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A-B trust An A-B trust is a joint trust created by a married couple for the purpose of minimizing estate taxes. An A-B trust is a trust that divides into two upon the death of the first spouse. It is formed with each spouse placing assets in the trust and naming as the final beneficiary any suitable person except the other spouse. The trust gets its name from the fact that it splits into two upon the first spouse’s death – trust A or the survivor’s trust, and trust B or the decedent’s trust.
asset allocation Asset allocation is an investment strategy that aims to balance risk and reward. This is achieved by apportioning a portfolio’s assets according to an individual’s goals, risk tolerance and investment horizon.
asset-backed security An asset-backed security is an investment security—a bond or note—which is collateralized by a pool of assets, such as loans, leases, credit card debt, royalties, or receivables. An asset-backed security is similar to a mortgage-backed security, except that the underlying securities are not mortgage-based. For investors, asset-backed securities can be an alternative to corporate debt.
blend fund A blend fund is a type of equity mutual fund that includes a mix of value and growth stocks. These funds offer investors diversification among value and growth investments in a single portfolio.
bond A debt investment in which an investor loans money to an entity (corporate or governmental) that borrows the funds for a defined period of time. This is at a fixed interest rate. Bonds are used by companies, municipalities, states and U.S. and foreign governments. They finance a variety of projects and activities. Bonds are commonly referred to as fixed-income securities and are one of the three main asset classes, along with stocks and cash equivalents.
broker A broker is an individual or firm that charges a fee or commission for executing buy and sell orders submitted by an investor.
callable bond A callable bond is a bond that the issuer may redeem before it reaches the stated maturity date. In essence, a callable bond allows the issuing company to pay off their debt early. A business may choose to call their bond if market interest rates move in a favorable direction and will allow them to borrow at a more beneficial rate.
callable preferred stock Callable preferred stock is a type of preferred stock in which the issuer has the right to call in or redeem the stock at a pre-set price after a defined date.
Chartered Financial Analyst (CFA) A chartered financial analyst (CFA) is a professional designation given by the CFA Institute, formerly AIMR, that measures the competence and integrity of financial analysts. Candidates are required to pass three levels of exams covering areas, such as accounting, economics, ethics, money management, and security analysis. The CFA charter is one of the most respected designations in finance and is widely considered to be the gold standard in the field of investment analysis.
Certified Financial Planner (CFP) A certified financial planner refers to the certification owned and awarded by the Certified Financial Planner Board of Standards, Inc. The CFP designation is awarded to individuals who successfully complete the CFP Board’s initial and ongoing certification requirements. Individuals desiring to become a CFP professional must take extensive exams in the areas of financial planning, taxes, insurance, estate planning and retirement. Attaining the CFP designation takes experience and a substantial amount of work. CFP professionals must also complete continuing education programs each year to maintain their certification status.
Certified Public Accountant (CPA) Certified Public Accountant (CPA) is a designation given by the American Institute of Certified Public Accountants to those who meet education and experience requirements and pass an exam. The CPA designation helps enforce professional standards in the industry. They are also required to complete 150 hours of education and have no less than two years of public accounting experience. CPAs must pass a certification exam; certification requirements vary by state. Additionally, they must complete a specific number of continuing hours of education yearly.
Collateralized Debt Obligation (CDO) A collateralized debt obligation (CDO) is a structured financial product that pools together cash flow-generating assets. Then, it repackages this asset pool into discrete tranches that can be sold to investors. A collateralized debt obligation is named for the pooled assets — such as mortgages, bonds and loans — that are essentially debt obligations that serve as collateral for the CDO.
Collateralized Loan Obligation (CLO) A collateralized loan obligation (CLO) is a single security backed by a pool of debt. Often these are corporate loans that have a low credit rating, or leveraged buyouts made by a private equity firm consequently taking a controlling interest in an existing company.
Collateralized Mortgage Obligation (CMO) A collateralized mortgage obligation (CMO) refers to a type of mortgage-backed security that contains a pool of mortgages bundled together and sold as an investment. Organized by maturity and level of risk, CMOs receive cash flows as borrowers repay the mortgages that act as collateral on these securities.
Consumer Price Index (CPI) The Consumer Price Index is a measure that examines the weighted average of prices of a basket of consumer goods and services. These include transportation, food and medical care. The CPI is one of the most frequently used statistics for identifying periods of inflation or deflation.
contingent beneficiary A contingent beneficiary is specified by an insurance contract holder or retirement account owner as the person or entity receiving proceeds if the primary beneficiary is deceased, unable to be located, or refuses the inheritance at the time the proceeds are to be paid.
convertible debenture A convertible debenture is a type of long-term debt issued by a company that can be converted into stock after a specified period. Convertible debentures are usually unsecured bonds or loans meaning that there is no underlying collateral connected to the debt.
convertible preferred stock Convertible preferred stock is preferred stock that includes an option for the holder to convert the preferred shares into a fixed number of common shares. This is done usually any time after a predetermined date.
corporate bond A debt security issued by a corporation and sold to investors. The backing for the bond is usually the payment ability of the company, which is typically money to be earned from future operations. In some cases, the company’s physical assets may be used as collateral for bonds. Corporate bonds are considered higher risk than government bonds. As a result, interest rates are almost always higher, even for top-flight credit quality companies.
cost basis Cost basis is the original value of an asset for tax purposes. This is usually the purchase price, adjusted for stock splits, dividends and return of capital distributions.
credit shelter trust A Credit Shelter Trust is designed to allow affluent couples to reduce or completely avoid estate taxes when passing assets on to heirs, typically the couple’s children. This type of irrevocable trust is structured so that upon the death of the trust’s creator or settler, the assets specified in the trust agreement and the income they generate are transferred to the settlor’s spouse.
diversification Diversification is a risk management technique that mixes a wide variety of investments within a portfolio. It strives to smooth out unsystematic risk events in a portfolio so the positive performance of some investments neutralizes the negative performance of others.
dollar-cost averaging (DCA) Dollar-Cost Averaging is a strategy that allows an investor to buy the same dollar amount of an investment on regular intervals. The purchases occur regardless of the asset’s price.
dual class stock A dual class stock is the issuing of various types of shares by a single company. Its structure can consist of Class A and Class B shares, for example. Shares can differ, based on distinct voting rights and dividend payments.
emerging market A nation’s economy that is progressing toward becoming advanced. Typically shown by some liquidity in local debt and equity markets and the existence of some form of market exchange and regulatory body. Emerging markets generally do not have the level of market efficiency and strict standards in accounting and securities regulation to be on par with advanced economies (such as the United States, Europe and Japan). However, emerging markets will typically have a physical financial infrastructure including banks, a stock exchange and a unified currency.
exchange traded funds (ETF) An ETF, or exchange-traded fund, is a marketable security that tracks a stock index, a commodity, bonds, or a basket of assets. Although similar in many ways, ETFs differ from mutual funds because shares trade like common stock on an exchange. The price of an ETF’s shares will change throughout the day as they are bought and sold.
exchange traded notes (ETN) Exchange-traded notes (ETNs) are a type of unsecured, unsubordinated debt security based on the performance of a market index minus applicable fees. They have no period coupon payments distributed and no principal protections. Similar to exchange-traded funds (ETFs), ETNs are traded on a major exchange, such as the New York Stock Exchange (NYSE) during normal trading hours.
expense ratio The expense ratio, also known as the management expense ratio (MER), measures how much of a fund’s assets are used for administrative and other operating expenses. The ratio is determined by dividing a fund’s operating expenses by the average dollar value of its assets under management (AUM). Operating expenses reduce the fund’s assets, thereby reducing the return to investors.
estate planning Estate planning is the preparation of tasks that serve to manage an individual’s asset base in the event of their incapacitation or death. The planning includes the bequest of assets to heirs and the settlement of estate taxes. Most estate plans are set up with the help of an attorney experienced in estate law.
exchange-traded fund (ETF) A security that tracks an index, a commodity or a basket of assets like an index fund, but trades like a stock on an exchange. ETFs experience price changes throughout the day as they are bought and sold.
fiduciary A fiduciary is a person who acts on behalf of another person, or persons to manage assets. The fiduciary is expected to manage the assets for the benefit of the other person rather than for his or her own profit, and cannot benefit personally from their management of assets.
Generation-Skipping Trust (GST) A generation-skipping trust (GST) is a type of legally binding trust agreement in which the contributed assets are passed down to the grantor’s grandchildren, thus “skipping” the next generation, the grantor’s children. By passing over the grantor’s children, the assets avoid the estate taxes—taxes on an individual’s property upon his or her death—that would apply if the children directly inherited them.
growth stock Shares in a company whose earnings are expected to grow at an above-average rate relative to the market.
high-yield bond A high paying bond with a lower credit rating than investment-grade corporate bonds. These include treasury bonds and municipal bonds. Because of the higher risk of default, these bonds pay a higher yield than investment grade bonds. Based on the two main credit rating agencies, high-yield bonds carry a rating below ‘BBB’ from S&P, and below ‘Baa’ from Moody’s. Bonds with ratings at or above these levels are considered investment grade. Credit ratings can be as low as ‘D’ (currently in default), and most bonds with ‘C’ ratings or lower carry a high risk of default. To compensate for this risk, yields will typically be very high.
individual (or independent) 401(k) A 401(k) plan set up for an individual running a sole proprietorship or a small business with a spouse/immediate family member. Plan contribution limits for the individual are equal to a typical company-sponsored 401(k), In this case, however, the sole proprietor can also make an employer contribution to an independent 401(k), thereby raising the total contribution allowed. The independent 401(k) may also be called a “solo 401(k)” or an “indie K.”
insurance trust An insurance trust is an irrevocable trust set up with a life insurance policy as the asset, allowing the grantor of the policy to exempt assets away from his or her taxable estate. Once the life insurance policy is placed in the trust, the insured person no longer owns the policy, which will be managed by the trustee on behalf of the policy beneficiaries when the insured person dies.
international bond Debt investments that are issued in a country by a non-domestic entity. International bonds are issued in countries outside of the United States, in their native country’s currency. They pay interest at specific intervals, and pay the principal amount back to the bond’s buyer at maturity.
Joint Tenants With Right of Survivorship (JTWROS) Joint tenants with right of survivorship (JTWROS) is a type of brokerage account owned by at least two people, where all tenants have an equal right to the account’s assets and are afforded survivorship rights in the event of the death of another account holder. The concept also applies to real estate property.
international market The market in which participants from around the world are able to buy, sell, exchange and speculate on different currencies. International currency markets are made up of banks, commercial companies, central banks, investment management firms, hedge funds, retail forex brokers and investors.
large cap Refers to stocks with a relatively large market capitalization. The definition of large cap can vary among brokerages, but generally it is a company with market capitalization value of more than $10 billion.
living trust A living trust is a legal document, or trust, created during an individual’s lifetime where a designated person, the trustee, is given responsibility for managing that individual’s assets for the benefit of the eventual beneficiary. A living trust is designed to allow for the easy transfer of the trust creator or settlor’s assets while bypassing the often complex and expensive legal process of probate. Living trust agreements designate a trustee who holds legal possession of assets and property that flow into the trust.
market index A market index is a hypothetical portfolio of investment holdings which represents a segment of the financial market. The calculation of the index value comes from the prices of the underlying holdings.
master limited partnership (MLP) A master limited partnership (MLP) is a type of business venture that exists in the form of a publicly traded limited partnership. It combines the tax benefits of a partnership with the liquidity of a public company.
mid cap A company with a market capitalization between $2 and $10 billion. This is calculated by multiplying the number of a company’s shares outstanding by its stock price. Mid cap is an abbreviation for the term “middle capitalization.”
money market A segment of the financial market in which financial instruments with high liquidity and very short maturities are traded. The money market is used by participants as a means for borrowing and lending in the short term. This can occur from several days to just under a year. Money market securities consist of negotiable certificates of deposit (CDs), bankers acceptances, U.S. Treasury bills, commercial paper, municipal notes, federal funds and repurchase agreements (repos).
mortality and expense risk charge A mortality and expense risk charge is a fee imposed on investors in annuities and other products offered by insurance companies. It compensates the insurer for any losses that it might suffer as a result of unexpected events, including the death of the annuity holder.
mortgage pool A group of mortgages held in trust as collateral for the issuance of a mortgage-backed security. Some mortgage-backed securities issued by Fannie Mae, Freddie Mac and Ginnie Mae are known as “pools” themselves. These are the simplest form of mortgage-backed security. They are also known as “pass-throughs” and trade in the to-be-announced (TBA) forward market.
municipal bond A debt security issued by a state, municipality or county to finance its capital expenditures. Municipal bonds are exempt from federal taxes and from most state and local taxes. This is true especially if you live in the state in which the bond is issued.
mutual fund An investment vehicle that is made up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and similar assets. Mutual funds are operated by money managers. These managers then invest the fund’s capital and attempt to produce capital gains and income for the fund’s investors. A mutual fund’s portfolio is structured and maintained to match the investment objectives stated in its prospectus.
preferred stock A preferred stock is a class of ownership in a corporation that has a higher claim on its assets and earnings than common stock. Preferred shares generally have a dividend that must be paid out before dividends to common shareholders. These shares usually do not carry voting rights.
price-to-earnings ratio The price-to-earnings ratio (P/E ratio) is the ratio for valuing a company that measures its current share price relative to its per-share earnings. This ratio is also sometimes known as the price multiple or the earnings multiple.
primary beneficiary A primary beneficiary is an individual or organization who is first in line to receive benefits in a will, trust, retirement account, life insurance policy, or annuity upon the account or trust holder’s death.
proprietary fund A house-brand, or proprietary, mutual fund is created when the bank or brokerage firm that distributes the fund also acts as an investment advisor for the fund.
rebalancing The process of realigning the weightings of a portfolio of assets. Rebalancing involves periodically buying or selling assets in a portfolio to maintain an original desired level of asset allocation.
Registered Investment Advisor (RIA) An RIA is an advisor or firm engaged in the investment advisory business and registered either with the Securities and Exchange Commission (SEC) or state securities authorities. RIAs have a fiduciary duty to their clients. Therefore, they have a fundamental obligation to provide the best investment advice and always act in their clients’ best interests.
Required Minimum Distribution (RMD) A required minimum distribution (RMD) is the amount of money that must be withdrawn from a traditional IRA, SEP, or SIMPLE individual retirement account (IRA) by owners and qualified retirement plan participants of retirement age. As of 2020, the age for withdrawing from retirement accounts changed. It now must happen by April 1 following the year account holders reach age 72 (prior to 2020, the RMD age had been 70½ years old). The retiree must then withdraw the RMD amount each subsequent year based on the current RMD calculation.
reverse convertible note (RCN) A reverse convertible note (RCN) is a financial product that shares characteristics with both bonds and stocks. A coupon-bearing investment offers a payout at maturity which depends on the performance of an underlying stock. Structured as high-yield, short-term investments, most RCNs have maturity periods of three months to two years.
reverse stock split A reverse stock split is a type of corporate action which consolidates the number of existing shares of stock into fewer, proportionally more valuable, shares. The process involves a company reducing the total number of its outstanding shares in the open market, and often signals a company in distress.
revocable trust A revocable trust is a part of estate planning that manages and protects assets as the grantor, or owner, ages. The trust is amended or revoked as the grantor desires and is included in estate taxes. A revocable trust does not offer the grantor tax advantages.
rollover IRA A rollover Individual Retirement Account (IRA) is an account that allows for the transfer of assets from an old employer-sponsored retirement account to a traditional IRA. The purpose of a rollover IRA is to maintain the tax-deferred status of those assets. Rollover IRAs are commonly used to hold 401(k), 403(b), or profit-sharing plan assets that are transferred from a former employer’s sponsored retirement account or qualified plan.
Roth IRA A Roth IRA is a tax-advantaged, retirement savings account that allows you to withdraw your savings tax-free. Roth IRAs are similar to traditional IRAs with biggest distinction between the two being how they’re taxed. Roth IRAs are funded with after-tax dollars; the contributions are not tax-deductible. But once you start withdrawing funds, the money is tax-free.
senior bank loan A senior bank loan is a debt financing obligation issued by a bank or similar financial institution to a company or individual. The company or individual then holds legal claim to the borrower’s assets above all other debt obligations. The loan is considered senior to all other claims against the borrower. Consequently meaning that in the event of a bankruptcy the senior bank loan is the first to be repaid before all other interested parties receive repayment.
simple IRA A retirement plan that can be used by most small businesses with 100 or fewer employees. SIMPLE stands for “Savings Investment Match Plan for Employees”. IRA stands for “individual retirement account.” Employers can choose to make a mandatory 2% retirement account contribution to all employees or an optional matching contribution of up to 3%. Employees can contribute a maximum of $12,000 annually in 2013. The maximum is increased periodically to account for inflation.
simplified employee pension (SEP IRA) A retirement plan that an employer or self-employed individuals can establish. The employer is allowed a tax deduction for contributions made to the SEP plan and makes contributions to each eligible employee’s SEP IRA on a discretionary basis.
small cap Refers to stocks with a relatively small market capitalization. The definition of small cap can vary among brokerages, but generally it is a company with a market capitalization of between $300 million and $2 billion.
solo 401(k) also known as a Self Employed 401(k) or Individual 401(k)) is a 401(k) qualified retirement plan for Americans that was designed specifically for employers with no full-time employees other than the business owner(s) and their spouse(s).
special needs trust A special needs trust is a legal arrangement and fiduciary relationship that allows a physically or mentally disabled or chronically ill person to receive income without reducing their eligibility for the public assistance disability benefits provided by Social Security, Supplemental Security Income, Medicare or Medicaid.
stock split A stock split is a corporate action in which a company divides its existing shares into multiple shares to boost the liquidity of the shares. Although the number of shares outstanding increases by a specific multiple, the total dollar value of the shares remains the same compared to pre-split amounts, because the split does not add any real value.
stock A type of security that signifies ownership in a corporation and represents a claim on part of the corporation’s assets and earnings. There are two main types of stock: common and preferred. Common stock usually entitles the owner to vote at shareholders’ meetings and to receive dividends. Preferred stock generally does not have voting rights, but has a higher claim on assets and earnings than the common shares. For example, owners of preferred stock receive dividends before common shareholders. Therefore, they have priority in the event that a company goes bankrupt and is liquidated.
surrender fee A surrender fee is a charge levied against an investor for the early withdrawal of funds from an insurance or annuity contract, or for the cancellation of the agreement. They act as an economic incentive for investors to maintain their contract. Surrender fees allow the insurance company to have reasonable expectations for the frequency of early withdrawals.
subordinated debt Subordinated debt (also known as a subordinated debenture) is an unsecured loan or bond that ranks below other, more senior loans or securities with respect to claims on assets or earnings.
tracking stock A tracking stock is a common stock issued by a parent company that tracks the performance of a particular division without having claim on the assets of the division or the parent company.
transfer on death (TOD) The transfer on death designation lets beneficiaries receive assets at the time of the person’s death without going through probate. This designation also lets the account holder or security owner specify the percentage of assets each designated beneficiary receives, which helps the executor distribute the person’s assets after death. With TOD registration, the named beneficiaries have no access to or control over a person’s assets as long as the person is alive.
treasury bill (t-bill) A short-term debt obligation backed by the U.S. government with a maturity of less than one year. T-bills are sold in denominations of $1,000 up to a maximum purchase of $5 million. Their maturities are commonly of one month (four weeks), three months (13 weeks) or six months (26 weeks). T-bills are issued through a competitive bidding process at a discount from par. This means that rather than paying fixed interest payments like conventional bonds, the appreciation of the bond provides the return to the holder.
treasury bond A marketable, fixed-interest U.S. government debt security with a maturity of more than 10 years. Treasury bonds make interest payments semi-annually and the income that holders receive is only taxed at the federal level.
UGMA The Uniform Gifts to Minors Act (UGMA) allows individuals to give or transfer assets to underage beneficiaries—traditionally, parents and their children, respectively. The amount is free of gift tax, up to a certain amount. The assets are usually placed in UGMA accounts on behalf of minors.
UTMA The Uniform Transfers to Minors Act (UTMA) allows a minor to receive gifts—such as money, patents, royalties, real estate, and fine art—without the aid of a guardian or trustee. A UTMA account allows the gift giver or an appointed custodian to manage the minor’s account until the latter is of age. UTMA also shields the minor from tax consequences on the gifts, up to a specified value.
treasury inflation protected securities (TIPS) A treasury security that is indexed to inflation in order to protect investors from the negative effects of inflation. TIPS are considered an extremely low-risk investment since they are backed by the U.S. government. Their par value rises with inflation, as measured by the Consumer Price Index, while their interest rate remains fixed. Interest on TIPS is paid semiannually. TIPS can be purchased directly from the government through the TreasuryDirect system in $100 increments with a minimum investment of $100. They are available with 5-, 10-, and 30-year maturities.
value stock A stock that tends to trade at a lower price relative to its fundamentals (i.e. dividends, earnings, sales, etc.) and thus considered undervalued by a value investor. Common characteristics of such stocks include a high dividend yield, low price-to-book ratio and/or low price-to-earnings ratio.
zero-coupon convertible A zero-coupon convertible is a fixed income instrument that combines a zero-coupon bond and a convertible bond. Due to the zero-coupon feature, the bond pays no interest and is issued at a discount to par value, while the convertible feature means that the bond is convertible into common stock of the issuer at a certain conversion price.
All definitions from investopedia.com.