Accelerated depreciation
An accounting method that allows a company to write off an asset's cost at a faster rate than the traditional method. It often results in a larger tax deduction on a company's income statement. See depreciation.
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Accidental-death-and-dismemberment insurance
A type of insurance that pays if you are killed or maimed in an accident but provides no benefit in the event of illness or illness-related death.
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Accountant
A person who records and examines the finances of individuals or businesses.
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Accountant's opinion
A signed statement of opinion from an accounting firm of a corporation's financial statements. The auditor must follow generally accepted accounting principles. The opinion can be unqualified or qualified. A qualified opinion calls attention to limitations of the audit or unusual items in the statement.
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Accounts payable
Money a company owes to suppliers. By adding accounts payable, short-term debt and interest on long term-debt together we arrive at a company's current liabilities. See Current Assets/Liabilities.
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Accounts receivable
Money owed to a company by its customers. By adding cash, accounts receivable, marketable securities and inventory we arrive at a company's current assets. See Current Assets/Liabilities.
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Accrual basis
Accounting method in which income and expenses are accounted for as they are earned or incurred, although they may not have been received or paid yet. The alternative is cash-basis accounting, in which revenues and expenses are recognized only when cash is received or paid. Accrual-basis accounting is useful for painting a long-term portrait of a company.
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Actual-cash-value coverage
In home insurance, the type of policy that pays only the current, depreciated value of furniture and other household possessions when they are damaged or destroyed. Provides less protection than replacement-cost coverage.
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Adjustable-rate mortgage (ARM)
A home mortgage with interest rates that moves up and down over time, based on changes in market interest rates. The upside to an ARM is that lenders charge a lower rate for such loans because you are taking on some of the interest rate risk. This makes your monthly payments lower — at least in the beginning. such loans provide a way for many buyers to afford a larger loan amount for a given monthly payment. An adjustable works out wonderfully if rates drop — something you should never count on. But watch out if interest rates rise. Compare to Fixed-rate mortgage.
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Adjusted gross income (AGI)
Adjusted gross income is the figure used to compute your federal income tax. It's your gross income minus some deductions, including IRA contributions (as well as SEP, SIMPLE and Keogh contributions), medical savings account contributions, moving expenses, alimony payments and contributions toward health insurance for the self-employed. AGI doesn't include standard or itemized deductions.
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Affaersvaerlden General Index
A popular index that tracks share prices on the Stockholm Stock Exchange. It measures the performance of "A shares," which entitle holders to full voting rights.
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Affiliate
Two companies are affiliated when one owns less than a majority stake of the other, or when both are subsidiaries of a third company. Or, generally, any association between two companies that is short of a parent-subsidiary tie. See subsidiary.
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Agency bond
Bonds issued by government-sponsored agencies and federally related institutions. All government agency bonds carry the highest credit ratings — AAA from Standard & Poor's and Aaa from Moody's Investors Service. The quality of agency bonds, and the liquidity for certain agency issues, is considered second only to Treasurys. Normally, agency bonds offer a slightly higher interest rate over comparable Treasury issues. Agency bonds are issued by institutions like the Federal Home Loan Mortgage Corporation and the Federal National Mortgage Association. See "Smoothing Out the Ride."
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Aggregate
A total amount.
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Aggressive growth funds
Funds that seek rapid growth of capital and that may invest in emerging market growth companies without specifying a market capitalization range. They often invest in small or emerging growth companies and are more likely than other funds to invest in initial public offerings or in companies with high price-to-earnings and price-to-book ratios. They may use such investment techniques as heavy sector concentrations, leveraging and short-selling. See "Aggressive Equity Fund For a Gen-Xer."
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Alimony
A type of payment from one former spouse to another that is agreed to as part of a divorce settlement. Alimony is tax-deductible for the person who pays it and taxable income for the person who receives it. See adjustable gross income.
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All-Ordinaries Index
Index of stocks on the Australian stock market chosen on the basis of market capitalization and volume.
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Alpha
A measure of a fund's risk-adjusted return. Alpha can be used to directly measure the value added or subtracted by a fund's manager. It is calculated by measuring the difference between a fund's actual returns and its expected performance given its level of market risk as measured by beta. An alpha of 1.0 means the fund produced a return 1% higher than its beta would predict. An alpha of -1.0 means the fund produced a return 1% lower. The accuracy of an alpha rating depends on two factors: 1) the assumption that market risk, as measured by beta, is the only risk measure necessary; 2) the strength of fund's correlation to a chosen benchmark such as the S&P 500. Correlation is measured by R-squared. An R-squared of less than 50 makes a fund's alpha rating virtually meaningless.
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Alternative minimum tax
A tax-law provision that ensures that individuals and companies pay some income tax, no matter how many deductions or credits they claim. Under the AMT, certain money not usually considered taxable — such as municipal bond interest — is treated as taxable. People with income over $75,000 and many tax deductions often fall under this provision. Most vulnerable are taxpayers with several children, interest deductions from second mortgages, high state and local taxes and incentive stock options.
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American depositary receipts (ADR)
Shares of non-U.S. companies that trade in the U.S. stock market. American depositary receipts, or ADRs, offer distinct advantages to the U.S. investor. First, they require no complex currency transactions as they can be purchased in U.S. dollars. Also, most ADR companies are required to report financial details of their operations in accordance with generally accepted accounting principles. That makes their earnings more transparent and less subject to manipulation or fraud.
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American Stock Exchange (AMEX)
The third most-active market in the U.S., behind the New York Stock Exchange (NYSE) and the Nasdaq Stock Market. The exchange was founded in 1842 in New York City. Most stocks traded on it are those of small- to mid-sized companies. Also called Amex, and the curb exchange.
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American-style option
An option that may be exercised at any time prior to expiration.
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Amex Market Value Index
A stock index that measures the performance of more than 800 companies representing all major industry groups on the American Stock Exchange.
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Amortization
The accounting procedure that companies use to write off intangible rights or assets — such as goodwill, patents or copyrights — over the period of their existence. For fixed assets the term used is depreciation. Both depreciation and amortization expenses are subtracted from a company's operating revenues to calculate net income.
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Analyst
An employee of a brokerage or fund management firm who studies companies and makes buy and sell recommendations on stocks of these companies. Most specialize in a specific industry such as health care, semiconductors or banks.
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Annual effective yield
The actual annual return on an account after interest is compounded.
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Annualized return
A way to calculate the return on an investment of more than one year. The annualized or average annual return is calculated by adding each year's return on investment and dividing that number by the number of years invested. The return takes into account the reinvestment of dividends (and distributed capital gains for mutual funds) as well as the change in the price of the investment over time. Compare to cumulative return.
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Annual percentage rate (APR)
The interest rate borrowers pay on a loan. Most of a loan's upfront fees are factored into the APR. Calculating the APR on a credit card can be a tricky business, however. Grace periods and late fees can have a dramatic affect on your APR. For more info, see "Managing Your Credit Cards."
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Annual-renewable-term life
Term life insurance that is renewed each year, with premiums going up each time.
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Annual report
An annual report is a record published every year by a publicly held corporation that details its financial condition. The report, which must be distributed to all shareholders, contains a description of the company's operations, its balance sheet, income statement, and other relevant information. The official SEC terminology for an annual report is a 10-K form.
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Annuity
A tax-deferred investment product sold by insurers, banks, brokerage firms and mutual fund companies. Fixed annuities provide a rate of return that is fixed for a year or so but then can move up and down. Variable annuities allow investors to allocate their money among a basket of mutual fund-like subaccounts; the return depends on the performance of the funds selected. Watch out for high sales commissions, expense ratios and penalties for early withdrawals. See "Does Anyone Really Need Annuities?" for more information.
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Antitrust law
Any law that encourages competition by limiting unfair business practices and curbing monopolies' power.
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Appreciation
An increase in an asset's value. Stocks and bonds appreciate by going up in price at a securities exchange.
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Arbitrage
The simultaneous buying and selling of a security at two different prices in two different markets. The arbitrageur makes money by taking advantage of the price disparity by selling in one market while simultaneously buying in the other. Since the disparity is usually very small, a large volume is required to lock in a significant profit for the arbitrageur. Perfectly efficient markets present no arbitrage opportunities. Fortunately, perfectly efficient markets seldom exist.
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Asked
The price that someone is willing to accept for a security or an asset. In the stock market, the ask portion of a stock quote is the lowest price anyone is willing to accept for a security or an asset at that time.
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Ask price
The price at which someone is willing to sell a security or an asset. In the stock market, the ask portion of a stock quote is the lowest price a seller is willing to accept at that time. The difference between the ask price and bid price is known as the spread.
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Asset allocation
An investment technique that diversifies a portfolio among different types of assets such as stocks, bonds, cash equivalents, precious metals, real estate and collectibles. When it comes to risk and reward, different asset classes behave quite differently. Stocks, for instance, offer the highest return, but they also carry the highest risk of losses. Bonds aren't so lucrative, but they offer a lot more stability than stocks. Money-market returns are puny, but it's highly unlikely you'll lose your initial investment. An asset allocation strategy allows you to achieve the optimal blend of risk and reward. See "Defense Is the Best Offense."
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Asset-backed bond
Bonds backed by loans or accounts receivable. An asset-backed bond is created when a securities firm bundles some type of debt — such as car loans, credit card debt or bank loans — and sells investors the right to receive the payments that consumers make on those loans.
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Asset-backed securities
Securities backed by loans or accounts receivable. For example, an asset-backed bond is created when a securities firm bundles some type of debt, like car loans, and sells investors the right to receive the payments that consumers make on those loans.
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Asset-management accounts
All-in-one accounts that allow customers of brokerage firms to buy and sell securities and store cash in one or more money-market mutual funds. Asset-management accounts generally offer check-writing privileges, credit or debit cards and automatic transfers from one account to another.
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Assets
Any item of economic value owned by an individual or corporation, especially that which could be converted to cash. Examples are cash, securities, accounts receivable, inventory, office equipment, a house, a car and other property. See current assets, total assets, intangible assets and fixed assets.
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Assets under management
The total market value of a mutual fund. The asset level can change, depending on the flow of money into and out of the fund, as well as the change in market valuation. Asset figures are useful in gauging a fund's size, agility and popularity. They help determine whether a small-company fund, for example, can remain in its investment-objective category if its asset base reaches an ungainly size.
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At-the-money
An option with a strike price equal to the current price of the instrument, such as a stock, upon which the option was granted.
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Auction market
Trading securities on a stock exchange where buyers compete with other buyers and sellers compete with other sellers for the best stock price. Trading in individual stocks is managed and kept orderly by a specialist.
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Auditor's report
An independent accounting firm's opinion on whether a company's financial statements conform to generally accepted accounting principles (GAAP). The auditor's report is included in a company's annual report.
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Average annual yield
A way to calculate the return on investments of more than one year. It is calculated by adding each year's return on investment and dividing that number by the number of years invested.
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Averages
In the stock market, averages are indicators that measure price changes in representative stock prices. The most popular indicator is the Dow Jones Industrial Average, which measures the performance of 30 large-capitalization stocks.
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