12b-1 Fee
The maximum annual charge deducted from fund assets to pay for distribution and marketing costs.

401(K) Plan
A plan whereby an employee may contribute pretax earnings to a qualified tax-deferred retirement plan--also called "cash or deferred arrangement" (CODA) or "salary reduction plan." Withdrawals for other than death, disability, termination of employment, or qualifying hardship prior to the age of 59 1/2 may be subject to a 10% penalty tax.

Average Maturity
A fund's average maturity is the dollar-weighted average of the maturities of its fixed-income holdings. Maturity represents the date on which a bond's principal is to be repaid.

Alpha
A coefficient measuring a security's price volatility caused by factors other than the stock market in its entirety. Alpha calculates the amount of return expected from an investment's intrinsic value, such as the rate of growth in earnings per share. For instance, an alpha of 1.35 infers that a security is projected to increase 35% in price when the security's "beta" is zero. A security, whose price is low in relation to its alpha, is considered undervalued.

American Depository Receipt (ADR)
Receipt for shares of a foreign-based corporation held by a US banking institution. ADRs are created to facilitate transactions and transfers of ownership of foreign securities in the United States.

American Stock Exchange (AMEX)
The second largest stock exchange in the US is located in the financial district of New York City at 86 Trinity Place. As a general rule, the securities traded on the AMEX are those of small to mid-size corporations. The AMEX also trades options of many NYSE securities and some OTC securities.

Amortization
1: An accounting procedure that gradually decreases the book value of an intangible asset through periodic charges to income. For fixed assets, the term used is depreciation, and for wasting assets, it is depletion. Both terms mean essentially the same thing as amortization. The purpose of amortization is to reflect resale or redemption value.

2: In a bond bought at a premium, it is a method of reducing a taxpayer's cost basis (vs. Accretion).

3: Amortization also applies to debt reduction through periodic payments of principal and interest sufficient to pay off a loan by maturity.

Appreciation
Appreciation is an asset's increase in value.

Asset Market Meltdown Thesis
A theory that believes that the stock market boom was due in large part to the Boomers’ heightened participation in the equity markets and that the market will take a significant decline once the Baby Boomers begin to retire in large numbers, taking their money out of the market to pay for their retirement lifestyles.  This theory is hotly contested, but so was the spherical nature of the Earth and the existence of land in the Western Hemisphere.  While Asset Market Meltdown is a little too doomsday for us, we all should be knowledgeable of it and how this generation can help to prevent it.

Baby Boomers
The approximately 78.2 million Americans born between 1946 and 1964 according to the US Census Bureau (www.census.gov). If you consider yourself Generation X or Y it is more likely than not that your parents are Boomers.

Balance Sheet
A financial report that entails the status of a corporation's assets, liabilities, and owners' equity for a specific date, usually at month end. It only captures this information as of that date; it does not cover a period of time.

Bear Market
A prolonged decline in stock prices that may occur for months or years. A bear market in bonds is usually caused by rising interest rates while a bear market in stocks is usually caused by investors who expect economic activity to decline.

Beneficial Owner
The person(s) entitled to the benefits of ownership even though another party such as a broker or bank--the nominal owner--actually has possession and title to the security.

Beneficiary
A person or entity who is the recipient of or will receive some or all proceeds of money or property held by the current owner upon a specified event or condition. Such vehicles as life insurance policies, inheritances, annuities or trusts may require that a beneficiary be named.

Blue Chip
A publicly traded company known for the quality and wide acceptance of its products, services and management, and for its ability to profit and pay dividends to shareholders. Examples of blue chip stocks are IBM and General Electric. The term originates from blue poker chips--the most valuable chips.

Book Value
An accounting term that states the equity value of an outstanding share of stock. A stock's book value is determined by dividing the amount of stockholders' equity by the number of common shares outstanding. A company's book value may be of no relevance to its to market value.

Bull Market
An advancing trend in stock prices that usually occurs for a time period of months or years. Bull markets are generally characterized by high trading volume.

Common Stock
Securities which represent an ownership interest in a public corporation. Owners are entitled to vote on the selection of directors and other important matters as well as to receive dividends when they are declared. If a corporation is liquidated, the claims of secured and unsecured creditors, bondholders and owners of preferred stock have priority over the claims of common stockholders.

CUSIP (Committee On Uniform Securities Identification Procedures)
Committee that assigns codes to securities for the purposes of identification--commonly just referred to as a "Cusip Number."

Custodial Account
An account opened on the behalf of a minor by an adult who acts as custodian. The custodian is usually one of the child's parents--both parents cannot be custodian. This type of account is opened because minors cannot enter into contracts. Thus, they cannot make securities transactions for themselves. Any assets placed into a custodial account are irrevocable. Once the minor is of majority (usually 18, but some states are 21), they may do what they please with the assets.

Custodian
A financial institution, such as a brokerage firm, or a bank that holds stock certificates and other assets on the behalf of a mutual fund, corporation or individual. An individual may also act as a custodian in the case of an account for an minor.

Custodian Bank
Bank assigned by a mutual fund to act as its custodian. The bank performs clerical functions and holds the fund's cash and securities.

Debt-to-Equity Ratio
1: The ratio of a company's securities with fixed charges to the company's common stock equity. To calculate, divide the total amount of preferred stock and bonds by the amount of common stock equity.

2: In the case of liquidation, the ratio indicates the extent owner's equity can cover creditors' claims. It is calculated by dividing total liabilities by total shareholders' equity.

Deflation
A persistent price decline of goods and services--the inverse to inflation. Deflation usually occurs during a recession and is characterized by supply exceeding demand, and while there is increased buying power, the amount of currency in circulation is greatly reduced. Marked deflation generally affects production and employment negatively. Deflation should not be confused with disinflation, which is a result of a slow down in the rate that prices increase.

Demographic Convergence Thesis
The investment thesis that believes that there are specific companies and industries that are taking advantage of the convergence between Generation X and Y’s newfound spending power and trend setting and the Baby Boomers’ desire to stay young forever and use their spending power to emulate the trends of the younger generations.  This convergence is seen most prominently in the retail sector but the thesis can be used to find generationally relevant investments across all industries. 

Distributions
1: The payment, to investors, of realized capital gains on securities within the portfolio of a mutual fund or closed-end investment company.

Diversification
Spreading risk by placing assets in different types of investments (i.e., mutual funds, stocks, bonds, etc.) and various companies in different industry groups (i.e., pharmaceutical, utility, airline, etc.).

Dividend
Distribution of a company's earnings to its shareholders, usually in the form of a quarterly check. The company's board of directors authorize and determine the amount of the dividend. Dividends are taxed as income in the year they are received by the shareholder. A mutual fund dividend is paid out of income and the shareholder's tax is dependent on whether the distributions originated from interest income, capital gains, or dividends received by the fund.

Dividend Reinvestment Plan (DRIP)
A program in which a dividend paying company (especially mutual funds) will automatically reinvest an investor's dividend to purchase additional shares of the company's stock. The dividend is still taxable by the IRS. In participating in a DRIP, investors use dollar cost averaging to increase their amount of capital in the stock.

Dow Jones Industrial Average
The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the Nasdaq. The DJIA was invented by Charles Dow in 1896. 

The "Dow" includes companies like Disney, Microsoft, McDonald's, Coke and Wal-Mart.

Earnings Per Share (EPS)
Amount of a corporation's earnings that are apportioned to each outstanding share of common stock. It is calculated by dividing net income minus preferred dividends and bond interest by the number of outstanding common shares. If all common stock equivalents--such as convertible bonds, preferred stock, rights and warrants--have been exchanged into common stock, earnings per share is considered to be "fully diluted."

Earnings Price Ratio (EPR)
A corporation's earnings per share related to its current stock price. It is used to compare the attractiveness of stocks, bonds, and money market instruments--also called "earnings yield."

Equity
1: Ownership interest in a business endeavor; net worth.

2: Ownership interest in a corporation through the purchase of shares of stock.

3: A customers ownership in an account at a brokerage firm. The customer's equity is the account's market value of long positions (commonly just referred to as "long market value") minus the account's debit balance, or the credit balance minus market value of short positions ("short market value").

ERISA (Employee Retirement Income Security Act of 1974)
Federal law passed in 1974 that regulates the establishment, management, operation, and funding of most non-government pension and benefit plans.

Expense Ratio
The percentage of fund assets paid for operating expenses and management fees, including 12b-1 fees, administrative fees, and all other asset-based costs incurred by the fund, except brokerage costs. Fund expenses are reflected in the fund's NAV. Sales charges are not included in the expense ratio.

Federal Reserve Board (FRB)
Acronym for the Federal Reserve Board, the governing body of the Federal Reserve System. The Federal Reserve Board is comprised of seven members appointed by the President and subject to confirmation by the Senate. In order to ensure members' independence from political influence, each member serves a 14-year term. The FRB is responsible for setting monetary policy for the U.S. and has the authority to determine bank reserve requirements, set the discount rate, regulate the availability of credit, and control the purchase of securities on margin.

Full Disclosure
Term which refers to the requirements established by the Securities and Exchange Commission regarding public divulgence of material facts by corporations.

Fund Class
To accommodate the largest number of investors, many funds offer separate classes of shares, each carrying different load structures. Shares offered with a front-end load are commonly called "Class A shares," and those with a back-end load "Class B shares." A fund's performance figures and NAVs will be different for different share classes.

Fund Inception Date
The date on which the fund began its operations.

GAAP (Generally Accepted Accounting Principles)
Detailed rules and procedures as defined by accepted accounting practices. Although the principles were established by the Accounting Principles Board, the board has since been superseded by the Financial Accounting Standards Board (FASB), a self-regulatory organization.

Growth Persistence
A measure of how consistently a fund has outperformed its equity or fixed-income peers.

Hedge Fund
Securities term that describes funds that use hedging techniques. For example, an option fund may use futures contracts on stock market indexes and short sales with stock options to limit risks.

Hedging
The use of almost opposite direction securities, instruments, or futures contracts as a method of attempting to reduce market risk. A perfect hedge is one that eliminates the prospects of any future gains or losses. Investors frequently try to hedge against inflation by purchasing assets (e.g, gold) that will rise in value faster than inflation.

Hemline Theory
Capricious idea that stock prices move in the same direction as women's dress hemlines. Short dresses and skirts are considered bullish signs that stock prices will rise. Longer dresses and skirts are considered bearish signs that stock prices will decline. Notwithstanding that it is occasionally correct, the hemline theory has endured more as wishful thinking than serious market analysis.

Individual Retirement Account (IRA)
A personal savings plan that offers tax advantages to save and invest for retirement. Contributions are often tax deductible in whole or in part, depending on individual circumstances, including compensation levels and participation in an employer sponsored qualified retirement plan. Income derived from investments in a traditional deductible or nondeductible IRA is tax deferred until withdrawn. Under certain circumstances, withdrawals from a Roth IRA are tax-free. Tax penalties may apply to IRA distributions taken before age 59 ½. The most you can contribute to your traditional IRA for 2002 has been increased to $3,000 or if you are 50 or older, $3,500. Keep in mind that contributions on your behalf to a traditional IRA reduce your limit for contributions to a 'Roth IRA'.

Inflation
The persistent and appreciable rise in the prices of goods and services. Moderate inflation is normally associated with periods of expansion and high employment--increasing dollars chasing a dwindling supply of goods. Hyperinflation, when prices rise 100% or more a year, causes people to lose confidence in the currency. During inflationary times, people often divert their investments into real estate and gold because they usually retain their value.

Initial Public Offering (IPO)
The first public issuance of stock from a company that has not been publicly traded before.

Investment Advisor
Individual or organization who provides investment advice for a fee. In most cases, investment advisors with more than 15 clients must register with the SEC and abide by the Investment Advisors Act of 1940. Brokers, banks and general circulation periodicals are exempted from registration with SEC. Most states require an investment advisor to pass an examination.

Investment Company
A company or trust, such as unit investment trusts and management companies, engaged in the business of investing the pooled funds of small investors in securities appropriate for stated investment objectives. For a fee, it provides investors with more diversification, liquidity, and professional management service than would normally be available to them as individuals.

Investment Company Act Of 1940
Federal law that regulates investment companies. The Act regulates how mutual funds and other investment vehicles of investment companies operate.

Investment Letter
A letter that is an agreement between a seller and a buyer who is purchasing private placement securities (unregistered securities under Regulation D). The investor affirms that the purchase is a long-term investment and not for resale. The securities are also called "letter stock".

IRA Rollover
An individual's reinvestment of assets received as a lump-sum distribution from a qualified tax-deferred retirement plan such as a corporate pension plan. The assets must have been received because of either the individual's retirement or employment termination. If the assets are deposited in an IRA within 60 days from the time they are withdrawn, the individual will not have any tax consequences and the assets will continue to accumulate on a tax-deferred basis.

Large Cap
Companies with over $5 billion in market capitalization (number of shares multiplied by the price per share). Companies are usually classified as either large cap, medium cap, small cap, or micro cap, depending on their market capitalization, but the dividing lines are somewhat arbitrary. When we use the term in this book, large cap means $5 billion or more, $1 billion to $5 billion for medium caps, $250 million to $1 billion for small caps, and less than $250 million for micro caps. If anyone argues with you about the definitions, just let us know, we’ll come and handle it.

Long
Brokerage lingo signifying that an investor has ownership of a security. Ownership rights entitle the investor to receive any income and dividends paid by the security and, once sold, to profit or to lose money. The owner also may transfer ownership of the security by sale or by gift.

Joint Account
An account that is owned jointly by two or more clients.

Joint Account Agreement
Form used to establish a joint account at a brokerage firm or a bank. It must be signed by all account owners.

Maintenance Fee
Yearly charge to maintain certain types of brokerage or bank accounts such as an IRA or an asset management account.

Management Fee
An expense paid by an investment company to the investment advisor for managing a portfolio. As disclosed in the prospectus, this fee is past onto the investor and is a fixed percentage of the fund's asset value.

Maximum Sales Charge
A combination of the highest possible deferred fees and front-end sales charges a fund can apply. The amount is generally relative to the amount of the investment, so that larger investments incur smaller rates of charge. If 0% is listed, then the fund does not have a front-end sales charge.

Sales charges will usually decrease over time and are generally proportionate to the size of the investment.

Minimum Automatic Investment
The smallest investment amount accepted for establishing an automatic investment plan.

Minimum Initial Investment
The smallest investment amount accepted for establishing a new account.

Minimum IRA Investment
The smallest investment amount accepted for establishing an individual retirement account.

Money Market
The market for short term debt instruments maturing in one year or less. Examples of money market instruments include Treasury bills, commercial paper, and certificate of deposits.

Money Market Fund
A mutual fund investing in short term money market instruments, such as certificates of deposit, treasury bills and commercial paper. The fund's net asset value is usually $1 a share and its interest rate goes up or down. Most money market funds offer checkwriting privileges.

Mutual Fund
An investment vehicle operated by an investment company which raises money from shareholders in the public and invests in a group of assets, in accordance with a stated set of objectives. mutual funds raise money by selling shares of the fund to the public, much like any other type of company can sell stock in itself to the public. Mutual funds then take the money they receive from the sale of their shares and use that money to buy different investments like stocks, bonds and money market instruments. 

Net Assets
The total amount of assets held by the fund.

Net Asset Value
NAV, or Net Asset Value, is the share price of a mutual fund. It is calculated by dividing the total net assets of the fund by the total number of shares outstanding. Value Line lists NAV as of the latest available month end prior to the issue date; for instance, for issue date February 24, the NAV is from January 31.

An investor purchasing shares of a fund with a front-end sales charge will pay a higher price--the offer price--which is calculated by dividing the amount invested by the actual number of shares purchased. For example, a person investing $1,000 in a fund with a 5 percent load and NAV of $10 actually invests only $950. He or she receives 95 shares and thus pays an offer price of $1,000 ~ 95 or $10.53.

New York Stock Exchange (NYSE)
The oldest and largest stock exchange in the United States--also known as the "Big Board" and "The Exchange". The exchange is a not-for-profit corporation consisting of 1,366 individual members. It is governed by a Board of Directors that is made up of 10 public representatives, 10 exchange members, and a full-time paid chairman and president.

The NYSE does not buy, sell, own or set the prices of securities traded there. The NYSE has operating divisions that are concerned with market operations, member firm regulation and surveillance, finance and office services, product development and planning, and customer relations. The NYSE imposes requirements on corporations who wish to have their securities listed on the exchange.

No-load Fund
A mutual fund whose shares are sold without a sales commission and without a 12b-1 fee of more than .25% per year.

Percent of Net Assets
The percentage of a fund's entire net assets represented by an individual holding.

Price/Book Ratio
A ratio of the price of a stock to its company's book value per share. Companies that are older, slower-growing, or depressed in price because of poor current earnings performance generally sell at low price/book value.

Price/Earnings Ratio
The relationship between a stock's price and its earnings per share. It is calculated by dividing the stock's price per share by earnings per share for a twelve month period. For instance, a stock selling for $25 a share and earning $5 a share is said to be selling at a P/E ratio of 5.

The ratio, also known as the "multiple", gives an investor an approximation of how much they are paying for a corporation's earning power. Low P/E stocks are usually in mature industries. They may be blue chip or out of favor companies. In either case, their growth potential is limited.

Pension Fund
A fund that is set up to pay pension benefits to retired employees of a corporation, government entity, or to other organizations. The fund's earnings are tax deferred until withdrawn by the retiree, who is then responsible for paying taxes on the amount withdrawn.

Portfolio
The holdings of more than one stock, bond, cash equivalent or other asset by an individual or institution. A portfolio may be designed to achieve the investors goals--such as obtaining maximum returns or reducing risk through diversification.

Prospectus
A printed document that summarizes a corporation's registration statement for a new issue of non-exempt securities that was filed with the SEC. It details material information about the corporation and the security being issued. A prospectus must be given to all buyers and potential buyers of the new issue.

A preliminary prospectus is given to investors when brokers obtain indications of interest. Although the document does not have all the information included in the offering circular, it does include the major facts. A preliminary prospectus is often called a "red herring" because its front-page notice is printed in red ink. The notice states that the preliminary prospectus is "subject to completion or amendment" and "shall not constitute an offer to sell...".

Proxy
A written authorization by a shareholder allowing a representative to vote for or against business proposals and directors at annual meetings. The results of these votes are announced at the meeting.

Recession
As reflected in the gross national product, a decline in economic activity in at least two consecutive quarters.

Redemption
The repayment of the principal (par) amount of a debt security, or a preferred stock, at or before its maturity. Mutual fund shares are redeemed at net asset value when a shareholder liquidates their shares.

Return On Equity (ROE)
An amount, stated as a percentage, that informs common shareholders how effectively the funds invested are being utilized during a specific period. Trends can be found if current and prior periods are compared and if compared with industry composites, it shows whether or not the company is keeping up with its competitors. The rate is calculated by dividing net earnings by average stockholders' equity.

Risk/Reward Ratio
The greater the investment risk--the greater the expected return. The ratio places an investor's desire for capital preservation at one end of the scale and a desire to maximize returns at the other end.

Redemption Fees
An annual amount charged when assets are withdrawn from some funds. Unlike deferred fees, however, some redemption fees go back into the fund itself, rather than into the fund company's pockets, and thus do not represent a net cost to shareholders.

Roth IRA
An IRA established in the Taxpayer Relief Act of 1997 which allows taxpayers, subject to certain income limits, to save for retirement while allowing the savings to grow tax-free. Taxes are paid on contributions, but withdrawals, subject to certain rules, are not taxed at all.

Russell 2000
An index measuring the performance of the 2,000 smallest companies in the Russell 3000 Index, which is made up of 3,000 of the biggest U.S. stocks.  There are more than 7,000 stocks overall that are publicly traded.

S&P 500
An index consisting of 500 stocks chosen for market size, liquidity and industry grouping, among other factors. The S&P 500 is designed to be a leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large-cap universe.

Companies included in the index are selected by the S&P Index Committee, a team of analysts and economists at Standard & Poor's. The S&P 500 is a market-value weighted index—each stock's weight in the index is proportionate to its market value.

Securities And Exchange Commission (SEC)
A federal agency created in 1934 by an act of Congress to regulate various aspects of the securities industry. The SEC is made up of five commissioners, each appointed by the President, with the advice and consent of the Senate, for a five-year term. In order to ensure the political independence of the commissioners, no more than three may be from the same political party at any one time.

Selling Short
The sale of a security that the investor does not own in order to take advantage of an anticipated decline in the price of the security. In order to sell short, the investor must borrow the security from his broker in order to make delivery to the buyer. The short seller will eventually have to buy the security back, or buy to cover, in order to return it to the broker. Short selling Is regulated by Regulation T of the Federal Reserve Board.

Settlement Date
The date upon which the buyer and seller of a security are expected to settle a transaction, as evidenced by the seller delivering the security and the buyer paying for it. Most securities, but not all, settle in three business days.

Shares
The number of shares of a particular stock held by a fund.

Shareholder
An individual who owns one or more shares of a corporation or mutual fund. Shareholders may earn dividends and shareholders of common stock have voting rights with regard to matters that affect the corporation.

Small-cap Stocks: Stocks of smaller-sized companies, which are generally considered to be companies whose total outstanding shares are valued at less than $1 billion.

Standard Deviation
A measure of the variability of a fund's returns. The figure indicates the number of percentage points above or below the fund's average annual return within which any given annual return can be expected to fall two-thirds of the time.

Weighted-Average Market Capitalization
Market capitalization is the value of a corporation as measured by multiplying the number of common shares outstanding by the current market price of a share.

Yield
A measure of net income (dividends and interest) earned by the securities in a fund’s portfolio minus the fund’s expenses during a specified period. A fund’s yield is expressed as a percentage of the maximum offering price per share on a specified date.