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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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Early withdrawal If you withdraw assets from a fixed-term
investment, such as a certificate of deposit (CD), before it matures,
or from an individual retirement account (IRA) or tax-deferred
retirement savings plan before you turn 59 1/2, it is generally considered an
early withdrawal.
If you withdraw early, you usually have to pay a
penalty imposed by the issuer (in the case of a CD) or by the federal
government (in the case of an IRA or other tax-deferred or tax-free savings plan). However, you may be able to
use the money in your account without penalty under certain circumstances. For
example, if you withdraw IRA assets to pay for higher education or to buy a first home, the penalty is waived though taxes are due on the tax-deferred portion of the withdrawal. |
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Earnings estimate Professional stock analysts use mathematical
models that weigh companies' financial data to predict their
future earnings per share on a quarterly, annual, and long-term
basis. Investment research companies, such as Zacks, publish averages
of analysts' estimates, called consensus estimates, for stocks that are closely followed by market professionals.
When a company's
earnings report either exceeds or fails to meet analysts'
estimates, it's called an earnings surprise. An upside surprise
occurs when a company reports higher earnings than analysts predicted
and usually triggers an increase in the stock price. A negative surprise,
on the other hand, occurs when a company fails to meet expectations
and often causes the stock's price to fall. Companies try hard to
avoid negative surprises since even a small deviation can create a
big stir. |
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Earnings per share (EPS) Earnings per share (EPS) is calculated by
dividing a company's total earnings by the number of existing shares. For example, if a company earns $100 million in a year and
has issued 50 million shares, the earnings per share are $2.
Earnings and other financial measures are provided on a per-share
basis to make it easier for investors analyze the information and compare the results
to those of other investments.
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EARNINGS PER SHARE
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Total company earnings
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= Earnings per share |
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Number of outstanding shares
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For example:
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$100,000,000
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= $2 per share |
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50,000,000
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Economic indicator Economic indicators are statistical measurements of current business conditions. Changes in leading
indicators, including those that track factory orders,
stock prices, the money supply, and consumer confidence, forecast short-term economic strength or weakness. In contrast, lagging indicators, such as business spending, bank interest rates, and unemployment figures, move up or down in the wake of changes in the economy.
The Conference Board, a nonprofit business research firm, releases its weighted indexes of leading, lagging, and coincident indicators every month. Though the individual components are also reported separately throughout the month, the indexes provide a snapshot if the economy's overall health.
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Educational Savings Account (ESA) You can put up to $2,000 a year into an Educational Savings Account (ESA) that you
establish in the name of a minor child. The assets in the account can be invested any way you choose.
There is no limit on the number of accounts you can set up for different children, but no more than a total of $2,000 can be
contributed in a single child's name in any one year.
Your contribution is not tax deductible, but any earnings that accumulate in
the account can be withdrawn tax free if they're used to
pay qualified educational expenses for the beneficiary until he or she reaches age 30. The costs can be incurred at any level, from elementary school through a graduate degree.
There are no restrictions on using money from an ESA in the same year the student uses other tax-free savings or that or the student you take tax credits for educational expenses. And, you may be able to switch the beneficiary of an ESA if the initial beneficiary doesn't use the money. However, there is a cap on the amount you can earn in any year you contribute to an ESA $110,000 if you file your tax return as a single taxpayer and $220,000 if you file a joint return.
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Electronic communications network (ECN) An ECN is an alternative
securities trading system that collects, displays, and
executes orders electronically without a middleman (such as a specialist or market
maker). Trading on an ECN allows institutional and individual
investors to buy and sell anonymously. Further, ECNs facilitate extended, or
after-hours, trading.
ECN trade execution can be faster and less expensive than trades handled through screen-based or
traditional markets, though the volume is sometimes thin. However some ECNs have been approved for official
stock exchange status, expanding the number of stocks that can be traded on their systems. |
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Employee stock ownership plan (ESOP) An ESOP is a trust to which a company contributes shares of newly issued stock, shares the company has held in reserve, or the cash to buy shares on the open market. The shares go into individual accounts set up for employees who meet the plan's eligibility requirements.
An ESOP may be part of a 401(k) plan or separate from it. If it's linked, an employer's matching contribution may be shares added to the ESOP account rather than cash added to an investment account. If you're part of an ESOP and you leave your job, you have the right to sell your shares on the open market if your employer is a public company or back to the company at fair market value if your employer is a privately held company. The vast majority of ESOPs are offered by privately held companies. |
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Employer sponsored retirement plan Employers may offer their employees either defined benefit or defined contribution retirement plans, or they may make both types of plans available. Any employer may offer a defined benefit plan, but certain types of defined contribution plans are available only through specific categories of employers. For example, 403(b) plans may be offered only by tax-exempt, not-for-profit employers, 457 plans only by state and municipal governments, and and SIMPLE plans only by employers with fewer than 100 workers.
Corporate employers who contribute to a retirement plan that meets Internal Revenue Service (IRS) guidelines can take a tax deduction for the amount of their contribution
and may enjoy other tax benefits. Offering a retirement plan may also make the employer more attractive to potential employees.
However, employers are not required to offer plans. If they do, they can make the plan as generous or as limited as they choose as long as the plan meets the government's nondiscrimination guidelines.
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Enhanced index fund Unlike an index fund, which strives to mirror
the performance of a particular index by
owning all of the stocks in the index, an enhanced index fund chooses selectively among
the stocks in a particular index in order to produce a
slightly higher return. The goal is to narrowly beat the index by
anywhere from a fraction of a percent to two percentage points but
not more, since a wider spread would classify the enhanced fund as an actively managed mutual fund rather than an index fund.
Enhanced index fund managers may achieve higher
returns by identifying the under-valued stocks in the index, adjusting holdings to
include a larger proportion of securities in higher- performing sectors, or using other investment
strategies, such as buying derivatives. While enhanced index funds may expose you to the risk of greater losses than their plain-vanilla counterparts, they may also offer
an opportunity for higher returns. |
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Equity In the broadest sense, equity means ownership. If you own
stock, you have equity in, or own a portion however small of the
company that issued the stock. Having equity is the opposite of owning a
bond or commercial paper, which is a debt the company must repay to
you.
Equity also means the difference between the amount an asset's current market value the amount it could be sold for and any debt or claim
against it. For example, if you own a home currently valued at $300,000 but still owe $200,000 on your mortgage, your equity in the home is $100,000. |
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Equivalent taxable yield Although tax-exempt municipal bonds
generally pay interest at a lower rate than taxable corporate bonds,
agency bonds, and Treasury's, they may actually provide a higher
yield, especially if you are in
the higher federal income tax brackets.
That's because a certain percentage of your taxable yield disappears to pay the tax that's due. You can use the formula below to find the equivalent taxable yield you'd need to equal the yield you'd realize on a tax-exempt bond.
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Tax-exempt yield
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Equivalent taxable yield |
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100
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(Your tax rate)
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Escrow When someone else holds assets of yours, such as money,
securities, real estate, or even a deed, until the terms of a
contract or an agreement are fulfilled, your assets are said to be
held in escrow. The person or organization that holds the assets is
the escrow agent, and the account in which they are held is an escrow
account.
For example, if you make a down payment on a home, the
money is held in escrow until the sale is completed or the deal falls
through. Amounts you prepay to cover property taxes and
insurance premiums as part of your regular mortgage payment are also
held in escrow until those bills come due and are paid. In that case,
you may earn interest on the amount in the escrow
account. |
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Estate Your estate is what you leave behind, financially speaking,
when you die. To figure its worth, your assets are valued to
determine your gross estate. The assets may include cash,
investments, retirement accounts, business interests, real estate,
precious objects and antiques, and personal effects. Then all of your
outstanding debts, which may include income taxes, loans, or other
obligations, are paid, plus any costs of settling the estate are
subtracted from the gross estate.
If the amount that's left is larger than the amount
you can leave to your heirs tax free, you
have a taxable estate, and federal estate taxes will be due.
Depending on the state where you live and the size of your taxable
estate, there may be additional state taxes as well.
After any taxes that
may be due are paid, what remains is distributed among your heirs
according to the terms of your will or the rulings of a court, if you
didn't leave a will. |
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Estate tax Your estate owes federal estate tax on the value of your taxable
estate (your gross estate minus your liabilities and the cost of
settling the estate) if the estate is larger than the amount you are
permitted to leave to your heirs tax free. That amount, which is set by Congress, is $1 million for 2002 and 2003. The tax-exempt amount is scheduled to increase periodically between 2004 and 2009, and the estate tax will be eliminated in 2010. However, without further Congressional action, the tax will be reinstated in 2011at 2002 levels .
If your
estate may be vulnerable to these taxes, which are figured at a higher rate than income taxes, you may want to reduce
its value by using a number of tax planning strategies, including
making nontaxable gifts and creating irrevocable trusts.
Further, if you're
married to a US citizen and leave your entire estate to your spouse,
there are no estate taxes, no matter how much the
estate is worth. However, estate taxes may be due when your surviving
spouse dies.
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European Central Bank (ECB) The European Central Bank is the
central bank of the European Monetary Union (EMU), whose member
countries use the euro
as their currency. The ECB, which is based in Frankfurt, Germany,
issues currency, sets interest rates, and oversees other aspects of
monetary policy for the EMU.
The EMU's National Central Banks
(such as the Banque de France and the Deutsche Bundesbank), together
with the ECB, form the European System of Central Banks, and play an
important role in implementing monetary policy, conducting foreign
exchange operations, and maintaining the foreign reserves of member
states. |
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Exchange An exchange is a physical location for trading
securities, typically by using what's known as an open outcry or
auction system. In the US, for example, stocks are traded on the New
York Stock Exchange (NYSE), the largest stock exchange in the world,
on the American Stock Exchange (AMEX), a division of the Nasdaq-Amex
Market Group, and on smaller regional exchanges in Boston, Chicago,
Cincinnati, and Philadelphia, and on the Pacific Exchange in
California.
Futures contracts and options are traded on exchanges in
Chicago, Kansas City, Minneapolis, New York, and Philadelphia.
Increasingly, however, trading also takes place on electronic
markets, including the Nasdaq Stock Market (Nasdaq), which allow
brokers to trade by computer from any location.
The term exchange
also describes moving assets from one mutual fund to another in the
same fund family, or from one variable annuity subaccount to another
offered through the same contract. |
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Exchange-traded fund Exchange-traded or closed-end funds behave
like mutual funds in some ways and like stocks in others. Like other
mutual funds, exchange-traded funds buy and sell individual
investments in keeping with their investment objectives.
But the
funds resemble stocks in the way they are traded, since they raise
money by selling a fixed number of shares when the fund is first
issued. Then the shares trade in the secondary market, either on a
stock exchange or in an electronic market. The market price of shares
of a closed-end fund fluctuates not only according to the value of
its underlying investments but also in response to investor
demand. |
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Ex-dividend An ex-dividend period exists between the
announcement and the subsequent payment of a dividend on a stock or mutual fund. Any
investors who buy in the ex-dividend period, which may run from a week to a month or more, are not entitled to the dividend.
On the day the
ex-dividend period begins, the stock is said to go ex-dividend. Generally, the price of a stock rises in relation to the
amount of the anticipated dividend as the ex-dividend date
approaches. It drops back on the first day of the ex-dividend
period to reflect the amount that is being paid out. |
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Executor/Executrix When you die, an executor (male) or executrix
(female) administers your estate and carries out the terms of your
will. Among the duties are collecting and valuing your assets, paying
taxes and debts out of those assets, and distributing the remaining
assets according to the terms of your will.
You may want to appoint
a professional-often a bank trust officer or lawyer-as executor, or
you may choose a family member or close friend. Or you may appoint a
professional and a nonprofessional to work together.
Executors are
entitled to be paid for the job, which ends when your estate is
settled, usually in anywhere from one to three years. Professional
executors always charge, while non-professional ones may or may
not. |
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Exercise When you act on a buying or selling opportunity-known as
a right-that you have been granted under the terms of a contract, you
are said to exercise that right. Typical rights contracts include
exchanging stock options for stock or buying the underlying stock of
a call option.
For example, if you buy a call option giving you the
right to buy shares of a stock at $50 a share, and the market price
jumps to $60 a share, you would be likely to exercise your option to
buy at the lower price. |
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Expense ratio An expense ratio is the percentage of a mutual
fund's or variable annuity's current value that you pay every year to
cover the cost of management, customer service, and other expenses
related to administering the fund or contract. For example, if you
own shares in a fund with a 1.25% expense ratio, you're charged $1.25
for every $100 of fund value that you own.
The amounts you owe are
subtracted directly from your account rather than charged separately.
Expense ratios vary from one fund company to another and among
different types of funds. Typically, international funds have among
the highest expense ratios, and index funds among the lowest.
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HOW EXPENSE RATIOS WORK
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Value of your shares
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Expense ratio |
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= Yearly fees
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For example:
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$150,000
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(Value)
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1.25% |
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(Expense ratio)
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$1,875 |
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(Yearly fees)
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Copyright 2002 Lightbulb Press, Inc. All Rights Reserved
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