Glossary of Financial Terms

 

Invesco | Glossary of Financial Terms

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Glossary of Financial Terms The information presented here is not intended as financial, investment, tax or legal advice and is provided for educational purposes only.

0-9 A B C D E F G H I J K L M N O P Q R S T U V W X Y Z 10-K   10-K An annual audited financial report filed with the U.S. Securities and Exchange Commission by all registered and/or exchange-listed issuers and by all companies with more than 500 shareholders or $1 million in gross assets. 10-Q   10-Q A quarterly financial report filed with the U.S. Securities and Exchange Commission by every issuer of listed securities. 12b-1 Fee  Fee  A mutual fund’s annual marketing or distribution fee, charged to fund shareholders. 401(k) Plan  Plan  An employer-sponsored qualified retirement plan that allows employees to contribute pretax dollars that are often matched by employer contributions. Contributions and earnings grow tax deferred until withdrawn, when they are taxed as ordinary income. 403(b) Plan  Plan  A qualified retirement plan, similar to a 401(k) plan, for employees of public schools, certain non-profit groups and churches. Contributions and earnings grow tax deferred until withdrawn, when they are taxed as ordinary income. 8-K   8-K A financial report filed with the U.S. Securities and Exchange Commission used to disclose any material events or developments likely to affect a company’s stock price. It provides more current information than a 10Q or 10K.

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Adjusted Gross Income (AGI)  (AGI)   Income on which taxpayers compute their federal income taxes. Generally, this is the sum of wages, interest income, dividend income and capital gains/losses — less unreimbursed business expenses and other allowable adjustments (such as IRA contributions, alimony payments, etc.). Advance/Decline Advance/ Decline Line Line   A measure of the number of stocks advancing (rising in value) versus the number of stocks declining (losing value) over a particular period. The ratio of advancers to decliners illustrates the general direction of the market. If advancers outnumber decliners, it is considered "bullish;” if decliners outnumber advancers, it is considered “bearish.” After-Tax Contribution  Contribution  Money deducted from an individual’s paycheck and invested after taxes are withheld. Agent   Agent 1. An individual or firm that buys or sells securities for others. 2. A securities salesperson that represents a broker-dealer when selling securities to the general public. Aggressive Investments  Investments  One end of the risk spectrum. Aggressive investments generally seek maximum capital gains. Aggressive growth funds may invest in shares of companies with histories of, and the potential for, rapid earnings and profit growth. Such funds seek only capital appreciation and typically produce no dividend income. Because such funds tend to be more volatile than the stock market as a whole, particularly over short periods, they may not suitable for investors who are risk-averse, who have short-term investment horizons or who need current income. Alpha (cash adjusted)  adjusted)  A risk-adjusted measure of excess return generated by a mutual fund versus its benchmark index. Alpha subtracts the risk-free rate from the returns of both the fund and its benchmark. A positive alpha means a fund beat expectations while a negative alpha means a manager failed to match performance with risk. Alternative Minimum Tax (AMT)  (AMT)  A minimum tax imposed on taxpayers who itemize deductions — such as interest payments, medical expenses, state taxes, miscellaneous deductions and passive activity losses — or who earn certain types of income. These deductions are added back into the taxpayers’ income and the result is taxed at a flat rate. The taxpayer pays the higher of either his regular tax or this

 

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AMT. Taxpayers who may be subject to the AMT should consult their tax adviser. American Depositary Receipts (ADR)  (ADR)  Receipt for shares of stock of a non-U.S. corporation held by U.S. banks and sold in the U.S. market. ADRs allow U.S. investors to buy or sell shares of foreign companies without having to conduct the transaction in foreign markets. They also entitle owners to dividends and capital gains. Annual Report  Report  A report on a mutual fund’s operations and holdings over a 12-month period. Mutual funds operate on a fiscal year; as a result, individual mutual funds may issue their annual reports at different times during the calendar year. Annualized Return  Return  Expressed as a percentage, annualized return calculates the average annual return of a mutual fund or other investment over several years. Also called “average annual total return.” (see Average Annual Total Return) Return) Annuity   Annuity An investment that offers guaranteed annual payments at some future date, usually in retirement. Such payments may be either fixed or variable, depending on the structure of the annuity. The investment may be in stocks, bonds or other vehicles, and grows tax-deferred. Investors should consider the financial soundness of the insurance company offering the annuity (since the company, not any government agency, “guarantees” the annual payments) and the level of fees and commissions paid to salespersons. Appreciation   Appreciation An increase in an asset’s value. Arbitrage   Arbitrage Profiting by simultaneously buying a security, currency or commodity in one market and selling it in another because the prices are different in the two markets. By taking advantage of momentary disparities in price, the arbitrageur performs the economic function of making the markets more efficient. Asked Price/Offering Price  Price  The price at which a mutual fund’s shares can be purchased. The asked or offering price equals the current net asset value (NAV) per share plus sales charge, if any. For a no-load mutual fund, the asked price is the same as the net asset value. (see Bid Price/Offering Price; Price; see Net Asset Value; see Spread) Spread) Asset   Asset Anything having value that is owned by an individual, institution or business. Asset Allocation  Allocation  Investing in different types of assets (such as stocks, bonds, precious metals, real estate, cash, etc.) in an effort to diversify and reduce risk. Asset allocation cannot guarantee a profit or protect against loss. (see Diversification Diversification)) Asset Class  Class  Types of investments — such as stocks, bonds, real estate and cash. Asset-Backed Commercial Paper  Paper   Short-term obligations, issued by banks and corporations, and backed by the issuers’ assets, such as receivables. Asset backed commercial paper is frequently used for short-term financing needs. Automated Clearinghouse (ACH)  (ACH)  The electronic funds transfer network that enables investors to make direct transfers of money from their bank accounts to their mutual funds, provided their bank participates in the ACH. Automatic Reinvestment  Reinvestment  A service offered by most mutual fund companies whereby dividends and capital gain distributions can be used to buy additional shares. Over time, this can build up holdings through the effects of compounding. Average Annual Total Return  Return  An investment’s average annual gain or loss over a specified period. It is a hypothetical rate of return that reflects a fund’s actual cumulative total return as if performance had been constant over the entire period. (see Annualized Return) Return ) Average Weighted Maturity (WAM)  (WAM)  The length of time until the average security in a fund matures or will be redeemed by its issuer. It indicates a fixed income fund’s sensitivity to interest rate changes. Longer average weighted maturity implies greater volatility in response to interest rate changes, while shorter average weighted maturity implies less volatility.

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Back-End Load  Load  A sales charge levied at the time an investor redeems his mutual fund shares. It declines annually to zero over an extended holding period, as described in a fund’s prospectus. Also called a contingent deferred sales charge. Balanced Fund  Fund  A mutual fund that invests in common stocks, preferred stocks, bonds and short-term fixed income securities. Such a fund seeks to provide shareholders with capital appreciation from its stock holdings and income from its bond holdings. Bank Notes  Notes  Currency or money. The U.S. Federal Reserve Bank regulates the amount of currency or bank notes in circulation in the United States. Bank of Record Record    A bank designated by a shareholder to which proceeds from redemptions can be wired or mailed. Banker's Acceptance  Acceptance  An order created by a buyer and provided to a seller, promising to pay an amount of money at a certain date. When accepted by a bank, it guarantees payment to the seller. Banker’s acceptances are often used in international trade when parties to a transaction are unwilling to offer credit. As bank-guaranteed obligations, banker’s acceptances are frequently traded at a discount to face value in the secondary market. Basis Point  Point  The smallest measure used for quoting yields on bonds and notes. One basis point is one onehundredth of a percentage point, or 0.01%. If the U.S. Federal Reserve increases its short-term interest rate target by 50 basis points, or a bond’s yield rises by 50 basis points, the change would be 0.50% or one-half of one percent. Bear Market  Market  A period of generally falling stock prices. Before-Tax Contribution  Contribution  Money invested in a retirement plan, such as a 401(k) or traditional IRA, before taxes are withheld. While before-tax (or pre-tax) contributions may reduce current taxable income, distributions from retirement accounts funded with such contributions are taxable when withdrawn. Beneficiary   Beneficiary 1. A person to whom an inheritance passes as the result of being named in a will. 2. A recipient of the proceeds from an IRA, UGMA/UTMA, life insurance policy, or other investment account. 3. A party in whose favor a letter of credit is issued. 4. One to whom the amount of an annuity is payable. 5. A party for whose benefit a trust exists. Beta   Beta A measure of the volatility of a security (stock, bond, mutual fund, etc.) relative to the overall market or an index. If a security has a beta greater than 1, it is more volatile than the market or index; if a security has a beta below 1, it is less volatile. Generally, conservative investors favor low-beta investments, while more aggressive investors favor higher beta investments. Bid Price/Redemption Price  Price  The price at which shares of a mutual fund can be redeemed. The bid price is usually the fund’s net asset value per share. This amount may be reduced by contingent deferred sales charges. Also called redemption price. (see Asked Price/Offering Price; Price; see Net Asset Value; Value; see Spread)) Spread Blue Chips  Chips  Financially stable, well-established companies that historically have demonstrated an ability to pay dividends and grow profits regardless of economic conditions. Blue-Sky Laws  Laws  Laws passed by states to protect investors against securities fraud. These laws require sellers of new stock or mutual funds to register the offerings and provide financial data on the issues. Bond   Bond A debt security issued by corporations, government agencies, municipalities and states, requiring the issuer to pay the bondholder the principal amount at maturity. Bonds come in many different forms and may be sold at a discount or be interest-bearing. Bondholders essentially have an “IOU” from the issuer. Unlike stockholders, bondholders have no ownership stake in a corporation — although convertible bonds allow bondholders, under certain conditions, to exchange a corporation’s bonds for stock. Bond Funds  Funds  Mutual funds that invest in bonds — debt securities issued by corporations, governments or government entities. These fixed-income funds typically seek to provide monthly income as well as relative stability of principal. Bond Rating  Rating  A system of evaluating the chance a bond issuer may default. Fitch, Moody’s and Standard and

 

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Poor’s, among other firms, analyze the financial stability of both corporate and government bond issuers. S&P ratings, for example, range from AAA or Aaa (extremely unlikely to default) to D (currently in default). Bonds rated BB or below by S&P or Baa or below by Moody’s are not considered to be investment grade. Mutual funds generally restrict their bond holdings to issues of certain quality ratings, which are specified in their prospectuses. (see Credit Rating) Rating) Book Value  Value  The value at which an asset is carried on a company’s balance sheet. Normally, the asset is calculated as actual cost less depreciation. The book value of an asset may be more or less than its market value. Breakpoints   Breakpoints For mutual funds that are sold with a sales charge, the dollar amount an investor must purchase in one transaction orInformation in multiple transactions within appears a specified qualify for(either a discounted sales charge. about breakpoints in aperiod) fund’s to prospectus. Broker-Dealer   Broker-Dealer A broker acts on behalf of its client by seeking the best price at which buy or sell a security in the market place. A broker carries out the transaction but neither takes possession of the security nor maintains an inventory of securities. A dealer acts on behalf of itself by buying and selling securities and maintaining an inventory of securities in its own account. Budget Deficit  Deficit  The difference between the federal government’s income and its spending in a given fiscal year, when spending exceeds income. (The opposite of a budget deficit is a budget surplus — when the amount of money the government takes in exceeds the amount it spends.) (see National Debt)) Debt Bull Market  Market  A period of generally rising stock prices.

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Callable Bond  Bond  A bond that allows the issuer to redeem, or “call” it at a specified price at a predetermined time prior to maturity. If interest rates decline significantly, an issuer may call existing higher yielding bonds and issue new bonds with a lower yield. Capital   Capital Money used to make more money. Capital Gain  Gain  The difference between an asset’s purchase price and its sale price, when the difference is positive. Capital gains can be long term (if a profit is made on an investment held at least one year) or short term (if a profit is made on an investment held for less than one year.) Long- and short-term capital gains are treated differently for tax purposes. Capital Gains Distribution  Distribution  A payment to shareholders when securities in their fund’s portfolio are sold at a profit. These payments are made on a regular basis, often near year-end, and are taxable to shareholders unless their funds are held in tax-deferred or tax-free accounts. Most funds allow shareholders to receive capital gains distributions in cash or to use their distributions to buy additional fund shares. Capital Growth  Growth  A rise in the market value of a mutual fund’s securities, reflected in its net asset value. This is a specific long-term objective of many mutual funds. Capital Loss  Loss  The difference between an asset’s purchase price and its sale price, when the difference is negative. Capital losses can be long term (if a loss is incurred on an investment held at least one year) or short term (if a loss is incurred on an investment held for less than one year.) Long-term capital losses may be used to offset long-term capital gains; short-term capital losses may be used to offset short-term capital gains. Certificates of Deposit (CDs)  (CDs)  Short-term investments issued by banks. CDs pay fixed principal and interest over a specified period and, unlike mutual funds, are insured by the Federal Deposit Insurance Corporation. Certified Financial Planner  Planner  A person who has passed examinations accredited by the Denver-based Institute of Certified Financial Planners, testing his ability to coordinate a client’s banking, estate, insurance, investment and tax affairs. cfp.net  cfp.net  Chapter 11  11  A plan to reorganize an insolvent business. The reorganization plan allows a debtor to continue

 

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to operate his business while negotiating with creditors to restructure and repay his debts. Chapter 7  7  A court-supervised plan in which a court-appointed trustee is charged with liquidating an insolvent business. Chartered Financial Analyst® (CFA®)  (CFA®)  A globally recognized standard for measuring the competence and integrity of investment professionals. CFA designations are awarded by the non-profit CFA Institute. cfainstitute.org Closed-End Management Company  Company  An investment company that manages a mutual fund that offers a fixed number of shares for sale. The shares trade in the public markets, with supply and demand determining their price — as with any listed security. Fund shares are sold to other investors, not redeemed by the investment company, and are quoted at current market price, not at net asset value. Commercial Paper Paper    Short term debt obligations with maturities ranging from several days to nine months. The debt is usually issued by banks and corporations, and is most often unsecured — although often backed by a bank line of credit. Commercial paper is traded, often at a discount, in the secondary market. Commingling   Commingling 1. Contributing after-tax money to a qualified retirement account consisting of pre-tax contributions. 2. Mixing customer-owned securities with those owned by a firm in its proprietary accounts. Done without the customer’s permission, this is a violation of a firm’s fiduciary responsibility. Commission Sharing Arrangement  Arrangement  An arrangement in which a mutual fund pays a brokerage firm higher trading commissions in exchange for additional services, such as research or technology. Commodity   Commodity A transportable article of trade or commerce that can be sold or bartered. Commodities widely traded on commodities exchanges around the world are agricultural products and raw materials such as oil and copper. Common Stock  Stock  A security representing ownership in a company. Because stock holders actually own part of the company, they are entitled to share in its profits and losses. They also have the right to attend annual meetings, voice their opinions on the company’s general operations, elect the board of directors and vote on important changes within the organization. Many companies pay annual dividends to shareholders of their common stock. Bond holders, in contrast, are simply creditors with none of these ownership privileges. Compensation   Compensation Something given in exchange for work, loss or injury. The Internal Revenue Service distinguishes between earned income (such as wages, salaries, tips and net earnings from selfemployment) and unearned income (such as interest and dividends, pensions, unemployment benefits, and alimony and child support). Compound Interest  Interest  Interest earned on principal and previously earned interest. For example, consider a hypothetical $1,000 investment earning 6% interest annually. At the end of the first year, the investment’s value would be $1,060 — the principal plus $60 in interest. At the end of the second year, the investment’s value would total $1,123.60 — another $60 earned on the principal and $3.60 earned on the $60 in interest that was earned the previous year. The $3.60 is compound interest. Confirm   Confirm An acknowledgment sent to an investor after the purchase, sale or exchange of a security. The confirm reflects the details of the transaction. Confirm Date  Date  The date on which a mutual fund investor’s transaction is processed, typically the same day or the day after the trade date. Confirmation   Confirmation A written acknowledgment of a security trade. A confirmation lists important details of the trade, such as the date, size of the transaction, price, commission, taxes, etc. A confirmation is generally mailed the day after a trade takes place. Conservative Investments  Investments  One end of the risk spectrum. Generally, conservative investments place greater emphasis on protecting principal, reducing volatility and, often, on providing current income than they do on providing significant capital appreciation. Risk-averse investors, or those approaching or already in retirement, may favor conservative investments for their relative stability and security. Consumer Price Index (CPI)  (CPI)  Commonly used as a measure of inflation, the CPI is the monthly change in consumer prices (e.g., housing costs, food, transportation and utilities) determined by the U.S. Bureau of Labor

 

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bls.gov (see  (see Inflation Inflation)) Statistics. bls.gov Contingent Deferred Sale Charge (CDSC)  (CDSC)  Back-end sales charges imposed when selling certain fund shares. See the fund’s prospectus for complete details. Cost Basis  Basis  The cost of an investment, used to determine capital gains or losses when selling it. Coupon Rate  Rate  A fixed income security’s interest rate, determined at issuance and expressed as a percentage of the security’s face value. For example, a bond selling for $1,000 and paying $55 in interest annually would have a coupon of 5.5%. A bond’s coupon is likely to differ from its current yield. (see Current Yield) Yield) Coverdell Education Savings Accounts Accounts    Tax-deferred accounts that allow individuals to save for educational expenses, most often their children’s. Assets in the accounts may be invested in mutual funds or other investments. Credit Crunch  Crunch  A sharp and sudden reduction in the availability of credit and investment capital, even to creditworthy customers. A credit crunch usually occurs during a recession or period of economic difficulty. While it has negative effects for the economy as a whole, a credit crunch can be particularly difficult for small businesses. Credit Rating  Rating  A credit rating is an assessment provided by a nationally recognized statistical rating organization of the creditworthiness of an issuer with respect to debt obligations, including specific securities, money market instruments or other debts. Ratings are measured on a scale that generally ranges from AAA (highest) to D (lowest). Ratings are subject to change without notice. “NR” indicates the issuer was not rated, and should not be interpreted as indicating low quality. (see Bond Rating) Rating) Credit Spread  Spread  The yield difference between Treasury securities and non-Treasury securities with the same maturity. Treasury securities are considered “risk free” because they are backed by the U.S. government; non-Treasury securities such as corporate or municipal bonds have a variety of risks. Tighter credit spreads generally reflect improving economic conditions, which historically have led investors to be more comfortable with taking risk. Wider credit spreads generally mean that investors demand extra yield from non-Treasuries in the face of, or anticipation of, worsening economic conditions. Cumulative Return  Return  An investment’s total percentage gain or loss over a given period. Current Yield  Yield  A security’s annual dividend or interest rate divided by the security’s current market price. Because a security’s price may rise or fall after issuance, its current yield may be higher or lower than its coupon. A bond selling at a premium to its face value would have a current yield below its coupon; a bond selling at a discount to its face value would have a current yield above its coupon. CUSIP Numbers  Numbers  Identification numbers and codes assigned to securities for trading purposes. CUSIP stands for the Committee on Uniform Securities Identification Procedures.

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Debt-Equity Ratio  Ratio  One measure of a company’s financial health. The ratio is calculated by dividing a company’s total liabilities by total shareholder equity. This ratio gives an indication of how much equity would be available to pay off creditors if the company were liquidated. A debt-equity ratio of 3:1, for example, indicates that the company’s debt is three times the value of shareholder equity. Defined Benefit Pension Plan  Plan  A retirement plan that promises to pay a predetermined amount to employees who retire after a specified number of years of employment. Some defined benefit plans permit employee contributions while others are funded exclusively by employer contributions. In a defined benefit plan, separate accounts are not established for each employee. Defined Contribution Plan  Plan  A retirement plan in which the employee and/or employer contribute specified amounts periodically. Upon retirement, benefits will vary based on the amount of assets each employee accumulated and the performance of the investments in which the employee invested his assets. Accounts may be controlled by a firm-appointed trustee or self directed by each

 

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employee. Examples include 401(k)s, money purchase plans and profit sharing plans. Deflation   Deflation A general decline in the prices of goods and services, often caused by reduced money supply and/or a decrease in government, corporate and consumer spending and investing. Deflation can be especially dangerous because businesses earn less for each item sold, and consumers earn less money for the same work. With consumers and businesses earning less than anticipated, they find it increasingly difficult to repay existing debts — and an increasing percentage of income is used for debt repayment, businesses have less to invest and consumers have less to spend. This decreased demand can put further pressure on prices and demand, creating a “deflationary spiral.” Deleverage   Deleverage A company’s to paydoesn’t off its debts. Corporations borrow sums—toby operate grow. But if aefforts corporation grow, it must delever — or significant get out of debt payingand off loans. This is a signal that the corporation is not growing. Depreciation   Depreciation A decline in the value of an asset, such as an automobile. Businesses may see their physical assets (manufacturing plants, computer equipment, etc.) depreciate due to age, physical damage or obsolescence, among other factors. Direct Rollover  Rollover  The transfer of assets from one qualified retirement plan (for example, a 401(k) or 403(b) plan) directly to an IRA or other qualified retirement plan that accepts rollovers. A direct rollover avoids penalties on the distribution, since the owner did not take custody of the assets. Discount   Discount 1. The difference between a bond’s current market price and its face value or redemption value, if its current market price is less than its face value. 2. A type of debt security, such as Treasury bills and zero coupon bonds, which are issued at less than face value but are redeemed, at maturity, at face value. (see Premium Premium)) Discount Rate  Rate  The interest rate the U.S. Federal Reserve charges member banks for loans. It is one of several federalreserve.gov   tools the Fed employs to help set short-term interest rates. federalreserve.gov Discounted Discounte d Cash Flow Flow   A method used to estimate the present value of future earnings or cash flows. Distribution   Distribution 1. The removal of assets from a retirement account and paid to the retirement account owner or beneficiary. 2. A company’s payment of cash or stock or physical products to its shareholders. Distributor   Distributor An individual or corporation serving as principal underwriter of a mutual fund’s shares — buying shares directly from the fund and reselling them to investors. Diversification   Diversification An investment strategy of investing in different types of investments within an asset class. For example, an equity fund investor might diversify his holdings by investing in a large-cap value fund, a foreign-stock fund and a small-cap growth fund. The goal is to reduce the impact of any one security on overall portfolio performance. Diversification cannot guarantee a profit or protect against loss. (see Asset Allocation) Allocation) Dividend Payout Ratio  Ratio  The percentage of a company’s earnings that it pays to shareholders in the form of dividends. Generally, mature, established and profitable companies may have higher ratios while smaller start-up companies in fast growing industries may choose to reinvest all earnings rather than pay dividends to shareholders. Dividend Yield  Yield  The annual rate of return on a common or preferred stock. Dividends   Dividends A distribution of earnings from a fund (or company) to its shareholders paid in the form of cash or additional shares. Dollar-Cost Averaging  Averaging  An investment strategy of investing a fixed amount at regular intervals regardless of stock market movements. This may reduce average share costs to the investor, who acquires more shares when prices are low and fewer shares when prices are high. Dollar cost averaging cannot guarantee a profit or eliminate the risk of loss. Investors should consider their ability to continue investing regardless of fluctuating security prices. Dow Jones Industrial Average (the Dow)  Dow)  A widely followed price-weighted index of 30 of the largest, most widely held stocks traded on the New York Stock Exchange. Dow Jones & Co., a leading provider of global business news and information services, is a subsidiary of News Corporation. dowjones.com dowjones.com   Durable Power of Attorney  Attorney  

 

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A legal document in which one person gives another person the authority to act on his behalf, should the need arise due to mental or physical incapacitation. The person granted power of attorney can manage the other person’s day-to-day financial needs, for example, as well as handle more complex matters that may arise. (see Non-Durable Power of Attorney) Attorney ) Duration   Duration The measure of a debt security’s price sensitivity to interest rate changes, expressed in terms of years. Securities with longer durations usually are more sensitive to interest rate movements than those with shorter durations. Should interest rates change, the value of a fund that invests in securities with longer durations will fluctuate more than the value of a fund that invests in securities with shorter durations.

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Earnings Per Share (EPS)  (EPS)   A company’s earnings divided by the number of common shares outstanding. For example, if a company earns a profit of $1 million and has 1 million shares outstanding, its EPS would be $1. Earnings Yield  Yield  A company’s earnings divided by its current stock price. Earnings yield (also called earningsprice ratio) can be used to compare the attractiveness of stocks, bonds and money market securities. Economic Growth and Tax Relief Reconciliation Act  Act   Enacted after the terrorist attacks of September 11, 2001, legislation intended to help stimulate the U.S. economy. The temporary, 10-year measure reduced income taxes for most Americans, repealed estate and gift taxes and increased the amount of tax-deductible contributions individuals can make to their IRAs. Education IRAs  IRAs  (see Coverdell Education Savings Accounts) Accounts) See also Coverdell Education Savings Accounts.. Accounts Emerging Markets  Markets  Generally, economies in Africa, Asia, Eastern Europe, the Far East, Latin America and the Middle East which, while relatively undeveloped, may hold significant growth potential in the future. Investing in such economies may provide significant rewards — and significant risks. Those risks include potentially high rates of inflation, high transaction costs, relative market illiquidity, political and economic instability and less strict financial and accounting controls and standards than common in more developed markets. Employee Retirement Income Security Act (ERISA)  (ERISA)  The 1974 law that created the Pension Benefit Guaranty Corporation. ERISA laws established specific guidelines for managing pension funds and eased eligibility regulations. Employee Stock Ownership Plan (ESOP)  (ESOP)  A program giving employees the opportunity to buy stock in their company, and with it, a voice in the firm’s management. Equity-Income Funds  Funds  Funds that invest primarily in stocks of companies with histories of paying dividends. Equivalent Taxable Yield  Yield  A way of comparing taxable yields on corporate or government bonds to tax-free yields of municipal bonds. Depending on an individual’s tax situation, a higher yielding corporate bond with a taxable yield may be less attractive than a municipal bond with a lower, but tax-free yield. Eurodollar   Eurodollar U.S. dollar-denominated currency deposited in a European bank or foreign branch of an American bank. Eurodollars are most commonly used to settle international transactions outside the United States. Ex-Dividend Date  Date  The date on which a mutual fund’s net asset value (NAV) or a stock’s price will fall by an amount equal to the dividend and/or capital gain distribution. Most publications that list mutual funds’ closing NAVs place an "X" after a fund’s name on its ex-dividend date. (see Record Date. Date)) See also Record Date. Date Excessive Trading  Trading  1. An unethical practice in which a broker makes frequent trades in a customer’s account for the purpose of increasing his or her commissions, rather than to further the customer’s investment goals. 2. Frequent trading by mutual fund investors in response to short-term changes in market conditions. Because mutual funds are intended to be long-term investments, mutual fund companies may monitor accounts of customers suspected of engaging in excessive trading, may impose short-term trading fees or may take other actions to protect the interest of

 

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long-term investors. Exchange Privilege  Privilege  The right of mutual fund shareholders to transfer their investment from one fund to another within the same fund family, often at no charge. Executor   Executor A person designated to carry out the provisions of a will as to the administration of the deceased’s estate and the distribution of the assets in it. An executor may be a bank trust officer, family member or trusted friend. Expense Ratio  Ratio  The ratio of a mutual fund’s total expenses (operating expenses and management fees) to its total net assets. A mutual fund’s expense ratio is listed in its prospectus. A fund’s expense ratio may be a function of its size rather than of its success in controlling expenses.

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Fair Market Value  Value  The negotiated price at which an asset can be bought or sold in an open market. Federal Agency Issue  Issue  Debt securities issued by agencies or corporations chartered by the federal government, such as the Tennessee Valley Authority. The issuers of such securities lack an explicit guarantee from the federal government, but because they have an implicit guarantee their debt is considered high quality. Federal Deficit  Deficit  The shortfall created when the federal government spends more in a fiscal year than it receives in revenues. To cover the shortfall, the government sells long- and short-term debt securities. Federal Deposit Insurance Corporation, U.S. (FDIC)  (FDIC)  An independent agency created by Congress in 1933 that maintains the stability and public confidence in the U.S. financial system by insuring deposits, examining and supervising www.fdic.gov   financial institutions and managing receiverships. www.fdic.gov Federal Funds Target Rate  Rate  The interest rate charged by banks with excess reserves at a Federal Reserve district bank to other banks who need overnight loans to meet reserve requirements. The Fed funds target rate is the most sensitive gauge as to the direction of interest rates, since it changes daily. federalreserve.gov   federalreserve.gov  Fiduciary   Fiduciary A person, company or association charged with investing assets for the benefit of another. Examples include a pension fund trustee or an executor of a will. Financial Adviser  Adviser  An investment professional who assists clients on financial issues such as retirement planning, investing and, if qualified to do so, insurance. Financial advisers may have varying levels or areas of expertise, but all are registered with — but not licensed or endorsed by — FINRA. finra.org/Investors/ToolsCalculators/BrokerCheck/index.htm Financial Industry Regulatory Authority (FINRA)  (FINRA)   The largest non-governmental regulator of securities firms doing business in the United States. FINRA is dedicated to investor protection and market integrity through effective and efficient www.finra.org   regulation and complementary compliance and technology-based services. www.finra.org Financial Planner  Planner  A professional who analyzes clients’ financial circumstances and prepares a comprehensive plan designed to meet their financial needs and objectives. A financial planner may or may not be certified by the Institute of Certified Financial Planners. (see Certified Financial Planner) Planner) Fiscal Policy  Policy  Tax and spending policies implemented by Congress intended to achieve full employment, price stability and sustained economic growth. In times of economic distress, government spending may be increased and/or taxes may be decreased to stimulate demand and promote full employment. The “cash for clunkers” program in 2009 — in which the government provided financial incentives to spur new-car sales — is a recent example of fiscal policy. (see Monetary Policy)) Policy Fiscal Stimulus  Stimulus  (see Fiscal Policy) Policy) Fiscal Year-End  Year-End  The time when a corporation closes its books and determines its profit or loss. It may or may not coincide with the calendar year-end. Fixed-Income Security  Security  A security that pays a fixed rate of return, such as a bond or note.

 

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Floater   Floater  A debt security with a variable interest rate tied to another interest rate — similar to an adjustable rate mortgage. Interest rates on floaters rise if the related interest rate increases, but fall if the related interest rate declines. Floaters can be particularly attractive when interest rates appear likely to rise. Foreign Tax Credit  Credit  A tax credit provided to shareholders of certain mutual funds. Funds that invest in securities of foreign companies may pay taxes in those companies’ home countries. Funds with more than 50% of their assets invested in foreign securities at fiscal year-end may pass foreign tax credits through to their shareholders, reducing the shareholders’ federal tax obligations. A tax adviser can provide more complete information. Front-End Load Load    A sales charge on certain fund shares levied at the time of purchase. A mutual fund’s prospectus includes complete information about applicable front-end sales charges. Fund Family  Family  An issuer that sponsors multiple mutual funds, each with its own investment objective. Often, investors may move assets from one fund to another within the same fund family without charge. (see Exchange Privilege) Privilege) Funding Agreement  Agreement  Illiquid insurance contracts, often held by mutual fund companies, that provide guaranteed payment of principal and interest for a specified period of time. Futures Contract  Contract  An agreement obligating a seller to sell, and a buyer to buy, an asset (such as a commodity or financial instrument) at a predetermined date and price. Futures contracts are used for speculation, hedging and arbitrage, and may be traded themselves before the predetermined date. Futures contracts differ from options, which give a buyer the right — but not the obligation — to purchase an asset.

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G-20 (Group of Twenty)  Twenty)   Finance ministers and central bank governors from 20 industrialized and developing nations who meet regularly to discuss key global economic issues. G-20 members are Argentina, Australia, Brazil, Canada, China, the European Union, France, Germany, India, Indonesia, Italy, Japan, South Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, the United Kingdom and the United States. General Obligation Bond  Bond  (see Municipal Bond) Bond) Gift Tax  Tax  A federal and/or state tax levied on donors of gifts in excess of certain limits. Global Funds  Funds  Mutual funds that invest primarily in securities of foreign (non-U.S.) companies but may also invest in securities of U.S. companies. Government National Mortgage Association (Ginnie Mae)  Mae)  A government-owned corporation within the U.S. Department of Housing and Urban Development. Ginnie Mae guarantees investors the full and timely payment of principal and interest on their mortgage backed securities (MBS) — mainly MBS issued by the Federal Housing Administration and the U.S. Department of Veterans Affairs (FHA and VA loans). Ginnie Mae securities are the only MBS backed by the full faith and credit of the U.S. government. ginniemae.gov   ginniemae.gov Gross Domestic Product (GDP)  (GDP)  The value of all goods and services produced in the United States, estimated quarterly by the U.S. Bureau of Economic Analysis. It is the broadest measure of overall economic activity and the primary indicator of economic growth or contraction. bea.gov  bea.gov  Growth and Income Funds  Funds   Mutual funds that invest primarily in common stocks of well-established corporations whose stock has the potential for share-price appreciation and the potential for continued dividend payments. Growth Funds  Funds  Mutual funds that invest in stocks of companies with high growth rates, whose stocks are expected to increase in value more rapidly than the overall market. Growth stocks may be more volatile than other investment styles because they are more sensitive to investor perceptions of an issuing company’s growth potential. Guaranteed Income Contract (GIC)  (GIC) 

 

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A contract between an insurance company and a corporate profit-sharing or pension plan under which the insurance company guarantees a specific rate of return over the life of the contract.

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Health Care Proxy  Proxy  A document in which an individual appoints someone else to make health care decisions on his behalf if he becomes physically or mentally incapacitated or unable to communicate with medical professionals. Once drafted, the document remains in affect unless cancelled or unless the individual appointed to make decisions becomes unable to do so. A health care proxy is not a power of attorney. (see Power of Attorney) Attorney) High Yield Bonds  Bonds  Lower rated (i.e. noninvestment-grade) debt securities that may provide higher returns than investment-grade bonds, but may involve special risks. High yield bonds may be more susceptible to real or perceived adverse economic and industry conditions and they may be less liquid than higher rated securities. High yield bonds generally have a greater risk of default on interest and principal payments and their price may change significantly if the credit quality of their issuer changes. (see Bond Rating; Rating; see Junk Bonds) Bonds)

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Income Funds  Funds  Mutual funds that invest in income-producing securities. They seek to provide a high level of monthly income while also maintaining relative stability of principal. Index   Index A measure of something’s performance — often, the performance of the stock or bond markets. Mutual funds use indexes to compare their performance with the broad market as well as their peers — competitors with similar investment styles and objectives. In the U.S., closely followed equity indexes include the Standard & Poor’s 500 Index, the Dow Jones Industrial Average and the Nasdaq Composite Index. Hundreds of indexes exist to measure the performance of stocks, bonds, foreign stock markets, etc. An investment cannot be made directly in an index. Index Fund  Fund  A mutual fund that seeks to mirror the performance of an index, often the Standard & Poor’s 500 Index. Not actively managed, index funds buy and hold the same securities, in the same proportion, as the index. Individual Retirement Account (IRA)  (IRA)  A personal, tax-deferred savings account an employed person can establish to help fund retirement. IRA assets can be invested in stocks, bonds, mutual funds, certificates of deposit, annuities and precious metals; physical real estate cannot be held in an IRA. Eligibility requirements, contribution limits, investment options, tax treatment and withdrawal regulations are subject to change; a financial adviser can provide more complete information. Two broad categories of IRAs exist: traditional and Roth. Traditional IRAs are funded with pretax dollars; they grow tax-deferred; and withdrawals are taxed as ordinary income. Roth IRAs are funded with after-tax dollars; they grow tax-deferred; and withdrawals are not subject to tax. (see Spousal IRA) IRA) Individual Retirement Account (IRA) Rollover  Rollover   The movement of assets from a qualified employer-sponsored retirement plan (such as a 401 (k) or profit-sharing plan) into an IRA, often upon retirement or change of employment. Inflation   Inflation A rise in the price of goods and services, resulting from increased spending relative to the supply of goods and services available. When “too much money chases too few goods,” the value or purchasing power of currency declines. In the U.S., the Consumer Price Index is commonly used to measure the rate of inflation. (see Consumer Price Index) Index) Initial Public Offering (IPO)  (IPO)  A corporation’s first sale of common stock to the public. Subsequently, the corporation’s common stock trades among individual buyers and sellers and the corporation receives no proceeds. (see Secondary Market) Market) Insider   Insider Directors, officers and others with access to confidential corporate information not available to the public. Securitiesinformation. and Exchange Commission regulations prohibit insiders from trading.” trading stock based on non-public A violation of those regulations is called “insider Interest   Interest Compensation paid for the use of borrowed money.

 

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Interest Rate  Rate  The annual rate, expressed as a percentage of principal, charged for the use of borrowed money. Interest Rate Risk  Risk  The risk that bond prices generally fall as interest rates rise, and vice versa. Internal Rate of Return (IRR)  (IRR)  A means of measuring and comparing the profitability of investments. The internal rate of return on an investment is the annualized effective compounded rate of return that can be earned on invested capital. When the internal rate of return is greater than the required return, an investment represents a good opportunity. International Funds  Funds  Mutual funds that in invest the bulk ofaround their assets in non-U.S. securities. Diversified funds may invest securities from the globe and may hold securities from international companies in developed and developing markets. Other international funds may focus on a single country or region. Foreign securities have special risks, including exchange rate changes, potential political and economic instability, less availability of information, relatively low market liquidity, and the potential lack of strict financial and accounting controls and standards. Intrinsic Value  Value  The estimated value of a company’s stock, separate and apart from its market price. Market analysts or fund managers may use a variety of data to determine whether a stock’s current market price fairly values a company’s tangible assets and growth prospects. If estimated intrinsic value is greater than the stock’s current market price, the stock may be considered undervalued and a candidate for purchase. There is no guarantee that a stock’s estimated intrinsic value will ever be reflected in its market price. Investment Adviser  Adviser  (see Financial Adviser) Adviser) Investment Advisers Act  Act  A 1940 law regulating investment advisers. With certain exceptions, the Act requires that firms or sole practitioners compensated for advising others about securities must register with the Securities and Exchange Commission and conform to investments regulations designed to sec.gov   protect investors. sec.gov Investment Company Act of 1940  1940  A 1940 law regulating the organization of companies, including mutual funds, that engage primarily in investing, reinvesting and trading securities — and whose own securities are offered to the investing public. The Act is designed to minimize conflicts of interest that arise in these complex operations. The Act requires such companies to disclose their financial condition and investment policies to investors when stock is initially sold, and subsequently, on a regular basis. The focus of the Act is on disclosure to the investing public of information about the fund and its investment objectives, as well as on investment companies’ structures and operations. sec.gov  sec.gov  Investment Grade Bonds  Bonds  Highly rated debt securities that may provide lower returns, but less risk, than lower rated debt securities. Bonds rated from AAA to BBB are considered investment grade; bonds rated BB and below are below investment grade. (see Bond Rating) Rating) Investment Objective  Objective  The financial (long-term growthappears of capital, current income, etc.) a mutual fund mutual fund’sgoal investment objective in its prospectus. A mutual fund may or pursues. may not A achieve its investment objective.

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Junk Bonds Bonds   Speculative, noninvestment-grade debt securities rated BB or below by Standard & Poor’s or Ba or below by Moody’s. "Junk bonds" are generally issued by corporations of questionable financial strength or without proven track records. Junk bonds, also called high-yield bonds, tend to provide higher yields than investment-grade bonds, but also tend to be more volatile. Compared to higher quality debt securities, junk bonds involve greater risk of default or price changes due to changes in credit quality of the issuer because they are generally unsecured and may be subordinated to other creditors’ claims. (see Bond Rating; Rating; see High Yield Bonds) Bonds)

K There are no glossary entries for this letter. letter.  

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Letter of Intent  Intent  An agreement between a mutual fund investor and a mutual fund company in which the investor expresses a desire to invest a certain amount of money over a specified period (often 13 months) in order to qualify for reduced sales charges. A letter of intent allows a smaller investor to qualify for breakpoints (reduced sales charges) by investing smaller amounts regularly over time — in the same way wealthier investors can qualify for reduced sales charges by making a single large investment. A letter of intent is not a contract; if the investor invests too little money to trigger breakpoint discounts, he is simply charged the normal, nondiscounted sales charge. Leverage   Leverage  The use of certain financial instruments or borrowed capital, such as margin, to increase the potential return of an investment. Homebuyers use leverage when they borrow money to buy a home; their mortgages represent borrowed capital. While leverage may increase investors’ potential returns, it also increases risk and potential losses. If the value of an investment purchased with borrowed money declines, the investor not only suffers a loss on his investment, but also incurs borrowing costs. Leveraged Buyout  Buyout  The acquisition of one company by another that is financed largely with borrowed money. Often, the assets of the company being acquired, as well as the assets of the acquiring company, are used as collateral for loans. Leveraged buyouts allow companies to make large acquisitions without having to commit a great deal of capital. Liability   Liability A claim on the assets of an individual or a corporation, excluding ownership equity. A liability represents a transfer of assets or services at a specified date. The corporation or individual has little or no discretion to avoid the transfer because the event causing the obligation has already Libor  Libor 

occurred.

The London Interbank Offered Rate. The Libor is the world’s most widely followed benchmark for short-term interest rates. Fixed daily, the Libor is the interest rate at which banks in the London interbank market can borrow overnight funds from one another. It serves as a base when determining interest rates for corporations and other large borrowers. Lipper   Lipper An independent and widely followed mutual fund performance monitor. Lipper, Inc., a Thomson Reuters company, is a global leader in supplying mutual fund information, analytical tools and commentary. Based on total return performance, Lipper calculates mutual fund rankings within a variety of categories. Liquidity   Liquidity The ease with which an asset or security can be sold (i.e., converted into cash) in the market without affecting its price. Assets that can be easily bought or sold are known as liquid assets. The stock of a widely held public corporation or a short-term Treasury bill would both be considered more liquid than a home. Liquidity Crunch  Crunch  (see Credit Crunch) Crunch) Living Will  Will  A legal document in which an individual, prior to a final illness or injury, expresses his wishes about what procedures and equipment should, or should not, be used to extend his life. A living will is also called a directive to physicians. Load   Load A fee paid by an investor when buying (or in some case, selling) shares of a mutual fund that charges a front-end load or contingent deferred sales charge. (see Contingent Deferred Sales Charge and Front-End Load) Load) Load Fund  Fund  A mutual fund that imposes a front-end sales charge when investors buy shares or a contingent deferred sales charge when investors sell shares. Long-Term Capital Gain  Gain   (see Capital Gain) Gain) Long-Term Gain or Loss  Loss  (see Capital Loss) Loss) Lump-Sum Distribution  Distribution  A single payment that represents an employee’s interest in his or her qualified retirement plan — triggered most commonly by retirement (or other separation from service), death, disability or attainment of age 59-1/2. A lump sum distribution must be made within a single tax year to

 

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avoid the federal government’s 10% penalty tax. Most often, individuals receiving a lump-sum Rollover.. distribution immediately deposit the funds in an IRA rollover account. See also Rollover

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Management Fee  Fee  A fee charged by a mutual fund for day-to-day management of the fund, including selecting its holdings ― and for shareholder relations and administrative services. Typically, the management fee is a percentage of a mutual fund’s assets. A mutual fund’s management fee is explained in the fund’s prospectus. Margin   Margin Cash, securities or other form of collateral an investor must deposit with a brokerage firm when borrowing money from the company to buy securities. “Buying on margin” is a complex and potentially very risky practice that allows an individual to buy stocks or other securities using money borrowed from a broker. In return for the loan, the brokerage firm requires collateral (usually 50% of the loan) in the form of cash or securities. If the value of the securities used as collateral declines, the individual may receive a “margin call” from the brokerage firm demanding additional collateral. Buying on margin and margin calls (together with lax margin requirements) were significant contributing factors to the stock market collapse of 1929 which led to the Great Depression. Market Capitalization  Capitalization  A broad measure of the size or value of a publicly traded company. In simple terms, a company’s market capitalization (or “market cap”) equals the number of its outstanding shares multiplied by the price of each share. Companies are placed in broad categories — such as a micro cap, small cap, mid cap or large cap. Some mutual funds (AIM Small Cap Growth Fund or AIM Large Cap Growth Fund, for example) invest primarily or exclusively in companies of certain market cap levels. Market Timing  Timing  A strategy of shifting investments among asset classes in an effort to benefit from exposure to those asset classes expected to appreciate most over the near term. When carried to an extreme, market timing can be a risky strategy, since few if any investors can be positive when particular asset classes (or the market as a whole) will rise or fall — and because market sentiment is subject to sharp and sudden change. A potentially wiser strategy may be to maintain a broadly diversified portfolio of investments. (see Asset Allocation; Allocation; see Diversification)) Diversification Master Notes  Notes  Debt instruments with a minimum face value of $25 million offered by the Federal Farm Credit Bank. Maturity   Maturity The date on which a debt security becomes due and payable. A bondholder receives his principal and a final interest payment upon a bond’s maturity. Medium Term Note (MTN)  (MTN)  A type of corporate debt security with varying maturities (usually ranging from nine months to 30 years) that is continuously offered to investors. Usually issued by investment-grade firms, MTNs provide companies with constant cash flow at a relatively low price, since a company must register with the U.S. Securities and Exchange only once, rather than each time it issues debt securities. MTNs generally offer higher coupon rates than comparable short-term notes. Monetary Policy  Policy  Central banks’ actions that are intended to promote economic growth and price stability. In times of economic distress, the U.S. Federal Reserve (the Fed) can provide more credit to the banking system to promote economic expansion. In times of economic expansion, the Fed can withdraw credit from the banking system to promote price stability. The Fed has a variety of tools through which it implements monetary policy. (see Fiscal Policy) Policy) federalreserve.gov federalreserve.gov   Money Market Fund  Fund  An open-ended mutual fund that invests in high-quality, short-term liquid securities, such as commercial paper and banker’s acceptances. Money market funds are intended to provide investors with safety, liquidity and yield. While the interest rate paid to investors varies, the net asset value of each share is intended to remain at a constant $1. An $1. An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency and is not a deposit or other obligation of, or guaranteed by, a depository institution. Although a money market fund seeks to  preserve the value valu e of an investment at $1 per share, it is possible to lose money by investing in a money market fund.  fund.  Morningstar   Morningstar

 

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An independent and widely followed mutual fund performance monitor. Morningstar is a global leader in supplying mutual fund performance data and commentary to individual investors and investment industry professionals. It rates mutual funds using a scale of from one (lowest) to five (highest) stars; ratings are recalculated monthly. Municipal Bond Fund  Fund   A mutual fund that invests in debt securities issued by state and local governments, or entities associated with or sponsored by them. Such funds are often designed to provide investors with income exempt from federal income taxes. (see Municipal Bond) Bond) Mutual Fund  Fund  An investment vehicle that collects money from shareholders and invests it in stocks, bonds, money market securities or other investments. Generally, mutual funds offer shareholders diversification and there professional management — in exchange forfunds management andwith other fees. At the close of 2008, were nearly 9,000 open-ended mutual in the U.S. assets totaling $9.6 trillion.1 Mutual funds come in many types and vary based on their investment objectives; types of holdings; geographic, sector or market-cap focuses; among other factors. A trusted financial adviser can recommend mutual funds that may be appropriate based on an individual’s financial situation, risk tolerance and investment goals.

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Nasdaq OMX Group  Group  The world’s largest exchange company. The Nasdaq began operations in 1971 as the world’s first electronic stock market; today it delivers trading, exchange technology and public company services across six continents. More than 3,700 companies are listed on the Nasdaq.2 National Debt  Debt  The total amount of money the federal government owes to its creditors, accumulated over many decades. Congress imposes a ceiling on the total national debt, but can raise it when accumulated debt approaches the ceiling. (see Budget Deficit) Deficit) treasurydirect.gov/NP/BPDLogin?application=np   Net Asset Value (NAV)  (NAV)  The value of one share of a mutual fund. With the exception of money market funds, a fund’s NAV changes daily, due to changes in the value of its holdings. A fund’s NAV is calculated each day after the close of the exchanges. Net Yield  Yield  Rate of return on a security net of out-of-pocket costs associated with its purchase. No-load Fund  Fund  A commission-free mutual fund that sells its shares at net asset value, either directly to the public or through an affiliated distributor, without the addition of a sales charge. Non-Durable Power of Attorney  Attorney  A legal document in which one person gives another person the authority to act on his behalf. The person granted power of attorney can manage the other person’s day-to-day financial needs, for example, as well as handle more complex matters that may arise. Under common law, a non-durable power of attorney ceases to be effective if the person granting authority becomes incapacitated. (see Durable Power of Attorney) Attorney) NYSE Euronext  Euronext  Formerly, the New York Stock Exchange. In 2007, the NYSE Group, Inc., joined with Euronext N.V. to create NYSE Euronext. As of December 31, 2008, approximately 8,500 listed stocks with a total market capitalization of $16.7 trillion were listed on NYSE Euronext exchanges, and daily trading volume was approximately $153 billion.3

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Offering Price  Price  The price at which one share of a mutual fund may be purchased; it is net asset value per share plus the maximum applicable sales charge. Open-End Management Company  Company  An investment company that manages a mutual fund that continually offers shares for sale to the public and redeems shares at their current net asset value, which may be higher or lower than the purchase price. Most mutual fund companies are open-end management companies, because they sell and redeem shares of the funds they manage. On occasion, an open-end management company may decide to close itself to new investors, usually when it decides it is too large. Operating Operatin g Expenses Expenses  

 

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The day-to-day costs of running a business paid from a fund's assets before earnings are Ratio.. distributed to shareholders. See also Expense Ratio Options   Options The right but not the obligation to purchase or sell the underlying asset at a stated price (the strike price) for a predetermined period of time. Call options are the right to buy the asset, and put options are the right to sell the asset. Both calls and puts may be bought and sold. If the right is not exercised, the option expires. In-the-money options are contracts whose current market price is above the strike price for calls and below the strike price for puts. Out-of-themoney options are contracts whose strike price is above the market price for calls and below the market price for puts. Option sellers are also known as writers. A covered call is secured by a position in the underlying asset. A naked or uncovered call is not backed by a security position. OneDividend  contract is Ordinary Income Dividend   equal to 100 shares of stock. A dividend of net investment income or a realized short-term capital gain.

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Payable Date  Date  The date when dividends or capital gains are paid to shareholders. Shareholders can receive their dividends or capital gains in cash or can reinvest them to buy additional shares. See also Date. Record Date. Payroll Deduction Plan  Plan  An arrangement between an employer and a mutual fund, authorized by the employee, through which a specified sum is deducted from an employee's salary to buy shares in the fund. Plan Administrator  Administrator  The person or, more typically, the company an employer selects to manage its employee retirement plan. The administrator works with the plan provider to ensure that the plan meets government regulations and that employees have the information needed to enroll, select and change investments within the plan and request distributions. Portfolio   Portfolio A group of securities held by an individual or institution which may contain various types of assets such as stocks and bonds. The purpose of a portfolio is to diversify risk. Portfolio managers are professionals responsible for the securities portfolio. Portfolio Turnover  Turnover  The rate at which the fund's portfolio securities are changed each year. If a fund's assets total $100 million and the fund bought and sold $100 million worth of securities that year, its portfolio turnover rate would be 100%. Aggressively managed funds generally have higher portfolio turnover rates than do conservative funds that invest for the long term. High portfolio turnover rates generally add to the expenses of a fund. Premium   Premium The amount by which a bond sells above its face value. Price Earnings Ratio (Price-to-Earnings)  (Price-to-Earnings)  Stock price divided by last year's earnings. The P/E indicates how much the stock owner pays per dollar of earnings that is generated by the firm on each share. As a generality, the higher the P/E ratio, the more risky and volatile a stock. Prime Rate  Rate  The interest rate banks charge their most creditworthy customers. The rate is determined by the market forces that affect a bank's cost of funds and the rates that borrowers will accept. The prime rate is a key interest rate for commercial lending. Principal   Principal 1. One who owns property. 2. The initial investment or the face amount of a bond. 3. A person who trades for his own account or on behalf of the broker-dealer firm in the primary or secondary market. Probate   Probate Judicial process whereby the will of a deceased person is presented to a court and an executor or administrator is appointed to carry out the will's instructions. Protectionism   Protectionism A policy of imposing tariffs, quotas or other handicaps on imported goods to make them less attractive to consumers. Historically, protectionism has increased during periods of economic difficulty, as governments seek to maintain or increase domestic production and jobs. Also historically, protectionist actions by one country have been met with retaliatory actions by its trading partners. Such retaliation can negatively affect the very production and jobs the initial actions sought to protect. Also, protectionist policies effectively raise consumer prices; limit consumer choice; and may leave them able to afford fewer domestically produce goods.

 

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Public-Private Investment Program (PPIP)  (PPIP)  A program created by the U.S. Treasury and the Federal Deposit Insurance Corporation to spend TARP funds to buy toxic or legacy assets; the program also allows private investors to use their own funds to buy such assets. The program is intended to allow taxpayers to share in the upside that government funding may produce. (see Toxic Assets/Legacy Assets; Assets; see Troubled Assets Relief Program) Program )

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Qualified Domestic Relation Order (QDRO)  (QDRO)   A judicial order or court decree that divides ownership of an individual’s qualified (i.e. taxadvantaged) retirement account or pension with a spouse, ex-spouse, child or other dependent as part of the equitable distribution of marital assets following a divorce or legal separation. The QDRO may be a separate document or it may be a part of the divorce decree. Quantitative Easing/Credit Easing  Easing  Specific steps the government can take to increase liquidity in the economy by encouraging banks to lend money. Typically, lowering short-term interest rate targets is the first step taken to improve liquidity. But after short-term interest rates are close to, or at zero, the government has limited options ― which makes quantitative easing something of a last resort. U.S. Federal Reserve Board (the Fed) Chairman Ben Bernanke refers to the U.S. version of quantitative easing as “credit easing” because it focuses on the mix of assets to be used to increase liquidity rather than on the quantity of credit created. Quantitative easing is sometimes described as  “printing money,” although al though the Fed actuall actually y creates it electro electronically nically by increasi ng the credit in its own bank account. It uses these funds to:  toxic assets from banks, providing them more money to lend.  Buy toxic Buy Buy long-term Buy  long-term government bonds, thereby lowering yields on long-term Treasuries. This  encourages banks to lend money to individuals and businesses ― because the banks can earn more from those loans than they could earn by investing in Treasuries.  that financial institutions have access to short-term credit ― thereby  Ensure that Ensure encouraging them to make loans rather than hoard reserves. (see Toxic Assets/Legacy Assets) Assets)

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Ratings  Ratings  Designations assigned by various investors services to give relative indications of quality. Ratings Agency  Agency  A company that researches and analyzes corporate and municipal bond issues and preferred stocks in an effort to assess their creditworthiness and the likelihood that investors will receive their principal and interest, or dividend, payments. Fitch Ratings, Moody’s and Standard & Poor’s are the largest ratings agencies. Recession   Recession A widespread downturn in economic activity over several months. Many economists define the term as two quarters of decline in a country’s gross domestic product. (see Gross Domestic Product)) Product Record Date  Date  The date by which an individual must own shares of a company’s stock in order to qualify for a dividend. The record date is set by the company’s board of directors. (see Ex-Divide Ex-Dividend nd Date Date)) Redemption Redemptio n Fee Fee   A fee charged by a limited number of funds for redeeming or exchanging fund shares. Redemption Price  Price  The price at which a mutual fund's shares are redeemed (bought back) by the fund. The redemption price is usually equal to the current net asset value per share. Also called the bid, call or sell price. Some funds do not charge a redemption fee. Registered Investment Advisor (RIA)  (RIA)  A corporation or individual, registered with the U.S. Securities and Exchange Commission (SEC), who manages the investments of others. An RIA may offer direct financial advice to individuals or businesses, or may provide asset management advice to a mutual fund or hedge fund. The RIA designation does not represent an endorsement by the SEC. Their compensation may be based on a percentage of assets under management — or on an annual, hourly or “flat fee” basis. Registered Investment Company  Company 

 

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Most commonly, a legal term for open- or closed end mutual fund companies registered with the Securities and Exchange Commission and meeting the requirements of the Investment Company Act of 1940. Reinstatement Privilege  Privilege  A policy of many mutual fund firms that allows an investor to avoid paying additional sales charges for a specified period of time after he redeems shares. The length of time may vary from company to company. Reinvestment privilege allows a former shareholder to avoid additional sales charges by buying the same class of shares in his former fund, or another fund within the same fund family, subject to certain terms and conditions. Reinvestment Date (Payable Date)  Date)  The date on which a share's dividend and/or capital gain will be reinvested (if requested) in additional fund shares. Reinvestment Privilege  Privilege  A service that most mutual funds offer whereby a shareholder's income dividends and capital gain distributions are automatically reinvested in additional shares. Repurchase Agreement (“Repo”)  (“Repo”)  A short-term financing mechanism for a dealer of government securities. The dealer sells its securities but simultaneously agrees to repurchase them at a higher price at a later date — usually the next day. It is, in effect, a short-term loan with the government securities serving as collateral. Required Beginning Date (RBD)  (RBD)   The date by which a qualified plan participant (such as a traditional IRA owner) must begin taking required minimum distributions from his or her retirement account. This date generally occurs on April 1 of the year after the calendar year in which the participant reaches age 70½. Required Minimum Distribution  Distribution  The amount of money a qualified plan participant (such as a traditional IRA owner) must withdraw from his or her retirement account annually. Required minimum distributions must begin by April 1 of the year after the calendar year in which the participant reaches age 70½. The required distribution is based on the value of the participant’s retirement account and his or herminimum life expectancy. Retained Earnings  Earnings  The net profits reinvested in the business after dividends are paid. Revenue Bond  Bond  (see Municipal Bond) Bond) Reverse Stock Split  Split  An action taken by a corporation’s board to decrease the number of outstanding shares of stock without changing total shareholder equity. Decreasing the number of shares outstanding increases the stock’s share price and per-share dividend — but leaves the value of a shareholder’s investment unchanged. Companies often split their stock when they believe the price of their stock is too low to attract investors to buy their stock. A company’s board of directors may declare a reverse stock split without shareholder approval. (see Stock Split) Split) Rights of Accumulation (ROA)  (ROA)  A right that allows a shareholder to receive reduced sales charges when the amount of mutual funds purchased, plus the amount already owned, equals an ROA breakpoint. Risk   Risk The that an will with not perform as anticipated. An acceptable of risk mustpossibility be determined byinvestment the individual the understanding that the higher the degree expected return, the greater the risk factor. There are many different kinds of risk, such as exchange, inflation, interest rate, liquidity, political, et cetera. Most investors are considered to be risk adverse. That is, they seek security over risk. Risk Tolerance  Tolerance  The level of risk an investor is willing to accept in the pursuit of potential financial reward. Generally, an individual with a high risk tolerance is willing to invest a greater portion of his assets in high-risk assets. An individual who is risk-averse, or who has a low risk tolerance, is generally unwilling to invest a significant portion of his assets in riskier assets. Individual risk tolerance is an important concept that investors and their financial advisers should discuss before selecting investments. Risk – Return Tradeoff   The concept that individuals seeking high potential returns generally must be willing to accept high risk — and that individuals unwilling to assume much risk generally must settle for lower potential returns. Rollover   Rollover (see ; see ) Direct Rollover Individual Retirement Account Rollover

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Sales Charge  Charge  Also known as Sales Load. It is the fee charged on an investment, and varies according to the fund and investment. The charge is added to the net asset value when determining the offering price. Sarbanes-Oxley Act of 2002  2002  A 2002 law mandating a number of reforms to enhance corporate responsibility, enhance financial disclosures and combat corporate and accounting fraud. The Act created the Public Company Accounting Oversight Board to oversee the activities of the auditing profession. The Act is named after former U.S. Sen. Paul Sarbanes of Maryland and U.S. Rep. Michael Oxley of sec.gov   Ohio. sec.gov Secondary Market  Market  Exchanges and over-the-counter markets where securities and bought and sold after their initial public offering. (see Initial Public Offering) Offering) Sector   Sector A group of companies operating within the same general industry. The S&P 500 Index, considered representative of the U.S. stock market as a whole, consists of 10 sectors: consumer discretionary; consumer staples; energy; financials; health care; industrials; information technology; materials; telecommunications services; and utilities. Many mutual fund families offer “sector funds” that invest chiefly or exclusively within a given sector. Securities and Exchange Commission, U.S. (SEC)  (SEC)  A government agency created in 1933 to protect investors; maintain fair, orderly and efficient markets; and facilitate capital formation. The SEC oversees securities exchanges, securities brokers and dealers, investment advisers and mutual funds. The SEC promotes the disclosure of important market-related information, maintaining fair dealing and protecting against fraud. www.sec.gov  www.sec.gov  Selling Short  Short  A potentially risky investment technique that most commonly involves selling borrowed securities — in the expectation that the price of those securities will decline. An investor who believes the price of a stock (or commodity) will decline can borrow shares from a brokerage firm (for a fee) and then sell the shares in the open market. If the price of the securities fall, the investor purchases the shares in the open market, repays the broker and makes a profit. If the shares rise in price, however, the investor must buy the shares in the open market for more than he sold them, resulting in a loss. Because, in theory, there is no limit how high the price of the securities could rise, the investor’s potential loss is unlimited. Semiannual Report  Report  A report on a mutual fund’s operations and holdings over a six-month period. Mutual funds operate on a fiscal year; as a result, individual mutual funds may issue their semiannual reports at different times during the calendar year. Settlement Date  Date  The date, following a securities trade, by which a buyer must pay for his purchase and a seller must deliver the securities and receive payment. The settlement date typically ranges between one and three days after the trade date. (see Trade Date) Date) Share Class  Class  Different types of mutual fund shares, each representing a similar interest in a fund’s portfolio but each of which has its own unique sales charge and expenses.  Class A A - Mutual fund shares typically sold with an up-front sales charge, or load, but with generally lower annual expenses than other share classes. Discounted sales charges may be available to individuals making large purchases; persons already owning shares of the fund family’s other mutual funds; or investors who commit in writing to purchase additional shares on a regular basis.  Class B B - Mutual fund shares typically sold with no up-front sales charge but with a contingent deferred sales charge (CDSC), which an investor pays if he or she sells shares within a specified time period, often six years. In addition to a CDSC, which declines over time, Class B shares often have higher annual expenses than Class A shares. After a number of years, Class B shares may convert to Class A shares.  Class C C - Mutual fund shares typically sold with no up-front sales charge but with a contingent deferred sales charge of 1% which an investor pays if he or she sells shares within the first year. Typically, Class C shares never convert to Class A shares, regardless of the length of time they are owned. Shareholder Equity  Equity  For a publicly traded corporation, its total assets minus total liabilities. Sharpe Ratio  Ratio  A complex calculation that measures and compares the risk-adjusted performance of mutual funds. The Sharpe ratio is the amount of performance that a mutual fund earned over and

 

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above the risk-free rate of return, divided by the standard deviation of returns. The Sharpe ratio indicates whether a fund’s returns were due to smart investment decisions or the result of taking on excess risk. While one fund may outperform another, it is only a good investment if its higher returns did not come with too much added risk. A higher Sharpe ratio is better than a lower one; the higher a fund’s Sharpe ratio, the better its risk-adjusted performance. (see Standard D eviatio eviation n) Spousal IRA  IRA  For an individual who has an individual retirement account, a similar account for a non-working spouse. A financial adviser and/or tax adviser can explain contribution limits, tax treatment of contributions and other important information. (see Individual Retirement Account) Account) Spread   Spread The difference between a mutual fund’s asked price or offered price and its bid price or redemption price. More generally, a spread is the difference between the price someone is willing to pay for a security and the price at which someone is willing to sell it. Spreads change constantly based on the supply of and the demand for a security. (see Asked Price/Offered Price;; see Bid Price/Redemption Price) Price Price ) Standard Deviation  Deviation  Standard deviation is a statistical measure of the range of a mutual fund’s past performance. When a fund has a high standard deviation, its performance has varied widely from year to year, indicating a greater potential for volatility — extremely high returns one year and extreme losses the next, for example. When a fund has a low standard deviation, its returns have varied little from year to year and have been relatively consistent. Stock Split  Split  An action taken by a corporation’s board to increase the number of outstanding shares of stock without changing total shareholder equity. For example, a company might decide to double the number of its shares; this proportionately reduces the stock’s share price and per-share dividend — but leaves the value of a shareholder’s investment unchanged. Companies may undertake a stock split to make their shares more affordable to individual investors. (see Reverse Stock Split) Split)   STRIPS STRIPS  Separate Trading of Registered Interest and Principal of Securities; the practice of separating the principal and interest on a bond creating two tradable products. It was started by the brokerage industry, but is now also performed by others such as the U.S. government. Syndicate   Syndicate A group of investment firms that agree to purchase newly issued securities (either stock or debt) from the issuer for resale to the public. Syndicates allow investment firms to pool their resources while also spreading the risks inherent in a new issue. Once all the shares of the new issue are sold, the syndicate — or purchase group, as it is also called — disbands.

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Take Over Over   The acquisition of a corporation (the target) by another (the acquirer) by the purchase or exchange of stock. (see Tender Offer) Offer) Tax-Exempt Security  Security  A bond that is not taxed at the federal, state and/or local level. Typically, tax-exempt securities are municipal bonds issued by state or local governments (or their agencies). Mutual funds may be tax-exempt if they invest exclusively in tax-exempt securities. (see Municipal Bond) Bond) Tender Offer  Offer  A company’s public announcement that it will buy, at a given price (usually higher than the current market price), some or all of the stock of another company. The company making the tender offer typically seeks to take over the target company. (see Takeover Takeover)) Term Asset-Backed Securities Loan Facility (TALF)  (TALF)   A consumer and business lending initiative to finance the purchase of existing mortgages and mortgage-backed securities. TALF is one of several initiatives to deal with the financial crisis that began in late 2007. (see Public-Private Investment Program; Program ; see Toxic Assets/Legacy Assets; Assets; see Troubled Assets Relief Program) Program) Time Value Of Money  Money  The concept that the use of money has value. The sooner money is received the more valuable it is because it can earn interest. In short, a dollar today is more valuable than a dollar at some point in the future, because the dollar can earn interest between now and then. Toxic Assets/Legacy Assets  Assets  Term coined in 2007 to describe financial assets such as mortgage-based securities that financial institutions could not resell because their value had declined significantly. In 2009, the

 

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U.S. Treasury began using the term “legacy assets” to describe such securities. Such assets create uncertainty about the balance sheets of institutions that hold them; this uncertainty has compromised their ability to raise cash and their willingness to make loans. Some of these assets have declined in value for fundamental reasons as foreclosures have risen; others continue to perform as expected but have declined in value due to poor market liquidity. Trade Date  Date  The date on which a security is sold by one party and bought by another. Treasuries   Treasuries Debt securities issued by the U.S. government and backed by the full faith and credit of the United States of America. Treasury bills have maturities of one year or less and are issued at a discount to face value. Treasury notes are intermediate-term securities with maturities of one to 10 years. Treasury bonds are long-term securities with maturities of 10 years or more. Income from Treasuries is exempt from state and local, but not federal, taxes. Troubled Assets Relief Program (TARP)  (TARP)  A program created by the government that established a $700 billion Treasury fund to buy toxic assets from financial institutions, thereby helping to address the financial crisis that began in late 2007. TARP was created with the passage of the Emergency Economic Stabilization Act of 2008. In practice, much of the initial TARP funding flowed into nonvoting preferred equity shares of banks and bank holding companies. It was believed this approach would shore up bank capital and translate into increased lending. (see Toxic Assets/Legacy Assets) Assets) Trust   Trust An agreement created at the direction of one party (the grantor) under which another party (the trustee) manages and invests assets for the benefit of a third party (the beneficiary). There are many types of trusts and many reasons for their creation. Often, a grantor seeks to control the distribution of property during his lifetime or seeks to ensure the financial well-being of others (a spouse or minor children, for example) after his death. (see Trustee Trustee)) Trustee   Trustee An individual or organization that manages and invests assets for the benefit of another. In all trust-related matters, a trustee is legally obliged to act in the beneficiary’s best interests. (see Trust)) Trust

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Uniform Transfer to Minors Act (UTMA)  (UTMA)   A law allowing an adult to establish a custodial account for the benefit of a minor. Assets placed into the account by the custodian or others are irrevocable gifts to the minor, who gains control of the assets when he reaches the age of majority. Virtually any type of asset can be placed into an UTMA account, including cash, securities, real estate, art and antiques. Although UTMA accounts are not specifically designed to pay for higher education expenses, many investors use them for that purpose. Unit Investment Trust (UIT)  (UIT)   A registered investment company that purchases a fixed portfolio of securities. The portfolio may consist of corporate, municipal or government bonds — or common or preferred stocks. Bond trusts are designed to provide current (usually monthly) income and capital preservation; as individual bonds mature, proceeds are distributed to unit holders. Stock trusts are intended to provide capital appreciation and dividend income; on the stock trust’s expiration date, the trust liquidates and distributes its net asset value as proceeds to the unit holders. Units of a trust are sold to investors through brokers.

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Value Funds Funds   Mutual funds that invest in stocks that are believed to be priced below what they are really worth, based on fundamental factors. Managers of value funds believe such stocks will, in time, appreciate and realize their true value. Value stocks may continue to be inexpensive for long periods of time and may never realize their full value. Variable Rate Demand Note  Note  A debt instrument that represents borrowed funds. As a demand note, the lender can request repayment at any time — and interest accrues at prevailing market rates, which vary over time.

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Wash Sale Rule  Rule  An IRS regulation forbidding a taxpayer from claiming a loss on the sale of an investment if that same investment was purchased within 30 days before or after the sale. The rule seeks to discourage investors from selling securities at a loss simply to obtain a tax deduction. Weighted Average Maturity  Maturity  The weighted average of the remaining terms to maturity of the securities underlying the collateral pool at the date of issue, using the balances of the securities as of the issue date as the weighting factor. Weighted Average Maturity (WAM)  (WAM)  The average time until maturity for securities in a portfolio, weighted in proportion to the dollar amount that is invested in the portfolio. WAM measures the sensitivity of fixed-income portfolios to interest rate changes. Portfolios with longer WAMs are more sensitive to changes in interest rates; shorter WAMs indicate less sensitivity. Will   Will A legal document in which a person, the testator, names one or more persons to manage his estate and facilitate the transfer of his property after his death. Withdrawal Plan  Plan  An arrangement in which an investor, at his request, receives periodic payments from his mutual fund holdings. Most commonly, withdrawal plans are used to provide income during retirement and to pay for periodic expenses, such as a child’s college expenses.

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There are no glossary entries for this letter. letter.  

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Yield   Yield The return on an investment expressed as a percentage of the cost of the investment, paid in dividends or interest. A $1,000 bond that pays $50 in interest annually has a yield of 5.0%. Yield Curve  Curve  A graph showing the relationship between the yields of bonds of the same credit quality but with different maturities. The yield curve can forecast turning points in the business cycle. Yield curves can be normal, flat or inverted. A normal yield curve shows lower yields for short-term bonds and higher yields for long-term bonds. A flat yield curve shows little difference between short- and long-term yields. An inverted yield curve shows higher yields on short-term bonds and lower yields for long-term bonds. Normal yield curves indicate a healthy and growing economy; flat yield curves indicate uncertainty about the direction of the economy; and inverted yield curves often precede economic contraction or recession. Yield to Maturity  Maturity  The percentage rate of return paid on a fixed-income security if an investor buys and holds it to maturity. The yield to maturity factors in the price paid for the security — either a discount from or a premium to face value. If an investor pays a premium (more than face value), the yield to maturity will be less than the security’s coupon rate; if he buys it at a discount (less than face value), the yield to maturity will be greater than the coupon rate.

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Zero Coupon Bond  Bond  A debt security that pays no interest. It is sold at a deep discount to its face value, and the buyer receives a rate of return in the form of price appreciation. Examples include STRIPs, CATs and TIGERs. Sources: 1 Investment Company Institute 2 Nasdaq OMX 3 NYSE Euronext Prospectuses | Help | Site Map | Terms of Use | Privacy | Legal Information | Business Continuity Plan | Money Market Holdings  

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NOT FDI FDIC C INSUR INSURED ED MAY LOSE LOSE VALUE VALUE NO BANK BANK GUAR GUARANT ANTEE EE

s and/or summary summary Before investing, investors should carefully read the prospectu the prospectus  prospectus and  prospectus  and carefully consider the investment objectives, risks, charges and expenses. For this and more complete information about the fund(s), investors  should  shou ld ask their advisers advisers for a prospec prospectus/sum tus/summary mary prospectus prospectus..  All data provided by Invesco unless otherwise noted. Invesco Distributors, Inc. is a US distributor for retail mutual funds, exchange-traded funds, institutional money market funds and unit investment trusts. Van Kampen Funds Inc. is a sponsor of unit investment trusts. Both entities are wholly owned, indirect subsidiaries of Invesco Ltd. Invesco Distributors, Inc.  ©2012 Invesco Ltd. All rights reserved.