It is very hard to understand a new subject unless you know the basic vocabulary used to talk about that subject. Here we have provided a glossary of words and terms used in the mutual fund industry. ==================== 12b-1 Fee - Named after the Securities and Exchange Commission ruling that permits mutual funds to pay certain expenses, such as advertising and distribution costs, out of fund assets. The fund's prospectus details 12b-1 charges, if applicable. 401(k) - A qualified employee benefit plan in which employee contributions are made on a pre-tax basis. Both employer and employee contributions compound tax-free until withdrawn. Adviser - The organization employed by a mutual fund to give professional advice on the fund's investments and to administer its assets. Asked Price - The price at which a mutual fund's shares can be purchased. It is the current net asset value per share plus sales charge, if any. For no-load funds, bid and asked prices are the same. (See Bid Price) Automatic Reinvestment - A big advantage of mutual funds is the ability to reinvest dividends and capital gains distributions. These reinvested dividends are used to buy more shares of the fund and increase your holdings. Balanced Funds - Generally have a three-part investment objective: 1) to conserve the investors' principal, 2) to pay current income, and 3) to promote long-term growth of both principal and income. Balanced funds have a portfolio mix of bonds, preferred stocks, and common stocks. Bankers'Acceptances(BAs) - Short-term,non-interest-bearing notes sold at a discount and redeemed at maturity for full face value. Primarily used to finance foreign trade. BAs represent a future claim on a U.S. bank that provides lines of credit to U.S. importers. BAs are collateralized by the goods to be sold and are guaranteed by the importer's U.S. bank. Basis Point - Term used to described the movement of interest rates, expressed in hundredths of a percent. One hundred basis points equals one percent. An increase from 7 percent to 8 percent would be a change of 100 basis points. Bear Market - A sustained period in which prices of stocks or bonds drop. Usually indicates a period of poor economic activity. The opposite of a bull market. Bid Price - The price at which a fund's shares are redeemed (bought back) by the fund, generally the net asset value per share. Also known as the sell price or redemption price. Blue Chip - The common stock of a well-known national company with a history of earnings growth and dividend increases, e.g., IBM, General Motors, AT&T, ect. Blue Sky Laws - Laws of the various states governing the sale of securities including mutual fund shares. Bond - A security that represents debt of an issuing corporation (or government). Usually, the issuer is required to pay the bondholder a specified rate of interest for a specified time and then repay the principal amount, or face value, of the bond at maturity. Bond Fund - A mutual fund whose portfolio consists primarily of bonds. The emphasis is generally on income rather than growth. Broker - A person in the business of effecting securities transactions for others. Generally paid by commission. Bull Market - A sustained period in which prices of stocks or bonds are advancing (going up). Usually indicates a period of economic growth. The opposite of a bear market. Call Option - A contract that gives the holder the right to purchase a specified security at a specified price by a specified date. Capital Gains - Profits realized from the sale of an investment. Capital Gains Distribution - When a mutual fund sells an investment for a profit, it realizes a capital gain. Most mutual funds distribute these capital gains once a year. Capital Growth - An increase in the market value of a mutual fund's securities, as reflected in the net asset value of the fund shares. Cash Equivalent - A term used for assorted short-term instruments such as U.S. government securities, CDs, and short-term municipal and corporate bonds and notes. Certificates of Deposit (CDs) - Usually issued by banks and other financial institutions, certificates of deposit pay a fixed rate of interest for a specific period of time. Also known as "time certificates of deposit". Closed-End Fund - Investment company that issues a fixed number of shares which are then bought and sold on a stock exchange or over the counter. The price of a closed-end share is determined by supply and demand - it may be more or less than the fund's net asset value. Commercial Paper - Short-term, unsecured promissory note issued by corporations and financial institutions to finance short-term credit needs. Compound Interest - When you deposit money in the bank, it earns interest. When that interest also begins to earn interest, the result is compound interest. Compounding also occurs if income or dividends from mutual funds are reinvested. Because of compounding, money is able to grow much faster if an investment's earnings are left in the account. Consumer Price Index (CPI) - Index that notes the change in prices for consumer goods and services. Custodian - The organization (usually a bank or trust company) that keeps custody of the securities and other assets of a mutual fund. Debenture - A bond secured only by the credit worthiness of the corporation. Distributions - Dividends paid from investment income and payments made from realized capital gains. Diversification - The spreading of one's investment risk by putting assets in a wide-ranging portfolio of securities. Most mutual funds are highly diversified; most containing dozens, even hundreds or thousands of individual stocks. Dividend - When companies pay part of their profits to shareholders, those profits are called dividends. Dollar Cost Averaging - Investing a fixed amount of money in mutual fund shares at regular intervals, such as monthly or quarterly, rather than all at once. This reduces the average share costs to the investor, who acquires more shares during periods of lower prices and fewer shares during periods of higher prices. Dow Jones Industrial Average (DJIA) - Stock market index of 30 blue chip industrial stocks issued by Dow Jones & Co. to indicate changes in the overall market. Equity - When you own part of something, your home or car, for example, you have equity in it. Stock is also an equity investment because each share you own represents part of the company that issued it. Exchange Privilege - Mutual fund families generally allow shareholders to transfer funds from one fund in the family to another. There are usually restrictions on how often the privilege can be exercised. (This is generally considered a sale and new purchase for tax purposes.) Expense Ratio - The amount, expressed as a percentage of total investment, that shareholders pay for mutual fund operating expenses and management fees. This money, which may be as high as 1% or more of shareholders assets, is taken out of the funds current income and is disclosed in the annual report to shareholders. FDIC (Federal Deposit Insurance Corporation) - The agency of the U.S. government whose basic purpose is to insure bank deposits. Currently, depositors are covered up to $100,000 at an insured bank (this is subject to change). IRA (Individual Retirement Account) - Personal retirement account that an individual with employment income can fund with tax-deductible contributions of up to $2,000 per year. All earnings within the account accumulate tax-deferred until the funds are withdrawn - generally at retirement. Early withdrawals - generally those made before age 59 1/2 - may be subject to a 10% penalty tax as well as ordinary income taxes. IRA Rollover - The transfer of IRA money from one investment and the placement (or roll-over) of that money into another investment. There are restrictions on this and heavy tax consequences may occur if not done properly. Investment Company - A corporation, trust, or partnership which invests the pooled funds of its shareholders in securities appropriate to the fund's investment objective. Mutual funds are the most popular type of investment company. Investment Objective - The goal, such as current income, long-term growth, growth and income, ect., which a mutual fund pursues. This is always listed in the prospectus of the fund. Leverage - The use of borrowed money for investment purposes. Can increase profits or losses and increase risk. Liquidity - The ability of an asset or security to be converted quickly and easily into cash. Bank deposits and mutual fund shares are examples of a liquid investment. Real estate is not considered liquid because it may take a long time to sell. Load Fund - Load funds are simply funds with a sales charge. They are generally offered through brokers, financial planners, or insurance agents. A load is a sales commission that goes to the person selling the fund shares. (See No-Load Fund) Management Fee - The amount paid by mutual funds to their investment advisers. The average annual fee is about one-half of one percent of fund assets. Margin Account - A brokerage account that allows an investor to buy or sell securities on credit. An investor can purchase additional securities against the value of the securities in the account. Maturity - The length of time before a bond is due to be repaid in full. Money Market Instruments - Short-term credit instruments such as Treasury bills, bankers' acceptances, certificates of deposit, and bank repurchase agreements. Municipal Bonds - Debt obligations of state and local entities. Generally, the interest earned is free from federal taxation and often from state and local taxes as well. Mutual Fund - A professionally managed investment company that combines the money of many people and invests this money in a wide variety of different securities. Most mutual funds are open-ended - meaning that they continuously sell new shares to investors as well as redeem, or buy back shares. National Association of Securities Dealers (NASD) - A self-regulatory organization of brokers and dealers which administers rules and regulations to prevent fraudulent acts against the investing public. Net Asset Value Per Share (NAV) - This is the market value of a mutual fund's total net assets, divided by the number of shares outstanding. No-Load Fund - A mutual fund that does not charge a sales commission, or load, when you buy shares. Generally, no-load mutual fund shares are purchased directly from the fund. (See Load-Fund) Open-End Mutual Fund - The more technical description of a mutual fund. The term open-end refers to the fact that this type of mutual fund is continuously offering new shares to investors as well as redeeming, or buying, them back. P/E (Price/Earnings) Ratio - The relationship between a stock's price and the amount of earnings per share. Prospectus - The official booklet that describes a mutual fund. The prospectus contains information as required by the Securities and Exchange Commission on such subjects as the fund's investment objectives and policies, services, fees, restrictions, officers and directors, how shares are bought and redeemed, and the fund's financial statements. Proxy - The written transfer of voting rights to someone who will then vote according to the wishes of the shareholder. Usually done if the shareholder cannot be present at a stockholders' meeting. Put Option - A contract that gives the holder the right to sell a specified number of shares by a specified date at a specified price. Redemption Price - The price at which a fund's shares are redeemed (bought back) by the fund, generally the net asset value per share. Also known as the sell price or bid price. Reinvestment Privilege - A service provided by most mutual funds for the automatic reinvestment of shareholder dividends and capital gain distributions into additional shares. Sales Charge - A commission paid to a broker or other sales professional when purchasing shares of a mutual fund. The charge is added to the net asset value per share when determining the asked price. Securities & Exchange Commission (SEC) - An agency of the federal government with the power to enforce federal laws pertaining to the sale of securities. Regulates and governs stock exchanges, stockbrokers, investment advisers and mutual funds. SIPC (Securities Investor Protection Corporation) - An agency established by Congress to provide customers of most brokerage firms with protection similar to that provided by the FDIC for bank depositors, in the event that a firm is unable to meet its financial obligations. Speculative - A high degree of risk. Stock, Common - A security that represents ownership in a corporation. Stock, Preferred - A security that pays a fixed dividend and has first claim on profits over common stocks for the payment of that dividend. Total Return - A calculation that includes the fund's change in net asset value plus the value of capital gains and dividends distributed and presumed reinvested. Transfer Agent - An organization, usually a bank, that is employed by a mutual fund to prepare and maintain shareholder account records. Treasury Bill (T-Bill) - Short-term debt (maturities of one year or less) issued by the U.S. government at a discount from face value. Treasury Bond - Debt obligation issued by the U.S. government with a maturity ranging from 10 to 30 years. Treasury Note - Debt obligation issued by the U.S. government with a maturity ranging from 1 to 10 years. Turnover Rate - Indicates how active the fund traded securities in the past one year period. The higher the turnover, the greater the fund's brokerage costs. These costs can lower your return because they reduce the profits (or increase the losses) on securities trades. Wire Transfer - Use of a bank to send money to a fund or receive money from a fund. Withdrawal Plan - A service many mutual funds offer to their shareholders who wish to receive payments at regular intervals - usually monthly or quarterly. The payments are drawn from the fund's dividends and capital gain distributions, if any, and from principal, as needed. Yield - The dividend or interest income that a mutual fund pays out in one year, expressed as a percentage of the fund's net asset value. Zero-Coupon Bond - A bond that is sold at a discount (less than its face value) and pays no interest until it is redeemed at face value on a specific date. *** End of Chapter ***