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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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
Q
No entries for this letter
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.
T
Trading. Trading refers to the buying and selling of
investments, such as stocks and bonds, for a mutual fund.
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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