Glossary of Terms
appreciation- an increase in the basic value of an investment.
bear market- a market characterized by generally falling prices over a period of several months or years.
blue chip- common stock of a company known nationally for the quality of its products and its profitability.
boiler rooms- fraudulent schemes operated by high-pressure salespersons working out of rooms equipped with many telephones, offering phony investment opportunities.
bond- certificate representing a loan of money to a corporation or government for a specific period, in change for a promise to repay bondholder the amount borrowed plus interest.
broker- a representative who handles transactions related to investors’ orders to buy and sell securities.
bull market- a market characterized by generally rising prices over a period of several months or years.
capital- the wealth of a business or an individual in terms of money or property.
capital gain- the gain realized when security is sold for more than its purchase price.
capital loss- the loss when a security is sold for less than its purchase price.
capitalism- the economic system practiced in the United States, which allows individual ownership of land, buildings and equipment.
commission- a broker’s fee for buying or selling securities for an investor or earned by a real estate agent for selling property.
commodity- an article of commerce or a product that can be used in commerce, such as agricultural products, metals, petroleum, foreign currencies, financial instruments and indexes.
common stock- the most basic form of corporation ownership. Owners of common stock have a claim on the assets of a company after those of preferred stockholders and bondholders.
compound interest- interest earned on interest that is added to the principal.
convertible bond- a bond than an owner can exchange for a stock before maturity.
coupon rate- fixed annual interest rate quoted when a bond is issued.
discount- sale of bond at a price less than face value.
diversification- spreading investment funds among different types of investments and industries.
dividend- payment received by stockholders from the earnings of a corporation.
exchanges- marketplaces for transactions such as the New York Stock Exchange, the American Stock Exchange, and the Chicago Board of Trade.
face value-the amount a bond is worth when it matures.
FDIC-Federal Deposit Insurance Corporation, an agency of the federal government created to guarantee bank deposits.
financial planner-a person who advises others about financial issues.
fraud-the art of deceiving or misrepresenting the truth.
full-service brokers-people who buy and sell securities or commodities to investors and offer information and advice.
futures contract-a legal commitment to buy or sell a commodity at a specific future date and place.
hedging-the process of protecting an investment against price increases.
inflation-a general rise in prices of goods and services. This reduces purchasing power of money.
inflation risk-the risk that the financial return on an investment will lose purchasing power due to a general rise in price of goods and services.
insider trading-the illegal use of investment information not generally known to the public.
interest-for the investor, interest is the payment received from a financial institution for lending money to it.
IRA-Individual Retirement Account, a tax deferred savings account.
junk bonds-high risk bonds issued by corporations of little financial strength. Interest rate is high, but default rate is also high.
liquidity-the ease with which an investment can be converted into cash.
load fund-a mutual fund purchased directly by the public that charges a sales commission when bought.
market price-the price the seller will accept and the buyer will pay.
mutual fund-a company that invests the pooled money of its shareholders in various types of investments.
NASD-National Association of Securities Dealers, the securities industry’s self-regulatory agency. Enforces rules of fair practice in an attempt to prevent investment fraud.
NASDAQ-NASD Automated Quotations, a telecommunications system for relaying information about securities in the over-the-counter market.
NYSE-New York Stock Exchange is a floor-based securities market located on Wall Street in New York City where brokers who represent investors trade stocks and bonds.
no-load fund-a mutual fund purchased directly by the public; does not have a charge for buying.
odd lot-a unit of less than 100 shares of stock.
p/e ratio-price/earnings ratio, the price of a stock divided by per share earnings. A figure used to evaluate the value of a stock. Also referred to as the "multiple", that is the number of times by which the company’s latest 12-month earning must be multiplied to obtain the current stock price. Obtained by dividing the current earnings into current market value.
penny stocks-high risk stocks that generally sell for less than $5, and do not trade on any exchange. (Con artists often deal in penny stock frauds.)
portfolio-the total investments held by an individual.
preferred stock-ownership in a corporation which has a claim on assets and earnings of a company before those of common stockholders but after bondholders.
premium-sale of a bond at a price greater than face value.
prospectus-legal document describing an investment offered for sale.
pyramid scheme-fraudulent scheme where an investor buys the right to be a sales representative for a "product." Those in the scheme early may profit; those in late always lose.
rate of return-a combination of yield (dividends or interest) and appreciation (increase in basic value of the investment).
redemption fee-a charge levied by the mutual fund when shares are sold.
return-the total income from an investment; includes income plus capital gains or minus capital losses.
Risk tolerance-a person’s capacity to endure market price swings in an investment.
Round lot-100 shares of one stock.
Rule of 72-a mathematical tool used to determine the length of time needed to double an investment.
Savings-money set aside to meet future needs with very little risk to principal or interest.
Securities-a broad range of investment instruments, including stocks, bonds and mutual funds.
SEC-Securities and Exchange Commission, a federal agency established to license brokerage firms and regulate the securities industry. While the SEC helps curb investment fraud, the individual investor, not the SEC, must judge the worth of the security offered for sale.