DIVERSIFICATION Diversification is an investment strategy in which you spread your investment dollars among different sectors, industries, and securities within a number of asset classes to protect your portfolio against market and management risk. Finding the diversification mix that's right for your portfolio depends on your age, your assets, your tolerance for risk, and your investment goals.
DIVIDEND Corporations may pay part of their earnings as dividends to you and other shareholders as a return on your investment. These dividends, which are often declared quarterly, are usually in the form of cash.
DIVIDEND YIELD If you own dividend-paying stocks, you figure the current dividend yield on your investment by dividing the dividend being paid on each share by the share's current market price.
EARNINGS PER SHARE (EPS) Earnings per share (EPS) is calculated by dividing a company's total earnings by the number of outstanding shares.
Earnings and other financial measures are provided on a per share basis to make it easier for you to analyze the information and compare the results to those of other investments.
EQUITY In the broadest sense, equity means ownership. If you own stock, you have equity in, or own a portion of the company that issued the stock.
EX-DIVIDEND You must own a security by the record date the company sets to be entitled to the dividend it will pay on the payable date.
FIDUCIARY A fiduciary is an individual or organization legally responsible for holding or investing assets on behalf of someone else, usually called the beneficiary. The assets must be managed in the best interests of the beneficiary, not for the personal gain of the fiduciary.
FIXED INCOME INVESTMENTS Fixed-income investments typically pay interest or dividends on a regular schedule and may promise to return your principal at maturity, though that promise is not guaranteed in most cases.
Some examples are government, corporate, and municipal bonds, and preferred stock.
FUNDAMENTAL ANALYSIS Fundamental analysis is one of two primary methods for analyzing a stock's potential return.
It involves assessing a corporation's financial history and current standing, including earnings, sales, and management. It also involves gauging the strength of the corporation's products or services in the marketplace.
GOVERNMENT BOND The term government bond is used to describe the debt securities issued by the federal government, such as US Treasury bills, notes, and bonds. They're also known as government obligations.
Treasuries are backed by the full faith and credit of the US government, and the interest they pay is exempt from state and local, though not federal, income taxes.
HIGH YIELD BOND High-yield bonds may be bonds whose ratings from independent rating services are below investment grade.
As a result, to attract investors, issuers of high-yield bonds must pay a higher rate of interest than the rates that issuers of higher-rated bonds with the same maturity are paying. The higher rate translates to more income, which is the higher yield.
High-yield bonds may also be described as junk bonds.
INDIVIDUAL RETIREMENT ACCOUNT (IRA) Individual retirement accounts (IRAs) provide tax incentives to encourage people who earn income to invest for retirement.
You open an IRA with a financial services firm, such as a bank, brokerage firm, or investment company, as custodian. The accounts are self-directed, which means you can choose among the investments available through your custodian.
There are two types of IRAs, tax-deferred traditional accounts and tax-free Roth accounts. With either type you usually can't make withdrawals without penalty before you turn 59 1/2.
With a traditional IRA you must begin to take minimum required distributions (MRD) by April 1 of the year you turn 70 1/2. Distributions are taxed at your regular rate as you withdraw.
There are no required distributions from a Roth IRA, and all withdrawals are free of federal income tax if you're at least 59 1/2 and your account has been open at least five years.
INVESTMENT HORIZON Your investment horizon is the point in time when you hope to achieve a particular investment goal. That horizon, sometimes called your time frame, may be fixed or flexible, depending on the nature of the goal and the investment decisions you make.
For example, paying for college is often a fixed goal because most students enroll the year they graduate from high school. Retirement may be a more flexible goal if you have the choice about when you will stop working.
INVESTMENT OBJECTIVE An investment objective is a financial goal that helps determine the type of investments you make. For example, if you want a source of regular income, you might select a portfolio of high-rated bonds and dividend-paying stocks.
LIQUIDITY The term liquidity is sometimes used to describe investments, such as stocks, that you can sell easily to generate cash.
MINIMUM REQUIRED DISTRIBUTION (MRD) A minimum required distribution is the smallest amount you can take each year from your retirement savings plan once you've reached the mandatory withdrawal age.
There are MRDs for 401(k) plans, 403(b) plans, and traditional IRAs, and the maximum age you can reach before they start is usually 70 1/2. If you take less than the required minimum, you owe a 50% penalty on the amount you should have taken.
MONEY MARKET The money market isn't a place. It's the continual buying and selling of short-term liquid investments.
Those investments include Treasury bills, certificates of deposit (CDs), commercial paper, and other debt issued by corporations and governments. These investments are also known as money market instruments.
MORTGAGE BONDS Mortgage-backed securities are created when the sponsor buys up mortgages from lenders, pools them, and packages them for sale to the public, a process known as securitization.
Securities are available through publicly held corporations such as Fannie Mae and Freddie Mac or other financial institutions. Some of the securities are guaranteed by the Government National Mortgage Association, or Ginnie Mae.
The money raised by selling the bonds is used to buy additional mortgages, making more money available to lend.
MUNICIPAL BONDS Municipal bonds, munis for short, are debt securities issued by state or local governments or their agencies to finance general governmental activities or special projects.
For example, a state may float a bond to fund the construction of highways or college dormitories.
The interest a muni pays is usually exempt from federal income taxes, and is also exempt from state and local income taxes if you live in the state where it was issued.
Munis generally pay interest at a lower rate than similarly rated corporate bonds of the same term. However, they appeal to investors in the highest tax brackets, who may benefit most from the tax-exempt income.
DIVIDEND Corporations may pay part of their earnings as dividends to you and other shareholders as a return on your investment. These dividends, which are often declared quarterly, are usually in the form of cash.
DIVIDEND YIELD If you own dividend-paying stocks, you figure the current dividend yield on your investment by dividing the dividend being paid on each share by the share's current market price.
EARNINGS PER SHARE (EPS) Earnings per share (EPS) is calculated by dividing a company's total earnings by the number of outstanding shares.
Earnings and other financial measures are provided on a per share basis to make it easier for you to analyze the information and compare the results to those of other investments.
EQUITY In the broadest sense, equity means ownership. If you own stock, you have equity in, or own a portion of the company that issued the stock.
EX-DIVIDEND You must own a security by the record date the company sets to be entitled to the dividend it will pay on the payable date.
FIDUCIARY A fiduciary is an individual or organization legally responsible for holding or investing assets on behalf of someone else, usually called the beneficiary. The assets must be managed in the best interests of the beneficiary, not for the personal gain of the fiduciary.
FIXED INCOME INVESTMENTS Fixed-income investments typically pay interest or dividends on a regular schedule and may promise to return your principal at maturity, though that promise is not guaranteed in most cases.
Some examples are government, corporate, and municipal bonds, and preferred stock.
FUNDAMENTAL ANALYSIS Fundamental analysis is one of two primary methods for analyzing a stock's potential return.
It involves assessing a corporation's financial history and current standing, including earnings, sales, and management. It also involves gauging the strength of the corporation's products or services in the marketplace.
GOVERNMENT BOND The term government bond is used to describe the debt securities issued by the federal government, such as US Treasury bills, notes, and bonds. They're also known as government obligations.
Treasuries are backed by the full faith and credit of the US government, and the interest they pay is exempt from state and local, though not federal, income taxes.
HIGH YIELD BOND High-yield bonds may be bonds whose ratings from independent rating services are below investment grade.
As a result, to attract investors, issuers of high-yield bonds must pay a higher rate of interest than the rates that issuers of higher-rated bonds with the same maturity are paying. The higher rate translates to more income, which is the higher yield.
High-yield bonds may also be described as junk bonds.
INDIVIDUAL RETIREMENT ACCOUNT (IRA) Individual retirement accounts (IRAs) provide tax incentives to encourage people who earn income to invest for retirement.
You open an IRA with a financial services firm, such as a bank, brokerage firm, or investment company, as custodian. The accounts are self-directed, which means you can choose among the investments available through your custodian.
There are two types of IRAs, tax-deferred traditional accounts and tax-free Roth accounts. With either type you usually can't make withdrawals without penalty before you turn 59 1/2.
With a traditional IRA you must begin to take minimum required distributions (MRD) by April 1 of the year you turn 70 1/2. Distributions are taxed at your regular rate as you withdraw.
There are no required distributions from a Roth IRA, and all withdrawals are free of federal income tax if you're at least 59 1/2 and your account has been open at least five years.
INVESTMENT HORIZON Your investment horizon is the point in time when you hope to achieve a particular investment goal. That horizon, sometimes called your time frame, may be fixed or flexible, depending on the nature of the goal and the investment decisions you make.
For example, paying for college is often a fixed goal because most students enroll the year they graduate from high school. Retirement may be a more flexible goal if you have the choice about when you will stop working.
INVESTMENT OBJECTIVE An investment objective is a financial goal that helps determine the type of investments you make. For example, if you want a source of regular income, you might select a portfolio of high-rated bonds and dividend-paying stocks.
LIQUIDITY The term liquidity is sometimes used to describe investments, such as stocks, that you can sell easily to generate cash.
MINIMUM REQUIRED DISTRIBUTION (MRD) A minimum required distribution is the smallest amount you can take each year from your retirement savings plan once you've reached the mandatory withdrawal age.
There are MRDs for 401(k) plans, 403(b) plans, and traditional IRAs, and the maximum age you can reach before they start is usually 70 1/2. If you take less than the required minimum, you owe a 50% penalty on the amount you should have taken.
MONEY MARKET The money market isn't a place. It's the continual buying and selling of short-term liquid investments.
Those investments include Treasury bills, certificates of deposit (CDs), commercial paper, and other debt issued by corporations and governments. These investments are also known as money market instruments.
MORTGAGE BONDS Mortgage-backed securities are created when the sponsor buys up mortgages from lenders, pools them, and packages them for sale to the public, a process known as securitization.
Securities are available through publicly held corporations such as Fannie Mae and Freddie Mac or other financial institutions. Some of the securities are guaranteed by the Government National Mortgage Association, or Ginnie Mae.
The money raised by selling the bonds is used to buy additional mortgages, making more money available to lend.
MUNICIPAL BONDS Municipal bonds, munis for short, are debt securities issued by state or local governments or their agencies to finance general governmental activities or special projects.
For example, a state may float a bond to fund the construction of highways or college dormitories.
The interest a muni pays is usually exempt from federal income taxes, and is also exempt from state and local income taxes if you live in the state where it was issued.
Munis generally pay interest at a lower rate than similarly rated corporate bonds of the same term. However, they appeal to investors in the highest tax brackets, who may benefit most from the tax-exempt income.
