| Glossary
of mutual fund investing terms
Bid price
The price a prospective buyer is ready to pay. This term is used by traders who maintain firm bid and offer prices in a given security by standing ready to buy or sell security units at publicly quoted prices.
Bond
A certificate of debt, or IOU, issued by a government or corporation.
Bottom-up analysis
The search for outstanding performance of individual stocks before considering
the impact of economic trends. Such companies may be identified from research
reports, stock screens, or personal knowledge of the products and services.
Capital gain distributions
Payments to a fund's shareholders of profits earned from selling securities
in a fund's portfolio. Capital gain distributions are usually paid once a
year.
Credit rating
Independent evaluation of a bond's creditworthiness. This measurement is usually calculated through an index compiled by companies such as S&P or Moody's. Bonds with a credit rating of BBB or higher by S&P or Baa or higher by Moody's are generally considered investment grade.
Derivative
A financial instrument whose value and performance are based upon the value and performance of another security or financial instrument.
Discounted price
The difference between a bond's current market price and its face or redemption value.
Diversification
The strategy of investing in a wide range of companies or industries to reduce the risk if an individual company or sector suffers losses.
Dividend yield
The current or estimated annual dividend divided by the market price per share of a security.
Dow Jones Industrial Average
An unmanaged list of 30 industrial stocks widely used by the media to reflect stock market activity. When reporters say "the market" went up or down by so many points, they are referring to the Dow. It is not possible to invest directly in an index.
Duration
A measure of how much a bond's price inversely fluctuates with changes in prevailing interest rates.
Earnings growth
A pattern of increasing rate of growth in earnings per share from one period to another, which usually causes a stock's price to rise.
Federal Funds Rate
The interest rate banks charge on loans to one another to lend money short-term; this is one of the few tools the Federal Reserve Board has to control interest rates. Long-term rates are set by the bond market.
Fundamental analysis
An analysis of the balance sheet and income statements of a company in order to forecast its future stock price movements. Fundamental analysts consider past records of assets, earnings, sales, products, management and markets in predicting future trends in these indicators of a company's success or failure. By appraising a company's prospects, these analysts assess whether a particular stock or group of stocks is undervalued or overvalued at its current market price.
Growth investing
An investment style that emphasizes companies with strong earnings growth. Growth investing is generally considered more aggressive than "value" investing.
Income distributions
Payments to a fund's shareholders resulting from the net interest or dividend
income earned by a fund's portfolio.
Inflation
A general increase in prices coinciding with a fall in the real value of money, as measured by the Consumer Price Index.
Interest rate
Rate of interest charged for the use of money, usually expressed at an annual rate.
Market capitalization
The market price of company's shares multiplied by the number of shares outstanding.
Large-capitalization companies generally have over $5 billion in market capitalization;
mid cap companies between $1.5 billion and $5 billion; and small-cap companies
less than $1.5 billion. These capitalization figures may vary depending upon
the index being used and/or the guidelines used by the portfolio manager.
Maturity
The final date on which the payment of a debt instrument (e.g. bonds, notes, repurchase agreements) becomes due and payable. Short-term bonds generally have maturities of up to 5 years; intermediate-term bonds between 5 and 15 years; and long-term bonds over 15 years.
Municipal bond
A debt security issued by a state or municipality to finance public expenditures. Interest payments are exempt from federal taxes and, in most cases, from state and local income taxes. The two main types are general obligation (GO) bonds, which are backed by the full faith and credit and taxing powers of the municipality; and revenue bonds, supported by the revenues from a municipal enterprise, such as airports and toll bridges.
Net Asset Value (NAV)
The market value of one share of a fund on any given day without a front-end
sales charge or CDSC. It is determined by dividing a fund's total net assets
by the number of shares outstanding.
Note
A debt security with a date of between one and ten years; note prices tend
to be less sensitive to interest rate changes than bond prices.
Price-to-book ratio
Current market price of a stock divided by its book value, or net asset value.
Price-to-earnings ratio
Current market price of a stock divided by its earnings per share. Also known as the "multiple," the price-to-earnings ratio gives investors an idea of how much they are paying for a company's earning power and is a useful tool for evaluating the costs of different securities. Some firms use the inverse ratio for this calculation (i.e. earnings-to-price ratio).
Productivity
Is defined as output per hour of work; increases can finance wage hikes.
Quality
Measure or rating of investment grade of a fund.
Return on equity
The amount, expressed as a percentage, earned on a company's common stock investment for a given period. It is calculated by dividing net income for the period after preferred stock dividends but before common stock dividends by the common stock equity (net worth) average for the accounting period. This tells common shareholders how effectively their money is being employed.
Spread
Refers to the difference between the yield of a Treasury bond and a government
agency, mortgage, or corporate bond of similar maturity; yields differ because
of factors such as credit worthiness and supply and demand factors. U.S. Treasuries
and other bonds issued by the U.S. government fluctuate in value, but they
are guaranteed as to the timely payment of interest and they provide a guaranteed
return of principal if held to maturity.
Standard & Poor's 500
Market value-weighted index showing the change in aggregate market value of 500 stocks relative to the base period of 1941-1943. It is composed mostly of companies listed on the New York Stock Exchange.
Technical analysis
The research into the demand and supply for securities, options, mutual funds,
and commodities based on trading volume and price studies. Technical analysis
uses charts or computer programs to identify and project price trends in a
market, security, mutual fund, or futures contract.
Top-down approach
The method in which an investor first looks at trends in the general economy, selects attractive industries and then companies that should benefit from those trends.
Total return
The change in value of an investment in a fund over a specific time period expressed as a percentage. Total returns assume all earnings are reinvested in additional shares of a Fund.
Treasuries
Negotiable debt obligations of the U.S. government, secured by its full faith and credit. The income from Treasury securities is exempt from state and local income taxes, but not from federal income taxes. There are three types of Treasuries: Bills (maturity of 3-12 months), Notes (maturity of 1-10 years) and Bonds (maturity of 10-30 years).
Value investing
A relatively conservative investment approach that focuses on companies that may be temporarily out of favor or whose earnings or assets are not fully reflected in their stock prices. Value stocks will tend to have a lower price-to-earnings ratio than growth stocks.
Volatility
The general variability of a portfolio's value resulting from price fluctuations of its investments. In most cases, the more diversified a portfolio is, the less volatile it will be.
Yield
The rate at which a fund pays income. Yield calculations for 30-day periods are standardized among mutual funds, based on a formula developed by the Securities and Exchange Commission.
Yield-to-maturity
The concept used to determine the rate of return an investor will receive
if a long-term, interest-bearing investment, such as a bond, is held to its
maturity date. It takes into account purchase price, redemption value, time
to maturity, coupon yield (the interest rate on a debt security the issuer
promises to pay to the holder until maturity, expressed as an annual percentage
of face value), and the time between interest payments.
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