement, or deed of trust. Bonds are typically called when interest rates fall, since issuers can save money by paying off existing debt and offering new bonds at lower rates. If a bond is called, the issuer may pay the bondholder a premium, or an amount above the par value of the bond.

Cap
A cap is a ceiling, or the highest level to which something can go. For example, an interest rate cap limits the amount by which an interest rate can be increased over a specific period of time. A typical cap on an adjustable rate mortgage (ARM) limits interest rate increases to two percentage points annually and six percentage points over the term of the loan. In a different example, the cap on your annual contribution to an individual retirement account (IRA) is $4,000 for 2006 and 2007 and $5,000 in 2008, provided you have earned at least that much. If you're 50 or older, you can make an additional catch-up contribution of $1,000 each year.

Capital
Capital is money that is used to generate income or make an investment. For example, the money you use to buy shares of a mutual fund is capital that you're investing in the fund. Companies raise capital from investors by selling stocks and bonds and use the money to expand, make acquisitions, or otherwise build the business. The term capital markets refers to the physical and electronic environments where this capital is raised, either through public offerings or private placements.

Capital appreciation
Any increase in a capital asset's fair market value is called capital appreciation. For example, if a stock increases in value from $30 a share to $60 a share, it shows capital appreciation. Some stock mutual funds that invest for aggressive growth are called capital appreciation funds.

Capital gain
When you sell an asset at a higher price than you paid for it, the difference is your capital gain. For example, if you buy 100 shares of stock for $20 a share and sell them for $30 a share, you realize a capital gain of $10 a share, or $1,000 in total. If you own the stock for more than a year before selling it, you have a long-term capital gain. If you hold the stock for less than a year, you have a short-term capital gain.Most long-term capital gains are taxed at a lower rate than your other income while short-term gains are taxed at your regular rate. There are some exceptions, such as gains on collectibles, which are taxed at 28%. The long-term capital tax rates are 15% for anyone whose marginal federal tax rate is 25% or higher, and 5% for anyone whose marginal rate is 10% or 15%.You are exempt from paying capital gains tax on profits of up to $250,000 on the sale of your primary home if you're single and up to $500,000 if you're married and file a joint return, provided you meet the requirements for this exemption.

Capital gains distribution
When mutual fund companies sell investments that have increased in value, the profits, or capital gains, are passed on to their shareholders as capital gains distributions. These distributions are made on a regular schedule, often at the end of the year and are taxable at your regular rate unless the funds are held in a tax-deferred or tax-free account. Most funds offer the option of automatically reinvesting all or part of your capital gains distributions to buy more shares.

Capital gains tax (CGT)
A capital gains tax is due on profits you realize on the sale of a capital asset, such as stock, bonds, or real estate. Long-term gains, on assets you own more than a year, are taxed at a lower rate than ordinary income while short-term gains are taxed at your regular rate.The long-term capital gains tax rates on most investments is 15% for anyone whose marginal federal tax rate is 25% or higher, and 5% for anyone whose marginal rate is 10% or 15%. There are some exceptions. For example, long-term gains on collectibles are taxed at 28%.You are exempt from capital gains tax on profits of up to $250,000 on the sale of your primary home if you're single and up to $500,000 if you're married and file a joint return, provided you meet the requirements for this exemption.

Capital loss
When you sell an asset for less than you paid for it, the difference between the two prices is your capital loss. For example, if you buy 100 shares of stock at $30 a share and sell when the price has dropped to $20 a share, you will realize a capital loss of $10 a share, or $1,000. Although nobody wants to lose money on an investment, there is a silver lining: You can use capital losses to offset capital gains in computing your income tax. However, you must use short-term losses to offset short-term gains and long-term losses to offset long-term gains. If you have a net capital loss in any year — that is, your losses exceed your gains — you can usually deduct up to $3,000 of this amount from regular income on your tax return. You may also be able to carry forward net capital losses and deduct on future tax returns.

Capital markets
Capital markets are the physical and electronic markets where equity and debt securities, commodities, and other investments are sold to investors. When you place an order through a brokerage firm, trade online, or use a dividend reinvestment plan (DRIP), you're participating in a capital market. Corporations use capital markets to raise money through public offerings of stocks and bonds or private placements of securities to institutional investors, such as mutual fund companies.

Capital preservation
Capital preservation is a strategy for protecting the money you have available to invest by choosing insured accounts or fixed-income investments that promise return of principal. The downside of capital preservation over the long term is that by avoiding the potential risks of equity investing, you exposure yourself to inflation risk. That’s the case because your investments are unlikely to increase enough in value to offset the gradual loss of purchasing power that’s a result of even moderate inflation.

Car insurance
Car insurance covers theft of and damage to your car or damage that your car causes, plus liability protection in case you are sued as a result of an accident. Your state may require proof of insurance before you can register your car.As a car owner, you pay premiums set by the insurance company based on the value of your car and the risk the company believes you pose. The insurance company agrees to cover your losses, subject to a deductible and the limits specified in the contract.Some states have insurance pools that allow car owners who have been turned down elsewhere to obtain coverage.

Cash balance plan
A cash balance retirement plan is a defined benefit plan that has many of the characteristics of a defined contribution plan. The benefit that you'll be entitled to builds up as credits to a hypothetical account. The hypothetical account is credited with hypothetical earnings, based on a percentage of your current pay. These plans are portable, which means you can roll them over from one employer to another when you change jobs. That makes them popular with younger and mobile workers. But they are often unpopular with older workers whose employers switch from a defined benefit to cash balance plan because their pensions may be less than with traditional defined benefit plans.

Cash basis accounting
Cash basis accounting is one of two ways of recording revenues and expenses. Using this method, a company records income on its books when it receives a payment and expenses when it makes a payment. In accrual accounting, by comparison, a company counts revenue as it’s earned and expenses as they’re incurred.For example, when a magazine company sells annual subscriptions, it receives the cash for the subscriptions at the beginning of the year, but it doesn’t earn the whole amount of the subscription cost until it has sent the subscriber a full year’s issues of the magazine. In cash basis accounting, paid subscriptions are recorded as revenue when the company receives the payments. In accrual accounting, the company records revenue only as the subscription is fulfilled. A $24 subscription for 12 monthly issues of a magazine would result in immediate revenue of $24 in cash basis accounting, versus an accrual of $2 of revenue each month under accrual accounting.

Cash equivalent
Short-term, low-risk investments, such as US Treasury bills or short-term certificates of deposit (CDs), are considered cash equivalents. The Financial Accounting Standards Board (FASB) defines cash equivalents as highly liquid securities with maturities of less than three months. Liquid securities typically are those that can be sold easily with little or no loss of value.

Cash flow
Cash flow is a measure of changes in a company’s cash account during an accounting period, specifically its cash income minus the cash payments it makes. For example, if a car dealership sells $100,000 worth of cars in a month and spends $35,000 on expenses, it has a positive cash flow of $65,000. But if it takes in only $35,000 and has $100,000 in expenses, it has a negative cash flow of $65,000. Investors often consider cash flow when they evaluate a company since without adequate money to pay its bills, it will have a hard time staying in business.You can calculate whether your personal cash flow is positive or negative the same way you would a company’s. You'd subtract the money you receive (from wages, investments, and other income) from the money you spend on expenses (such as housing, transportation, and other costs). If there’s money left over, your cash flow is positive. If you spend more than you have coming in, it’s negative.

Cash market
In a cash market buyers pay the market price for securities, currency, or commodities "on the spot," just as you would pay cash for groceries or other consumer products. Cash markets are also called spot markets. A cash market is the opposite of a futures market, where commodities or financial products are scheduled for delivery and payment at a set price at a specified time in the future.In a cash market, ownership is transferred promptly, and payment is made upon delivery.

Cash settlement
To settle a futures contract where the underlying asset is a financial instrument, such as a stock index or interest rate rather than a physical commodity, you deliver cash. In contrast, when you settle a futures contract on other commodities, you deliver the physical product. But because index values or interest rates are intangible, physical delivery is not possible. The way you calculate the amount due is defined in the contract. When the underlying instrument is an index, this usually involves multiplying the value of the index times a fixed amount. For example, the cash settlement of a contract on the Standard & Poor’s MidCap 400 Index is determined by multiplying the value of the index times $500. However, in the vast majority of cases, futures contracts are offset before the settlement date, and no delivery is required.

Cash surrender value
The cash surrender value of a permanent life insurance policy is the amount you receive if you cancel or surrender your policy before you die. It’s a portion of the money that accumulates tax-deferred in your cash value account during the period you pay premiums on the policy, minus fees and expenses.Generally the only portion of the cash surrender value that’s subject to income tax is the amount that exceeds what you paid in premiums during the time the policy was in force, though you should check with your tax adviser.

Cash value
Cash value is the amount that an account is worth at any given time. For example, the cash value of your 401(k) or IRA is what the account is worth at the end of a period, such as the end of a business day, or at the end of the plan year, often December 31. The cash value of an insurance policy is the amount the insurer will pay you, based on your policy's cash reserve, if you cancel your policy. The cash value is the difference between the amount you paid in premiums and the actual cost of insurance plus other expenses.

Cash value account
If you have a permanent life insurance policy, part of each premium you pay goes into a tax-deferred account called the cash value account. You can borrow against the money that accumulates in this account, though any outstanding balance at the time of your death reduces the death benefit your beneficiary receives.If you cancel or surrender your policy, or if you stop paying the premiums, you are entitled to receive a portion of your cash value account. That amount is your cash surrender value.

Catastrophic illness insurance
Many health insurance policies cap, or limit, the amount they will pay to cover medical expenses. But you can buy catastrophic illness insurance to cover medical expenses above the maximum your regular health insurance will pay.

Catch-up contribution
You are entitled to make an annual catch-up contribution to your employer sponsored retirement savings plan and individual retirement account (IRA) if you’re 50 or older. The catch-up amounts, which are larger for employer plans than for IRAs, increase from time to time based on the rate of inflation. You are eligible to make catch-up contributions whether or not you have contributed the maximum amount you were eligible for in the past. And if you participate in an employer plan and also put money in an IRA, you are entitled to use both catch-up options.Earnings on catch-up contributions accumulate tax deferred, just as other earnings in your account do. And when your primary contributions are tax deferred, so are your catch-up contributions.Health savings accounts (HSAs), which you’re eligible to open if you have a high deductible health plan (HDHP), allow catch-up contributions if you’re at least 55. Your eligibility to make any contributions to an HSA ends when you turn 65.

Ceiling
If there is an upper limit, or cap, on the interest rate you can be charged on an adjustable-rate loan, it's known as a ceiling. Even if interest rates in general rise higher than the interest-rate ceiling on your loan, the rate you're paying can't be increased above the ceiling.However, according to the terms of some loans, lenders can add some of the interest they weren't allowed to charge you because of the ceiling to the total amount you owe. This is known as negative amortization. That means, despite a ceiling, you don't escape the consequences of rising rates, though repayment is postponed, often until the end of the loan's original term.Ceiling can also refer to a cap on the amount of interest a bond issuer is willing to pay to float a bond. Or, it's the highest price a futures contract can reach on any single trading day before the market locks up, or stops trading, that contract.

Central bank
Most countries have a central bank, which issues the country's currency and holds the reserve deposits of other banks in that country. It also either initiates or carries out the country's monetary policy, including keeping tabs on the money supply. In the United States, the 12 regional banks that make up the Federal Reserve System act as the central bank. This multibank structure was deliberately developed to ensure that no single region of the country could control economic decision making.

Central Registration Depository (CRD)
The Central Registration Depository (CRD) is an automated database maintained by NASD. The database contains records and information about registered securities employees including employment history, licensing status, the firms that employ them, and any disciplinary actions taken against them. You can access some of the information about a broker’s regulatory background and registration in the database free of charge through NASD’s BrokerCheck service at www.nasd.com. You can generally obtain even more extensive information from the CRD through your state’s securities regulator.

Certificate of Accrual on Treasury Securities (CATS)
CATS are US Treasury zero-coupon bonds that are sold at deep discount to par, or face value. Like other zeros, the interest isn't actually paid during the bond's term but accumulates so that you receive face value at maturity. You can use CATS in your long-term portfolio to provide money for college tuition or retirement. For example, you may purchase them in a tax-deferred IRA or a tax-free Roth IRA or Coverdell Education Savings Account (ESA). As with other zeros, CATS prices can be volatile, so you risk losing some of your principal if you sell before maturity. And like other federal government issues, the interest is free of state and local income tax but subject to federal income tax.

Certificate of deposit (CD)
CDs are time deposits. When you purchase a CD from a bank, up to $100,000 is insured by the Federal Deposit Insurance Corporation (FDIC). You generally earn compound interest at a fixed rate, which is determined by the current interest rate and the CD's term, which can range from a week to five years.However, rates can vary significantly from bank to bank. You usually face a penalty if you withdraw funds before your CD matures, often equal to the interest that has accrued up to the time you make the withdrawal.

Check hold
When you deposit a check, your bank or other financial institution may delay crediting the money to your account during what’s called the check hold period. The number of days that your bank can legally hold your funds depends on the type of check you deposit and, at some banks, on the type of deposit slip you use. Under federal law, certain deposits must be available by the next business day, including checks payable by the US Treasury or a Federal Reserve Bank, US Postal Service money orders, cashier’s checks, and electronic payments. Other deposits can be subject to a check hold of one to five business days, depending on whether the check is drawn on a local or non-local bank, and the size of the deposit. The law does require banks to make the first $100 of your deposit available on the next business day. Your bank must inform you of its check hold policy, although keep in mind that banks can impose longer holds if your account has been open less than 30 days.

Check truncation
To process payments faster and more efficiently, many banks no longer transport paper checks, but replace them with digital images — called substitute checks — that can be transferred electronically, in a system called check truncation. When you receive your account statements, the bank may send you substitute checks in place of cancelled checks, each formatted on a separate piece of paper, with the words “This is a legal copy of your check” appearing next to the image. Most banks destroy original checks once they’ve archived the substitutes. However, many banks send out either a line item statement or an image statement with photocopies of multiple cancelled checks on each page. If you need to verify a payment, you can request a substitute check from your bank. There may be a fee for this service.

Checking account
Checking accounts are transaction accounts that allow you to authorize the transfer money to another person or organization either by writing a check that includes the words “Pay to the order of” or by making an electronic transfer. Banks and credit unions provide transaction accounts, as do brokerage firms and other financial services companies that offering banking services. Money in transaction accounts is insured by the Federal Deposit Insurance Corporation (FDIC) up to $100,000 per depositor in each banking institution. However, the FDIC doesn’t insure money market mutual funds that offer check-writing privileges.

Churning
If a broker intentionally mishandles buying and selling securities in your investment account, it's known as churning.The broker might buy and sell securities at an excessive rate, or at a rate that’s inconsistent with your investment goals or the amount of money you have invested.One indication of potential churning is that you're paying more in commissions than you are earning on your investments. Churning is illegal but is often hard to prove.

Circuit breaker
After the stock market crash of 1987, stock and commodities exchanges established a system of trigger-point rules known as circuit breakers. They temporarily restrict trading in stocks, stock options, and stock index futures when prices fall too far, too fast.Currently, trading on the New York Stock Exchange (NYSE) is halted when the Dow Jones Industrial Average (DJIA) drops 10% any time before 2:30 p.m., sooner if the drop is 20%. But trading could resume, depending on the time of day the loss occurs. However, if the DJIA drops 30% at any point in the day, trading ends for the day. The actual number of points the DJIA would need to drop to hit the trigger is set four times a year, at the end of each quarter, based on the average value of the DJIA in the previous month.The only time the circuit breakers have been triggered was on October 27, 1997, when the DJIA fell 554 points, or 7.2%, and the shut-down level was lower. In fact, the DJIA has dropped as much as 10% in a single day only three times in its history.

Claim
You file an insurance claim when you send your insurance company paperwork asking the company to pay for any of the expenses your policy covers.

Clearance
Clearance is the first half of the process that completes your order to buy or sell a security. During clearance, the details on both sides of the transaction are compared electronically to ensure that the order to buy and the order to sell correspond. For example, in a stock transaction, the Committee on Uniform Securities Identification Procedures (CUSIP) number, the number of shares, and the price per share must match.Next, transactions within each broker-dealer are netted down, or offset, by matching its clients’ buy orders against sell orders from others of its clients or among a group of affiliated firms. Their records are then updated to reflect the new ownership and account balances.Any unmatched orders are forwarded to the National Securities Clearing Corporation (NSCC), which instructs selling broker-dealers to provide the relevant securities and the buying broker-dealer to send the cash.

Clearing firm
Clearing firms handle the back-office details of securities transactions between broker-dealers, making the settlement process streamlined and efficient. In brief, when a broker’s order to buy or sell a security has been filled, the clearing firm electronically compares and verifies the details of that trade. Then it nets down the trades to minimize the number of securities that must be received or delivered at settlement. Cleared trades are settled within a specific time after the trade date, based on the type of security being traded.

Clearinghouse
Clearing corporations, or clearinghouses, provide operational support for securities and commodities exchanges. They also help ensure the integrity of listed securities and derivatives transactions in the United States and other open markets. For example, when an order to buy or sell a futures or options contract is executed, the clearinghouse compares the details of the trade. Then it delivers the product to the buyer and ensures that payment is made to settle the transaction.

Closed-end fund
Closed-end mutual funds are actively managed funds that raise capital only once, by issuing a fixed number of shares. Like other mutual funds, however, fund managers buy and sell individual investments in keeping with their investment objectives.The shares are traded on an exchange and their prices fluctuate throughout the trading day, based on supply, demand, and the changing values of their underlying holdings. Most single country funds are closed-end funds.

Closely held
A closely held corporation is one in which a handful of investors, often the people who founded the company, members of the founders' families, or sometimes the current management team, own a majority of the outstanding stock.

Closing costs
When you purchase real estate, there are expenses — known as closing costs — you pay to finalize the transaction, over and above the cost of the property. In some cases, the seller may offer to pay certain closing costs to attract buyers or close the sale more quickly. Closing costs vary depending on the area where the property is located and are either prepaid or non-recurring. Prepaid costs are expenses that recur periodically, including home insurance premiums and real estate taxes. Non-recurring costs pay for securing a mortgage and transferring the property, and may include a filing fee to record the transfer of ownership, mortgage tax, attorneys’ fees, credit check fees, title search and title insurance expenses, home inspection fees, an appraisal fee, and any points, or up-front interest charges, you have agreed to pay the lender.The lender will give you a good faith estimate (GFE) of your closing costs before the closing date, so you’ll know approximately how much money you need to have available at closing — usually 5% to 10% of your mortgage. Many closing costs are tax deductible, so it’s a good idea to consult with your tax adviser.

Closing price
The closing price of a stock, bond, option, or futures contract is the last trading price before the exchange or market on which it is traded closes for the day. With after-hours trading, however, the opening price at the start of the next trading day may be different from the closing price the day before. When a security is valued as part of an estate or charitable gift, its value is set at the closing price on the day of the valuation of the estate.

Closing statement
A closing statement, also called a HUD1 or settlement sheet, is a legal form your closing or settlement agent uses to itemize all of the costs you and the seller will have to pay at closing to complete a real estate transaction. Your total cost should be similar to the amount in the good faith estimate (GFE) provided by your lender.It’s important to review the closing statement with your real estate agent and settlement agent. Mistakes do occasionally happen, so be sure to ask questions if there are any charges you don’t understand.

Coinsurance
When your healthcare insurance has a coinsurance provision, you and your insurer divide the responsibility for paying doctor and hospital bills by splitting the costs on a percentage basis.With an 80/20 coinsurance split, for example, your insurer would pay 80%, or $80 of a $100 medical bill, and you would pay 20%, or $20. Some policies set a cap on your out-of-pocket expenses, so that the insurance company covers 95% to 100% of the cost once you have paid the specified amount.Coinsurance may also apply when you buy insurance on your home or other real estate. In that case, insurers may require you to insure at least a minimum percentage of your property’s value — usually about 80% — and may reduce what they will cover if you file a claim but have failed to meet the coinsurance requirement. Coinsurance also describes a situation in which two insurers split the risk of providing coverage, often in cases when the dollar amount of the potential claims is larger than a single insurer is willing to handle. This type of coinsurance is also called reinsurance.

Collateral
Assets with monetary value, such as stock, bonds, or real estate, which are used to guarantee a loan, are considered collateral. If the borrower defaults and fails to fulfill the terms of the loan agreement, the collateral, or some portion of it, may become the property of the lender. For example, if you borrow money to buy a car, the car is the collateral. If you default, the lender can repossess the car and sell it to recover the amount you borrowed. Loans guaranteed by collateral are also known as secured loans.

Collateralized mortgage obligation (CMO)
CMOs are fixed-income investments backed by mortgages or pools of mortgages. A conventional mortgage-backed security has a single interest rate and maturity date. In contrast, the pool of mortgages in a CMO is divided into four tranches, each with a different interest rate and term. Owners of the first three tranches receive regular interest payments and principal is repaid to reflect the order in which the tranches mature. The fourth tranche is usually a deep-discount zero coupon bond on which interest accrues until maturity, when the full face value is repaid. CMOs usually involve high-quality mortgages or those guaranteed by the government. Their yield may be lower than those of other mortgage-backed investments.However, the way in which they are repaid makes them especially attractive to institutional investors including insurance companies and pension funds. The risk, as with all mortgage-backed securities, is that a change in interest rates can affect the rate of repayment and the market value of the CMO.

Collectible
When you invest in objects rather than in capital assets such as stocks or bonds, you are putting your money into collectibles. Collectibles can run the gamut from fine art, antique furniture, stamps, and coins to baseball cards and Barbie dolls. Their common drawback, as an investment, is their lack of liquidity. If you need to sell your collectibles, you may not be able to find a buyer who is willing to pay what you believe your investment is worth. In fact, you may not be able to find a buyer at all. On the other hand, collectibles can provide a sizable return on your investment if you have the right thing for sale at the right time.

CollegeSure® CD
CollegeSure® CDs are certificates of deposit designed to let you prepay future college costs at today's rates, plus a premium based on the child's age and the amount you invest.The CDs, which are issued by the College Savings Bank of Princeton (NJ), pay annual interest rates linked to increases in an index of average college costs and are available with terms from one to twenty-two years.While these CDs are insured by the Federal Deposit Insurance Corporation (FDIC), the interest they pay is taxable, unless you own them within a Coverdell education savings account (ESA), participating state 529 plan, or Roth IRA. With the Roth IRA option, the account must be open for at least five years and you must be at least 59 1/2 to qualify for tax-free withdrawals. CollegeSure® CDs are sold in whole or partial units. At maturity, each whole unit is guaranteed to pay the average cost of one year of tuition, fees, and room and board at a four-year private college. If you decide to purchase only a partial unit, it will be worth only that portion of the average yearly college cost at maturity. If the intended beneficiary decides not to go to college, you can get the entire principal and interest calculated at the guaranteed rate back when the CD matures and use it for any purpose.However, if you choose to cash in the CD before its maturity date, you’ll owe a penalty of 10% of the principal during the first three years of its term. The penalty drops to 5% for the remaining years of the CD’s term, except for the last year, which carries a 1% penalty.

Commercial bank
Commercial banks offer a full range of retail banking products and services, such as checking and savings accounts, loans, credit cards, and lines of credit to individuals and businesses.Most commerical banks also sell certain investments and many offer full brokerage and financial planning services.

Commercial paper
To help meet their immediate needs for cash, banks and corporations sometimes issue unsecured, short-term debt instruments known as commercial paper. Commercial paper usually matures within a year and is an important part of what’s known as the money market.It can be a good place for investors — institutional investors in particular — to put their cash temporarily. That's because these investments are liquid and essentially risk-free, since they are typically issued by profitable, long-established, and highly regarded corporations.

Commission
Securities brokers and other sales agents typically charge a commission, or sales charge, on each transaction. With traditional, full-service brokers, the charge is usually a percentage of the total cost of the trade, though some brokers may offer favorable rates to frequent traders.Online brokerage firms, on the other hand, usually charge a flat fee for each transaction, regardless of the value of the trade. The flat fee may have certain limits, however, such as the number of shares being traded at one time.The commissions on some transactions, such as stock trades, are reported on your confirmation slip. But commissions on other transactions are not reported separately. In the case of cash value life insurance, for example, the commission may be as large as a year's premium.

Committee on Uniform Securities Identifying Procedures (CUSIP)
The Committee on Uniform Securities Identifying Procedures (CUSIP) assigns codes and numbers to all securities traded in the United States. The CUSIP identification number is used to track the securities when they are bought and sold. You'll find the CUSIP number on a confirmation statement from your broker, for example, and on the face of a stock certificate.

Commodity
Commodities are bulk goods and raw materials, such as grains, metals, livestock, oil, cotton, coffee, sugar, and cocoa, that are used to produce consumer products. The term also describes financial products, such as currency or stock and bond indexes.Commodities are bought and sold on the cash market, and they are traded on the futures exchanges in the form of futures contracts. Commodity prices are driven by supply and demand: When a commodity is plentiful — tomatoes in August, for example — prices are comparatively low. When a commodity is scarce because of a bad crop or because it is out of season, the price will generally be higher.You can buy options on many commodity futures contracts to participate in the market for less than it might cost you to buy the underlying futures contracts. You can also invest through commodity funds.

Commodity Futures Trading Commission (CFTC)
The CFTC is the federal agency that regulates the US futures markets, as the Securities and Exchange Commission (SEC) regulates the securities markets. The agency's five commissioners are appointed by the US president for staggered five-year terms. The agency is responsible for maintaining fair and orderly markets, enforcing market regulations, and ensuring that customers have the information they need to make informed decisions. Commodity exchanges also regulate themselves, but any changes they want to make must be approved by the CFTC before they go into effect.

Common stock
When you own common stock, your shares represent ownership in the corporation and give you the right to vote for the company's board of directors and benefit from its financial success. You may receive a portion of the company’s profits as dividend payments if the board of directors declares a dividend. You also have the right to sell your stock and realize a capital gain if the share value increases. But if the company falters and the price falls, your investment could lose some or all of its value.

Community property
In nine US states, any assets, investments, and income that are acquired during a marriage are considered community property, or owned jointly by the married couple. For example, if you're married, live in one of these states, and buy stock, half the value of that stock belongs to your spouse even if you paid the entire cost of buying it. In a divorce, the value of the community property is divided equally. However, property you owned before you married or that you received as a gift is generally not considered community property. The community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.

Competitive trader
Competitive traders, also known as registered competitive traders or floor traders, buy and sell stocks for their own accounts on the floor of an exchange.Traders must follow very specific rules governing when they can buy and sell. But since they trade in large volumes and do not pay commissions on their transactions, they can profit from small differences between the prices at which they buy and sell.

Composite trading
Composite trading figures report end-of-day price changes, closing prices, and the daily trading volume for stocks, warrants, and options listed on a stock exchange. The New York Stock Exchange (NYSE) total also includes transactions on regional exchanges and listed securities traded over-the-counter. Since trading continues on some of those exchanges after the close of business in New York, the composite figures give a comprehensive picture of the day's activities but do not include after-hours transactions.

Compound interest
When the interest you earn on an investment is added to form the new base on which future interest accumulates, it is compound interest. For example, say you earn 5% compound interest on $100 every year for five years. You'll have $105 after one year, $110.25 after two years, $115.76 after three years, and $127.63 after five years.Without compounding, you earn simple interest, and your investment doesn't grow as quickly. For example, if you earned 5% simple interest on $100 for five years, you would have $125. A larger base or a higher rate provide even more pronounced differences. Compound interest earnings are reported as annual percentage yield (APY), though the compounding can occur annually, monthly, or daily.

Compounding
Compounding occurs when your investment earnings or savings account interest is added to your principal, forming a larger base on which future earnings may accumulate. As your investment base gets larger, it has the potential to grow faster. And the longer your money is invested, the more you stand to gain from compounding. For example, if you invested $10,000 earning 8% annually and reinvested all your earnings, you’d have $21,589 in your account after 10 years. If instead of reinvesting you withdrew the earnings each year, you would have collected $800 a year, or $8,000 over the 10 years. The $3,589 difference is the benefit of 10 years of compound growth.

Comptroller of the Currency
The Office of the Comptroller of the Currency, housed in the US Department of the Treasury, charters, regulates, and oversees national banks. The comptroller ensures bank integrity, fosters economic growth, promotes competition among banks, and guarantees that people have access to adequate financial services.The comptroller does this by enforcing the Community Reinvestment Act and federal fair lending laws, which mandate that access. The comptroller is appointed by the US president and confirmed by the Senate.

Conduit IRA
A conduit IRA is another name for a rollover IRA, which you establish with money you roll over from a 401(k), 403(b), or other retirement savings plan. Assets in a conduit IRA continue to be tax deferred until they are withdrawn and may be transferred into a new employer's plan if the plan allows transfers.

Confirmation
When you buy or sell a stock or bond, your brokerage firm will send you a confirmation, or printed document, with the details of the transaction.Confirmations include the price, any fees, and the trade and settlement dates. Stock confirmations also include the commission if it applies. These documents are your back-up for calculating capital gains and losses.You'll also receive a confirmation to reaffirm orders you place, such as a good 'til canceled order to buy or sell a certain stock at a stop or limit price. In addition, activity in your trading account, such as stock splits, spinoffs, or mergers will trigger a confirmation notice.

Conglomerate
A conglomerate is a corporation whose multiple business units operate in different, often unrelated, areas. A conglomerate is generally formed when one company expands by acquiring other firms, which it brings together under a single management umbrella. In some, but not all, cases, the formerly independent elements of the conglomerate retain their brand identities, though they are responsible to the conglomerate’s management. Some conglomerates are successful, with different parts of the whole contributing the lion’s share of the profits in different phases of the economic cycle, offsetting weaker performance by other units. Other conglomerates are never able to meld the parts into a functioning whole. In those cases, the parent company may sell or spin off various divisions into new independent companies.

Conscience fund
Conscience funds, also known as socially responsible funds, allow you to invest in companies whose business practices are in keeping with your personal values. For example, you can choose mutual funds that invest in companies that have exceptional environmental or social records, or that refuse to invest in companies that manufacture certain products or have certain employee benefit practices.Each fund explains the principles it follows in its prospectus and describes the screens, or set of criteria, it uses to identify its investments.

Consensus recommendation
A consensus recommendation for an individual stock compiles ratings from a number of analysts who track that stock. The recommendation is expressed as either the mean or median of the separate recommendations. Calculating the consensus is a multi-step process that involves grouping the terms that analysts use to recommend buying, selling, or holding, generally into three or five categories, assigning a scale, and computing the result either by averaging the numbers for the mean or identifying the median, which is the point at which half the views are higher and half are lower.A consensus recommendation provides a snapshot of current thinking about a stock, so it can serve as a benchmark against which you can compare a single analyst’s opinion to gauge how mainstream it is. But like any statistical mean or median, a consensus recommendation can distort strong differences at either end of the scale. Further, if the report accompanying the consensus view doesn’t point out significant differences in the viewpoints of the various analysts it includes, you won’t be able to tell where the most respected analysts stand on the stock.In addition, you should be aware that the consensus recommendation for any given stock might differ from one research company to the next. This is because the mathematical formula that assigns weights to the individual recommendations will vary, based in part on how many levels of differentiation the research company uses and how it interprets the words that analysts use to express their opinions.

Consumer confidence index
The consumer confidence index is released each month by the Conference Board, an independent business research organization.It measures how a representative sample of 5,000 US households feel about the current state of the economy, and what they anticipate the future will bring. The survey focuses specifically on the participants' impressions of business conditions and the job market. Economic observers follow the index because when consumer attitudes are positive they are more likely to spend money, contributing to the very economic growth they anticipate. But if consumers are worried about their jobs, they may spend less, contributing to an economic slowdown.

Consumer price index (CPI)
The consumer price index (CPI) is compiled monthly by the US Bureau of Labor Statistics and is a gauge of inflation that measures changes in the prices of basic goods and services.Some of the things it tracks are housing, food, clothing, transportation, medical care, and education.The CPI is used as a benchmark for making adjustments in Social Security payments, wages, pensions, and tax brackets to keep them in tune with the buying power of the dollar. It's often incorrectly referred to as the cost-of-living index.

Contango
The price of a futures contract tends to reflect the cost of storage, insurance, financing, and other expenses incurred by the producer as the commodity awaits delivery. So typically the further in the future the maturity date, the higher the price of the contract. That relationship is described as contango.If the opposite is true, and the price of a longer-term contract is lower than the price of one with a closer expiration date, the relationship is described as backwardation.

Contingency order
A contingency order to buy or sell a security or other investment product is one that has strings attached. Specifically, it is an order, such as a stop order, a stop-limit order, or an all-or-none order, that is to be executed only if the condition or conditions that the order specifies are met.For example, if you gave a stop-limit order to sell a particular stock if the price fell to $30 — the stop price — but not to sell if the transaction price were less than $27 — the limit price — execution would be contingent on the stock price being between $27 and $30.Broker-dealers aren’t required to accept contingency orders, but if they do accept them they are required to abide by the terms of the order.

Contingent beneficiary
A contingent beneficiary receives the proceeds of an insurance policy, term-certain annuity, individual retirement account (IRA), employer-sponsored retirement savings plan, will, or trust if the primary beneficiary dies before the benefit is paid or if he or she declines to accept the benefit.For example, if you name your spouse as the primary beneficiary of your IRA, you might name your children as contingent beneficiaries. Then, if your spouse is not alive at your death, your children inherit your IRA directly. It’s often a good idea to name as contingent beneficiary someone who is younger than you and your primary beneficiary, increasing the chances that the contingent beneficiary will outlive you. Or, if you choose, you might name an institution or a trust as contingent beneficiary.You have the right to change your designation of contingent beneficiaries, except in the case of an irrevocable trust or a life insurance policy whose terms and conditions were established in a court ruling.A contingent beneficiary may also be someone who is entitled to inherit assets if he or she meets the terms of the will or trust granting those assets.

Contingent deferred sales load
A contingent deferred sales load, also called a back-end load, is a sales charge some mutual funds impose when you sell shares in the fund within a certain period of time after you buy them. These shares are typically identified as Class B shares, and the period that the load applies is often as long as seven to ten years, as determined by the fund. The charge is a percentage of the amount of the investment you're liquidating. It typically begins at a certain level — say 7% — and drops by a percentage point each year until it disappears entirely. Information about the charge and how long it's levied is provided in the fund's prospectus.

Continuous net settlement
In continuous net settlement, most securities transactions are finalized, or cleared and settled, within a brokerage firm. The firm’s clients’ orders to buy and sell are offset, or matched against each other, so that at the end of the trading day only those positions that haven’t been offset internally remain to be settled. In a simplified example, all the shares of Stock A that a firm’s clients bought are netted against all of the shares that its clients sold by reallocating ownership on the firm’s books. Payment is handled in a similar fashion, as money is transferred from the buyers’ account to the sellers’. If the firm has more buys than sells or the other way around, as is likely, it either delivers shares or receives them and makes a payment or receives it.Clearing and settlement for transactions that aren’t offset are handled by an automated system through two branches of the Depository Trust & Clearing Corporation (DTCC), the National Securities Clearing Corporation (NSCC), and the Depository Trust Company (DTC).

Contrarian
An investor who marches to a different drummer is sometimes described as a contrarian. In other words, if most investors are buying large-cap growth stocks, a contrarian is concentrating on building a portfolio of small-cap value stocks. This approach is based, in part, on the idea that if everybody expects something to happen, it probably won't.In addition, the contrarian believes that if other investors are fully committed to a certain type of investment, they're not likely to have cash available if a better one comes along. But the contrarian would. Contrarian mutual funds use this approach as their investment strategy, concentrating on building a portfolio of out-of-favor, and therefore often undervalued, investments.

Conversion price
A conversion price is the predetermined price, set at the time of issue, at which you can exchange a convertible bond or other convertible security for common stock. The number of shares that you’ll receive at conversion is calculated by dividing the face value of the security by the conversion price. However, that number changes if the stock has split or has paid dividends.

Convertible bond
Convertible bonds are corporate bonds that give you the alternative of converting their value into common stock of that company or redeeming them for cash when they mature. The details governing the conversion, such as the number of shares of stock you would receive, are set when the bonds are issued. A convertible bond has a double appeal for investors: Its market value goes up if the stock price rises, but falls only to what it would be as a conventional bond if the stock prices falls. In other words, the upside potential is considered greater than the downside risk. While convertible bonds typically provide lower yields than conventional bonds from the same issuer, they may provide higher yields than the underlying stock. You can buy convertibles through a broker or choose a mutual fund that invests in them.

Convertible hedge
When you use a convertible hedge, you buy a convertible bond, which you can exchange under certain circumstances for shares of the company’s common stock. At the same time, you sell short the common stock of the same company. As in any hedge, your goal is to make more money on one of the transactions than you lose on the other. For example, if the price of the stock falls, you’re in a position to make money on the short sale while at the same time knowing that the convertible bond will continue to be at least as valuable as other bonds the company has issued. On the other hand, if the stock gains value, you hope to be able to realize more profit from either selling the convertible or exchanging it for shares you can sell than it costs you to have borrowed and repaid the shares you sold short.There are no guarantees this strategy or any other hedging strategy will work, especially for an individual investor who faces the challenge of identifying an appropriate security to hedge and the appropriate time to act.

Convertible term
A convertible term life insurance policy can be converted into a permanent life policy at some point in the future without requiring you to pass a health screening exam. A convertible term policy is generally more expensive than a regular term policy from the same insurance provider.Like other term insurance policies, a convertible term policy remains in force for a specific period of time, or term, and can usually be renewed for an additional term, though the premiums typically increase with each renewal.

Cook the books
When a company cooks the books, it is deliberately — and illegally — providing false information about its financial situation to bolster its stock price, often by overstating profits and hiding losses. A company may also cook the books to reduce its tax liability, but then it stirs in the opposite direction by underreporting profits and overstating losses.

Cooling-off period
In the financial industry, a cooling-off period applies when a new issue is being brought to market. During this time, also known as the quiet period, investment bankers and underwriters aren’t permitted to discuss the issue with the public.In the consumer world, during a cooling-off period you can cancel your obligation to purchase a product or take a loan without penalty if you change your mind.Different kinds of transactions are governed by different cooling-off rules. For example, one federal rule allows you to cancel home improvement loans and second mortgages within three days of signing. Another gives you three days to return purchases you make at places other than a merchant's usual place of business, such as at a trade show. The law governing your cooling-off rights, sometimes known as buyers' remorse rules, is included in the fine print on any agreement you sign.

Cooperative (co-op)
A co-op is a corporation that owns a particular residential property. The shareholders are the tenants who, instead of owning an individual unit, own shares in the corporation, which gives them the right to live in that unit.

Copayment
If you have a managed-care health insurance plan, your copayment is the fixed amount you pay — often $10 to $25 — for each in-network doctor's office visit or approved medical treatmentIn some plans the copayment to see a specialist to whom you're referred is higher than the copayment to visit your primary care physician. Some plans may not require copayments for annual physicals and certain diagnostic tests.If you see an out-of-network provider, you are likely to be responsible for a percentage of the approved charge, called coinsurance, plus any amount above the approved charge.

Core earnings
Standard & Poor's (S&P) developed the core earnings measure to give investors a more uniform way to compare earnings numbers. Otherwise, it may be difficult to compare numbers since companies often use different formulas to calculate their earnings.Core earnings differs in several ways from more traditional measures of earnings. Most notably, they treat company stock options as an expense and exclude any income that comes from the company's pension fund investments.

Cornering the market
If someone tries to buy up as much of a particular investment as possible in order to control its price, that investor is trying to corner the market. Not only is it difficult to make this strategy work in a complex economic environment, but the practice is illegal in US markets.

Corporate bond
Corporate bonds are debt securities issued by publicly held corporations to raise money for expansion or other business needs. Corporate bonds typically pay a higher rate of interest than federal or municipal government bonds but the interest you earn is generally fully taxable. You may be able to buy corporate bonds at issue through your brokerage firm, usually at the offering price of $1,000 per bond, though you may have to buy several bonds of the same issue rather than just one. You can buy bonds on the secondary market at their current market price, which may be higher or lower than par. However, most individual investors buy corporate bonds though a mutual fund that specializes in those issues.

Correction
A correction is a drop — usually a sudden and substantial one of 10% or more — in the price of an individual stock, bond, commodity, index, or the market as a whole. Market analysts anticipate market corrections when security prices are high in relation to company earnings and other indicators of economic health. When a market correction is greater than 10% and the prices do not begin to recover relatively promptly, some analysts point to the correction as the beginning of a bear market.

Correlation
In investment terms, correlation is the extent to which the values of different types of investments move in tandem with one another in response to changing economic and market conditions. Correlation is measured on a scale of -1 to +1. Investments with a correlation of +.5 or more tend to rise and fall in value at the same time. Investments with a negative correlation of -.5 to -1 are more likely to gain or lose value in opposing cycles.

Correspondent
A correspondent is a financial institution, such as a bank or brokerage firm, that handles transactions on behalf of another financial institution that it can’t complete on its own.For example, if a US bank has a client who needs to make a payment to a supplier located overseas, the US bank would use its relationship with a correspondent bank in the supplier’s home country to credit the supplier’s bank account with money from its own client’s account that had been transferred through an international payment system.

Cost basis
The cost basis is the original price of an asset — usually the purchase price plus commissions. You use the cost basis to calculate capital gains and capital losses, depreciation, and return on investment. If you inherit assets, such as stocks or real estate, your cost basis is the asset's value on the date the person who left it to you died (or the date on which his or her estate was valued). This new valuation is known as a step-up in basis.For example, if you buy a stock at $20 a share and sell it for $50 a share, your cost basis is $20. If you sell, you owe capital gains tax on the $30-a-share profit. If you inherit stock that was bought at $20 a share but valued at $50 a share when that person died, your cost basis would be $50 a share, and you'd owe no tax if you sold it at that price.

Cost-of-living adjustment (COLA)
A COLA results in a wage or benefit increase that is designed to help you keep pace with increased living costs that result from inflation. COLAs are usually pegged to increases in the consumer price index (CPI). Federal government pensions, some state pensions, and Social Security are usually adjusted annually, but only a few private pensions provide COLAs.

Council of Economic Advisors (CEA)
The Council of Economic Advisors' job is to assist and advise the president of the United States on economic policy. The CEA differs from other government agencies in its academic orientation and emphasis on contemporary developments in economic thought.The Council consists of a chairman and two staff members, appointed by the president and confirmed by the Senate, plus a staff of about ten economists and ten younger scholars. The Council's chairman frequently speaks on behalf of the administration on economic issues and policies.

Countercyclical stock
Stocks described as countercyclical tend to continue to maintain their value and provide regular income when the economy is slowing down or staying flat and gain in value as the economy expands. Companies whose stocks fall into this category are those whose products are always in demand, such as food or utilities. They may also be companies whose services reduce the expenses of other companies, such as providers of temporary office help. Or they could be financial services companies that specialize in cash-equivalent or other stable value investments. By including some countercyclical stocks in your equity portfolio, you can balance the potential volatility of cyclical investments.

Counterparty
In any financial contract, the persons or institutions entering the contract on the opposite sides of the transaction are called the counterparties. For example, if you sign a contract to sell an item that you produce to a buyer, you and the buyer are counterparties to the contract.Similarly, the counterparties in financial transactions, known as forwards or swaps, are the banks or corporations that make deals between themselves to protect future cash flows or currency values.

Counterparty risk
Counterparty risk is the risk that the person or institution with whom you have entered a financial contract — who is a counterparty to the contract — will default on the obligation and fail to fulfill that side of the contractual agreement. In other words, counterparty risk is a type of credit risk. Counterparty risk is the greatest in contacts drawn up directly between two parties and least in contracts where an intermediary acts as counterparty. For example, in the listed derivatives market, the industry’s or the exchange’s clearinghouse is the counterparty to every purchase or sale of an options or futures contract. That eliminates the possibility that the buyer or seller won’t make good on the transaction. The clearinghouse, in turn, protects itself from risk by requiring market participants to meet margin requirements. In contrast, there is no such protection in the unlisted derivatives market where forwards and swaps are arranged.

Coupon
Originally, bonds were issued with coupons, which you clipped and presented to the issuer or the issuer's agent — typically a bank or brokerage firm — to receive interest payments. Bonds with coupons are also known as bearer bonds because the bearer of the coupon is entitled to the interest.Although most new bonds are electronically registered rather than issued in certificate form, the term coupon has stuck as a synonym for interest in phrases like the coupon rate. When interest accumulates rather than being paid during the bond's term, the bond is known as a zero coupon.

Coupon rate
The coupon rate is the interest rate that the issuer of a bond or other debt security promises to pay during the term of a loan. For example, a bond that is paying 6% annual interest has a coupon rate of 6%.The term is derived from the practice, now discontinued, of issuing bonds with detachable coupons. To collect a scheduled interest payment, you presented a coupon to the issuer or the issuer's agent. Today, coupon bonds are no longer issued. Most bonds are registered, and interest is paid by check or, increasingly, by electronic transfer.

Covered option
When you sell call options on stock that you own, they are covered options. That means if the option holder exercises the option, you can deliver your stock to meet your obligation if you are assigned to complete the transaction. Similarly, if you sell put options on stock and have enough cash on hand make the required purchase if the option holder exercises, the options are covered. Covered puts are also known as cash-secured puts. One appeal of selling a covered call is that you collect the premium but don't risk potentially large losses. Otherwise, you may have to buy the stock at a higher market price in order to meet your obligation to deliver stock at the strike price if the option is exercised. The downside is that if your stock is called away from you, you’ll no longer be in a position to profit from any potential dividends or increases in price.

Crash
A crash is a sudden, steep drop in stock prices. The downward spiral is intensified as more and more investors, seeing the bottom falling out of the market, try to sell their holdings before these investments lose all their value.The two great US crashes of the 20th century, in 1929 and 1987, had very different consequences. The first was followed by a period of economic stagnation and severe depression. The second had a much briefer impact. While some investors suffered huge losses in 1987, recovery was well underway within three months.In the aftermath of each of these crashes, the federal government instituted a number of changes designed to reduce the impact of future crashes.

Credit
Credit generally refers to the ability of a person or organization to borrow money, as well as the arrangements that are made for repaying the loan and the terms of the repayment schedule. If you are well qualified to obtain a loan, you are said to be credit-worthy. Credit is also used to mean positive cash entries in an account. For example, your bank account may be credited with interest. In this sense, a credit is the opposite of a debit, which means money is taken from your account.

Credit bureau
The three major credit bureaus — Equifax, Experian, and TransUnion — collect information about the way you use credit and make it available to anyone with a legitimate business need to see it, including potential lenders, landlords, and current or prospective employers. The bureaus keep records of the credit accounts you have, how much you owe, your payment habits, and the lenders and other businesses that have accessed your credit report.Credit bureaus, also known as credit reporting agencies, store other information about you as well, such as your present and past addresses, Social Security number, employment history, and information in the public record, including bankruptcies, liens, and any judgments against you. However, there are certain things, by law, your credit report can’t include, including your age, race, religion, political affiliation, or health records.You are entitled to a free copy of your credit report from each of the three major credit bureaus once a year, but you have to request them through the Annual Credit Report Request Service (www.annualcreditreport.com or 877-322-8228). If you've recently been denied credit, are unemployed, on public assistance, or have a reason to suspect identity theft or credit fraud, you’re also entitled to a free report. In those cases, you should contact the credit bureaus directly.

Credit limit
A credit limit, also known as a credit line, is the maximum amount of money you can borrow under a revolving credit agreement. For instance, if you have a credit card with a credit limit of $3,000, and you charge $1,000, you can spend $2,000 more before you reach your credit limit. And if you repay the $1,000 before the end of the month without making additional purchases, your credit limit is back up to $3,000 again. Most credit issuers charge additional fees or penalties if you exceed your credit limit.

Credit line
A credit line, or line of credit, is a revolving credit agreement that allows you to write checks or make cash withdrawals of amounts up to your credit limit. When you use the credit — sometimes called accessing the line — you owe interest on the amount you borrow. But when that amount has been repaid you can borrow it again. A home equity line of credit (HELOC) is secured by your home, but other credit lines, such as an overdraft arrangement linked to your checking account, are unsecured. In general, the interest rate on a secured credit line is less than the rate on an unsecured line.

Credit rating
Your credit rating is an independent statistical evaluation of your ability to repay debt based on your borrowing and repayment history. If you always pay your bills on time, you are more likely to have good credit and therefore may receive favorable terms on a loan or credit card, such as relatively low finance charges. If your credit rating is poor because you have paid bills late or have defaulted on a loan, you are likely to get less favorable terms or may be denied credit altogether.A corporation's credit rating is an assessment of whether it will be able to meet its obligations to bond holders and other investors. Credit rating systems for corporations generally range from AAA or Aaa at the high end to D (for default) at the low end.

Credit report
A credit report is a summary of your financial history. Potential lenders will use your credit report to help them evaluate whether you are a good credit risk. The three major credit-reporting agencies are Experian, Equifax, and Transunion. These agencies collect certain types of information about you, primarily your use of credit and information in the public record, and sell that information to qualified recipients.As a provision of the Fair and Accurate Credit Transaction Act (FACT Act), you are entitled to a free copy of your credit report each year from each of the credit reporting agencies. You also have a right to see your credit report at any time if you have been turned down for a loan, an apartment, or a job because of poor credit. You may also question any information the credit reporting agency has about you and ask that errors be corrected. If the information isn't changed following your request, you have the right to attach a comment or explanation, which must be sent out with future reports.

Credit score
Your credit score is a number, calculated based on information in your credit report, that lenders use to assess the credit risk you pose and the interest rate they will offer you if they agree to lend you money. Most lenders use credit scores rather than credit reports since the scores reduce extensive, detailed information about your financial history to a single number. There are actually two competing credit scoring systems, FICO, which has been the standard, and VantageScore, which was developed by the three major credit bureaus.Their formulas give different weights to particular types of credit-related behavior, though both put the most emphasis on paying your bills on time. They also have different scoring systems, ranging from 300 to 850 for FICO to 501 to 999 for AdvantageScore. The best — or lowest — interest rates go to applicants with the highest scores.Because your credit score and credit report are based on the same information, it’s very unlikely that they will tell a different story. It’s smart to check your credit report at least once a year, which you can do for free at www.annualcreditreport.com or by calling 877-322-8228. It may be a good idea to review your score if you anticipate applying for a major loan, such as a mortgage, in the next six months to a year. That allows time to bring your score up if you fear it’s too low.

Credit union
Credit unions are financial cooperatives set up by employee and community associations, labor unions, church groups, and other organizations. They provide affordable financial services to members of the sponsoring organization.In some cases, they're created in rural or economically disadvantaged areas, where commercial banks may be scarce or prohibitively expensive.Because they are not-for-profit, credit unions tend to charge lower fees and interest rates on loans than commercial banks while paying higher interest rates on savings and investment accounts. The services offered at large credit unions can be as comprehensive as those at large banks. At smaller credit unions, however, services and hours may be more limited, and a few deposits may not be insured. Assets in most credit unions are insured by the National Credit Union Share Insurance Fund on the same terms that deposits in national and state banks are insured by the Federal Deposit Insurance Corporation (FDIC).

Creditor
A person or company who provides credit to another person or company functions as a creditor. For example, if you take out a mortgage or car loan at your bank, then the bank is your creditor. But if you buy a bond issued by a corporation or other institution, you are the creditor because the money you pay to buy the bond is actually a loan to the issuer.

Crossed market
A market in a particular stock or option is described as crossed when a bid to buy that stock or option is higher than the offer to sell it, or when an offer to sell is lower than a bid to buy. A crossed market reverses the normal relationship of a stock quotation in which the bid price is always lower than the ask price, and it's illegal for market makers to cross a market deliberately.It may occur when investors place after-hours market orders electronically for execution at opening, or when investors trade directly through an electronic communications network (ECN). NASD has introduced a set of pre-opening procedures for market makers on the Nasdaq Stock Market. They help prevent the confusion and potential inequalities in pricing that a crossed market can produce.

Cumulative voting
With this method of voting for a corporation's board of directors, you may cast the total number of votes you're entitled to any way you choose. Generally, you receive one for each share of company stock you own times the number of directors to be elected.For example, you can either split your votes equally among the nominees, or you can cast all of them for a single candidate. Cumulative voting is designed to give individual stockholders greater influence in shaping the board. They can designate all their votes for a single candidate who represents their interest instead of spreading their votes equally among the candidates, as is the case with statutory voting.

Currency fluctuation
A currency has value, or worth, in relation to other currencies and those values change constantly. For example, if demand for a particular currency is high because investors want to invest in that country's stock market or buy exports, the price of its currency will increase. Just the opposite will happen if that country suffers an economic slowdown, or investors lose confidence in its markets.While some currencies fluctuate freely against each other, such as the Japanese yen and the US dollar, others are pegged, or linked. They may be pegged to the value of another currency, such as the US dollar or the euro, or to a basket, or weighted average of currencies.

Currency swap
In a currency swap, the parties to the contract exchange the principal of two different currencies immediately, so that each party has the use of the different currency. They also make interest payments to each other on the principal during the contract term. In many cases, one of the parties pays a fixed interest rate and the other pays a floating interest rate, but both could pay fixed or floating rates. When the contract ends, the parties re-exchange the principal amount of the swap.Originally, currency swaps were used to give each party access to enough foreign currency to make purchases in foreign markets. Increasingly, parties arrange currency swaps as a way to enter new capital markets or to provide predictable revenue streams in another currency.

Currency trading
The global currency market, where roughly $1.9 trillion a day changes hands, is by far the largest financial market in the world. Banks, other financial institutions, and multinational corporations buy and sell currencies in enormous quantities to handle the demands of international trade. In some cases, traders seek profits from minor fluctuations in exchange rates or speculate on currency fluctuations.

Current return
Current return, also called current yield, is the amount of interest you earn on a bond in any given year, expressed as a percent of the current market price. The current return will, in most cases, not be the same as the coupon rate, or the interest rate the bond pays calculated as a percentage of its par value. For example, if the par, or face value, of a bond is $1,000 and the coupon rate is 5%, then the interest payments, or annual income, from the bond is $50 per year. If however the bond is trading at $900, then that $50 annual income is actually a current return of 5.5%.The current return does not take capital gains or losses into account, so it is not a reflection of the total return on your bond investment.

Current yield
Current yield is a measure of your rate of return on an investment, expressed as a percentage. With a bond, current yield is calculated by dividing the interest you collect by the current market price.For example, if a bond paying 5% interest, or $50, is selling for $900, the current yield is 5.6%. If the market price is $1,200, the current yield is 4.2%. And if bond is selling exactly at par, or $1,000, the current yield is 5%, the same as the coupon rate. If you own a stock, its current yield is the annual dividend divided by its market price.

Custodial account
If you want to make investments on a minor’s behalf, or transfer property you own to that person, you can open a custodial account with a bank, brokerage firm, mutual fund company, or insurance company.You name an adult custodian for the account — either yourself or someone else — who is responsible for managing the account until the child reaches the age of majority. That age may be 18, 21, or 25 depending on the state and the type of account you choose. At majority, the child has the legal right to control the account and use the assets as he or she chooses.There may be some tax advantages in transferring assets to a minor. If the child is under 18, investment earnings above a specific level that Congress sets each year are taxed at the parents' marginal tax rate. But if the child is 18 or older, all investment earnings are taxed at the child's rate — again, typically the lowest rate. In addition, gifts you make to the account are no longer part of your estate, which may reduce vulnerability to estate taxes. However, it’s wise to review your plans with your legal and tax advisers.One drawback of a custodial account is that the assets are considered the property of the child, and may reduce the amount of financial aid the child qualifies for when he or she enrolls in a college or university.

Custodian
A custodian is legally responsible for ensuring that an item or person is safe and secure. In investment terms, a custodian is the financial services company that maintains electronic records of financial assets or has physical possession of specific securities. The custodian’s client may be another institution, such as a mutual fund, a corporation, or an individual. For example, with an individual retirement account (IRA), the custodian is the bank, brokerage firm, or other financial services company that holds your account. Similarly, the Depository Trust Company, a subsidiary of the Depository Trust and Clearing Corporation (DTCC), is the custodian of millions of stock certificates held in its vaults.

Cyclical stock
Cyclical stocks tend to rise in value during an upturn in the economy and fall during a downturn. They usually include stock in industries that flourish in good times, including airlines, automobiles, and travel and leisure.In contrast, stock in industries that provide necessities such as food, electricity, gas, and health care products tend to be more price-stable.Companies that provide services that reduce the expenses of other companies also are usually more stable. Those stocks are sometimes called countercyclicals.

Glossary wiki Back-up withholding

Baby bond
Bonds whose par values are less than $1,000 are often described as baby bonds, or, in the case of municipal bonds, as mini-munis. Small companies that may not be able to attract institutional investors, such as banks and mutual fund companies, may offer baby bonds to raise cash from individual investors. Some municipalities also use baby bonds to foster involvement in government activities by making it possible for more people to invest.

Baccalaureate bond
Baccalaureate bonds are tax-free zero coupon bonds issued by certain states specifically to help families accumulate assets to meet college tuition costs. The bonds are usually sold in small denominations, so that you can buy several, with maturity dates that correspond with the dates that tuition payments are due. In some states, baccalaureate bondholders receive a small tuition discount if they use the bonds to pay for attending an in-state school.

Back-end load
Some mutual funds impose a back-end load, or a contingent deferred sales charge, if you sell shares in the fund during the first six or seven years after you purchase them. The charge is a percentage of the value of the assets you’re selling. The percentage typically declines each year the charge applies and then is dropped. However, the annual asset-based management fee is higher on back-end load funds, also known as Class B shares, than on front-end load funds, where you pay the sales charge at the time you purchase.

Back-up withholding
Back-up withholding is triggered when a bank, brokerage firm, or other institution pays interest, dividends, or other income that must be reported on IRS Form 1099 to a payee who does not provide a tax identification number (TIN), typically a Social Security number, or provides an incorrect number.While income that’s reported on Form 1099 is not normally subject to withholding, in this instance, the payer must withhold 28% of the gross amount as income tax. You can avoid back-up withholding in most cases by providing a correct TIN using IRS form W-9. But if the IRS determines you have underreported your investment income, it may require back-up withholding even if the payer has your TIN.

Balance of trade
The difference between the value of a country's imports and exports during a specific period of time is called the balance of trade. If a country exports more than it imports, it has a surplus, or favorable balance of trade. A trade deficit, or unfavorable balance, occurs when a country imports more than it exports.

Balance sheet
A balance sheet is a statement of a company’s financial position at a particular moment in time. This financial report shows the two sides of a company’s financial situation — what it owns and what it owes. What the company owns, called its assets, is always equal to the combined value of what the company owes, called its liabilities, and the value of its shareholders’ equity. Expressed as an equation, a company’s balance sheets shows assets = liabilities + shareholder value. If the company were to dissolve, then its debts would be paid, and any assets that remained would be distributed to the shareholders as their equity. Bankruptcy occurs in situations where there is nothing left to distribute to the shareholders, and the company balance sheet is in fact unbalanced because the company owes more than it owns.

Balanced fund
Balanced funds are mutual funds that invest in a portfolio of common stocks, preferred stocks, and bonds to meet their investment goal of seeking a strong return while moderating risk. Balanced funds generally produce more income than stock funds, though their total return may be less than stock fund returns in a strong stock market. In a flat or falling stock market, however, disappointing returns on equity investments may be offset by a stronger performance from a balanced fund's fixed-income investments. Balanced funds are sometimes described as a type of asset allocation fund, which provides the oportunity to spread your money among asset classes with one investment.

Balloon mortgage
With a balloon mortgage, you make monthly payments over the mortgage term, which is typically five, seven, or ten years, and a final installment, or balloon payment, that is significantly larger than the usual monthly payments. In some cases, you pay only interest on the loan during the mortgage term, and the entire principal is due in the balloon payment. Many balloon mortgages offer a conversion feature that lets you extend the loan at a new interest rate. For instance, some balloon mortgages convert to a 30-year fixed-rate mortgage at the end of their original term.You might choose a balloon mortgage if you anticipate being able to refinance at a favorable rate at the end of the term or if you’re confident you’ll have enough money to pay off the loan in a lump sum. But you may risk losing your home when the balloon payment is due if you can afford to buy the home only because of the comparatively smaller monthly payments that may be available with a balloon mortgage.

Bankruptcy
Bankruptcy means being insolvent, or unable to pay your debts. In that case, you can file a bankruptcy petition to seek a legal resolution. Chapter 7 bankruptcy, which allows you to discharge your unsecured debts but may result in your losing your home, car, or other secured debt, is available only to those whose earn less than the median for their state or qualify because of special circumstances.With Chapter 11 bankruptcy, also called reorganization bankruptcy, you work with the court and your creditors to repay debt over three to five years.However, some debts are not reduced by a declaration of bankruptcy, including past due federal income taxes, alimony, and higher-education loans. Similarly, when you hear that a company is reorganizing or is "in Chapter 11," it means it has filed for bankruptcy.

Barbell strategy
When you use a barbell strategy you invest equivalent amounts in short-term and long-term bonds, creating the shape that gives the strategy its name. The goal is to earn more interest than intermediate-term bonds would provide without taking more risk. For example, you might buy a portfolio of bonds, with some that mature within a year or two and an equal number that mature in 30 years. When the shorter-term bonds come due, you replace them with other short-term bonds. It’s a different approach from laddering your bond investment, often with a portfolio of intermediate-term bonds, so that your bonds mature in a rolling pattern every few years.

Basis
Basis is the total cost of buying an investment or other asset, including the price, commissions, and other charges. If you sell the asset, you subtract your basis from the selling price to determine your capital gain or capital loss. If you give the asset away, the recipient’s basis is the same amount as yours. But if you leave an asset to a beneficiary in your will, the person receives the asset at a step-up in basis, which means the basis of the asset is reset to its market value as of the time of your death.When your investment is in real estate, basis is generally called cost basis.

Basis point
Yields on bonds, notes, and other fixed-income investments fluctuate regularly, typically changing only a few hundredths of a percentage point. These small variations are measured in basis points, or gradations of 0.01%, or one-hundredth of a percent, with 100 basis points equaling 1%. For example, when the yield on a bond changes from 6.72% to 6.65%, it has dropped 7 basis points.Similarly, small changes in the interest rates charged for mortgages or other loans are reported in basis points, as are the fees you pay on various investment products, such as annuities and mutual funds. For example, if the average management fee is 1.4%, you might hear it expressed as 140 basis points. Your percentage of ownership in certain kinds of investments may also be stated in basis points, and in this case each basis point equals 0.01% of the whole investment.

Basis price
When you sell a security, such as a stock or bond, or real estate, the price you use to calculate your capital gains is known as your basis price. In the case of a security, it includes the purchase price plus any commissions you paid to buy or sell. For real estate, it includes purchase price, certain closing costs at purchase and sale, and the costs of qualifying improvements to the property.

Bear market
A bear market is sometimes described as a period of falling securities prices and sometimes, more specifically, as a market where prices have fallen 20% or more from the most recent high. A bear market in stocks is triggered when investors sell off shares, generally because they anticipate worsening economic conditions and falling corporate profits. A bear market in bonds is usually the result of rising interest rates, which prompts investors to sell off older bonds paying lower rates.

Bear spread
A bear spread is an options strategy that you use when you anticipate a decline in the price of the underlying instrument, such as a stock or an index. As in any spread, you purchase one option and write another on the same underlying item. Both options are identical except for one element, such as the strike price or the expiration date.For example, with a vertical bear call spread, you buy a call with a higher strike price and sell a call with a lower strike price. With a vertical bear put, you buy a put at a higher price and sell a put at a lower price. In either case, if you’re right about the behavior of the underlying instrument — for example, if a stock whose price you expect to fall does lose value — you could have a net profit. If you’re wrong, you could have a net loss cushioned by the income from the sale of one of the legs of the spread.

Bearer bond
A bearer bond is a certificate that states the security's par value, the rate at which interest will be paid, and the name of the bond's owner. In the past, bearer bonds came with detachable coupons that had to be presented to the issuer to receive the interest payments. That practice explains why a bond's interest rate is often referred to as its coupon rate.Unlike most bonds issued in the United States since 1983, which are registered electronically, a bearer bond isn't registered, and there's no record of ownership. This means it can be sold or redeemed by the person or organization that holds it.

Bearer form
When securities are issued as paper certificates and the issuing corporation has no record of the owner, the securities are in bearer form. The bearer, or holder, of the certificate is considered the owner, and when ownership changes hands a physical transfer of the certificate is required. The securities may have attached coupons, which the holder must present or send in to the issuer or issuer’s agent — typically a bank or brokerage firm — to receive interest or dividend payments. Bearer securities are rare in the United States today because of the convenience, simplicity, and added security of electronic registration, known as book entry form. When book entry securities are traded, records of ownership are electronically updated, and the buyer’s and seller’s brokerage accounts are automatically debited and credited, similar to when you pay bills online.

Behavioral finance
Behavioral finance combines psychology and economics to explain why and how investors act and to analyze how that behavior affects the market. Behavioral finance theorists point to the market phenomenon of hot stocks and bubbles, from the Dutch tulip bulb mania that caused a market crash in the 17th century to the more recent examples of junk bonds in the 1980s and Internet stocks in the 1990s, to validate their position that market prices can be affected by the irrational behavior of investors.Behavioral finance is in conflict with the perspective of efficient market theory, which maintains that market prices are based on rational foundations, like the fundamental financial health and performance of a company.

Beige Book
Beige book is the colloquial name for the Federal report that is formally titled Summary of Commentary on Current Economic Conditions by Federal Reserve District. The Beige Book is prepared eight times per year by the Federal Reserve Board, in preparation for the Federal Open Market Committee (FOMC) meetings, at which its members discuss the state of the economy and determine whether any changes ought to be made to the discount rate and whether the money supply should be tightened or loosened.The report is based on information provided by each Federal Reserve Bank on its particular district and includes opinion and analysis from economists, bank directors, business people, and other market experts in each district. Economic forecasters use the Beige Book to predict whether and how the Fed will act after the FOMC meeting.

Bellwether
A market bellwether is a security whose changing price is considered a signal that the market is changing direction. It gets its name from the wether, or castrated ram, that walks at the head of a shepherd’s flock. The distinctive tone of the bell around the wether’s neck signals the flock’s position.There’s not an official list of these trend setters, or market barometers, and they do change as the overall markets and the fortunes of individual companies change.

Benchmark
An investment benchmark is a standard against which the performance of an individual security or group of securities is measured. For example, the average annual performance of a class of securities over time is a benchmark against which current performance of members of that class and the class itself is measured. When the benchmark is an index tracking a specific segment of the market, the changing value of the index not only measures the strength or weakness of its segment but is the standard against which the performance of individual investments within the segment are measured.For example, the Standard & Poor's 500 Index (S&P 500) and the Dow Jones Industrial Average (DJIA) are the most widely followed benchmarks, or indicators, of the US market for large-company stocks and the funds that invest in those stocks.There are other indexes that serve as benchmarks for both broader and narrower segments of the US equities markets, of international markets, and of other types of investments such as bonds, mutual funds, and commodities. Individual investors and financial professionals often gauge their market expectations and judge the performance of individual investments or market sectors against the appropriate benchmarks. In a somewhat different way, the changing yield on the 10-year US Treasury bond is considered a benchmark of investor attitudes. For example, a lower yield is an indication that investors are putting money into bonds, driving up the price, possibly because they expect stock prices to drop. Conversely, a higher yield indicates investors are putting their money elsewhere.Originally the term benchmark was a surveyor's mark indicating a specific height above sea level.

Beneficial owner
When your stocks are registered in street name, the brokerage firm has title to the stocks but you are the beneficial owner, or the person who actually benefits from owning the stock.

Beneficiary
A beneficiary is the person or organization who receives assets that are held in your name in a retirement plan, or are paid on your behalf by an insurance company, after your death. If you have established a trust, the beneficiary you name receives the assets of the trust.A life insurance policy pays your beneficiary the face value of your policy minus any loans you haven’t repaid when you die. An annuity contract pays the beneficiary the accumulated assets as dictated by the terms of the contract. A retirement plan, such as an IRA or 401(k), pays your beneficiary the value of the accumulated assets or requires the beneficiary to withdraw assets either as a lump sum or over a period of time, depending on the plan. Some retirement plans require that you name your spouse as beneficiary or obtain written permission to name someone else.You may name any person or institution — or several people and institutions — as beneficiary or contingent beneficiary of a trust, a retirement plan, annuity contract, or life insurance policy. A contingent beneficiary is one who inherits the assets if the primary beneficiary has died or chooses not to accept them.

Beta
Beta is a measure of an investment's relative volatility. The higher the beta, the more sharply the value of the investment can be expected to fluctuate in relation to a market index. For example, Standard & Poor's 500-stock Index (S&P 500) has a beta coefficient (or base) of 1. That means if the S&P 500 moves 2% in either direction, a stock with a beta of 1 would also move 2%. Under the same market conditions, however, a stock with a beta of 1.5 would move 3% (2% increase x 1.5 beta = 0.03, or 3%). But a stock with a beta lower than 1 would be expected to be more stable in price and move less. Betas as low as 0.5 and as high as 4 are fairly common, depending on the sector and size of the company. However, in recent years, there has been a lively debate about the validity of assigning and using a beta value as an accurate predictor of stock performance.

Bid
The bid is the price a market maker or broker is willing to pay for a security, such as a stock or bond, at a particular time. In the real estate market, a bid is the amount a buyer offers to pay for a property.

Bid and ask
Bid and ask is better known as a quotation or quote. Bid is the price a market maker or broker offers to pay for a security, and ask is the price at which a market maker or dealer offers to sell. The difference between the two prices is called the spread.

Big Board
The Big Board is the nickname of the New York Stock Exchange (NYSE), the oldest stock exchange in the United States and the one with the largest trading floor.Common and preferred stock, bonds, exchange traded funds, warrants, rights. and other investment products are all traded on the Big Board, which dates back to 1792.

Blind pool
If the general partner of a limited partnership does not say which investments the partnership will make, the investment is known as a blind pool. In a blind pool equipment leasing partnership, for example, you don’t know what type of equipment the partnership is planning to acquire for leasing, and in a blind pool real estate investment trust (REIT), you don’t know which properties the partnership will purchase.When you invest in a blind pool limited partnership, your evaluation of the partnership’s prospects is based on the investment track record of the general partner. In contrast, in a specified pool limited partnership, you can assess the partnership’s prospects on a more concrete analysis of the costs and projected revenues. However, there is no evidence that the average performance of blind pools differs significantly from the performance of comparable specified pool partnerships.

Blind trust
A blind trust is created when a third party, such as an investment adviser or other trustee, assumes complete control of the assets held in a trust. Elected officials often set up blind trusts to reassure the public that political decisions are not being made for personal financial benefit.

Block trade
When at least 10,000 shares of stock or bonds valued at $200,000 or more are bought or sold in a single transaction, it is called a block trade. Institutional investors, including mutual funds and pension funds, typically trade in this volume, and most individual investors do not.

Blue chip stock
Blue chip stock is the common stock of a large, well-regarded US company. The companies in that informal category are collectively known as blue chips companies. Blue chips have a long-established record of earning profits and paying dividends regardless of the economic climate. They take their name from the most valuable poker chips. In the United Kingdom, in contrast, comparable firms are called alpha companies.

Blue sky laws
Blue sky laws require companies that sell stock, mutual funds, and other financial products to register new issues with the appropriate public agency.They must also provide financial details of each offering in writing so that investors have the information they need to make informed buy and sell decisions. These are state rather than federal laws, and owe their origin — at least in legend — to a frustrated judge who equated the value of a worthless stock offering to a patch of blue sky.

Boiler room
A boiler room is a location used by con artists to contact potential victims out-of-the-blue — an approach known as cold calling — in an attempt to sell high-risk investments that may or may not be legitimate. Boiler room scammers typically use high-pressure tactics to close an immediate sale and are unwilling to provide written information about either the investment they are pushing or themselves.

Bond
Bonds are debt securities issued by corporations and governments. Bonds are, in fact, loans that you and other investors make to the issuers in return for the promise of being paid interest, usually but not always at a fixed rate, over the loan term. The issuer also promises to repay the loan principal at maturity, on time and in full. Because most bonds pay interest on a regular basis, they are also described as fixed-income investments. While the term bond is used generically to describe all debt securities, bonds are specifically long-term investments, with maturities longer than ten years.

Bond fund
A bond mutual fund sells shares in the fund to investors and uses the money it raises to invest in a portfolio of bonds to meet its investment objective — typically to provide regular income. The appeal of bond funds is that you can usually invest a much smaller amount of money than you would need to buy a portfolio of bonds, making it easier to diversify your fixed-income investments.Unlike individual bonds, however, bond funds have no maturity date and no guaranteed interest rate because their portfolios aren't fixed. Also unlike individual bonds, they don't promise to return your principal. You can choose among a variety of bond funds with different investment strategies and levels of risk. Some funds invest in long-term, and others in short-term, bonds. Some buy government bonds, while others buy corporate bonds or municipal bonds. Finally, some buy investment-grade bonds, while others focus on high-yield bonds.

Bond rating
Independent agencies, such as Standard & Poor's (S&P) and Moody's Investors Service, assess the likelihood that bond issuers are likely to default on their loans or interest payments. Ratings systems differ from one agency to another but usually have at least 10 categories, ranging from a high of AAA (or Aaa) to a low of D. Bonds ranked BBB (or Baa) or higher are considered investment-grade bonds.

Bond swap
In a bond swap, you buy one bond and sell another at the same time. For example, you might sell one bond at a loss at year's end to get a tax write-off while buying another to keep the same portion of your portfolio allocated to bonds. You may also sell a bond with a lower rating to buy one with a higher rating, or sell a bond that's close to maturity so you can buy a bond that won't mature for several years.

Book value
Book value is the net asset value (NAV) of a company's stocks and bonds. Finding the NAV involves subtracting the company's short- and long-term liabilities from its assets to find net assets. Then you'd divide the net assets by the number of shares of common stock, preferred stock, or bonds to get the NAV per share or per bond.Book value is sometimes cited as a way of determining whether a company's assets cover its outstanding obligations and equity issues. Further, some investors and analysts look at the price of a stock in relation to its book value, which is provided in the company's annual report, to help identify undervalued stocks. Other investors discount the relevance of this information.

Book-entry security
Book-entry securities are stocks, bonds, and similar investments whose ownership is recorded electronically rather than in certificate form. When you sell the security, the records are updated, deleting you as an owner and adding the purchaser. This means you don't have to keep track of paper documents, and they can't be lost or stolen. The Depository Trust & Clearing Corporation (DTCC) acts as a clearinghouse for book-entry securities.

Bottom fishing
Investors using a bottom-fishing strategy look for stocks that they consider undervalued because the prices are low. The logic of bottom fishing is that stock prices sometimes fall further than a company's actual financial situation warrants, especially in the aftermath of bad news. Bottom-fishing investors hope the stock will rebound dramatically and provide a healthy profit.

Bottom-up investing
When you use a bottom-up investing strategy, you focus on the potential of individual stocks, bonds, and other investments. Using this approach, for example, means you pay less attention to the economy as a whole, or to the prospects of the industry a company is in, than you do to the company itself.If your investing method is bottom up, you read research reports, examine the company's financial stability, and evaluate what you know about its products and services in great detail.

Bourse
Bourse is the French term for a stock exchange, meaning, literally, purse. The national stock market of France, a totally electronic market, is known as the Paris Bourse. The term is used throughout Europe and worldwide as a synonym for stock exchange, though it generally isn't used in the US.

Brady bond
These bonds of Latin American countries, named for former US Secretary of the Treasury Nicholas Brady, are issued in US dollars and backed by US Treasury zero coupon bonds. The bonds were originally issued in exchange for commercial bank loans that were in default. Their changing prices in the secondary market reflect the level of confidence investors have in the economies of the issuing nations.

Breakout
Stock prices fluctuate constantly, but each stock typically moves within a fairly narrow range. That means the stock’s average price changes gradually, if at all. But sometimes a stock’s price breaks out of its limits, and jumps or tumbles suddenly. Usually the breakout is fueled by a particular event. The company may realize a commercial success, such as a drug company discovering a new cure for a major disease. Or a breakout may reflect a financial development, such as a new alliance with a successful partner.

Breakpoint
A breakpoint is the level at which your account balance in a mutual fund company or the size of a new investment in the company's funds qualifies you to pay a reduced sales charge.Fund companies that charge a percentage of the amount you invest as a front-end load, or sales charge, may offer this cost saving. They are not required to do so, but if they do use breakpoints, they must ensure that all clients who qualify get the discount.In most cases, the first breakpoint is $25,000, with further reductions for each additional $25,000 or $50,000 purchase. For example, if the standard load were 5.5%, it might drop to 5.25% at $25,000, to 5% at $50,000, and perhaps to as low as 2.5% with an investment of $250,000.In calculating breakpoints, some fund companies will combine the value of all of your investments in the mutual funds they offer. Other companies count the investments of all of the members of your household or give you credit for purchases you intend to make in the future.

Broker
A broker acts as an agent or intermediary for a buyer and a seller. The buyer, seller, and broker may all be individuals, or one or more may be a business or other institution. For example, a stockbroker works for a brokerage firm, and handles client orders to buy or sell stocks, bonds, commodities, and options in return for a commission or asset-based fee. Stockbrokers must pass a uniform examination administered by the NASD and must register with the Securities and Exchange Commission (SEC). A floor broker handles buy and sell orders on the floor of a securities or commodities exchange. A real estate broker represents the seller in a real estate transaction and receives a commission on the sale. If as a real estate buyer you hire someone to represent your interests, that person is known as a buyer’s agent. A mortgage or insurance broker acts as an intermediary in finding a mortgage or insurance policy for his or her client and also receives a commission.

Broker-dealer
A broker-dealer (B/D) is a license granted by the Securities and Exchange Commission (SEC) that entitles the licensee to buy and sell securities for its clients’ accounts. The firm may also act as principal, or dealer, trading securities for its own inventory. Some broker-dealers act in both capacities, depending on the circumstances of the trade or the type of security being traded. For example, your order to purchase a particular security might be filled from the firm’s inventory. That’s perfectly legal, though you must be notified that it has occurred. B/Ds range in size from independent one-person offices to large brokerage firms.

Brokerage account
To buy and sell securities through a broker-dealer or other financial services firm, you establish an account, generally known as a brokerage account, with that firm.In a full-service brokerage firm, a registered representative or account executive handles your buy and sell instructions and often provides investment advice. If your account is with a discount firm, you are more likely to give your orders to the person who answers the telephone when you call. And if your account is with an online firm, you give orders and get confirmations electronically.In all three cases, the firm provides updated information on your investment activity and portfolio value, and handles the required paperwork. And in some cases, your brokerage account may be part of a larger package of financial services known as an asset management account.

Brokerage firm
Brokerage firms, also known as broker-dealers, are licensed by the Securities and Exchange Commission (SEC) to buy and sell securities for clients and for their own accounts. When a brokerage firm sells securities it owns, it is said to be acting as a principal in that transaction.Firms frequently maintain research departments for their own and their clients' benefit. They may also provide a range of financial products and services, including financial planning, asset management, and educational programs.Brokerage firms come in all sizes, from one- or two-person offices to huge firms with offices around the world. They are sometimes differentialed as full-service or discount firms, based on pricing structure and client relationships.Some brokerage firms exist entirely online, and nearly all firms offer you the option of placing orders electronically rather than over the telephone. In most cases, trading electronically is substantially less expensive than giving buy and sell orders by phone.

Brokerage window
A 401(k) account that permits its plan participants to buy and sell investments through a designated brokerage account is said to offer a brokerage window. Any securities trades you authorize for your account are made through this brokerage account. Transaction fees are subtracted as those orders are executed.

Bucket shop
A bucket shop is an illegal brokerage firm, whose salespeople pose as legitimate brokers and attempt to sell you securities. Typically, a bucket shop broker doesn’t actually purchase the securities you agree to buy and that you pay for. Rather the con artists pocket your money and move on, disappearing before you realize you have been scammed.

Budget
A budget is a written record of income and expenses during a specific time frame, typically a year. You use a budget as a spending plan to allocate your income to cover your expenses and to track how closely your actual expenditures line up with what you had planned to spend. An essential part of personal budgeting is creating an emergency fund, which you can use to cover unexpected expenses. You also want to budget a percentage of your income for saving and investing, just as you budget for food, housing, and clothing.Businesses and governments also create budgets to govern their expenditures for a fiscal year — though like individuals they make regular adjustments to reflect financial reality. And like individuals, businesses and governments can find themselves in trouble if their spending outpaces their income.

Bull market
A prolonged period when stock prices as a whole are moving upward is called a bull market, although the rate at which those gains occur can vary widely from bull market to bull market. The duration of a bull market, the severity of the falling market that follows, and the time that elapses until the next upturn are also different each time. Well-known bull markets began in 1923, 1949, 1982, and 1990.

Bull spread
A bull spread is an options strategy that you use when you anticipate an increase in the price of the underlying instrument, such as a stock or an index. As in any spread, you purchase one option and write another on the same underlying item. Both options are identical except for one element, such as the strike price or the expiration date.For example, with a vertical bull call spread, you buy a call with a lower strike price and sell a call with a higher strike price. With a vertical bull put, you buy a put at a lower price and sell a put at a higher price.In either case, if you’re right about the behavior of the underlying instrument, you could have a net profit. For example, you would make money if a stock whose price you expect to increase does gain value. If you’re wrong, you could have a net loss cushioned by the income from the sale of one of the legs of the spread.

Buy down
When you make an up-front cash payment to reduce your monthly payments on a mortgage loan, it’s called a buy down. In a temporary buy down, your payments during the buy-down period are calculated at a lower interest rate than the actual rate on your loan, which makes the payments smaller.For example, if you prepay $6,000, your rate might be reduced by a total of six percentage points, or one percent for each thousand dollars, spread over three years. Instead of an 8% rate in the first year, it would be 5%. In the second year, it would be 6%, and in the third year 7%. On a $100,000 loan with a 30-year term, a reduction from 8% to 5% would reduce your monthly payments in the first year from about $734 to about $535.The extra cash you prepaid would be used to make up the difference between the amounts due calculated at the lower rates and the actual cost of borrowing — in this case about $200 a month in the first year. Then, in the fourth year, you would begin to pay at the actual loan rate and your payments would increase. In a permanent buy down, which is less common, your rate might be reduced by about 0.25% for each thousand dollars, or point, you prepaid, but the reduction would last for the life of the loan.You might choose to do a buy down if you had extra cash at the time you were ready to buy, but a smaller income than would normally allow you to qualify to buy the home you want. In most cases, lenders require that your housing costs be no more than 28% of your income. You might be able to reach that level if your initial payments were less at the time of purchase. In other cases, a home builder who is having trouble selling new properties might offer buy downs through a local lender to encourage reluctant buyers to take advantage of lower payments in the first years they own their homes.

Buy side
Institutional money managers, such as mutual funds, pension funds, and endowments, are the buy side of Wall Street. Buy-side institutions use proprietary research to make investments for the portfolios they manage and don’t interact with or make recommendations to individual investors. In contrast, sell-side institutions such as brokerage firms act as agents for individual investors when they buy and sell securities, and make their research available to their clients.

Buy-and-hold
Buy-and-hold investors take a long-term view of investing, generally keeping a bond from date of issue to date of maturity and holding onto shares of a stock through bull and bear markets. Among the advantages of following a buy-and-hold strategy are increased opportunity for your assets to compound and reduced trading costs. Among the risks are continuing to hold investments that are no longer living up to reasonable expectations.

Buyback
When a company purchases shares of its own publicly traded stock or its own bonds in the open market, it's called a buyback. The most common reason a company buys back its stock is to make the stock more attractive to investors by increasing its earnings per share. While the actual earnings stay the same, the earnings per share increase because the number of shares has been reduced.Companies may also buy back shares to pay for acquisitions that are financed with stock swaps or to make stocks available for employee stock option plans. They may also want to decrease the risk of a hostile takeover by reducing the number of shares for sale, or to discourage short-term trading by driving up the share price.Companies may buy back bonds when they are selling at discount, which is typically the result of rising interest rates. By paying less than par in the open market, the company is able to reduce the cost of redeeming the bonds when they come due.

Buyer's agent
A buyer's agent represents a buyer in a real estate transaction, negotiating with the seller's agent for a lower price or a contract with more favorable terms. A real estate agent or broker, on the other hand, represents the seller. Although that agent customarily shows the property to prospective buyers, his or her primary obligation is to the seller.

Bylaws
Bylaws are the self-imposed rules governing an incorporated company. The bylaws cover details such as the structure of the company, what the company’s goals are, and how often shareholders meet.They also explain the voting process and how officers, committees, and board members are chosen. A company can put almost any provisions in its bylaws, as long as the rules don’t break federal or local law.

Glossary wiki Adjustable rate mortgage (ARM)

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.

What is Leverage?

Understanding leverage and how much to use in forex trading.

Leverage is a financial tool that allows an individual to increase their market exposure to a point that exceeds their actual investment. For example, a trader goes long 10000 units of the USD/JPY, with $1,000 dollars of equity in their account.

The USD/JPY trade is equivalent to controlling $10,000. Because the trade is 10 times larger than the equity in the trader’s account, the account is said to be leveraged 10 times or 10:1.

Had the trader bought 20,000 units of the USD/JPY, which is equivalent to $20,000, their account would have been leveraged 20:1.

Leverage allows an individual to control larger trade sizes. Traders will use this tool as a way to magnify their returns. It’s imperative to stress, that losses are also magnified when leverage is used. Therefore, it is important to understand that leverage needs to be controlled.

FXCM provides flexible leverage to its clients. You can trade with no leverage at all, or you can trade with a significant amount of leverage.

FXCM believes clients have a greater chance of long-term success when a conservative amount of leverage, or even no leverage, is implemented.

Here is a recent study completed of thousands of FXCM accounts (“Traits of Successful Traders: How Much Capital Should I Trade Forex With?”). What we found out is that when traders used more conservative amounts of effective leverage, the percentage of profitable traders increased. Traders should look to use effective leverage of 10 to 1 or less.

Next: How to Determine Effective Leverage

---Written by Jeremy Wagner, Lead Trading Instructor, DailyFX Education

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