A
Application.
The application is a form that comes with a fund's
prospectus. Investors open accounts with mutual funds by
completing the application, which asks for basic information
from the investor, including name, type of account, tax
identification number, and service option choices. When
completed, the application, along with a check made payable
to the fund, is mailed to the fund company.
Assets. As an
accounting or investment term, assets refer to owned items,
such as cash, stock, equipment, and real estate.
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B
Bond. A bond is a contract representing
the terms of borrowing and repayment for a debt. See also
Security.
Broker. A broker, also called a
Registered Representative or account executive, is a licensed
person authorized to receive commissions. Brokers are always
affiliated with a brokerage company, or broker-dealer. The
broker-dealer is responsible for oversight of their affiliated
brokers. Brokers generally work for commissions, while Registered
Investment Advisors work for fees.
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C
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D
Distribution. A distribution is
a dividend payable to investors. As mentioned elsewhere,
a dividend can be of three types: income, short-term capital
gain or long-term capital gain. While we're on the subject,
be aware that a mutual fund dividend, or distribution, may
be physically paid to the investor, or it may be reinvested
in the fund, giving the investor more shares.
Diversification. Diversification
refers to the numbers of securities held, and their types.
For example, ten stocks would constitute a more diversified
portfolio than two stocks. In addition, the concept of diversification
extends beyond the confines of a single type of investment.
For example, there is more diversification in a stock and
bond portfolio than in a portfolio constructed entirely
of stocks, alone.
Dividends. Dividends are payments
made by corporations on earnings. In other words, part of
the profits and income are shared with investors. This applies
not only to mutual funds, but to shares of companies, as
well. Dividends from mutual funds may be of three types:
income dividends, short-term capital gains dividends and
long-term capital gains.
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E
Economies of Scale. An economic
term, economies of scale refers to the savings that companies
may experience when they grow. For example, it may be cheaper,
on a per-employee basis, to produce payroll for ten employees
than for one, since it is being done anyway.
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F
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G
Growth. Growth refers to capital
appreciation. The underlying value of the investment is
expected to grow. Unlike income, which is somewhat regular
and consistent in most cases, growth is much less certain.
However, growth investments usually outpace the returns
on income-type investments over the long term (five to ten
years, or longer). Growth investments usually pay little
in current income.
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H
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I
Income. Income refers to the generation
of regular earnings, whether from interest on bonds or from
corporate dividends. Growth and income are somewhat mutually
exclusive. For example, a fast-growing technology company
may choose to reinvest earnings for further, rapid growth,
leaving little cash for dividend distributions to shareholders.
Index. Indexes are numerical calculations,
based on groups of similar investments, meant to convey
the overall price level of a given market. For example,
there are indexes for blue chip stocks, small stocks, foreign
stocks, Treasury Bonds, and so on. Examples of indexes you
may have heard of are the Dow Jones 30 Industrials, the
Standard and Poor's 500 Index, the Russell 2000 index, and
the MSCI EAFE (Europe, Australia, Far East) index.
Industry. Mutual funds generally
are well-diversified. A stock fund, for example, normally
will be invested not only in a wide variety of individual
stocks, but also a variety of industries, such as utilities,
technology, consumer durable goods, health care, retail,
and so on. Funds that focus on particular industries lack
a degree of diversification, and thus are subject to increased
risk.
Investment Company. Investment company
is another term for mutual fund. As we know, it is a company
designed for investment; it is organized as a corporation,
distributes shares, and pays dividends.
Issue. A security made available
to the public may be called an issue. On this basis, mutual
funds issue shares to investors in return for cash.
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J
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K
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L
Liability. What a person or company
owes to others. The opposite of an asset.
Load. Another word for sales charge.
A load, or sales charge, is added to the net asset value
of many mutual funds to come up with a public selling price.
For example, if a fund's shares are worth $10, and the load
is 5%, then the offering price to the public would be $10.50
($10.00 plus 5%, or $0.50). The load, or sales charge, is
paid to the selling brokerage firm, which in turn pays out
much of it to the individual broker, as a commission. Thus,
in our example, above, only $10.00 actually goes into the
fund; the other $0.50 goes to the brokerage firm.
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M
Management. Management, or manager,
is a general term that, in the mutual fund world, refers
to the people who select the actual investments of a mutual
fund.
Marking-to-Market. A process (required
of mutual funds, by law) of adjusting the price of shares
to a current market value, based on the value of the underlying
holdings.
Money Market. Money market has come
to mean a certain type of bank account (as a result of heavy
marketing by bankers, of course). However, the term actually
refers to debt instruments (bonds) that mature within one
year. A money market mutual fund invests in money market
instruments. By the way, bonds maturing at dates greater
than one year out are part of the capital market. In both
cases, the terms refer to the uses to which the proceeds
of the bond issues are used: as money (liquid) or for capital
investment (machinery, longer-term investments).
Morningstar. Morningstar, Inc.,
is an investment research and information company based
in Chicago, Illinois. Morningstar pioneered in-depth, timely
mutual fund information service called Morningstar Mutual
Funds, which has become the standard in mutual fund research
in just a few years.
Mutual Fund. An broad term meaning
an investment company, or trust, which is owned by investors
and is subject to regulations as described in the Investment
Company Act of 1940.
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N
Net Assets. When you add up the
value of assets, and deduct liabilities, you arrive at the
net value of assets over liabilities, or net assets.
Net Asset Value. In mutual fund
parlance, this is the value per share. It is arrived at
by taking the company's net assets, and dividing by the
number of shares outstanding.
No-Load. A general term applied
to mutual funds that have no sales charges or commissions.
No-Load Fund Analyst. The
No-Load Fund Analyst is a mutual fund newsletter published
by Litman/Gregory in the San Francisco Bay Area. This newsletter
has some unique strengths, including regular in-depth interviews
with top fund managers, their backgrounds, and their techniques
and investment philosophy. In addition to fund reviews,
the No-Load Fund Analyst
discusses economic trends and the relative values of various
asset classes at various points in time.
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O
Objective. The objective of a mutual
fund briefly (often in 25 words or less) tells what the
chief goal of the fund is. For example, a fund's primary
investment may be "growth with income as a secondary consideration,"
or "the highest level of income consistent with preservation
of capital." As in food labels, the first items mentioned
are usually the most important!
Offering Price. The offering price
is the price an investor pays per share of a mutual fund.
It is the total cost per share, and may include a sales
charge.
Open-End Mutual Fund. A type of
mutual fund that is designed to issue and redeem shares
from investors, directly, rather than through the secondary
(stock) market.
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P
Portfolio. A term denoting the
overall collection of securities, or investments, owned
by a person or company.
Prospectus. The prospectus is a
mutual fund's offering memorandum. It is a small booklet,
generally about thirty pages long, that gives basic information
designed to disclose relevant facts that investors need
to make an informed decision about investing in a given
fund. Federal regulations require prospectuses to cover
certain basic important information, such as the fund's
investment objective, expenses, management agreements, risks,
and how to do business with the fund.
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Q
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R
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S
Sales Charge. A commission, or
extra cost, added on top of the price of a mutual fund when
you buy it. The amount is calculated as a percentage of
the underlying value per share. The sales charge is paid
to a brokerage company, and is not invested in the fund.
In other words, it is simply a cost to the investor, off
the top, and is lost to the investor at the start.
Sector. Sector is another word for
industry. Sector funds usually focus on a single industry,
such as health care, technology, or utilities. These funds
are probably best avoided until investors gain a fair amount
of investment expertise at a minimum. In any event, investors
should endeavor to build a properly diversified portfolio
before venturing into these specialty funds.
Security. A document representing
participation in an investment. Stocks are securities representing
ownership shares. Bonds are securities representing a contractual
debt obligation of the issuer to repay the holder, with
interest.
Shares. Shares are units of ownership
in a corporation. For shares in a mutual fund, the ownership
value of each share may be determined by dividing the net
assets by the number of shares. The value of shares in a
publicly-traded stock is determined by supply-and-demand
only, and may or not bear any discernible correlation with
the value of the company's assets.
Shareholder. A mutual fund shareholder
is, simply put, an investor in a fund. He or she owns shares
in the fund as a result of the investment being made. Generally,
shares may be purchased or redeemed for cash at any time.
Statements. Statements are periodic
reports to investors regarding their investment accounts.
Statements usually contain the name and address of the account
holder, the date of the statement, the current number of
shares, the current value per share, recent transactions
that have occurred, such as purchases and dividends, and
the total account value. Year-end mutual fund summaries,
showing all transactions for the preceding year, should
be kept by investors as long as the account is open, for
tax calculation purposes, and then for a period of at least
three years.
Stock. A type of investment security,
denominated in shares, that represents ownership in a company.
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T
Trading. Trading refers to the
buying and selling of investments, such as stocks and bonds,
for a mutual fund.
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U
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V
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W
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X
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Y
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Z
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