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Beginner's Complete Investing Dictionary.

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10% Withdrawal tax penalty: 401Ks, IRAs and Roth IRAs impose penalties for early withdrawal. This 10% is in addition to your regular tax rate. There are a few exceptions such as home down payment, education expenses and medical expenses, but each requires that you meet a set of qualifying criteria. For a detailed breakdown of withdrawal penalties, see our 2008 401k & IRA Detail Table.

12b-1 Fees: 12b-1 Fees are described as marketing fees but they are most often a commission paid to a telemarketer for selling a fund. These fees are currently under fire, most people question the ethical justification for using a 12b-1 since there is a lot of evidence that this does absolutely nothing to enhance a fund’s performance. The thought process when this fee was invented was that marketing a mutual fund more aggressively would dramatically increase its assets (more people buy = more cash in the fund = more assets). They argued that bigger funds don’t necessarily cost more to manage, so as long as the assets are increasing and the management fees stay flat, the fund will experience economies of scale. This certainly hasn’t proven true, when you spend more to market a fund the expenses will usually increase as fast if not faster than the assets so 12b-1 fees are complete rubbish in our opinion. Avoid 12b-1 fees and don’t buy from cold callers. If you want to learn more on this topic, read our Mutual Fund Checklist.

1940 Investment Company Act: Federal law created to regulate investment companies. This act also regulates how mutual funds and other investment vehicles operate. This Act popularized funds because it required a lot more disclosure and helped to minimize conflicts of interest that were common prior to the 1929 market crash. Investors were finally able to tell what a fund was trying to do and how they were doing it. To learn more on this topic, read our Introduction to Mutual Funds guide.

401k: In the late 70’s, congress added a section to the Internal Revenue Code, Section 401(k), in which employees could avoid taxes on dollars contributed to deferred compensation plans. The two greatest benefits of a 401K for the employee are that they reduce the taxable income you have to report to the IRS and once money is in a deferred account, you can invest tax free until you withdraw the money at retirement. This program was intended for executives but companies were quick to interpret the legislation for their own benefit. The major reason for the explosion of 401K plans is that they allow employers to spend so much less on employee retirement planning. For more information on 401k’s and other Tax Deferred investment vehicles, read our 401k, IRA and Roth IRA Guide.

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Accumulation Phase: This is the market cycle phase in which investors buy up bargains. Stocks are undervalued at the beginning of this phase because of the selloff and market bottoming at the end of the last phase. At the beginning of the accumulation phase, only value investor types that are seeking stocks trading below their intrinsic value are buying but by the end of this phase, sentiment is turning bullish and the market is going up as a result of the flood of investors moving their money back into stocks, funds and other securities.

Active Management: Active Management is an investment approach that seeks to exceed the average returns of a specified benchmark such as the S&P 500. Active managers rely on research, market forecasts, and their own judgment and experience in selecting securities to buy and sell. Read our introduction to investing strategies for more on this topic.

Administrative Fees: Whenever we refer to Administrative Fees on this site we are either referring to the administrative expenses required to manage a mutual fund or the administrative fees to run a company. Mutual Fund investors often try to minimize this expense by selecting funds with low Expense Ratios. To learn more about mutual fund expenses, read our Introduction to Mutual Funds.

Aggressive Investor: Aggressive Investors feel bullish about the market and are usually a long way from retirement. They have a high tolerance for risk, don’t mind market volatility and are looking for capital growth rather than capital appreciation. They know they can weather any short-term market corrections or even recessions because they have a very long investing timeline (usually 15 or more years until retirement). For examples of an aggressive investing strategy, read our Growth Investing Strategy Review or our Momentum Investing Strategy Review.

Alpha: Alpha compares an investment’s expected performance, based on its beta, to its actual performance. If an investment has a negative alpha that means it underperformed expectations. Investors interpret this to mean that either the investment is poorly managed or that momentum is shifting somewhere else. If an investment has a positive alpha, that means it outperformed expectations. Investors interpret this to mean the investment is likely well managed, expense efficient and tax efficient.

Analyst Estimate (or Projection): Wall Street Analysts predict the quarterly and annual earnings of publicly traded companies around the world. They use all tools at their disposal, such as forecasting models, fundamental analysis, statistical analysis, and political/economic/business knowledge, to come up with earnings estimates. To learn more about these tools, read our Morningstar.com: The Power of Institutional Investors at your Fingertips guide.

Allocation Mix: This is the breakdown of the percentage of your portfolio allocated to each asset type. The most common asset types are stocks, bonds and commodities. Investors want a blend of assets because each type of investment behaves very differently from the others. Stocks, for example, have the highest potential return of any type of investment but they also have the highest risk of losses. Bonds, on the other hand, can’t provide the types of returns a stock can but they offer stability since their returns are often guaranteed. A blend of different asset classes is just another way to diversify and you can choose from a wide variety of allocations. To learn more about allocation mix and other important investing concepts, read the 10 Basic Principles of Investing.

Asset: The generic definition of an asset is anything owned by a business or person that has commercial value. When we talk about assets at Money-and-Investing.com, we are usually referring to the various forms of investment vehicles such as stocks, bonds and commodities. Each is a different type of asset and diversifying across asset types is one of the 10 Basic Principles of Investing.

Asset Allocation: This is the breakdown of the percentage of your portfolio allocated to each asset type. The most common asset types are stocks, bonds and commodities. Investors want a blend of assets because each type of investment behaves very differently from the others. Stocks, for example, have the highest potential return of any type of investment but they also have the highest risk of losses. Bonds, on the other hand, can’t provide the types of returns a stock can but they offer stability since their returns are often guaranteed. A blend of different asset classes is just another way to diversify and you can choose from a wide variety of allocations. To learn more about asset allocation, read our 10 Basic Principles of Investing.

Asset Allocation and Diversification Mix: This term incorporates three components; number of securities, diversification mix, and asset allocation. Number of securities refers to the total number of investments held in your portfolio and the recommended range is between 25 and 30. The mix refers to investing in a wide variety of industries, categories and geographies to ensure that when one specific area goes south, it doesn’t significantly hurt your whole portfolio. Finally, the asset allocation refers to the breakdown of the percentage of your portfolio allocated to each asset type. To learn more about the asset allocation and diversification mix, read our 10 Basic Principles of Investing.

Asset Class: Asset Class refers to the different investment categories. The most common types are Stocks, Bonds and Commodities. Investors typically want a blend of assets because each type of investment behaves very differently from the others. Stocks, for example, have the highest potential return of any type of investment but they also have the highest risk of losses. Bonds, on the other hand, can’t provide the types of returns a stock can but they offer stability since their returns are often guaranteed.

Automatic Contributions: When we refer to automatic contributions at Money-and-Investing.com we are talking about any automatic deduction of cash from your paycheck or checking account that goes into some form of savings account. A few examples are automatic payroll deductions for 401k, automatic IRA deductions from your checking, or automatic transfer of funds to your savings account each month. For more information on this topic, read our 401k, IRA and Roth IRA Guide.

Average Cost Per Share: See Cost Basis

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Balance Sheet: This piece of a company's financial statement lists the total assets and liabilities. You can determine what the company owns, what it owes and the ownership equity of shareholders. If you'd like to to learn more on this topic or read about other pieces of the financial statement and other valuation metrics, read our Value Investing Strategy Review.

Balanced Investor: Balanced Index Investors usually feel optimistic about the market but want to avoid extreme volatility. The typical balanced investor is 10 to 15 years from retirement and looking for capital appreciation, but would also like to have a large chunk of their portfolio in the biggest and safest stocks to dampen portfolio volatility and pay generous dividends. In addition to stocks, balanced investors tend to have money in bonds for safe but modest returns and for the loss protection that they provide against stocks. To learn more about different levels of risk tolerance, read the asset allocation and diversification section of our Index Investing guide.

Banking and Finance Industry: This industry category is comprised of banks, investment banks, insurance companies, brokerage houses and any other financial service and investment firms.

Barriers to Entry: Barriers to entry refers to obstacles that make it difficult for a new company to enter a new market or compete against established companies. Examples are prohibitive startup costs, patents, copyrights, strong brand names, or a small group of companies that hold most of the market share and stifle competition.

Baxter, Jay: Founder of Money-and-Investing.com and Editor of Fund Street© and ETF World Investor©.

Bear Market: A period when the majority of stocks on the market are currently decreasing in value because stock prices are dropping. Sentiment, headlines, and earnings estimates are generally negative.

Bearish: A Bearish market means that the majority of stocks on the market are currently decreasing in value because stock prices are dropping.

Benchmark: A standard against which the performance of a security, index, or investor can be measured. Common examples of benchmarks are the S&P 500 Index for US Large and Mid Cap stocks, MSCI EAFE Index for a composite of foreign large-caps, and the MSCI Emerging Market Index for a composite of foreign emerging markets. There are dozens of major indexes covering many different categories, geographies and strategies. Visit our Major Index Reference Chart for more information on this subject.

Beta: Beta is useful because it measures an investment’s volatility against a benchmark. For example, if you are comparing Bonds to Small Caps and the Bond beta is 0.8 this tells us that Bonds will grow less than Small Caps, 20% less to be exact. If the Small Cap index goes up by 20%, this means the Bond index with a beta of 0.8 will only increase by 16%. To learn more about Beta and other statistical measures, read our Momentum Strategy Investing Review.

Blue Chip: The term Blue Chip refers to a prestigious group of companies viewed as the leaders in their respective fields. Thirty of these Blue Chips combine to make up the most widely tracked index in the world, the Dow Jones Industrial Average. Blue Chips are generally very large companies that pay dividends, are in excellent financial shape, have a long history of success and are seen as low-risk compared to most other types of stock. Examples of Blue Chip stock are Wal-Mart, Microsoft, Disney, and Coca-Cola.

Bombay Stock Exchange: The Bombay Stock Exchange is located in Mumbai, India. It is the oldest stock exchange in Asia and one of the largest in the world with nearly 5,000 companies listed. Visit our Major Index Reference Chart for more information on this subject.

Bond: A bond is an interest bearing debt certificate issued by a government or company. They are simply an innovative way for a company or even for governments to borrow money at reasonable interest rates. The reason a Bond system is needed is because there isn’t a bank in the world that could or would lend the vast sums needed by the US Government to cover US debt or needed by some of the world’s largest companies to fund expansion. When you buy a bond, you are one of many creditors who have provided a loan. In return, the issuer will distribute fixed interest income payments once or twice per year (depending on the bond) called Coupon Payments. These payments won’t change regardless of the Bond’s price fluctuation. When the bond reaches maturity (ends), you will receive your price-adjusted principle back.

Bond Coupon Payment: These are the fixed income payments paid by the bond issuer (a government or company) to the bond holder (you, the investor). Bond issuers usually distribute coupon payments twice per year until maturity and the coupons are fixed dollar amounts, they will not fluctuate. Each coupon represents a predetermined payment promised to the bond-holder in return for his or her loan of money to the bond-issuer. The bond-holder is typically not the original lender, but receives this payment for effectively lending the money.

Bond Credit Rating: These ratings assess how likely a corporation or government will default on its debt. These credit ratings act as a risk measurement for investor considering debt vehicles such as bonds. For bonds, these ratings fall into two major categories, Junk and Investment Grade, with Junk bonds being the higher yielding and higher risk of the two. To learn more about bonds and other income producing assets, read our Income Investing Strategy Review.

Bond Maturity: The Bond's term, which is the length of time that must pass in order for the bond to expire or "Mature". Typically, one to three year maturities are referred to as short-term bonds, four to ten year maturities are referred to as intermediate-term bonds and 11+ year maturities are referred to as long-term bonds. To learn more about bonds and other income producing assets, read our Income Investing Strategy Review.

Book Value: The book value of a company is a measure of what it would be worth if the company liquidated all of its assets. It's basically the difference between assets and liabilities expressed in per-share terms. Investors use this and other fundamental analysis methods to calculate a company's value. To learn more about fundamental analysis or value investing, read our Value Investing Strategy Review.

Brand Strength: Brand strength refers to the power of a company's name, logos, slogans or anything else that consumers associate with a company's products and services.

Broad Index: Broad Indexes are those Indexes that follow a large category of stocks or a representative sample from a large category of stocks. They are popular for performance and portfolio comparison. There are many broad indexes, such as the S&P 500 and the MSCI EAFE, and investors typically choose one that is relevant to their portfolio and their strategy. Most are easy to look up on investing websites and there are plenty of free tools available that will allow you to compare your performance to a broad index with just a couple of mouse clicks. If you'd like to learn more about indexes, index investing, ETFs and Index Funds, read our Index Investing: The safe, easy and sure way to wealth or our Index Investing Strategy Review.

Broker: An agent who handles an investor’s stock, bond, option, future and commodity orders. A commission is charged for their service. Most also provide portfolio management and financial/investing guidance. To learn more about brokers, financial planners, and online brokerage firms, read our Online Investing Vs Traditional Financial Planners article.

Brown, Janet: While we consider her a Momentum Investor, Janet calls her investing style Upgrading. Regardless of what you want to call the strategy, Janet has had spectacular results. She crushes the average market return not to mention the returns of all but a handful of her growth and momentum investing peers. Most astonishing is that Janet’s entire portfolio is comprised of Mutual Funds rather than stocks. She uses a momentum scoring model to rank fund performance and “upgrading” refers to the practice of constantly moving your money into the highest ranking funds. Janet’s No Load Fund X provides strategy analysis and explanations, clear and easy to follow buy/sell instructions, and model portfolios. Please see our Can you Afford Outstanding Investing Advice article for more information on this topic.

Buckingham, John: John is Al Frank’s protégé and successor and the current editor of the Prudent Speculator monthly newsletter. His newsletter has beaten the market returns for over 25 years and counting, only a handful of investment advisors around the world can make that type of claim. John’s newsletter provides strategy analysis and explanations, clear and easy to follow buy/sell instructions, and model portfolios. Please see our Can you Afford Outstanding Investing Advice article for more information on this topic.

Buffet, Warren: Buffet is widely regarded as the best value investor of all time, his investing prowess earned him the nickname “the Oracle of Omaha”. He is also famous for his frugality. While he is the world’s richest man with an estimated net worth of $62Billion, he still lives in the same house he bought in 1958 for $31,500. Buffet has proven to be a generous billionaire, announcing in 2006 that he plans to give away his entire fortune to charity. To learn more about fundamental analysis or value investing, read our Value Investing Strategy Review.

Bull Market: A period when the majority of stocks on the market are currently increasing in value because stock prices are rising. Sentiment, headlines, and earnings estimates are generally positive.

Bullish: A Bullish market means that the majority of stocks on the market are currently increasing in value because stock prices are rising. Consumer sentiment is usually strong during a Bullish phase.

Business Cycle: This is the repeating economic cycle that investors experience over long periods of time. Business cycles in the US economy average four to six years but they can vary widely and have become increasingly irregular now that the global economy is much stronger and can have a greater impact on the US and other developed country's economies than ever before.

Business Model: This term is very broad, it encompasses a company's objectives, organizational structure, inventory system, and sales strategy to name a few. Basically, every aspect of a company that is an important part of how it operates and how it meets its goals and objectives is an important component of the business model.

Buy/Sell Recommendations: These are the trade recommendations you receive from your financial advisor, broker, or newsletter. Recommendations can be for stocks, bonds, funds, options, commodities or any other type of security. We talk about advisor Buy/Sell Recommendations a lot because they have a major impact on your returns. Regardless of the source of your buy/sell recommendations, they should be clear and timely. In other words, your advisor should be telling exactly what to buy and sell and when the transaction should occur. Please see our Can you Afford Outstanding Investing Advice or Online Investing Vs Traditional Financial Planners articles for more information on this topic.

Buy-and-Hold Strategy: This refers to any investing strategy that advocates holding your investments for long periods of time and ignoring short-term market volatility. Examples of Buy-and-Hold strategies are Index Investing, Value Investing, and Income Investing. Please see our Investing Strategy Review Guide article for more information on this topic.

Buy Criteria: These are the criteria you adhere to in order to identify attractive investments that are in line with your strategy. Every strategy has it’s own unique set of Buy Criteria, and most investors tailor their strategy’s criteria to match their own investing goals and risk tolerance. Please see our Investing Strategy Review Guide article for more information on this topic.

Buy Limit: Refers to setting an order for some type of security at or below a specified price. Buy Limits allow investors to ensure that they only buy a security when it reaches a price that they feel is attractive rather than simply buying at the current market price.

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Capital Appreciation: This is just a fancy way to say the value of your investment increased. If you own a stock, and the price moves from $45 to $50, you have experienced capital appreciation. Please see our Stock basics guide for a comprehensive introduction to this and many other topics.

Capital Gains: A capital gain is the amount your investment increased in value from the time you bought it to the time you sold it. For example, if you own 100 shares of EEM and the price increased from $110 to $150 from the time you bought until the time you sold, you experienced a capital gain. In this example, your capital gain is $40 per share or $4,000. Please see our Stock basics guide for a comprehensive introduction to this and many other topics.

Capital Gains Distribution: When mutual fund managers buy and sell (realize gains and losses) or receive dividends and other income from investments held in the fund's portfolio, they create capital gains and these are passed on to investors in the form of capital gains distributions. These gains are typically distributed quarterly or annually and, unlike long-term gains, they will be taxed at your individual tax rate. Read our Introduction to Mutual Funds guide to learn more about this topic.

Capital Growth: Refers to increase in the value of an investor's investments. If all of an investor's capital sits in cash rather than being invested in some type of security, this capital will lose value every year. Capital Growth through investment is essential in keeping ahead of inflation. Capital Growth also refers to an increase in value of a mutual fund’s holdings which will increase the NAV, or price, of the fund. To learn more about mutual funds, read our Introduction to Mutual Funds guide.

Capital Loss: A capital loss is the amount your investment decreased in value from the time you bought it to the time you sold it. For example, if you own 100 shares of EEM and the price decreased from $150 to $110 from the time you bought until the time you sold, you experienced a capital loss. In this example, your capital loss is $40 per share or $4,000. Please see our Stock basics guide for a comprehensive introduction to this and many other topics.

Capital Preservation: This refers to protecting your portfolio from losses. A good example of a capital preservation strategy is Income Investing in which investors buy conservative investments such as bonds and blue chips to generate current income and protect against losses.

Capitalization: See Market Capitalization

Cash Flow Statement: This piece of the financial report tracks a companies inflow and outflow of cash for a set period of time. The flow of capital back and forth between a company and other entities is a result of operating, investing and other financial activities.

Casual Investor: A casual investor is one that understands why people invest and how important it is to plan for the future but would prefer to learn as little as possible about investing. They do very little of their own research because they prefer to take the advice of others. Casual Investors are very likely to choose a managed account or trust the advice of a financial planner or broker. If you are trying to decide if you'd prefer a self-directed portfolio or would rather receive advice from a broker or financial planner, be sure to read our Online Investing Vs Traditional Financial Planners.

CD: See Certificate of Deposit

Certificate of Deposit: These are short-term debt securities. The issuer pays you, the CD holder, a low rate of interest income for lending the issuer your money for a stated period of time, usually several weeks to a few years. These are very safe investment vehicles and are attractive if you want to generate a small amount of income for a short period of time without risking your principal.

Charting: The use of graphs and charts in technical analysis to predict price movements and track volume and other technical indicators. To learn more about charting and other technical analysis topics, read our Day Trading & Technical Analysis Strategy Review.

Chase Returns: Many Investors wait until they see an investment performing well before they invest their money. This approach to investing places a lot of emphasis on current and historical returns while ignoring the fundamental and technical aspects of investing. Investors that chase returns often buy high and sell low, a recipe for guaranteed losses. If you’d like to learn more about how to avoid chasing returns, read our 10 Principles of Investing article.

Clason, George S.: Clason is famous for writing The Richest Man in Babylon, which has been a best seller for almost 80 years. The personal finance and investing information contained in this gem of a book is as true and valuable today as the first day it was published. If you’d like more information on this book or Clason, read our review of The Richest Man in Babylon.

Cold Caller: The ethically questionable practice by full-service brokers of making unsolicited phone calls to people they don't know in order to attract new business. To learn how to avoid this and other mutual fund expenses and questionable practices associated with mutual fund investing, read our Mutual Fund Checklist.

Commodity: The generic definition of commodity refers to any good that can be bought or sold. However, when we refer to commodities during investing discussions, we are usually referring to raw materials such as basic agricultural products (i.e. soy beans, coffee), precious metals (i.e. gold, silver), or raw materials (i.e. oil, lumber). All of these products trade on authorized commodities exchanges.

Common Stock: Stock traded in the secondary market is called Common Stock and is appropriately named since it will make up most, if not all, of your trades. This is the “every day” stock available to any investor. To learn more, read our Beginner’s Guide to Stocks.

Company Match Program: This is the amount that your company will contribute to your 401k plan based on your own contribution. If, for example, your company has a $3,000 company match, they will match 100% of your first $3,000 contribution to 401k. The company match is not counted as part of the legal annual maximum amount you are allowed to contribute. To learn more about 401k’s and other Tax Deferred accounts, read our 401k, IRA and Roth IRA Basics guide.

Competitive Advantage: The skills, patents, knowledge, leadership, resources or other characteristics that make a company stronger than it’s competitors.

Competitive Disadvantage: The lack of skills, patents, knowledge, leadership, resources or other characteristics that make a company weaker than it’s competitors.

Compound Interest: In this method of interest calculation, you calculate interest earned on all principal and interest previously accrued. Compound interest is the greatest wealth building tool the world has ever seen. Albert Einstein once declared that compound interest is “the most powerful force in the universe” and we agree because it certainly has made a lot of people rich. It’s a simple concept and is best demonstrated through examples.

In our Compound Interest example below, the investor has $10,000 in savings, he is going to add $10,000 in savings per year, and he will receive the S&P 500 annual return of 10% (compound interest at 10% + $10,000 savings per year).
- After 5 years he will have $77,156
- After 10 years he will have $185,312
- After 15 years he will have $359,497
- After 20 years he will have $640,024
- After 25 years he will have $1,091,818
- After 30 years (the length of the typical career) he will have $1,819,434
Not too shabby.

This is an important investing principle... to learn ten more, read our Basic Principles of Investing guide.

Conservative Investor: Conservative Index Investors are retired, near retirement or feel very bearish towards stocks. They have very low risk tolerance and want to avoid volatility and losses. They are often focused on dividends and bond coupon payments since both provide current income during retirement. Many are withdrawing more than they contribute to their portfolios. Since this is a big part of their income they want a lot of protection against market volatility and losses because the portfolio needs to last for the rest of their retirement. To learn more about the most popular conservative investing strategy, read our Income Investing Strategy Guide.

Contrarian Investor: Warren Buffet is a very successful contrarian and he sums the strategy up best with his philosophical statement, “simply attempt to be fearful when others are greedy and to be greedy when others are fearful”. Contrarian’s seek opportunities to buy or sell when the majority of investors are doing the exact opposite. They believe that excessive fear in the market creates undervalued bargains while excessive greed creates overvalued and dangerous stocks. Value Investing is a great example of a popular contrarian investing strategy, please read our Value Investing Strategy Review for more information on this topic.

Cost Basis: The original purchase price of an investment. The cost basis is used to determine capital gains so it has major tax implications.

Coupon Payment: See Bond Coupon Payment

Covered Call: A call option sold by someone who owns the underlying asset. The covered call writer gives up any potential profit beyond the strike of the calls in exchange for the premium income. Selling covered calls is on our very short list of option strategies that offers an acceptable risk/reward ratio and is relatively easy to master. This strategy is covered in our blog article A low-risk high-reward option income strategy.

Cost Efficient: Economical in terms of the goods or services received for the money spent. Producing optimum results for dollars spent.

Cramer, Jim: Jim is widely respected as one of today’s top investors. He developed a “strict set of investing disciplines” during his ten years as a hedge fund manager that have helped him and his clients profit in up and down markets. Jim stays very busy; he is the host of the popular CNBC Mad Money show, the editor of Action Alerts Plus investment advisory service, author of several top selling investment books, and co-founder of TheStreet.com. To learn more about Jim and many other of today's best investment advisors, read our Can I afford outstanding investing advice article.

Criteria Based Strategy: This method of choosing investments requires a constantly refined set of criteria designed to determine the quality of an investment and estimate its future performance. Please read our Growth Investing Strategy Review or Mutual Fund Investing Strategy Review for two examples of criteria based strategies.

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Daily Rebalancing: See Rebalancing

DAX: Germany’s version of the Dow. This is a Blue Chip stock index consisting of 30 major German companies. This is a good measure of the health of the German economy and a good benchmark for any large cap German based stocks. Visit our Major Index Reference Chart for a complete list and description of all of the world's major indexes.

Day Trader: Speculators are very active traders that get in and out of one or several investments during a single day. They will usually close all positions prior to the close of the current trading session, they will not hold positions overnight. Day Traders typically prefer options over other securities.

Debt: Something owed, such as money, goods, or services. When we refer to debt at Money-and-Investing.com we are usually referring to debt on a company’s financial statements. Debt and other valuation metrics are particularly important to Value Investors. Feel free to browse our Value Investing Strategy Guide for more on this topic.

Debt-to-Equity Ratio: Calculated by dividing a company’s total liabilities by the total the shareholder equity. This tells analysts how aggressively a company is financing expansion with debt. High debt-to-equity ratios can mean a lot of earnings volatility as a result of additional interest expense. To learn more about the Debt-to-Equity Ratio and other important valuation ratios, read our Value Investing Strategy Review.

Default: Default occurs when a debtor is unable to meet the legal obligation of debt repayment. Borrowers may default when they are unable to make the required payment or are unwilling to honor the debt. Investors are often talking about Bonds when they talk about default risk, particularly Junk Bonds which are higher risk.

Deferred Compensation Plan: A compensation plan in which benefits are paid at a later time, such as after retirement. To learn more about deferred compensation plans and other tax-deferred investment vehicles, read our 401k, IRA and Roth IRA Guide.

Derivative: Refers to any investment that derives its value from an underlying security. Options are the most common and popular form of derivative.

Developed Country: a country with a relatively high per capita income, where most people have a higher standard of living with access to more goods and services than most people in developing countries. An area of the world that is technologically advanced, highly urbanized and wealthy.

Developing Country: A country whose per capita income is low by world standards. A country that is in the process of becoming industrialized. Average national income must be below $9,265 for a country to be classified as a developing country. A developing country typically lacks industrialization, infrastructure, high literacy rate and advanced living standards.

Diminishing Returns: A theory that states that as extra units are produced, the output generated by each additional unit produced will eventually fall. For example, the first unit produced may cost a manufacturer $1.00, the 100,000th unit may cost $0.10, and the millionth unit may cost $0.08. There is significant economy of scale benefit from the first unit to the 100,000th, but very little additional improvement at the millionth because the return on productivity diminished after a certain number of units.

Disclosure Laws: (Source = Investopedia)
Investment Act of 1933 - A federal piece of legislation enacted as a result of the market crash of 1929. The legislation had two main goals: (1) to ensure more transparency in financial statements so investors can make informed decisions about investments, and (2) to establish laws against misrepresentation and fraudulent activities in the securities markets.
Securities Exchange Act of 1934 - A federal piece of legislation enacted as a result of the market crash of 1929. The legislation had two main goals: (1) to ensure more transparency in financial statements so investors can make informed decisions about investments, and (2) to establish laws against misrepresentation and fraudulent activities in the securities markets. All companies listed on stock exchanges must follow the requirements set forth in the Securities Exchange Act of 1934. Primary requirements include registration of any securities listed on stock exchanges, disclosure, proxy solicitations and margin and audit requirements. From this act the Securities Exchange Commission (SEC) was created. The SEC's responsibility is to enforce securities laws.
Investment Advisory Act of 1940 - law that was created to regulate the actions of investment advisers as defined by the law. Relates to their advice, counsel, publications, writings, analyses, and reports.

Disposable Income: Money left over after all expenses and taxes have been paid. These are your discretionary dollars that can be spent on anything from consumer goods to savings.

Distribution: This refers to the capital gains distributed from mutual funds to their investors. Distributions are made up of any income and realized gains experienced during the fund's most recent reporting period. To learn more about this topic, read our Introduction to Mutual Funds article. This can also refer to social security, 401k, IRA or Roth IRA retirement distributions. At the qualified retirement age (59 1/2), individuals can begin receiving retirement distributions without paying tax penalties for early withdrawal.

Distribution Date: Date that a mutual fund pays out any income and realized gains experienced during the current reporting period. To learn more about this topic, read our Introduction to Mutual Funds article.

Distribution Phase: It is unclear at the beginning of this phase whether the bull market is ending or if this is just a minor correction before more strong price action. This is a period of high volatility since buyers and sellers are trading on fear and greed. Prices may trade back and forth for a while but eventually sellers will begin to outnumber buyers and market sentiment turns negative.

Diversification: An investment strategy designed to reduce exposure to risk by combining a variety of investments, such as US stocks, international stocks, bonds and cash, which are unlikely to all move in the same direction at the same time since they aren't all strongly correlated. Diversification is one of the 10 Basic Investing Principles.

Diversification and Allocation Mix: This term incorporates three components; number of securities, diversification mix, and asset allocation. Number of securities refers to the total number of investments held in your portfolio and the recommended range is between 25 and 30. The mix refers to investing in a wide variety of industries, categories and geographies to ensure that when one specific area goes south, it doesn’t significantly hurt your whole portfolio. Finally, the asset allocation refers to the breakdown of the percentage of your portfolio allocated to each asset type. To learn more about the asset allocation and diversification mix, read our 10 Basic Principles of Investing.

Diversified Fund: In order to qualify as a “diversified” fund as defined by the Investment Company Act, 75% of a fund’s total asset value is limited to positions of no more than 5% of any one company. For example, if a fund only owns a couple stocks, why wouldn’t you just go buy them so you don’t have to worry about holding periods, management fees and the like? Not to mention the fact that a non-diversified fund is going to be more risky since the assets are concentrated into a few investments. For more on this subject, read our Introduction to Mutual Funds article.

Dividend: A distribution of the earnings of a corporation. A dividend is a portion of a company's profit paid to common and preferred shareholders.

Dividend Reinvestment: The process of automatically purchasing additional shares of a company’s stock or a mutual fund with any dividends distributed by that company or mutual fund. This is a form of dollar cost averaging, one of the 10 Basic Principles of Investing.

Dividend Yield: The annual percentage return that the dividend provides to the investor on either common or preferred stock.

Dollar Cost Averaging: Dollar Cost Averaging means investing a fixed amount of money on a regular basis. For example, if you invest $300 every month regardless of market conditions, you are dollar-cost averaging. The benefit is that you are always buying more stock at lower prices. The reason this is so important for you to learn is because most investors do the exact opposite. Don’t you feel the urge to buy when the market is bullish and rising and feel the urge to wait or sell when the market is bearish and dropping? Most people do, and as a result they buy when prices are high and do nothing or sell when prices are low or falling. This kind of behavior greatly increases your cost basis and decreases your returns, so avoid it, be a dollar-cost averager. This is the 3rd Investing Principle, read our 10 Basic Principles of Investing article for more on this subject.

Don't Throw Good Money After Bad: This means don’t hold on to your losers or sell your winners and it is the 9th Investing Principle. The result of throwing good money after bad is buying high and selling low, a behavior guaranteed to create losses.
- holding on to losers: Almost everyone has done this so it’s an easier concept to absorb. We often put a lot of hard work into selecting investments. By the time we finally hit the “Buy” button we are confident that we’ve made a wise and profitable choice. However, investing is a numbers game, we can’t be right every time and we will inevitably pick losers now and then. When this happens, rather than realizing that we either missed something when we did our research or that something has fundamentally changed about the company or the market, many of us still stubbornly believe that we made a good investment. Because we worked so hard to identify a good stock, we find it hard to believe that we were wrong. Even if the price is dropping while our other investments are going up we hold onto it because we’re sure the loss is only a temporary correction and that the stock will head back up very soon. This behavior is frequently referred to as “falling in love” with a stock. We can’t bear to part with a “good” stock and taking losses is psychologically painful so we wind up riding our losers down. This rarely ends well. Eventually we realize that no recovery is in sight and we sell the stock back into the market at a much larger loss than we should have taken.
- Selling Winners: On the other side of the equation, when we review our portfolio and see that an investment has done particularly well, we are often tempted to take a profit because we don’t think that any company can sustain such exceptional performance for long. This means we wind up selling our winners. Read our 10 Basic Principles of Investing article to learn about several other critical investing principles.

DOW: See Dow Jones Industrial Average

Dow Jones Industrial Average: Commonly referred to as the "Dow". Tracks the performance of 30 of the largest and most widely held US Blue Chip companies. Best-known and most widely followed market indicator in the world and a good measure of US economic health. Perfect benchmark for Blue Chip, large cap and Income Investors.

Dutch East India Company: The first publicly traded company and the Netherland’s version of a weapon of mass destruction. The company was incorporated in 1602 and was granted a monopoly that extended from the Cape of Good Hope to the Strait of Magellan with sovereign rights over whatever territory it could conquer. For over 100 years, the Dutch East India Company monopolized trade, erected fortifications, appointed governors, maintained a standing army, and formed treaties in the name of the Dutch government. At the peak of its power in 1669, the Dutch East India Company commanded 40 warships, 150 merchant ships, and 10,000 soldiers. The Dutch East India Company was an outstanding investment, between 1602 and 1696 the annual dividend paid to investors was never less than 12% and sometimes as high as 63%. For more about the stock history and stock basics, read our Stock Market Basics article.

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Earnings: Profit available to ordinary shareholders after all operating expenses have been deducted. The amount of profit a company realizes after subtracting all expenses and taxes from gross revenue.

Earnings Estimate: Analysts from the major brokerages and other investing institutions are constantly estimating how much a company will earn in the coming quarter, year, or longer period of time. Investors watch these estimates closely and a miss above or below the average analyst estimate can cause a great deal of price fluctuation.

Earnings Per Share (EPS): The formula is net earnings of a corporation divided by the average number of shares outstanding (shares of common stock). This is a popular and common method of expressing a corporation's profitability. To learn more about EPS and other valuation methods, read our Value Investing Strategy Guide.

Economic Trends: Production, employment, import, export and other trends that effect the national and global economy. Analysts and investors watch these trends closely for clues about future market activity.

Economics: Economics is the social science that studies the production, distribution, and consumption of goods and services. The study of how people use their limited resources in an attempt to satisfy unlimited wants.

Economies of Scale: A decrease in cost as supply increases. In many cases, the bigger a company gets, the cheaper it is able to produce or distribute each additional unit. Generally, this is because some costs of production do not increase with each unit.

Einstein, Albert: A German physicist best known for his theory of relativity, especially for the mass energy equivalence theory, E = MC2. Einstein is revered by the physics community, and in 1999 Time magazine named him the "Person of the Century". In wider culture the name "Einstein" has become synonymous with genius. (source = Wikipedia)

Emergency Fund: An emergency fund is for those unexpected events that are not regularly planned for in life.

Employee Match Program: This is the amount that your company will contribute to your 401k plan based on your own contribution. If, for example, your company has a $3,000 company match, they will match 100% of your first $3,000 contribution to 401k. Any company match is not counted against you so technically the maximum contribution is $15,500 + your company’s match amount. To learn more about company match and other tax-free investing options, read our introduction to 401k's, IRAs and Roth IRAs.

Enron: Famous for the largest, most spectacular, and corrupt melt-down in corporate history. Way to go guys… Before its bankruptcy in late 2001, Enron employed around 22,000 people and was one of the world's leading electricity, natural gas, pulp and paper, and communications companies, with claimed revenues of $111 billion in 2000. Fortune named Enron "America's Most Innovative Company" for six consecutive years. At the end of 2001 it was revealed that its reported financial condition was sustained mostly by institutionalized, systematic, and creatively planned accounting fraud. Enron has since become a popular symbol of willfull corporate fraud and corruption. (Source = Wikipedia)

Equity: Equity is the remaining interest in all assets after all liabilities are paid. It belongs to the owners of the company. When you buy stock, you receive shareholder equity in return, which means you own a small piece of the company.

Estate Planning: A plan to ensure your assets pass to designated heirs after your death and to avoid unnecessary taxes. Tools of estate planning include trusts, wills, gifts and power of attorney.

ETF: See Exchange Traded Fund

Exchange: A marketplace for buying and selling stocks such as the New York Stock Exchange and the NASDAQ.

Exchange Traded Fund (ETF): security that tracks an index and represents a basket of stocks like an index fund, but trades like a stock on an exchange. Similar to stock, each ETF has a ticker and can be bought and sold any time during trading hours rather than once a day like mutual funds. To learn all about ETFs, read our Index Investing: The safe, easy and sure way to wealth.

Expense Efficiency: Producing optimal results for money spent. Expense management is a critical component of portfolio management, see our 10 Principles of Investing or Can I afford Outstanding Investing Advice for more on minimizing expenses and maximizing returns.

Expense Management: Producing optimal results for money spent. Expense management is a critical component of portfolio management, see our 10 Principles of Investing or Can I afford Outstanding Investing Advice for more on minimizing expenses and maximizing returns.

Expense Ratio: The salary and administrative expenses required to manage the fund expressed as a percentage of total assets. Expense management is a critical component of portfolio management, see our 10 Principles of Investing or Can I afford Outstanding Investing Advice for more on minimizing expenses and maximizing returns.

Expenses: At Money-and-Investing.com we are generally referring to expenses on financial statements or in mutual funds so the accounting definition is most appropriate. In accounting, an expense represents an event in which an asset is used up or a liability is incurred.

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Fair Market Value: The price agreed upon when both buyer and seller are fully aware of market conditions and have complete knowledge of the situation.

False Indicator: Day traders, market timers, and momentum investors are constantly watching technical indicators for signals of what an index or stock is going to do. When the security they are tracking gives signals that lead these investors to false conclusions, this is called a false indicator. For example, if a stock's price goes above it's resistance level, analysts may assume that the stock is experiencing a breakout when it may only be experiencing unusual price fluctuation.

FDA Approval: Any new food and drug must pass FDA approval before it can be sold to consumers. When we talk about FDA approval at Money-and-Investing.com, we are most often talking about pharmaceuticals. Each drug must pass all FDA criteria and standards before it can be approved and prescribed by doctors or sold over-the-counter. The FDA acts as the watchdog of the food and drug industry to make sure that companies are behaving responsibly and only selling products that have passed rigorous safety tests.

Federal Reserve Bank (commonly referred to as the "Fed"): The central bank of the US. The Fed performs several major functions, but the major ones that have a direct impact on the market and the economy are managing the discount rate and lending money to member banks. By managing the discount rate (rate cuts or increases), the fed can promote economic growth to avoid recessions or cool the economy down to temper inflation. The Fed also lends money to member banks to ensure that there is sufficient liquidity in the banking system.

Fee-Based Financial Planner: Financial planners that charge a percentage of assets, wrap fee or some other portfolio or performance based fee to their clients. Charging these traditional fees creates many conflicts of interest in the client and planner relationship. We recommend choosing an hourly fee planner, this eliminates all conflicts of interest. Want to learn more about traditional financial planners and how their services compare to online brokerages? Read our Online Investing Vs Traditional Financial Planners article.

Fee-Laden Fund: We talk about mutual funds a lot at Money-and-Investing.com so we want people to understand the difference between no-loads no-fee funds and any other types. Fee-Laden Fund is our description for a fund laden with a variety of unnecessary expenses that you can avoid when you choose instead to invest in no-load no-fee funds. Examples of optional fees charged by mutual funds are 12b-1 Fees, Front Loads, and Back Loads. Want to learn more about mutual fund fees and no-load no-fee funds? Read our Mutual Fund Guide.

Fee Structure: When we talk about Fee Structure at Money-and-Investing we are usually referring to the fees charged by a Mutual Fund. See Mutual Fund Fees.

Fees: See Mutual Fund Fees

Financial Metrics: A Financial Metric is a calculation that presents the relationship between various items on a financial statement numerically. Financial metrics are usually expressed in percentages or ratios. Examples are P/E Ratio, Price-to-Book Ratio, and profit margin. Financial metrics are of particular interest to Value Investors.

Financial Planner: A planner's goal is to help investors with all aspects of investing, budgeting, tax, insurance, retirement and estate planning. Quality financial planners will spend a lot of time educating investors, finding capital growth opportunities in line with a client's risk tolerance and preserving capital. The ultimate goal is wealth preservation and net worth maximization. Want to learn more about traditional financial planners and how their services compare to online brokerages? Read our Online Investing Vs Traditional Financial Planners article.

Financial Planning: A process of money management that may include any or all of several strategies, including budgeting, tax planning, insurance, retirement and estate planning, and investment strategies. In effective financial planning, all elements are coordinated with the aim of building, protecting, and maximizing net worth. (Source = joann-low.com)

Financial Statement: A report that summarizes the financial status and health of an institution for a given period of time. The major pieces of a financial statement are the income statement (revenues and expenses), balance sheet (assets and liabilities) and cash flows statement (inflow and outflow of cash).

First Mover: The first firm to enter a market or launch a new product. This creates a first mover advantage.

First Mover Advantage: The advantage that a firm or country may derive from being the first to enter a market, or from being the first to use a new technology. The competitive advantage that the first company to launch a new type of product should have over those that start later.

Fitch's Credit Rating Service: Fitch Ratings is a leading global rating agency committed to providing the world's credit markets with independent, timely and prospective credit opinions across the fixed income global marketplace.

Foreign Funds: Foreign Funds invest at least 80% of their assets into international stocks and other foreign investments. These can be risky investments, they are more volatile on average than growth and value funds. Read our Introduction to Mutual Funds guide or our Complete Index Investing Guide for more information on Foreign Funds.

Frank, Al: The former editor of the Prudent Speculator monthly newsletter. His newsletter has beaten the market returns for over 25 years and counting, only a handful of investment advisors around the world can make that type of claim. Frank’s newsletter is now managed by his protege, John Buckingham. The Prudent Speculator provides strategy analysis and explanations, clear and easy to follow buy/sell instructions, and model portfolios. Please see our Can you Afford Outstanding Investing Advice article for more information on this topic.

Fried, David: David is an investment adviser that focuses on companies that are buying back their own stock. The theory is that this disrupts the natural balance between supply and demand because companies are eliminating some of the supply when they remove part of their stock from the open market. We don’t know much about buyback theory but based on David’s results, this is a winner. The Buyback Income Index’s performance is very strong on a risk-adjusted basis. While the intent is to produce income and preserve capital, the portfolio has also produced very nice growth, which is an important factor for conservative investors that want to stay ahead of inflation. The Buyback Letter provides strategy analysis and explanations, clear and easy to follow buy/sell instructions, and model portfolios. Read our Can you Afford Outstanding Investing Advice for more information on Fried, investing expense management, or monthly investing newsletters.

FTSE 100: Index of the 100 largest companies listed on the London Stock Exchange. Popular London Stock Exchange index and a good measure of the UK’s economic health. Good benchmark for any large cap UK based stocks.

Fund Manager: The person responsible for investing a mutual fund's assets, implementing its investment strategy, and managing the day-to-day portfolio trading. This individual or team of individuals manages a mutual fund's portfolio of stocks, bonds and other securities.

Fund Manager Tenure: The length of time the current fund manager has been responsible for all of the day-to-day management and trading of the fund’s portfolio.

Fund Family: a group of mutual funds controlled by a single investment company, bank, or other financial institution. The various funds within the family can all have different investment objectives, such as growth, income or international.

Fundamental Analysis: Interpreting a company’s financial statements, financial metrics and statistical measures to determine whether a company is trading above or below its fair value and to estimate future performance. This form of analysis is most popular with Value Investors. Several other strategies require at least rudimentary fundamental analysis to make sure that there is nothing glaringly bad about an investment, but Value Investors take their analysis several steps further. They dig deep into the balance sheet, financial statements, and cash flow statements because they want to have a clear picture of the assets, liabilities, revenues and expenses. Once they are comfortable that a company is on firm financial footing, they delve into the business model, products, and debt structure to see how well a company is run, what competitive advantages they can maintain, and what kind of pricing power they have. Finally, they will try to value intangible assets into the equation such as brand strength or intellectual capital. Some common fundamental analysis metrics include price-to-book ratio, intrinsic value, shareholder’s equity, Return on Equity, debt-to-equity ratio, and dividend yield. You can bet that when you hear one person use several of these terms during a conversation, he or she is a value investor that does a lot of fundamental analysis. To learn more on this topic, read our Value Investing Strategy Guide.

Futures Trading: Futures traders trade futures contracts, which are agreements to buy or sell a specific amount of a commodity or financial instrument at a set price on a specific future date. Futures are traded on an exchange like a stock but they are derivatives, which means they derive their value from an underlying asset such as a stock.

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GDP: See Gross Domestic Product

Greeks: Refers to a set of statistical sensitivity metrics; delta, gamma, lambda, rho, theta, and vega. These metrics are used by technical analysts to evaluate derivatives such as options. They are useful in helping to predict price movements.

Gross Domestic Product (GDP): The value of all goods and services produced within a nation in a given year. Because income arising from investments and possessions owned abroad is not included, only the value of the flow of goods and services produced in the country is estimated. Hence the word 'domestic' to distinguish it from the Gross National Product.

Growth Cycle: One of the 5 stages of the business Cycle. Growth cycle peaks (end of expansion) occur when activity is furthest above its trend level. Growth cycle troughs (end of contraction/recession) occur when activity is furthest below its trend level.

Growth Fund: A mutual fund that seeks long-term capital appreciation by selecting investments that should grow more quickly than the general economy. Growth investments are often associated with high P/E Ratios. Growth funds are more volatile than conservative funds such as income funds or money markets. To learn more about mutual funds, read our Mutual Fund Guide.

Growth Investor: An investor that seeks long-term capital appreciation by selecting investments that should grow more quickly than the general economy. Growth stocks are often associated with high P/E Ratios. Growth stocks are more volatile than conservative investments such as bonds or money markets. To learn more on this topic, read our Growth Investor Strategy Review.

Growth Stocks: A stock whose sales and earnings are growing faster then the general economy. These stocks are often associated with high P/E Ratios, which means investors have priced in their expectation that earnings will continue to grow for the foreseeable future. To learn more on this topic, read our Growth Investor Strategy Review.

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Hang Seng Composite: 200 of the largest and most widely held companies on the Hong Kong Stock Exchange.

Hardship Qualification: It is possible to withdraw money from your IRA and 401K and even to borrow against your 401K if you meet a hardship qualification. However, this is a bad idea, every penny you take out or borrow delays your retirement. Common hardship qualifications are medical expenses, purchase of a first home, and education expenses but each has several hardship criteria. See our 401k, IRA & Roth IRA Guide for more on Hardship Qualifications, IRAs, Roth IRAs or 401Ks and contribution limits.

Hardship Withdrawal Exceptions: See Hardship Qualification

Hedge Fund: Funds that use hedging techniques. An investment fund that attempts to generate returns by employing aggressive trading strategies and leverage not commonly used by traditional funds. Hedge funds may employ short and long positions, leverage, swaps, arbitrage and derivatives trading.

Hedge Fund Investor: Generally, high net worth individuals that are looking for returns that exceed the market. They are interested in aggressive hedging techniques such as short-selling, leverage, program trading, swaps, arbitrage and derivatives in order to achieve exceptional returns.

High Dividend Yield: Stocks that pay dividends yielding at least six percent annually and that are likely to increase their dividend payouts each year. Dividend yield is found by dividing the latest known dividend payout from a company by its current share price. This is an important component of Income Investing. For more on this topic, read our Income Investing Strategy Review.

Highly Compensated Employees (HCEs): For benefit plan purposes, a highly compensated employee receives compensation in the top 20% of all employees, is a 5% owner of the business, and exceeds certain annual compensation levels. This category is used in performing nondiscrimination tests.

Historical Performance: Past performance of an investment, often measured in terms of stock price, earnings, or revenue. You’ve probably seen the following statement a thousand times (at least)… historical performance is no guarantee of future results. While it has become cliché, there’s a lot of wisdom in that statement. Don't chase returns, take Jay Baxter's advice and "choose one strategy that is in line with your personality, risk tolerance, and investing goals and then work hard to master it. Do that, and everything else will fall into place if." To learn more on this topic, read our introduction to the 8 most popular investing strategies.

Hong Kong Stock Exchange: This is the stock exchange of Hong Kong, more commonly known as the Hang Seng index.

Hourly Financial Planner: Financial planners that charge a flat hourly fee rather than the more traditional percentage of assets or wrap fees. By working on an hourly basis rather than on a commission basis, hourly planners eliminate many conflicts of interest inherent in the traditional client and planner relationship. Want to learn more about financial planners and how their services compare to online brokerages? Read our Online Investing Vs Traditional Financial Planners article.

Hulbert Financial Digest: Independent rating service that tracks the performance of various investing analysts and newsletters. Today, HFD computers track the performance of over 180 stock and mutual fund letters with more than 500 recommended portfolios.

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Income Fund: An investment fund whose primary objective is current income. Such funds generally invest their assets in government, corporate, or other bonds and high dividend yield stocks. The primary objective is to produce income and preserve capital, they are seeking current income rather than capital growth.

Income Investor: An investor whose primary objective is current income. These investors buy government, co