Glossary
Adjusted Gross Income (AGI)
An interim calculation in the computation of income tax
liability. It is computed by subtracting certain allowable adjustments from
gross income.
Administrator
A person appointed by the court to settle an estate when
there is no will.
After-Tax Return
The return from an investment after the effects of taxes have
been taken into account.
Aggressive Growth Fund
A mutual fund whose primary investment objective is
substantial capital gains.
Alternative Minimum Tax
A method of calculating income tax that disallows certain
deductions, credits, and exclusions. This was intended to ensure that
individuals, trusts, and estates that benefit from tax preferences do not escape
all federal income tax liability. People must calculate their taxes both ways
and pay the greater of the two.
Annuity
An insurance-based contract that provides future payments at
regular intervals in exchange for current premiums. Annuity contracts are
usually purchased from banks, credit unions, brokerage firms, or insurance
companies.
Asset
Anything owned that has monetary value.
Asset Allocation
The process of repositioning assets within a portfolio to
maximize return for a given level of risk. This process is usually done using
the historical performance of the asset classes within sophisticated
mathematical models.
Asset Class
A category of investments with similar characteristics.
Audit
The examination of the accounting and financial documents of
a firm by an objective professional. The audit is done to determine the records'
accuracy, consistency, and conformity to legal and accounting principles.
Balanced Mutual Fund
A mutual fund whose objective is a balance of stocks and
bonds. Such funds tend to be less volatile than stock-only funds.
Bear Market
When the stock market appears to be declining overall, it is
said to be a bear market.
Beneficiary
A person named in a life insurance policy, annuity, will,
trust, or other agreement to receive a financial benefit upon the death of the
owner. A beneficiary can be an individual, company, organization, and so on.
Blue Chip Stock
The common stock of a company with a long history of
profitability and consistent dividend payments.
Bond
A bond is evidence of a debt in which the issuer promises to
pay the bondholders a specified amount of interest and to repay the principal at
maturity. Bonds are usually issued in multiples of $1,000.
Book Value
The net value of a company's assets, less its liabilities and
the liquidation price of its preferred issues. The net asset value divided by
the number of shares of common stock outstanding equals the book value per
share, which may be higher or lower than the stock's market value.
Bull Market
When the stock market appears to be advancing overall, it is
said to be a bull market.
Buy-Sell Agreement
A buy-sell agreement is an arrangement between two or more
parties that obligates one party to buy the business and another party to sell
the business upon the death, disability, or retirement of one of the owners.
Capital Gain or Loss
The difference between the sales price and the purchase price
of a capital asset. When that difference is positive, the difference is referred
to as a capital gain. When the difference is negative, it is a capital loss.
Cash Equivalents
Short-term investments, such as U.S. Treasury securities,
certificates of deposit, and money market fund shares, that can be readily
converted into cash.
Cash Surrender Value
The amount that an insurance policyholder is entitled to
receive when he or she discontinues coverage. Policyholders are usually able to
borrow against the surrender value of a policy from the insurance company. Loans
that are not repaid will reduce the policy's death benefit.
CERTIFIED FINANCIAL
PLANNER® Practitioner
A credential granted by the Certified Financial Planner Board
of Standards, Inc. (Denver, CO) to individuals who complete a comprehensive
curriculum in financial planning and ethics. CFP®, CERTIFIED FINANCIAL PLANNER®
and federally registered CFP (with flame logo)® are certification marks owned
by the Certified Financial Planner Board of Standards. These marks are awarded
to individuals who successfully complete the CFP Board's initial and ongoing
certification.
Certified Public
Accountant (CPA)
A professional license granted by a state board of
accountancy to an individual who has passed the Uniform CPA Examination
(administered by the American Institute of Certified Public Accountants) and has
fulfilled that state's educational and professional experience requirements for
certification.
Charitable Lead Trust
A trust established for the benefit of a charitable
organization under which the charitable organization receives income from an
asset for a set number of years or for the trustor's lifetime. Upon the
termination of the trust, the asset reverts to the trustor or to his or her
designated heirs. This type of trust can reduce estate taxes and allows the
trustor's heirs to retain control of the assets.
Charitable Remainder
Trust
A trust established for the benefit of a charitable
organization under which the trustor receives income from an asset for a set
number of years or for the trustor's lifetime. Upon the termination of the
trust, the asset reverts to the charitable organization. The trustor receives a
charitable contribution deduction in the year in which the trust is established,
and the assets placed in the trust are exempt from capital gains tax.
Chartered Financial
Consultant (ChFC)
A professional financial planning designation granted by The
American College (
Chartered Life
Underwriter (CLU)
A professional designation granted by The American College to
individuals who complete a comprehensive curriculum focused primarily on risk
management. Prerequisites include passing a series of written examinations,
meeting specified experience requirements, and maintaining ethical standards.
The curriculum encompasses insurance and financial planning, income taxation,
individual life insurance, life insurance law, estate and succession planning,
and planning for business owners and professionals.
COBRA
The Consolidated Omnibus Budget Reconciliation Act is a
federal law requiring employers with more than 20 employees to offer terminated
or retired employees the opportunity to continue their health insurance coverage
for 18 months at the employee's expense. Coverage may be extended to the
employee's dependents for 36 months in the case of divorce or death of the
employee.
Coinsurance or
Co-Payment
The amount an insured person must pay for a covered medical
and/or dental expense if his or her insurance doesn't provide 100 percent
coverage.
Commodities
The generic term for goods such as grains, foodstuffs,
livestock, oils, and metals which are traded on national exchanges. These
exchanges deal in both "spot" trading (for current delivery) and
"futures" trading (for delivery in future months).
Common Stock
A unit of ownership in a corporation. Common stockholders
participate in the corporation's profits or losses by receiving dividends and by
capital gains or losses in the stock's share price.
Community Property
State laws vary, but generally all property acquired during a
marriage - excluding property one spouse receives from a will, inheritance, or
gift - is considered community property, and each partner is entitled to one
half. This includes debt accumulated. There are currently nine community
property states:
Compound Interest
Interest that is computed on the principal and on the accrued
interest. Compound interest may be computed continuously, daily, monthly,
quarterly, semiannually, or annually.
Consumer Price Index
The U.S. Department of Labor's main indicator of inflation.
The Consumer Price Index is calculated each month from the cost of some 400
retail items in urban areas throughout the
Deduction
An amount that can be subtracted from gross income, from a
gross estate, or from a gift, thereby lowering the amount on which tax is
assessed.
Defined Benefit Plan
A qualified retirement plan under which a retiring employee
will receive a guaranteed retirement fund, usually payable in installments.
Annual contributions may be made to the plan by the employer at the level needed
to fund the benefit. The annual contributions are limited to a specified amount,
indexed for inflation.
Defined Contribution
Plan
A retirement plan under which the annual contributions made
by the employer or employee are generally stated as a fixed percentage of the
employee's compensation or company profits. The amount of retirement benefits is
not guaranteed; rather, it depends upon the investment performance of the
employee's account.
Diversification
Investing in different companies, industries, or asset
classes. Diversification may also mean the participation of a large corporation
in a wide range of business activities.
Dividend
A pro rata portion of earnings distributed in cash by a
corporation to its stockholders. In preferred stock, dividends are usually
fixed; with common shares, dividends may vary with the fortunes of the company.
Dollar Cost Averaging
A system of investing in which the investor buys a fixed
dollar amount of securities at regular intervals. The investor thus buys more
shares when the price is low and fewer shares when it rises, and the average
cost per share is lower than the average price per share. This strategy does not
protect against loss in declining markets and involves continuous investments,
regardless of fluctuating price levels.
Efficient Frontier
A statistical result from the analysis of the risk and return
for a given set of assets that indicates the balance of assets that may, under
certain assumptions, achieve the best return for a given level of risk.
Employer-Sponsored
Retirement Plan
A tax-favored retirement plan that is sponsored by an
employer. Among the more common employer-sponsored retirement plans are 401(k)
plans, 403(b) plans, simplified employee pension plans, and profit-sharing
plans.
Equity
The value of a person's ownership in real property or
securities; the market value of a property or business, less all claims and
liens upon it.
ERISA
The Employee Retirement Income Security Act is a federal law
covering all aspects of employee retirement plans. If employers provide plans,
they must be adequately funded and provide for vesting, survivor's rights, and
disclosures.
ESOP (employee stock ownership plan)
A defined contribution retirement plan in which company
contributions must be invested primarily in qualifying employer securities.
Estate Conservation
Activities coordinated to provide for the orderly and
cost-effective distribution of an individual's assets at the time of his or her
death. Estate conservation often includes wills and trusts.
Estate Tax
Upon the death of a decedent, federal and state governments
impose taxes on the value of the estate left to others (with limitations).
Executive Bonus Plan
The employer pays for a benefit that is owned by the
executive. The bonus could take the form of cash, automobiles, life insurance,
or other items of value to the executive.
Executor
A person named by the probate courts or the will to carry out
the directions and requests of the decedent.
Fixed Income
Income from investments such as CDs, Social Security
benefits, pension benefits, some annuities, or most bonds that is the same every
month.
401(k) Plan
A defined contribution plan that may be established by a
company for retirement. Employees may allocate a portion of their salaries into
this plan, and contributions are excluded from their income for tax purposes
(with limitations). Contributions and earnings will compound tax deferred.
Withdrawals from a 401(k) plan are taxed as ordinary income, and may be subject
to an additional 10 percent federal tax penalty if withdrawn prior to age 59 ½.
403(b) Plan
A defined contribution plan that may be established by a
nonprofit organization or school for retirement. Employees may allocate a
portion of their salaries into this plan, and contributions are excluded from
their income for tax purposes (with limitations). Contributions and earnings
will compound tax deferred. Withdrawals from a 403(b) plan are taxed as ordinary
income, and may be subject to an additional 10 percent federal tax penalty if
withdrawn prior to age 59 ½.
Fundamental Analysis
An approach to the stock market in which specific factors -
such as the price-to-earnings ratio, yield, or return on equity - are used to
determine what stock may be favorable for investment.
Gift Taxes
A federal tax levied on the transfer of property as a gift.
This tax is paid by the donor. The first $12,000 a year from a donor to each
recipient is exempt from tax. Most states also impose a gift tax. The gift tax
exemption is indexed annually for inflation.
Holographic Will
A will entirely in the handwriting of the testator. Without
witnesses, holographic wills are valid and enforceable only in some states.
Index
A calculation that uses a selection of stocks or bonds to
gauge a certain market. The Dow Jones Industrial Average, for example, is an
index of 30 large industrial companies on the New York Stock Exchange.
Individual Retirement
Account (IRA)
Contributions to a traditional IRA are deductible from earned
income in the calculation of federal and state income taxes if the taxpayer
meets certain requirements. The earnings accumulate tax deferred until
withdrawn, and then they are taxed as ordinary income. Individuals not eligible
to make deductible contributions may make nondeductible contributions, the
earnings on which would be tax deferred.
Inflation
An increase in the price of products and services over time.
The government's main measure of inflation is the Consumer Price Index.
Intestate
The condition of an estate left by a decedent without a valid
will. State law then determines who inherits the property or serves as guardian
for any minor children.
Investment Category
A broad class of assets with similar characteristics. The
five investment categories include cash equivalents, fixed principal, equity,
debt, and tangibles.
Irrevocable Trust
A trust that may not be modified or terminated by the trustor
after its creation.
Joint and Survivor
Annuity
Most pension plans must offer this form of pension plan
payout that pays over the life of the retiree and his or her spouse after the
retiree dies. The retiree and his or her spouse must specifically choose not to
accept this payment form.
Joint Tenancy
Co-ownership of property by two or more people in which the
survivor(s) automatically assumes ownership of a decedent's interest.
Jointly Held Property
Property owned by two or more persons under joint tenancy,
tenancy in common, or, in some states, community property.
Keogh Plan
This retirement plan, named for Eugene Keogh, is designed for
self-employed individuals. Up to $46,000 of self-employed income may be deducted
from compensation and set aside into the plan.
Liability
Any claim against the assets of a person or corporation:
accounts payable, wages, and salaries payable, dividends declared payable,
accrued taxes payable, and fixed or long-term obligations such as mortgages,
debentures, and bank loans.
Limited Partnership
Limited partnerships pool the money of investors to develop
or purchase income-producing properties. When the partnership subsequently
receives income from these properties, it distributes the income to its
investors as dividend payments.
Liquidity
The ease with which an asset or security can be converted
into cash without loss of principal.
Living Trust
A trust created by a person during his or her lifetime.
Lump-Sum Distribution
The disbursement of the entire value of a profit-sharing
plan, pension plan, annuity, or similar account to the account owner or
beneficiary. Lump-sum distributions may be rolled over into another tax-deferred
account.
Marginal Tax Bracket
The range of taxable income that is taxable at a certain
rate. Currently, there are six marginal tax brackets: 10 percent, 15 percent, 25
percent, 28 percent, 33 percent, and 35 percent.
Marital Deduction
A provision of the tax codes that allows all assets of a
deceased spouse to pass to the surviving spouse free of estate taxes. This
provision is also referred to as the unlimited marital deduction.
Money Market Fund
A mutual fund that specializes in investing in short-term
securities and that tries to maintain a constant net asset value of $1.
Municipal Bond
A debt security issued by municipalities. The income from
municipal bonds is usually exempt from federal income taxes. In many states, it
is also exempt from state income taxes in the state in which the municipal bond
is issued.
Municipal Bond Fund
A mutual fund that specializes in investing in municipal
bonds.
Mutual Fund
A collection of stocks, bonds, or other securities purchased
and managed by an investment company with funds from a group of investors.
Net Asset Value
The price at which a mutual fund sells or redeems its shares.
The net asset value is calculated by dividing the net market value of the fund's
assets by the number of outstanding shares.
Pooled Income Fund
A trust created by a charitable organization that combines
the contributions of several donors and distributes income to those donors based
on the earnings of the trust. The trust is managed by the charitable
organization, and contributions are partially deductible for income tax
purposes.
Portfolio
All the investments held by an individual or a mutual fund.
Preferred Stock
A class of stock with claim to a company's earnings, before
payment can be made on the common stock, and that is usually entitled to
priority over common stock if the company liquidates. Generally, preferred
stocks pay dividends at a fixed rate.
Prenuptial Agreement
A legal agreement arranged before marriage stating who owns
property acquired before marriage and during marriage and how property will be
divided in the event of divorce. ERISA benefits are not affected by prenuptial
agreements.
Price/Earnings Ratio
(P/E Ratio)
The market price of a stock divided by the company's annual
earnings per share. Because the P/E ratio is a widely regarded yardstick for
investors, it often appears with stock price quotations.
Principal
In a security, the principal is the amount of money that is
invested, excluding earnings. In a debt instrument such as a bond, it is the
face amount.
Probate
The court-supervised process in which a decedent's estate is
settled and distributed.
Profit-Sharing Plan
An agreement under which employees share in the profits of
their employer. The company makes annual contributions to the employees'
accounts. These funds usually accumulate tax deferred until the employee retires
or leaves the company.
Prospectus
A document provided by mutual fund companies to prospective
investors. The prospectus gives information needed by investors to make informed
decisions prior to investing in a specific mutual fund. The prospectus includes
information on the minimum investment amount, the fund's objectives, past
performance, risk level, sales charges, management fees, and any other expense
information about the fund, as well as a description of the services provided to
investors in the fund.
Qualified Domestic
Relations Order (QDRO)
At the time of divorce, this order would be issued by a state
domestic relations court and would require that an employee's ERISA retirement
plan accrued benefits be divided between the employee and the spouse.
Qualified Retirement
Plan
A pension, profit-sharing, or qualified savings plan that is
established by an employer for the benefit of the employees. These plans must be
established in conformity with IRS rules. Contributions accumulate tax deferred
until withdrawn and are deductible to the employer as a current business
expense.
Revocable Trust
A trust in which the creator reserves the right to modify or
terminate the trust.
Risk
The chance that an investor will lose all or part of an
investment.
Risk-Averse
Refers to the assumption that rational investors will choose
the security with the least risk if they can maintain the same return. As the
level of risk goes up, so must the expected return on the investment.
Rollover
A method by which an individual can transfer the assets from
one retirement program to another without the recognition of income for tax
purposes. The requirements for a rollover depend on the type of program from
which the distribution is made and the type of program receiving the
distribution.
Roth IRA
A nondeductible IRA that allows tax-free withdrawals when
certain conditions are met. Income and contribution limits apply.
Security
Evidence of an investment, either in direct ownership (as
with stocks), creditorship (as with bonds), or indirect ownership (as with
options).
Simplified Employee
Pension Plan (SEP)
A type of plan under which the employer contributes to an
employee's IRA. Contributions may be made up to a certain limit and are
immediately vested.
Single-Life Annuity
An insurance-based contract that provides future payments at
regular intervals in exchange for current premiums. Generally used as a
supplement to retirement income and pays over the life of one individual,
usually the retiree, with no rights of payment to any survivor.
Split-Dollar Plan
An arrangement under which two parties (usually a corporation
and employee) share the cost of a life insurance policy and split the proceeds.
Spousal IRA
An IRA designed for a couple when one spouse has no earned
income. The maximum combined contribution that can be made each year to an IRA
and a spousal IRA is $10,000 (in 2008) or 100 percent of earned income,
whichever is less. This total may be split between the two IRAs as the couple
wishes, provided the contribution to either IRA does not exceed $5,000.
Tax Bracket
The range of taxable income that is taxed at a certain rate.
Brackets are expressed by their marginal rate.
Tax Credit
Tax credits, the most appealing type of tax deductions, are
subtracted directly, dollar for dollar, from your income tax bill.
Tax Deferred
Interest, dividends, or capital gains that grow untaxed in
certain accounts or plans until they are withdrawn.
Tax-Exempt Bonds
Under certain conditions, the interest from bonds issued by
states, cities, and certain other government agencies is exempt from federal
income taxes. In many states, the interest from tax-exempt bonds will also be
exempt from state and local income taxes.
Taxable Income
The amount of income used to compute tax liability. It is
determined by subtracting adjustments, itemized deductions or the standard
deduction, and personal exemptions from gross income.
Technical Analysis
An approach to investing in stocks in which a stock's past
performance is mapped onto charts. These charts are examined to find familiar
patterns to use as an indicator of the stock's future performance.
Tenancy in Common
A form of co-ownership. Upon the death of a co-owner, his or
her interest passes to his or her chosen beneficiaries and not to the surviving
owner or owners.
Term Insurance
Term life insurance provides a death benefit if the insured
dies. Term insurance does not accumulate cash value and ends after a certain
number of years or at a certain age.
Testamentary Trust
A trust established by a will that takes effect upon death.
Testator
One who has made a will or who dies having left a will.
Total Return
The total of all earnings from a given investment, including
dividends, interest, and any capital gain.
Trust
A legal entity created by an individual in which one person
or institution holds the right to manage property or assets for the benefit of
someone else. Types of trusts include: Testamentary Trust – A trust
established by a will that takes effect upon death; Living Trust – A trust
created by a person during his or her lifetime; Revocable Trust – A trust in
which the creator reserves the right to modify or terminate the trust;
Irrevocable Trust – A trust that may not be modified or terminated by the
trustor after its creation
Trustee
An individual or institution appointed to administer a trust
for its beneficiaries.
Trustee-to-Trustee
Transfer
A method of transferring retirement plan assets from one
employer's plan to another employer plan or to an IRA. One benefit of this
method is that no federal income tax will be withheld by the trustee of the
first plan.
Universal Life
Insurance
A type of life insurance that combines a death benefit with a
savings element which accumulates tax deferred at current interest rates. Under
a universal life insurance policy, the policyholder can increase or decrease his
or her coverage, with limitations, without purchasing a new policy.
Variable Universal Life
Insurance
A type of life insurance that combines a death benefit with a
savings element that accumulates tax deferred. Under a variable universal life
insurance policy, the cash value in the policy can be placed in a variety of
subaccounts with different investment objectives. The policyholder can transfer
funds among the subaccounts as he or she wishes. Fees are charged after a
certain number of transfers.
Volatility
The range of price swings of a security or market over time.
Welfare Benefit Plan
An employee benefit plan that provides such benefits as
medical, sickness, accident, disability, death, or unemployment benefits.
Whole Life Insurance
A type of life insurance that offers a death benefit and also
accumulates cash value, tax deferred at fixed interest rates. Whole life
insurance policies generally have a fixed annual premium that does not rise over
the duration of the policy. Whole life insurance is also referred to as
"ordinary" or "straight" life insurance.
Will
A legal document that declares a person's wishes concerning
the disposition of property, the guardianship of his or her children, and the
administration of the estate after his or her death.
Yield
In general, the yield is the amount of current income
provided by an investment. For stocks, the yield is calculated by dividing the
total of the annual dividends by the current price. For bonds, the yield is
calculated by dividing the annual interest by the current price. The yield is
distinguished from the return, which includes price appreciation or
depreciation.
Zero-Coupon Bond
This type of bond makes no periodic interest payments but
instead is sold at a steep discount from its face value. Bondholders receive the
face value of their bonds when they mature.