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#1035
exchange
Section 1035 sets out provisions for the exchange of similar (insurance
related) assets without any tax consequence upon the conversion. If the
exchange qualifies for like-kind exchange consideration, income taxes
are deferred until the new property or asset is sold. The 1035 exchange
provisions are only available for a limited type of asset which includes
cash value life insurance policies and annuity contracts.
10K
An annual report filed by corporations each year as required by the SEC.
The 10K must be filed within 90 days after the end of the fiscal year
and provides a comprehensive overview of a company's business practices
and financial stability.
401(k) plan
A 401(k) plan is a tax-deferred defined contribution retirement plan
that gives eligible employees the opportunity to defer a portion of
their current compensation into the plan. Amounts that are deferred are
excluded from the participant's gross income for the year of the
deferral. The plan may provide for employer matching contributions and
discretionary profit-sharing contributions.
403(b) plan
Tax deferred annuity retirement plan available to employees of public
schools and colleges, and certain non-profit hospitals, charitable,
religious, scientific and educational organizations.
457 plan
Non-qualified deferred compensation plans available to employees of
state and local governments and tax-exempt organizations.
A a
accelerated death
benefits (adb's)
Some life insurance policies make a portion of the death benefit
available prior to the death of the insured. Such benefits are usually
available only due to terminal illness or for long-term care situations.
accidental death
benefit
An accidental death benefit is a rider added to an insurance policy
which provides that an additional death benefit will be paid in the
event death is caused by and accident. This rider is often called
"double indemnity."
accounts payable
A balance sheet item representing the amount of money a company owes to
its creditors.
accounts receivable
A balance sheet item representing the amount of money a company is owed
by its customers for goods and services it has provided.
accrual basis
One of several methods of accounting. Requires that all interest and
income be included as it is earned and that all expenses are included as
incurred.
adjustable rate
mortgage (arm)
An adjustable Rate Mortgage offers an initial interest rate that is
usually lower than a fixed rate, but that adjusts periodically according
to market conditions and financial indices. The rate may go up and/or
down, depending on economic conditions. To limit the borrower's risk,
the ARM will almost always have a maximum interest rate allowed, called
a "rate cap."
amortization
The amortization of a debt is its systematic repayment through
installments of principal and interest. An amortization schedule is a
periodic table illustrating payments, principal, interest, and
outstanding balance.
annual percentage
rate (apr)
The Annual Percentage Rate is the cost of credit expressed as a yearly
rate. The APR is a means of comparing loans offered by various lenders
on equal terms, taking into account interest rates, points, and other
finance charges. The federal Truth-in-Lending Act requires disclosure of
the APR.
annuitant
An individual who receives payments from an annuity. The person whose
life the annuity payments are measured on or determined by.
annuity
A contract between an insurance company and an individual which
generally guarantees lifetime income to the individual or whose life the
contract is based in return for either a lump sum or periodic payment to
the insurance company. Interest earned inside an annuity is income
tax-deferred until it is paid out or withdrawn.
appraisal
An appraisal is an estimate of a property's value, usually real estate,
at a specific point in time and as determined by a qualified
professional appraiser.
appreciation
Appreciation is the increase in value of an asset. The term
"appreciation" may be applied to real estate, stocks, bonds, etc.
arm's length
Acting at arm's length predicates that two parties negotiate with
opposing economic interests.
ask price
The price that a seller is willing to sell a security or commodity for.
B b
balance sheet
A balance sheet is a financial statement that is divided into three
major parts: assets, liabilities and shareholders' equity.
balloon mortgage
The terms on a balloon mortgage are insufficient to completely amortize
the loan. A balloon, or lump sum, payment is required at the maturity of
the loan to completely pay off the remaining principal. Balloon
mortgages often contain a contractual opportunity to refinance when the
balloon payment is due at prevailing rates.
bank reserves
The amounts that banks are required to keep on deposit at a Federal
Reserve Bank, as determined by reserve ratios. Funds in excess of these
reserves are loaned out or invested by the banks.
bankruptcy
A federal court proceeding in which a debtor who is unable to continue
to meet his/her financial obligations may be relieved from the payment
of certain debts. This action seriously affects the borrower's credit
worthiness.
basis
An amount usually representing the actual cost of an investment to the
buyer. The basis amount of an investment is important in calculating
capital gains and losses, depreciation, and other income tax
calculations.
basis points
Basis Points is a term used by investment professionals to describe
yields of bonds. One basis point equals one 100th of 1%, or .01%. A bond
yield increase from 10.0% to 10.1% represents an increase of 10 basis
points.
bear market
A prolonged decline in overall stock prices occurring
over a period of months or even years.
beneficiary
The person who is designated to receive the benefits of a contract.
beta
A statistically generated number that is used to measure the volatility
of a security or mutual fund in comparison to the market as a whole.
bid price
The price that a buyer is willing to pay for a security or commodity.
blue-chip stocks
The equity issues of financially stable, well-established companies that
usually have a history of being able to pay dividends in bear and bull
markets.
bond
A certificate of indebtedness issued by a government entity or a
corporation, which pays a fixed cash coupon at regular intervals. The
coupon payment is normally a fixed percentage of the initial investment.
The face value of the bond is repaid to the investor upon maturity.
bonding requirement
The individual(s) that are appointed to run the day-to-day operations of
a qualified plan, as well as the trustee(s) and investment managers must
be bonded. The bond is required to provide protection to the plan
against loss due to fraud, theft, forgery or dishonesty.
book value
The value that belongs to a company's owners or shareholders after total
liabilities have been subtracted from total assets. Also called
shareholders equity.
bull market
A prolonged increase in overall stock prices usually occurring over a
period of months or even years.
buy-down
A buy-down refers to the payment of additional discount points in return
for a below market interest rate (and therefore a lower monthly payment)
on a home mortgage.
buy-sell agreement
An agreement between shareholders or business partners to purchase each
others' shares in specified circumstances.
C c
capital markets
A general term encompassing all markets for financial
instruments with more than one year to maturity.
capital stock
All ownership shares of a company, both common and
preferred listed at par value.
cash equivalents
Assets that can be quickly converted to cash. These
include receivables, treasury bills, short-term commercial paper,
short-term municipal and corporate bonds and notes.
cash value
Permanent life insurance policies provide both a death
benefit and in an investment component called a cash value. The cash
value earns interest and often appreciates. The policyholder may
accumulate significant cash value over the years and, in some
circumstances, "borrow" the appreciated funds without paying taxes on
the borrowed gains. As long as the policy stays in force the borrowed
funds do not need to be repaid, but interest may be charged to your cash
value account.
certificate of
deposit (cd)
A Certificate of Deposit is a low risk, often federally
guaranteed investment offered by banks. A CD pays interest to investors
for as long as five years. The interest rate on a CD is fixed for the
duration of the CD term.
charitable remainder
trust (crt)
The Charitable Remainder Trust is an irrevocable trust
with both charitable and non-charitable beneficiaries. The donor
transfers highly appreciated assets into the trust and retains an income
interest. Upon expiration of the income interest, the remainder in the
trust passes to a qualified charity of the donor's choice. If properly
structured, the CRT permits the donor to receive income, estate, and/or
gift tax advantages. These advantages often provide for a much greater
income stream to the income beneficiary than would be available outside
the trust.
closed-end fund
A fund whose value is held within a fixed number of
shares. Until the fund is wound up, shares can be bought and sold on the
stock exchange or the over-the-counter market.
co-borrower
A co-borrower is individually or jointly obligated to
repay a loan entered into with a third party. The co-borrower may or may
not share in ownership of loan collateral.
codicil
An instrument in writing executed by a testator for
adding to, altering, explaining or confirming a will previously made by
the testator; executed with the same formalities as a will; and having
the effect of bringing the date of the will forward to the date of
codicil.
collateral
Assets pledged as security for a loan. If the borrower
defaults on payment, the lender may dispose of the property pledged as
security to raise money to repay the loan.
commission
The fee a broker or insurance agent collects for
administering a trade or policy.
commodity
A commodity is a physical substance such as a food or a
metal which investors buy or sell on a commodities exchange, usually via
futures contracts.
common stock
A security that represents ownership in a corporation.
compounding
The computation of interest paid using the principal
plus the previously earned interest.
conduit IRA
An individual who rolled over a total distribution from
a qualified plan into an IRA can later roll over those assets into a new
employer's plan. In this case the IRA has been used as a holding account
(a conduit).
conforming loan
A mortgage loan that conforms to Federal National
Mortgage Association (FNMA) or Federal Home Loan Mortgage Corporation (FHLMC)
guidelines. Currently, conforming first mortgages are under $275,000
($413,000 in Alaska and Hawaii).
construction loan
A construction loan is a short term loan applied to the
construction of a new home. The builder gradually withdraws the loan
proceeds and the home serves as collateral on the loan.
consumer debt
Debt incurred for consumable or depreciating
non-investment assets. Items include credit card debt, store-financed
consumer purchases, car loans, and family loans that will be repaid.
contrarian
An individual whose opinion is the opposite of the
majority.
conventional mortgage
A conventional mortgage is not insured, guaranteed or
funded by the Veterans Administration, the Federal Housing
Administration, or Rural Economic Community Development.
convertible mortgage
A convertible mortgage is an adjustable mortgage (ARM)
that allows the borrower to convert to a fixed rate mortgage during a
specified period of time.
convertible term
insurance
Term life insurance that can be converted to a permanent
or whole life policy without evidence of insurability, subject to time
limitations.
corporation
A legal business entity created under state law. Because
the corporation is a separate entity from its owners, shareholders have
no legal liability for its debts.
correction
A sudden decline in stock or bond prices after a period
of market strength.
co-signer
An individual or party who agrees to assume a debt
obligation of a third party in the event the principal borrower defaults
on the terms of the loan.
coupon rate
The rate of interest paid on a bond, expressed as a
percentage of the bond's par value.
credit cards
Cards such as Visa and MasterCard allow the holder to
charge purchases rather than pay cash.
credit bureau
repositories
A credit bureau repository is an organization that
compiles credit history information directly from lenders and creditors
into credit summaries and reports. These reports are made available to
lenders and creditors to assist them in gauging an individual's credit
worthiness.
critical illness
insurance
Insurance protection designed to provide a lump-sum
payment equal to the full value of the policy or a percentage of the
policy depending upon the product design, to the insured/policy owner
upon the diagnosis of a covered critical illness. Typical illnesses
covered include heart attack, stroke, cancer, paralysis, renal failure
and Alzheimer's disease. Many policies offer a partial payment for
certain medical procedures such as coronary bypass surgery or
angioplasty. Some policies offer a return of all premiums in the event
of death of the insured, others pay the full benefit upon the insured's
death.
currency risk
The level of risk when investing in international
markets, due to the fluctuations in exchange rates of the various world
currencies. Investing in any foreign country should be preceded by a
careful estimation of how well its currency is likely to do against the
dollar.
custodian
A financial institution, usually a bank or trust
company, that holds a person or company's cash and or securities in
safekeeping.
cyclical companies
Companies that report strong earnings when the overall
economy is doing well and weaker earnings when the economy is in
recession.
D d
debit cards
Debit cards allow the cost of a purchase to be
automatically deducted from the customer's bank account and credited to
the merchant.
debt markets
The fixed income sector of the capital markets devoted
to trading debt securities issued by corporations and governments.
debt to income ratio
The ratio of a person's total monthly debt obligations
compared to their total monthly resources is called their debt to income
ratio. This ratio is used to evaluate a borrower's capacity to repay
debts.
decedent
The term decedent refers to a person who has died.
decreasing term
A term life insurance featuring a decreasing death
benefit. Decreasing term is well suited to provide for an obligation
that decreases over the years such as a mortgage.
deed of trust
A document used to convey title (ownership) to a
property used as collateral for a loan to a trustee pending the
repayment of the loan. The equivalent of a mortgage.
deferral
A form of tax sheltering in which all earnings are
allowed to compound tax-free until they are withdrawn at a future date.
Placing funds in a qualified plan, for example, triggers deductions [not
all qualified plans provide for tax deductions; contributions may,
however, be excluded from gross income, i.e. 401(k) plans] for the
current tax year and postpones capital gains or other income taxes until
the funds are withdrawn from the plan.
deferred compensation
Income withheld by an employer and paid at some future
time, usually upon retirement or termination of employment.
defined benefit plan
A defined benefit plan pays participants a specific
retirement benefit that is promised (defined) in the plan document.
Under a defined benefit plan benefits must be definitely determinable.
For example, a plan that entitles a participant to a monthly pension
benefit for life equal to 30 percent of monthly compensation is a
defined benefit plan.
defined contribution
plan
In a defined contribution plan, contributions are
allocated to individual accounts according to a pre-determined
contribution allocation. This type of plan does not promise any specific
dollar benefit to a participant at retirement. Benefits received are
based on amounts contributed, investment performance and vesting. The
most common type of defined contribution plan is the 401(k)
profit-sharing plan.
deflation
A period in which the general price level of goods and
services is declining.
depreciation
Charges made against earnings to write off the cost of a
fixed asset over its estimated useful life. Depreciation does not
represent a cash outlay. It is a bookkeeping entry representing the
decline in value of an asset over time.
direct deposit
A means of authorizing payment made by governments or
companies to be deposited directly into a recipient's account. Used
mainly for the deposit of salary, pension and interest checks.
disability insurance
Insurance designed to replace a percentage of earned
income if accident or illness prevents the beneficiary from pursuing his
or her livelihood.
disposable income
After-tax income available for spending, saving or
investing.
diversification
Spreading investment risk among a number of different
securities, properties, companies, industries or geographical locations.
Diversification does not assure against market loss.
dividend reinvestment
plan (drip)
An investment plan that allows shareholders to receive
stock in lieu of cash dividends.
dividends
A distribution of the earnings of a company to it's
shareholders. Dividends are "declared" by the company based on
profitability and can change from time to time. There is a direct
relationship between dividends paid and share value growth. The most
aggressive growth companies do not pay a dividend, and the highest
dividend paying companies may not experience dramatic growth.
dollar cost averaging
Buying a mutual fund or securities using a consistent
dollar amount of money each month (or other period). More securities
will be bought when prices are low, resulting in lowering the average
cost per share.
Dollar cost averaging neither guarantees a profit nor eliminates the
risk of losses in declining markets and you should consider your ability
to continue investing through periods of market volatility and/or low
prices.
down payment
The down payment on a property is the amount of cash
applied to the purchase, with the remainder of the purchase accomplished
through a mortgage or other debt.
E e
earnest money
Similar to a deposit, earnest money is the money given
by the buyer to the seller of a property as an assurance of their
intentions to purchase the property.
earnings per share (eps)
Total net profits divided by the number of outstanding
common shares of a company.
economic cycle
Economic events are often felt to repeat a regular
pattern over a period of anywhere from two to eight years. This pattern
of events ends to be slightly different each time, but usually has a
large number of similarities to previous cycles.
effective tax rate
The percentage of total income paid in federal and state
income taxes.
efficient market
The market in which all the available information has
been analyzed and is reflected in the current stock price.
employee stock
ownership plans (esops)
An ESOP plan allows employees to purchase stock, usually
at a discount, that they can hold or sell. ESOPs offer a tax advantage
for both employer and employee. The employer earns a tax deduction for
contributions of stock or cash used to purchase stock for the employee.
The employee pays no tax on these contributions until they are
distributed.
escrow funds
Escrow funds are funds accumulated and held in an
account for the periodic payment of property taxes and insurance.
estate
A decedent's estate is equal to the total value of their
assets as of the date of death. The estate includes all funds, personal
effects, interest in business enterprises, titles to property, real
estate, stocks, bonds and notes receivable.
estate
planning
The orderly arrangement of one's financial
affairs to maximize the value transferred at death to the people and
institutions favored by the deceased, with minimum loss of value because
of taxes and forced liquidation of assets.
excess distributions
An individual may have to pay a 15% tax on distributions
received from qualified plans in excess of $150,000 during a single
year. The tax, however, does not apply to distributions due to death,
distributions that are rolled over, and distributions of after-tax
contributions.
executor
The person named in a will to manage the estate of the
deceased according to the terms of the will.
F f
face amount
The face amount stated in a life insurance policy is the
amount that will be paid upon death, or policy maturity. The face amount
of a permanent insurance policy may change with time as the cash value
in the policy increases.
fair market value
The fair market value of a property or other asset is
the price that a buyer and seller can establish in an arms-length
transaction where neither one is compelled to buy or to sell.
family trust
An inter vivos trust established with family members as
beneficiaries.
federal housing
administration (fha)
The Federal Housing Administration (FHA) is a government
agency that sets standards for underwriting residential mortgage loans
made by private lenders and insures such transactions.
federal national
mortgage association (fnma or fannie mae)
FNMA is a private corporation that acts as a secondary
market investor in buying and selling mortgage loans.
fiduciary
An individual or institution occupying a position of
trust. An executor, administrator or trustee.
financial planner
A person who helps you plan and carry out your financial
future.
fixed investment
Any investment paying a fixed interest rate such as a
money market account, a certificate of deposit, a bond, a note, or a
preferred stock. A fixed investment is the opposite of a variable
investment.
fixed rate mortgage
With a fixed rate mortgage, your interest rate will
remain the same for the entire term of the loan. Although the rate will
begin slightly higher than a comparable adjustable rate mortgage (ARM),
the interest rate you pay can never go up for as long as you have the
mortgage.
fluctuation
A variation in the market price of a security.
foreclosure
A foreclosure is the legal process by which a borrower
losses their ownership interest in a collateralized property due to
default on the attached loan.
fund manager
A person who manages the assets of a mutual fund.
fundamental analysis
Fundamental analysis is a technique of estimating a
stock's future value based on the in-depth study of the stock's
underlying financial statements. Fundamental analysis is the opposite of
technical analysis.
future value
The future worth of a payment, or stream of payments,
projected at a given interest rate for a given period of time.
futures market
A market in which contracts for future delivery of a
commodity are bought and sold.
G g
generally accepted
accounting principals (gaap)
Conventions, rules and procedures that define accepted
accounting practices in the U.S.
grace period
A period (usually 31 days) following each premium due
date, other than the first due date, during which an overdue premium may
be paid, and during which time all policy provisions remain in force and
effect.
group insurance
A form of insurance designed to insure classes of
persons rather than specific individuals.
growth stock
The common equity of a company that consistently grows
significantly faster than the economy.
guaranteed investment
certificate (gic)
A type of debt security sold to individuals by banks and
trust companies. They usually cannot be cashed before the specified
redemption date, and pay interest at a fixed rate.
guarantor
A third party who agrees to repay any outstanding
balance on a loan if you fail to do so. A guarantor is responsible for
the debt only if the principal debtor defaults on the loan.
guardian
A person or persons named to care for minor children
until they reach the age of majority. A will is the best way to ensure
that the person or persons whom you wish to have care for your minor
children are legally empowered to do so in the event of your death.
H h
hazard insurance
Hazard insurance protects the insured from losses
arising due to physical property damage associated with catastrophic
hazards such as flood, fire, earthquake, tornado, etc. Hazard insurance
will often be required by a lender to protect their collateral from such
risks.
home equity line of
credit (heloc)
A home equity line of credit allows a homeowner to
borrow against the equity in their home with specific limits and terms.
This is an open end loan which allows the borrower to borrow and repay
funds as needed.
home equity loan
A home equity loan is a collateralized mortgage, usually
in a subordinate position, entered into by the property owner under
specific terms of repayment.
I i
illiquid
The description of a security for which it is difficult
to find a buyer or seller. An illiquid investment is an investment that
may be difficult to sell quickly at a price close to its market value.
Examples include stock in private unlisted companies, commercial real
estate and limited partnerships.
illustration
A life insurance illustration, or ledger, is a reference
tool used to illustrate how a given life insurance policy underwritten
by a specific insurer is expected to perform over a period of years. The
insurance illustration assumes that conditions remain unchanged over the
period of time that the policy is held.
income averaging
Income averaging allows individuals who were age 50
before January 1, 1986 to pay tax on a lump sum distribution as though
it had been received over a five or ten year period, rather than all at
once. By using income averaging individuals may be able to pay income
tax at a more favorable rate.
income statement
A financial statement that shows the components of
profit, such as sales, expenses, taxes and net profit.
income stocks
Stocks that have a consistent, stable, above-average
dividend yield.
individual retirement
account (ira)
An Individual Retirement Account (IRA) is a personal
savings plan that offers tax advantages to those who set aside money for
retirement. Depending on the individual's circumstances, contributions
to the IRA may be deductible in whole or in part. Generally, amounts in
an IRA, including earnings and gains, are not taxed until distributed to
the individual.
inflation
A term used to describe the economic environment of
rising prices and declining purchasing power.
in-force policy
An in-force life insurance policy is simply a valid
policy. Generally speaking, a life insurance policy will remain in-force
as long as sufficient premiums are paid, and for approximately 31 days
thereafter. (See Grace Period)
Insurability
Insurability refers to the assessment of the applicant's
health and is used to gauge the level of risk the insurer would
potentially take by underwriting a policy, and therefore the premium it
must charge.
insured
A life insurance policy covers the life of one or more
insured individuals.
interest rate
The simple interest rate attached to the terms of a
mortgage or other loan. This rate is applied to the outstanding
principal owed in determining the portion of a payment attributable to
interest and to principal in any given payment.
interest rate risk
Is the uncertainty in the direction of interest rates.
Changes in interest rates could lead to capital loss, or a yield less
than that available to other investors, Putting at risk the earnings
capacity of capital.
intestate
A term describing the legal status of a person who dies
without a will.
investment banker
A firm that engages in the origination, underwriting,
and distribution of new issues.
investment company
A corporation or trust whose primary purpose is to
invest the funds of its shareholders.
investment
considerations
Choosing which investments are right for you will depend
on a number of factors, including; your primary objectives, your time
horizon and your risk tolerance.
investment portfolio
A term used to describe your total investment holdings.
investment risk
The chance that the actual returns realized on an
investment will differ from the expected return.
investment strategy
The method used to select which assets to include in a
portfolio and to decide when to buy and when to sell those assets.
ira (individual
retirement account)
An Individual Retirement Account (IRA) is a personal
savings plan that offers tax advantages to those who set aside money for
retirement. Depending on the individual's circumstances, contributions
to the IRA may be deductible in whole or in part. Generally, amounts in
an IRA, including earnings and gains, are not taxed until distributed to
the individual.
ira rollover
An individual may withdraw, tax-free, all or part of the
assets from one IRA, and reinvest them within 60 days in another IRA. A
rollover of this type can occur only once in any one-year period. The
one-year rule applies separately to each IRA the individual owns. An
individual must roll over into another IRA the same property he/she
received from the old IRA.
J j
jumbo loan
A loan that is larger than the limits set for
conventional loans by the Federal National Mortgage Association (FNMA)
or Federal Home Loan Mortgage Corportation (FHLMC). This limit is
currently set at $300,700.
junk bonds
A bond that pays an unusually higher rate of return to
compensate for a low credit rating.
K k
keogh
A Keogh is a tax deferred retirement plan for
self-employed individuals and employees of unincorporated businesses. A
Keogh plan is similar to an IRA but with significantly higher
contribution limits.
L l
leverage
Using "leverage" is the process of investing using
borrowed funds. Leveraging your investments magnifies your returns, both
positive and negative.
leveraged buyout (lbo)
Leveraged buyouts are deals in which a company is bought
with mostly borrowed money, money frequently raised through selling
high-yield and high-risk junk bonds.
liability risk
The risk that the legal system may assess punitive
damages against you if property damage or personal injuries can be
attributed to your carelessness or negligence.
lien
A lien represents a claim against a property or asset
for the payment of a debt. Examples include a mortgage, a tax lien, a
court judgment, etc.
life expectancy
Life expectancy represents the average future time an
individual can expect to live. Life expectancies have been increasing
steadily over the past century and may continue to increase in the
future. As people are living longer the cost of retirement is
increasing.
life
insurance
A contract between you and a life insurance company that specifies that
the insurer will provide either a stated sum or a periodic income to
your designated beneficiaries upon your death.
life settlement
Occurs when a person who does not have a terminal or chronic illness
sells his/her life insurance policy to a third party for an amount that
is less than the full amount of the death benefit. The buyer becomes the
new owner and/or beneficiary of the life insurance policy, pays all
future premiums, and collects the entire death benefit when the the
insured dies. Some states regulate the purchase as a security while
others may regulate it as insurance.
liquidity
Liquidity is the measure of your ability to immediately turn assets into
cash without penalty or risk of loss. Examples include a savings
account, money market account, checking account, etc.
living will
If you become incapacitated this document will preserve
your wishes and act as your voice in medical decisions, if you are
unable to speak for yourself as a result of medical reasons.
loan-to-value ratio
A loan-to-value ratio represents the relationship
between all outstanding and proposed loans on a property and the
appraised value of the property. For example, an $80,000 loan on a
$100,000 property would represent an 80% loan-to-value ratio. This ratio
assists a lender in determining the risk associated with the loan. The
higher this ratio, the riskier the loan.
long position
A long position in an investment indicates a current
ownership in that investment which would increase in value as the
underlying asset(s) increase in value, opposite of a short position.
M m
margin
The amount of money supplied by an investor as a portion of the total
funds needed to buy or sell a security, with the balance of required
funds loaned to the investor by a broker, dealer, or other lender.
margin account
A special account set up by a broker for a client who wants to buy and
sell securities using margin.
margin call
A call from a broker to a client asking for more money to back up a
security purchased on margin when such a security has declined in value.
If more money is not supplied, the broker usually sells the security.
market order
An order to buy at the lowest price going, or sell at the highest price
possible.
market risk
Every investment carries some element of market risk, the risk that the
entire market will decline, reducing the investment's value regardless
of other factors.
medical power of
attorney
This special power of attorney document allows you to designate another
person to make medical decisions on your behalf.
minimum distributions
An individual must start receiving distributions from a qualified plan
by April 1 of the year following the year in which he/she reaches age 70
� . Subsequent distributions must occur by each December 31st. The
minimum distributions can be based on the life expectancy of the
individual or the joint life expectancy of the individual and
beneficiary.
money purchase plan
A Money Purchase Plan has contributions that are a fixed percentage of
compensation and are not based on the employer's profits. For example,
if the plan requires that contributions be 10% of the participant's
compensation, the plan is a Money Purchase Pension Plan. With this type
of plan, the employer is committed to making contributions each year
even if the employer has no profits or is experiencing cash flow
problems. Employee contributions are limited to 25% of compensation.
Employer contributions are limited to the smaller of $30,000 or 25
percent of a participant's compensation.
mortality
Mortality is the risk of death of a given person based on factors such
as age, health, gender, and lifestyle.
mortgage
A legal instrument providing a loan to the mortgagee to be used to
purchase a real property in exchange for a lien against the property.
mortgage broker
A mortgage broker acts as an intermediary between a borrower and a
lender. A broker's expertise is to assist the borrower in identifying
mortgage lenders and products that they might not identify otherwise.
mortgage insurance
(mi)
Mortgage insurance protects the lender against the default of higher
risk loans. Most lenders require mortgage insurance on loans where the
loan-to-value ratio is higher than 80% (less than 20% equity).
municipal bonds
A bond offered by a state, county, city or other political entity (such
as a school district) to raise public funds for special projects. The
interest received from municipal bonds is often exempt from certain
income taxes.
mutual funds
A mutual fund is a pooling of investor (shareholder) assets, which is
professionally managed by an investment company for the benefit of the
fund's shareholders. Each fund has specific investment objectives and
associated risk. Mutual funds offer shareholders the advantage of
diversification and professional management in exchange for a management
fee.
N n
net asset value
The value of all the holdings of a mutual fund, less the fund's
liabilities [also describes the price at which fund shares are
redeemed].
net worth
Your net worth is the difference between your total assets and total
liabilities.
non-conforming loan
A loan that does not conform to Federal National Mortgage Association
(FNMA) or Federal Home Loan Mortgage Corporation (FHLMC) guidelines.
Such loans include jumbo loan, sub-prime loans and high risk loans.
note
A note is a legal document that acknowledges a debt and the terms and
conditions agreed upon by the borrower.
O o
odd lot
An uneven number of securities that represents less than a board lot.
offer price
The price that a buyer is willing to pay for an investment.
open-end fund
An open-end mutual fund continuously issues and redeems units, so the
number of units outstanding varies from day to day. Most mutual funds
are open-end funds. The opposite of closed-end fund.
origination fee
The origination fee on a mortgage is usually the amount charged by the
lender for originating the loan. Origination fees vary by lender and are
expressed in points where one point is equal to 1% of the original loan
balance.
over-the-counter (otc)
market
Market created by dealer trading as opposed to the auction market, which
prevails on most major exchanges.
P p
paper gain (loss)
Unrealized capital gain (loss) on securities held in portfolio, based on
a comparison of current market price to original cost.
par bond
A bond selling at par.
payroll deduction
Payments made on your behalf by your employer. They are automatically
deducted from your pay check.
points
Points are charges added to a mortgage loan by the lender and are based
on the loan amount. One point is equal to 1% of the original loan
balance.
policy
A contractual arrangement between the insurer and the insured describing
the terms and conditions of the life insurance contract.
policy loan
The policy owner can borrow from the cash value component of many
permanent insurance policies for virtually any purpose. Any policy loans
that are outstanding at the time of death of the insured will be
deducted from the benefit paid to the beneficiary.
political risk
Political risk is the risk that stock prices may decline dramatically
during periods of political unrest or crisis.
power of attorney
A legal document authorizing one person to act on behalf of another.
premium
The payment that the owner of a life insurance policy makes to the
insurer. In exchange for the premium payment, the insurer assumes the
financial risk (as defined by the insurance policy) associated with the
death of the insured.
present value
The current worth of a future payment, or stream of payments, discounted
at a given interest rate over a given period of time.
principal
The principal amount of a loan or mortgage is the outstanding balance,
excluding interest.
private mortgage
insurance
Private mortgage insurance protects the lender against the default of
higher risk loans. Most lenders require private mortgage insurance on
loans where the loan-to-value ratio is higher than 80% (less than 20%
equity).
probate
The process used to make an orderly distribution and transfer of
property from the deceased to a group of beneficiaries. The probate
process is characterized by court supervision of property transfer,
filing of claims against the estate by creditors and publication of a
last will and testament.
profit sharing plan
A Profit-Sharing Plan is the most flexible and simplest of the defined
contribution plans. It permits discretionary annual contributions that
are generally allocated on the basis of compensation. The employer will
determine the amount to be contributed each year depending on the
cash-flow of the company. The deduction for contributions to a
Profit-Sharing Plan cannot be more than 15% of the compensation paid to
the employees participating in the plan. Annual employer contributions
to the account of a participant cannot exceed the smaller of $30,000 or
25 percent of a participant's compensation.
prohibited ira
transactions
Generally, a prohibited transaction is any improper (self-dealing) use
of the IRA by the account owner. Some examples include borrowing money
from an IRA, using an IRA to secure a loan and selling property to an
IRA.
prospectus
A detailed statement prepared by an issuer and filed with the SEC prior
to the sale of a new issue. The prospectus gives detailed information on
the issue and on the issuer's condition and prospects.
Q q
qualified retirement
plan
A qualified retirement plan is a retirement plan that meets certain
specified tax rules contained primarily in section 401(a) of the
Internal Revenue Code. These rules are called "plan qualification
rules". If the rules are satisfied the plan's trust is exempt from
taxes.
R r
refinance
To refinance one's mortgage is to retire the existing mortgage using the
proceeds of a new mortgage and using the same property as collateral.
This is usually done to secure a lower interest rate mortgage or to
access equity from the property.
registered
representative
A registered representative is licensed with the NASD (National
Association of Securities Dealers), through association with an NASD
member broker / dealer, to act as an account representative for clients
and collect commission income.
revolving debt
A debt or liability that does not have a fixed principal balance or
payment. Examples include credit cards, home equity lines of credit,
etc.
rider
A life insurance rider is an amendment to the standard policy that
expands or restricts the policy's benefits. Common riders include a
disability waiver of premium rider and a children's life coverage rider.
risk
Investment risk is the chance that the actual returns realized on an
investment will differ from the expected return.
rule of 72
A way to determine the effect of compound interest. Divide 72 by the
expected return on your investment. If your expected return is 8%,
assuming that all interest is reinvested, you will double your money in
9 years.
S s
safety of principal
Safety of principal is an objective that emphasizes the security of the
invested principal.
salary reduction
simplified employee pension (sarsep)
A SARSEP is a simplified alternative to a 401(k) plan. It is a SEP that
includes a salary reduction arrangement. Under this special arrangement,
eligible employees can elect to have the employer contribute part of
their before-tax pay to their IRA. This amount is called an "elective
deferral".
SEC
The main regulatory body regulating the securities industry is called
the Securities and Exchange Commission.
second mortgage
A mortgage on real property in a junior position to a primary or first
mortgage. The increased risk associated with a second mortgage is often
reflected in a higher interest rate and a shorter term of repayment.
securities
Stocks and bonds are traditionally referred to as securities. More
specifically, stocks are often referred to as "equities" and bonds as
"debt instruments."
Securities and
Exchange Commission
The main regulatory body regulating the securities industry is called
the Securities and Exchange Commission.
short position
A short position in an investment indicates a position in an investment
that would increase in value as the underlying asset(s) decrease in
value. Opposite of a long position.
short sale
The sale of stock that you do not yet own in order to take advantage of
an expected share price decline. If the stock declines in price, the
stock is purchased at the now lower price and the short position is
closed.
simplified employee
pension (sep)
A SEP provides employers with a "simplified" alternative to a qualified
profit-sharing plan. Basically, a SEP is a written arrangement that
allows an employer to make contributions towards his or her own and
employees' retirement, without becoming involved in a more complex
retirement plan. Under a SEP, IRAs are set up for each eligible
employee. SEP contributions are made to IRAs of the participants in the
plan. The employer has no control over the employee's IRA once the money
is contributed.
small cap
A small cap stock is one issued by a company with less than $1.7 billion
in market capitalization.
smart card
A card with an embedded computer chip which stores more information,
performs more functions and is more secure than a credit card or debit
card.
spousal ira
An individual can set up and contribute to an IRA for his/her spouse.
This is called a "Spousal IRA" and can be established if certain
requirements are met. In the case of a spousal IRA, the individual and
spouse must have separate IRAs. A jointly owned IRA is not permitted.
stock
Stock certificates represent an ownership position in a corporation.
Stockholders are often entitled to dividends, voting rights, and
financial participation in company growth.
stock dividends
The investor's share of the income earned by the company issuing the
stock.
stock exchange
A market for trading of equities, a public market for the buying and
selling of public stocks.
stop-loss order
This is when you tell your broker to sell the stock if it drops to a
certain price.
succession planning
Planning for a business to pass to the next generation of
owner/managers.
surrender value
When a policy owner surrenders his/her permanent life insurance policy
to the insurance company, he or she will receive the surrender value of
that policy in return. The surrender value is the cash value of the
policy plus any dividend accumulations, plus the cash value of any
paid-up additions minus any policy loans, interest, and applicable
surrender charges.
T t
tax credit
An income tax credit directly reduces the amount of income tax paid by
offsetting other income tax liabilities.
tax deduction
A reduction of total income before the amount of income tax payable is
calculated.
tax-deferred
The term tax deferred refers to the deferral of income taxes on interest
earnings until the interest is withdrawn form the investment. Some
vehicles or products that enjoy this special tax treatment include
permanent life insurance, annuities, and any investment held in IRA's.
technical analysis
Technical analysis is a technique of estimating a stock's future value
strictly by examining its prices and volume of trading over time.
Technical analysis is the opposite of fundamental analysis.
tenants in common
Two or more people who own the same piece of property, with the inherent
condition that if one of the tenants die, his interest automatically
passes on to his heirs.
term insurance
Term insurance is life insurance coverage that pays a death benefit only
if the insured dies within a specified period of time. Term policies do
not have a cash value component and must be renewed periodically as
dictated by the insurance contract.
testamentary trust
A trust created under the terms of a will and that takes effect upon the
death of the testator.
ticker symbol
A ticker symbol is a combination of letters that identifies a
stock-exchange security.
title
A legal document establishing property ownership.
title search
A detailed examination of legal records to determine the history and
legal ownership of a property.
top heavy plans
Each year, a qualified plan must be tested to determine whether it is
"top-heavy". Generally, a "top-heavy" plan is one in which more than 60
percent of the benefits under the plan are for key employees (usually
owners and officers). Additional requirements apply to a top-heavy plan
such as faster vesting and mandatory employer contributions.
total disability
In order to make a disability claim a person must meet the definition of
disability set forth in the insurance contract. There are two general
definitions of disability used in today's contracts. The first
definition is that the insured is unable to perform all of the
substantial and material duties of his/her own occupation. The second,
and more restrictive, definition is that the insured is unable to
perform any occupation for which he/she is reasonably suited by
education, training, or experience.
treasury bill
Treasury bills, often referred to as T-bills, are short-term securities
(maturities of less than one year) offered and guaranteed by the federal
government. They are issued at a discount and pay their full face value
at maturity.
treasury bond
Treasury bonds are issued with maturities of more than 10 years and are
offered and guaranteed by the U.S. Government. They are issued at a
discount and pay their full face value at maturity.
treasury note
Treasury notes are issued with maturities between one and 10 years.
These notes are offered and guaranteed by the U.S. Government. They are
issued at a discount and pay their full face value at maturity.
TSA (tax-sheltered
annuity)
Tax deferred annuity retirement plan available to employees of public
schools and colleges, and certain non-profit hospitals, charitable,
religious, scientific and educational organizations.
U u
underwriter (banking)
A person, banker or group that guarantees to furnish a definite sum of
money by a definite date in return for an issue of bonds or stock.
underwriter
(insurance)
The one assuming a risk in return for the payment of a premium, or the
person who assesses the risk and establishes premium rates.
underwriter
(investments)
In the bond/stock market means a brokerage firm or group of firms that
has promised to buy a new issue of bonds/shares from a government or
company at a fixed discounted price, then arranges to resell them to
investors at full price.
unemployment rate
The number of people unemployed measured as a percentage of the labor
force.
universal life
insurance
An adjustable Universal Life insurance policy provides both a death
benefit and an investment component called a cash value. The cash value
earns interest at rates dictated by the insurer. The policyholder may
accumulate significant cash value over the years and, in some
circumstances, "borrow" the appreciated funds without paying taxes on
the borrowed gains (taxes may be required if policy is surrendered). As
long as the policy stays in force the borrowed funds do not need to be
repaid, but interest may be charged to your cash value account. Premiums
are adjustable by the policy owner.
V v
variable investment
A variable investment is any investment whose value, and therefore
returns, fluctuates with market conditions such as a common stock, a
plot of raw land, and a hard asset.
variable universal
life insurance
A Variable Life insurance policy provides both a death benefit and an
investment component called a cash value. The owner of the policy
invests the cash value in subaccounts selected by the insurer. The
policyholder may accumulate significant cash value over the years and
"borrow" the appreciated funds without paying taxes on the borrowed
gains (taxes may be required if policy is surrendered). As long as the
policy stays in force the borrowed funds do not need to be repaid, but
interest may be charged to your cash value account.
variable rate
mortgage (VRM)
A Variable Rate Mortgage offers an initial interest rate that is usually
lower than a fixed rate, but that adjusts periodically according to
market conditions and financial indices. The rate may go up and/or down,
depending on economic conditions. To limit the borrower's risk, the VRM
will almost always have a maximum interest rate allowed, called a "rate
cap."
venture capital
A common term for funds that are invested by a third party in a business
either as equity or as a form of secondary debt. In the event of failure
or business wind-up, these funds rank behind all other secured
creditors.
vesting
The law requires that a qualified plan have a schedule under which a
participant earns an ownership interest in employer provided
contributions based on his or her years of service with the employer.
Amounts contributed by the participant are always 100% vested.
viatical settlement
Occurs when a person with terminal or chronic illness sells his/her life
insurance policy to a third party for an amount that is less than the
full amount of the death benefit. The buyer becomes the new owner and/or
beneficiary of the life insurance policy, pays all future premiums, and
collects the entire death benefit when the insured dies. Some states
regulate the purchase as a security while others may regulate it as
insurance.
W w
waiver of premium
A waiver of premium rider on an insurance policy sets for conditions
under which premium payments are not required to be made for a time. The
most popular waiver of premium rider is the disability waiver under
which the owner of the policy (also called the policyholder) is not
required to make premium payments during a period of total disability.
whole life insurance
A traditional Whole Life insurance policy provides both a death benefit
and a cash value component. The policy is designed to remain in force
for a lifetime. Premiums stay level and the death benefit is guaranteed.
Over time, the cash value of the policy grows and helps keep the premium
level. Although the premiums start out significantly higher than that of
a comparable term life policy, over time the level premium eventually is
overtaken by the ever-increasing premium of a term policy.
will
The most basic and necessary of estate planning tools, a will is a legal
document declaring a person's wishes regarding the disposition of their
estate. A will ensures that the right people receive the right assets at
the right time. If an individual dies without a will they are said to
have died intestate.
wrap account
An account offered by investment dealers whereby investors are charged
an annual management fee based on the value of invested assets.
write-off
Any loan not expected to be recovered and is recorded as a loan loss.
X x
Y y
yield
The yield on an investment is the total proceeds paid from the
investment and is calculated as a percentage of the amount invested.
Z z
zero-coupon bond
A zero-coupon bond is a bond sold without interest-paying coupons.
Instead of paying periodic interest, the bond is sold at a discount and
pays its entire face amount upon maturity, which is usually a one year
period or longer. |
