CAC 40
Index of 40 stocks on the Paris Bourse, or stock market. The stocks are the most-active shares from the industrial, financial, consumer, construction and capital goods sectors.
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Cafeteria plan
A flexible-benefit plan offered by many employers that gives workers a certain number of credits and a menu of benefit options on which to spend them. The list may include medical coverage, life insurance, disability coverage, vacation days and dental care. Employees who don't want a particular benefit can spend more on another, or receive the difference in cash.
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Call
The issuer's right to redeem a bond or preferred share before it matures. A bond will usually be called when interest rates fall so significantly that the issuer can save money by floating new bonds at lower rates. The first date when an issuer may call a bond is specified in the bond's prospectus. See "How Bonds Behave."
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Callable bond
A bond which the issuer can decide to redeem before its stated maturity date. A call date and a call price are always given. You face a risk with a callable bond that it will be redeemed if its stated coupon is higher than prevailing rates at the time of its call date. If that happens, you won't be able to reinvest your capital in a comparable bond at as high a yield. See "Smoothing Out the Ride."
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Call option
An agreement that gives an investor the right but not the obligation to buy a stock, bond, commodity or other instrument at a specified price within a specific time period. Compare with put option.
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Call risk
The risk that an issuer may redeem a security sooner than expected. See callable bond.
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Capacity utilization
The Federal Reserve's estimate of the percentage of factory capacity that is being used. Published monthly, capacity utilization rarely exceeds 90% because production costs become too expensive after that point. A high rate of capacity utilization — over 85% — suggests inflation is on its way.
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Capital asset
An asset held for more than a year that isn't bought or sold in the normal course of business. Capital assets generally include fixed assets, such as land, buildings, equipment and furniture. These assets are subject to depreciation.
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Capital gains
Profit realized from the sale of securities, property or other assets. How much the IRS taxes gain depends on how long the security is held. Gains from stocks held for less than 12 months are considered short-term capital gains, which are taxed at the regular income-tax rate. That can be as high as 35%. But if a stock is held for more than one year, the gains tax will be a maximum of 15%. See "The Dreaded Capital Gains Tax."
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Capital gains distribution
The amount of capital gains a mutual fund distributes to its shareholders per share. Distributions usually occur once or twice per year and can be taxed as long-term or short-term gains, depending on how long the fund manager held securities in his portfolio. When purchasing a mutual fund, make sure it is not right before a distribution. Otherwise, you'll get slapped with a tax bill for money you didn't make. Also, pay attention to the fund's turnover ratio to see how tax efficient it is. See "The Taxing Side of Mutual Funds."
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Capital loss
Loss suffered from the sale of an asset for less than the price you paid for it. Capital losses can be used to your advantage come tax time. By balancing your capital losses with your capital gains, your tax bill is reduced. This tactic is called harvesting losses.
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Cash-balance plan
A type of pension plan where the employer contributes a percentage of your pay, typically 4%, to an account in your name each year. Your account earns an annual interest credit, often tied to the 30-year Treasury rate. For example, if your salary is $40,000 a year, your account will receive a contribution of $1,600. After a year, your account balance will be given an interest credit, of typically 5%. The major difference between a cash-balance plan and more traditional defined benefit plans is that instead of receiving a portion of your final salary as your subsequent benefit, you accumulate a portion of your ongoing salary each year. This is advantageous for younger workers who can build up retirement savings, but disadvantageous for older workers who have less years to accumulate and don't receive a benefit at their highest salary level. See "The Lowdown on Cash-Balance Plans."
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Cash/equivalent
The proportion of a fund's assets held in cash or short-term, fixed-income securities. Too much cash in an equity fund's portfolio can be a drag on performance. At the same time, cash can also be used by cautious managers to preserve capital in a down market. It is also used to take advantage of buying opportunities and to meet shareholder redemptions.
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Cash flow
Net earnings before depreciation, amortization and noncash charges. Sometimes called cash earnings, cash flow is calculated by adding depreciation to net earnings and subtracting preferred dividends. Many stock analysts think cash flow paints a better picture of a company's true growth potential than net earnings do because company accountants can use crafty write-offs to alter earnings numbers. See "Price/Cash Flow."
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Cash market
The trading of securities according to their current — or spot — price. That is in contrast to trading in a security for future delivery.
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Cash-on-cash return
A measure, often used in the real estate business for the return on an investment. Calculated by the cash flow divided by the equity in an investment.
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Cash-value life
Life insurance coverage that incorporates a tax-deferred savings component in addition to providing a certain death benefit. Types include whole life, universal life and variable life.
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CBS All Share Index
Index of shares traded on the Amsterdam Stock Exchange.
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Certificate of deposit (CD)
A certificate of deposit or CD is a certificate issued by a bank or thrift that indicates a specified sum of money has been deposited. The certificate guarantees to repay your principal — the amount you deposited — with interest on a specific maturity date. The amount of interest you receive depends on prevailing interest rates, the length of maturity and how much you deposited. There are often significant penalties for early withdrawal of your money. CDs are insured by the Federal Deposit Insurance Corporation (FDIC). That makes your investment safe from everything but inflation and a raging bull market. See "CDs: Low Risk, Low Return."
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Certified financial planner (CFP)
The best-known financial planning designation, given to qualifying planners by the CFP Board of Standards, Denver.
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Charitable lead trust
A trust that pays a charity income from a donated asset for a set number of years, after which time the principal goes to the donor's beneficiaries with reduced estate or gift taxes.
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Charitable remainder trust
This trust lets people leave assets to a favored charity and receive a tax break but still retain income for life. This works best for people with a large appreciated asset, which, if sold, would generate large capital-gains taxes.
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Chartered financial consultant (ChFC)
Financial planning designation given to qualifying planners by the American College, Bryn Mawr, Pa.
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Chartered life underwriter (CLU)
A professional designation given to qualifying life insurance agents by the American College, Bryn Mawr, Pennsylvania.
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Chicago Board of Trade
A commodity-trading market. Abbreviated as CBOT.
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Chicago Board Options Exchange
An exchange set up by the Chicago Board of Trade to trade stock options, foreign currency options and index options of the S&P 500 and other benchmarks. Abbreviated as CBOE.
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Child support
Money paid by one former spouse to another to cover the cost of raising children. These payments are neither tax-deductible for the person who pays them nor taxable income for the one who receives them.
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Churning
To trade securities excessively. In taxable investment accounts, churning invariably leads to reduced returns because of the hefty short-term capital gains tax. But even in tax-deferred 401(k)s or IRAs, trading commissions can eat into your return. In fact, brokers that encourage churning to increase their commissions are committing a securities law violation. A fund manager churning his portfolio will also make you feel the tax bite. See "The Dreaded Capital Gains Tax."
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Circuit breakers
Measures used by some major stock and commodities exchanges to restrict trading temporarily when markets rise or fall too far, too fast. For example the New York Stock Exchange (NYSE) employs a circuit breaker that will halt trading if the Dow Jones Industrial Average declines by more than 10% in one day.
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Closed-end fund
A type of mutual fund that issues a set number of shares and typically trades on a stock exchange. Unlike more traditional open-end funds, transactions in shares of closed-end funds are based on their market price as determined by the forces of supply and demand in the marketplace. Interestingly, the market price of a closed-end may be above (at a premium) or below (at a discount) the value of its underlying portfolio (or NAV). Investors in closed-ends will often try to capitalize on large discounts, hoping that eventually they will narrow. See "Closed Or Open End."
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Closely held
A company that has a small group of controlling shareholders. In contrast, a widely held firm has many shareholders. It is difficult or impossible to wage a proxy fight for any closely held firm.
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Closing costs
A variety of costs paid in conjunction with purchasing a home or taking on a new mortgage. Closing costs often include points, which typically are a form of additional interest. Other closing costs may include property taxes, title insurance, transfer tax and attorneys' fees.
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Closing price
The last trading price of a stock when the market closes.
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Cobra
The Consolidated Omnibus Budget Reconciliation Act of 1985 provides people the right to buy continuing health insurance through their former employers for a minimum of 18 months. COBRA offers up to 36 months of continuing coverage for those people insured through a spouse's work plan who lose that coverage due to divorce, separation or death of the spouse.
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Collateral
Stock or other property that borrowers are obliged to turn over to lenders if they are unable to repay a loan. Collateral is important for companies that default on their debt. In such cases, hard assets such plant, property and equipment can be repossessed and liquidated.
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Collateralized mortgage obligations
Mortgage-backed securities that are carved into an array of bonds of varying maturity, coupon and risk. The principal payments from the underlying pool of pass-through securities are used to retire the bonds on a priority basis as specified in the prospectus. Abbreviated as CMO.
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Collision coverage
The part of an auto insurance policy that covers damage to your car in an accident.
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Commercial bank
A bank owned by shareholders that accepts deposits, makes commercial and industrial loans and provides other banking services for the public. Also called a full-service bank.
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Commercial paper
Unsecured short-term promissory notes used by companies to obtain cash. They are sold through dealers in the open market or directly to investors. The maturity of commercial paper is typically less than 270 days; the most common maturity range is 30 to 50 days or less. Such short maturities make commercial paper a fairly stable, liquid investment. It will often be part of an equity fund's cash position or the cash part of a company's current assets. Money market funds also hold commercial paper.
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Commodities
Bulk goods such as grains, metals, livestock, oil, cotton, coffee, sugar and cocoa. They can either be sold on the spot market for immediate delivery or on the commodities exchanges for later delivery. Trade on the exchanges is in the form of futures contracts. Commodities are often viewed as a hedge against inflation because their price rises with the consumer price index.
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Common stock
Represents part ownership of a company. Holders of common stock have voting rights but no guarantee of dividend payments. In the event that a corporation is liquidated, the claims of owners of bonds and preferred stock take precedence over those who own common stock. For the most part, however, common stock has more potential for appreciation.
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Community property
Property and income that is accumulated by a husband or wife, or jointly as a couple, during a marriage; as a consequence, they are owned in common by both.
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Composite trading
The total amount of trading across all markets in a share that is listed on the New York Stock Exchange or American Stock Exchange. This includes transactions on those exchanges, regional exchanges and on the Nasdaq Stock Market.
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Compounding
Financial advisers love to talk about the magic of compounding. What magic? If your investments make 10% a year for five years, you earn not 50% but 61.1%. Here's the reason: As time goes on, you make money not only on your original investment but also on your accumulated gains from earlier years. See "The Power of Compounding."
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Comprehensive coverage
The part of an auto insurance policy that pays if your car is stolen or vandalized or otherwise damaged by something other than a collision.
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Comptroller of the Currency
A Treasury Department official, appointed by the president and confirmed by the Senate, who is responsible for chartering, examining, supervising and liquidating national banks.
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Concession
A price reduction or rebate from an established price or charge. In securities underwriting, the fee that is paid on each stock or bond that is sold by securities firms and brokers within the underwriting group of a public offering. Also known as selling concession.
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Conservation easement
A restriction placed on real estate that limits or prohibits development and, thus, lowers the property's value. Conservation easements are often used to lower estate taxes on family real estate, thus allowing family members to retain ownership of the family farm or beach retreat when they might otherwise be forced to sell to cover the tax bill.
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Construction spending
The Commerce Department's monthly measure of construction spending. The Commerce Department's report surveys new construction expenditures and is broken down by residential, nonresidential, and public expenditures on new construction. Construction trends are closely related to interest rates and the business cycle. An increase in construction spending is a sign of economic growth and potential inflation. See housing starts.
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Consumer comfort index
A measure of consumers' feelings about their finances and the economy as a whole. The numbers are calculated through a weekly survey by Money magazine and ABC News.
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Consumer credit
Money loaned to individuals, usually on an unsecured basis, requiring monthly repayment. Bank loans, credit cards and installment credit are examples of consumer credit.
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Consumer price index (CPI)
A gauge of inflation that measures changes in the prices of consumer goods. Abbreviated as CPI, the consumer price index is based on a list of specific goods and services purchased in urban areas. These goods include food, transportation, shelter, utilities, clothing, medical care, and entertainment. Index data are released monthly by the Labor Department.
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Contingent deferred sales charge (CDSC)
A back-end load that declines over time. For instance, if you sell the mutual fund shares after one year, you may owe a 5% charge, but if you hold for three years, it may decline to 2%.
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Contrarian
An investor who does the opposite of what most investors are doing at any particular time. According to contrarian opinion, if everyone is certain that something is going to happen, it won't. This is because most people who say the market will go up are fully invested so they have no more purchasing power, which means the market is at its peak. When people predict decline they have already sold out, so the market can only go up. Contrarian investing shares many qualities with value investing. The difference is, contrarian stocks aren't just cheap, they are also actively disliked by investors. That can make them risky but potentially lucrative investments. See "Commiserating With The Unloved."
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Convertible bond
A bond that investors may exchange for stock at a future date under certain conditions. Convertibles are an intriguing hybrid investment, offering some of the upside potential of stocks but also the downside protection of bonds. On the upside, bonds offer a conversion ratio that dictates how many shares of stock you can receive if you trade in your bonds. Typically, you'll pay a premium for the exchange, but if the underlying stock is on fire, conversion is worthwhile. On the downside, bonds offer a guaranteed dividend yield, even if the underlying stock slides. Because of their complexity, the best way to invest in convertibles is through a convertible bond fund.
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Corporate bonds
A corporate bond is a debt instrument issued by a private or public corporation. Corporate bonds are rated by Standard & Poor's, Moody's and other credit rating agencies. They assign ratings based on a company's perceived ability to pay its debts over time. Those ratings — expressed as letters (AAA, AA, A, etc.) — help determine the interest rate that company or government has to pay. A bond with a rating below BBB is considered a high yield or "junk" bond. Such bonds pay higher interest rates but have greater risk of default. Corporate bonds have historically been viewed as safer investments than stocks. The main reason for this is the prior claim corporate bond holders have on a company's earnings and assets. See "Types of Bonds."
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Corporation
A business entity treated as a person in the eyes of the law. A corporation is allowed to own assets, incur liabilities and sell securities, among other things. It is also able to be sued.
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Correction
A downward movement in the price of an individual stock, bond, commodity, index or the stock market as a whole.
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Cost basis
The original price of an asset, used in determining capital gains. It usually refers to the purchase price of a stock, bond or other security.
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Cost of living
The level of prices of goods and services required for a reasonable standard of living.
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Cost-push inflation
A sustained rise in prices caused by businesses passing on increases in costs, especially labor costs, to purchasers.
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Council of Economic Advisers
Presidential advisers who recommend economic measures and help prepare an annual economic report to Congress.
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Coupon
The stated interest rate on a bond when it's first issued. A $1,000 bond with a coupon of 6% will pay you $60 a year until its maturity. Of course, not everyone holds bonds till maturity. The actual dividend yield you get from buying a bond on the secondary market can vary greatly from the coupon rate because the bond can sell above or below its face value. See "When Yield Goes Up, Price Goes Down."
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Covered
A derivative investment strategy in which the seller owns the underlying security. An investor constructs a covered call position by buying a security and selling a call option of the same security. A covered call is a market-neutral investment strategy that protects the investor from the downside of owning a stock, while still affording him some of the upside.
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Cram down
A maneuver in bankruptcy negotiations in which a reorganization plan is forced upon creditors with the least influence.
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Credit ratings
Formal evaluation of a government body's or company's credit history and ability to repay its debts. An AAA rating is the highest credit rating assigned by Standard & Poor's to a debt obligation. It indicates an extremely strong capacity to pay principal and interest. Bonds rated AA are just a notch below, then single A, then BBB, and so on. (A similar ratings system is available from Moody's Investors Service, with Aaa being the highest rating.) Some ratings show a + or - to further differentiate creditworthiness. Bonds rated 'BBB' and above are considered investment grade, a category to which certain investors, including many pension funds, confine their bond holdings. Bonds rated BB, B, CCC, CC, and C are regarded as speculative. Such bonds are called high-yield or "junk bonds." They offer higher interest rates but greater risk of default. A bond rating of D indicates payment default or the filing of a bankruptcy petition. See "Types of Bonds."
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Cumulative return
The total return an investment earned over a specific period. Returns are added year by year instead of averaged as they are with an annualized return. The end result 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.
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Cumulative voting
A method of voting for corporate directors. Each share has as many votes as there are directors to be elected, and the holder may distribute these votes as he wishes.
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Currency
A country's official unit of monetary exchange. When investing overseas, currency risk can be problematic. Even when foreign economies are doing reasonably well, currency fluctuations can have a negative effect on stock prices. While stocks in the chosen country could be soaring, a decline in the value of the currency's exchange rate to the dollar could eliminate your stock gains.
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Current account balance
One of the components of a country's balance of payments, the current account balance covers the imports and exports of goods and services. The current account balance helps a country evaluate its competitive strengths and weaknesses and forecast the strength of its currency.
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Current assets
Assets that can be converted to cash within 12 months. These include cash, marketable securities, accounts receivable and inventory. See "Current Assets/Liabilities."
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Current liabilities
Obligations that must be paid within 12 months. These include accounts payable, short-term debt and interest on long-term debt. See "Current Assets/Liabilities."
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Current ratio
A measure of a company's liquidity, or its ability to pay its short-term debts. Calculated by dividing current assets by current liabilities. Current assets at least twice current liabilities is considered a healthy condition for most businesses. See Current Assets/Liabilities.
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Current yield
You might think the current yield would be the same as the coupon rate on a bond. But, unless you're buying a new issue of a bond trading at face value, it's not. Unlike the coupon rate, which doesn't change, the current yield of a bond fluctuates with a bond's price on the secondary market. To get the current yield, divide the coupon by the bond's current market price. For example, a bond with a $1,000 face value and a coupon of 6% purchased at $900 has a current yield of 6.7% (60/900). When the current yield of a bond rises, its market price declines. Conversely, when the current yield declines, the price of the bond rises. See "When Yield Goes Up, Price Goes Down."
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Cusip number
An identification number for securities. Cusip is an acronym for Committee on Uniform Securities Identifying Procedures.
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Cyclical stocks
Stocks that tend to rise quickly during an upturn in the economy and fall quickly during a downturn. Examples are housing, steel, automobiles, and paper. These economically sensitive stocks are the bread and butter of value investors who pick them up during economic troughs and wait for the recovery.
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