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Dictionary of Financial Terms |
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Click on any letter below to browse our list of financial terms or enter key words below to focus your search.
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| Definitions |
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Laddering By laddering, or staggering, the maturities on
fixed-income investments, such as certificates of deposit (CDs) and
bonds, you can set up a schedule for when various investments come
due. That way, you can avoid having to reinvest all your money at one
time, when interest rates may be low, and you can take advantage of
new investment opportunities, including those with higher returns, as
they become available.
As each investment matures, you can reinvest
that amount, use it for a preplanned purchase, or have it available
to cover unexpected expenses. For example, instead of one $15,000,
five-year CD yielding 5%, you can buy three $5,000 CDs maturing one
year apart. Laddering is sometimes used in planning to pay for
college expenses, with each investment coming due in time to pay
tuition for that year. |
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Large-capitalization (large-cap) stock This is the stock of large,
established companies, with market capitalizations in the billions of
dollars. (Market capitalization is figured by multiplying the number
of outstanding shares by the current share price.) Large-cap stocks,
such as those tracked by Standard & Poor's 500-stock Index (S&P 500),
are generally considered less volatile than mid-cap or small-cap
stocks. Mutual funds that invest in this type of stock are known as
large-cap funds.
Recently, however, several Internet stocks have
enjoyed large market capitalizations as their stock prices have
soared, though as new issues they would not ordinarily be thought of
as large-cap stocks. |
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Level load Some mutual funds impose a recurring sales charge,
called a level load, each year you own the fund rather than charging
either a front- or back-end load.
The level-load rate is generally
less, usually 1% to 2% annually, than the rate that's charged on a
front- or back-end load fund. But the total sales charge you pay over
time with a level load can be substantially more than other types of
loads, especially if you own the fund for a number of years.
Level-load funds are frequently identified by mutual fund companies
as Class C shares to distinguish them from front-end loads (Class A
shares) and back-end loads (Class B shares). |
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Leverage Using leverage is an investment technique in which you
borrow money to increase the size of your investment. The expectation
is that you'll realize a much greater return than you could by
investing your own money alone. In addition, using leverage lets you
wield greater financial power without putting your own money at
stake. For example, if you borrow money to buy a home, you are using
the leverage of the mortgage to buy a much more expensive home than
you could have afforded by paying cash.
Buying on margin is a type
of leveraging, as is buying a futures contract or an option.
Leveraging can be very risky, however, if the investment doesn't
perform as you anticipate, since you risk losing your own money as
well as the borrowed money you will have to
repay. |
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Liability In personal finance, liabilities are the amounts you owe
to creditors, or the people and organizations that lend you money.
Typical liabilities include your mortgage, car and educational loans,
and credit card debt. When you figure your net worth, you subtract
your liabilities, or what you owe, from your assets. The result is
your net worth, or the cash value of what you own.
In business,
liabilities also refer to the claims against the assets of a
corporation, and may include accounts payable, wages and salaries,
dividends, taxes, and debt obligations, such as bonds and bank
loans. |
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Limited partnership A limited partnership is a financial
affiliation, including a general partner and a number of limited
partners, that usually invests in real estate or some other
venture.
The arrangement can be public, which means you can buy into
the partnership through a brokerage firm. Or it can be private, which
generally means you have to know the people involved to participate.
What makes the partnership limited is that everyone but the general
partner has limited liability. The most they can lose is the amount
they invest. |
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Liquidity If you can convert an investment easily and quickly to
cash, with little or no loss of value, you have liquidity. For
example, you can typically redeem shares in a money market mutual
fund at $1 a share. Similarly, you can cash in a certificate of
deposit (CD) and get back at least the amount you put into it (though
you may forfeit some or all of the interest you had expected to earn
if you liquidate before the end of the CD's term).
In a related way,
investments have liquidity if you can buy or sell them quickly. For
example, you could sell several hundred shares of a blue chip stock
by simply calling your broker, something that might not be possible
if you wanted to sell stock in a small, thinly traded company.
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difference between cash-equivalent investments and securities like
stocks and bonds, however, is that securities constantly fluctuate in
value. So while you may be able to sell them quickly, you might get
back less than you paid if you have to sell when the price is
down. |
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Listing requirement Each organized securities exchange and stock
market-including the New York Stock Exchange (NYSE) and the
Nasdaq-Amex Market Group-has its own listing requirements, which a
corporation must meet in order to have its stocks or bonds traded
there.
Among the criteria used for listing are a corporation's
pretax earnings, number of outstanding shares, and minimum market
value. For example, the NYSE, which has the most stringent
requirements, requires pretax earnings of $2.5 million, a minimum of
1.1 million outstanding shares, and a minimum market value of $100
million. |
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Load fund Some mutual funds charge a load, or sales commission,
when you buy or sell shares or, in some cases, each year you own the
fund. The charge is generally figured as a percentage of your
investment amount. Most load funds are sold by brokers, financial
planners, and other advisors, while no-load funds, which don't have
sales charges (but may levy other fees), are usually sold directly to
the public by the fund company.
There's no evidence that load funds
outperform no-loads, or that funds with higher loads outperform those
with lower ones, so the added cost of load funds should be considered
in choosing one fund rather than another. |
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Logarithmic scale On a logarithmic scale or graph, comparable percentage changes in the value of an investment, an index, or an average appear similar even though the underlying change in value may be significantly different.
For example, a stock whose price increases during the year from $25 a share to $50 a share has the same percentage change as a stock whose price increases from $100 a share to $200 a share despite the fact that the dollar value of the second stock is four times the value of the first. Similarly, the percentage change in the Dow Jones Industrial Average (DJIA) as it rose from 1,000 to 2,000 is comparable to the percentage change when it moved from 4,000 to 8,000. |
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Long position Having a long position when you own a stock or bond
means you have the right to collect the dividends or interest it
pays, the right to sell it or give it away when you wish, and the
right to keep any profits if you do sell.
It's the opposite of
having a short position, which means you have borrowed shares from
your broker, sold them, and must return them at some point in the
future. The term long position is also used to describe stocks or
bonds you own that are held by your brokerage firm in street
name. |
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Loose credit In order to combat a sluggish economy, the Federal
Reserve Board (the Fed) sometimes institutes a loose credit policy.
The Fed buys large quantities of Treasury securities, which gives
banks additional money to lend at lower interest rates. This
abundance, or looseness, of credit tends to stimulate borrowing,
which in turn is designed to stimulate the economy as a whole.
Tight
money is the opposite of loose credit. It's the result of the Fed's
selling securities, which makes borrowing-and therefore
spending-harder. A tight money policy is designed to slow down a
rapidly accelerating economy. |
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Loser Stocks whose market price drops the most during the trading
day are described, rather bluntly, as losers. The stocks that lose
the most value relative to their opening price are called percentage
losers, and stocks that lose the most points are called net losers or
dollar losers.
The number of losers in a trading day is usually
compared to the number of gainers, or stocks that have risen the most
in value during the day. If there are more losers than gainers over a
period of days, the market as a whole is in a
slump. |
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Lump sum A lump sum is money you pay or receive all at once rather
than in increments over a period of time. For example, you buy an
immediate annuity with a single lump-sum payment. Similarly, if you
receive the face value of a life insurance policy when the insured
person dies, or get a check for the full value of the assets in your
retirement account, those payments are also lump sums.
Cash
distribution:
PROS
- Can use money immediately
- Can
make your own investment decisions
CONS
- Taxes due immediately-
Owe additional taxes on investment gains - Must make initial
investment decisions quickly - Easy to spend too
fast |
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Lump-sum distribution When you retire, you may have the option of
taking the value of your pension, salary reduction, or profit-sharing
plan in a series of regular payments, generally described as an
annuity, or all at once, in what is known as a lump-sum
distribution.
If you take the lump sum from a pension, your employer
calculates how much you would have received over your estimated
lifespan if you'd taken the pension as an annuity and then subtracts
the amount the pension fund estimates it would have earned in
interest on that amount during the years of payout.
When you take a
lump-sum distribution from a salary reduction or profit-sharing plan,
you receive the amount that has accumulated in the plan. You may also
take a lump-sum distribution from these plans when you change jobs.
However, that is usually not the case with a traditional pension
plan.
Whether you're retiring or changing jobs, you can take a
lump-sum distribution as cash, or you can roll over the distribution
into an individual retirement account (IRA). If you take the cash,
you owe income tax on the full amount of the distribution, and you
may owe an additional 10% penalty if you're younger than 59 1/2. If
you roll over the lump sum into an IRA, the full amount continues to
be tax-deferred, and you can postpone paying income tax until you
withdraw from the account. |
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Copyright 2002 Lightbulb Press, Inc. All Rights Reserved
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