Glossary of Terms

401(k) Plan

A type of defined contribution qualified retirement plan that permits employees to defer paying current income taxes by contributing a portion of their salary to the plan. The name of the plan reflects the section of the Internal Revenue Code defining the basic rules for these plans. These plans may be established by for-profit and tax-exempt entities.

403(b) Plan

A type of defined contribution qualified retirement plan named for the section of the Internal Revenue Code that permits employees of certain approved institutions, such as schools, universities, hospitals and certain other 501(c)(3) non-profit organizations, to defer paying current income taxes by contributing money to the plan for retirement.

457 Plan

A tax-exempt deferred compensation program made available to employees of state and federal governments and agencies. A 457 plan is similar to a 401(k) plan, except there are never employer matching contributions and the IRS does not consider it a qualified retirement plan. The name of the plan reflects the section of the Internal Revenue Code defining the basic rules for these plans.

Accidental Death Benefit

A provision that can be added to some life insurance contracts for payment of an additional benefit in the event death is caused by an accident, as defined in the rider. In many cases the original policy death benefit is doubled in the event of accidental death, which is why this benefit is sometimes called double indemnity.

Active Management

An investment management style whereby an investor or professional money manager actively buys and sells securities in order to maximize portfolio returns. This is in contrast to a Passive Management style.

Adjustable Rate Mortgage

A mortgage loan that has an interest rate that may change. Also known as ARMs, these loans typically set an interest rate for some period of time, such as 1 year or 5 years, after which the rate may be adjusted periodically, such as annually. Most ARM loans also have an annual interest rate cap to guarantee that the rate will not increase more than a certain amount in one year, and a lifetime ceiling which is the highest rate the loan can charge over its lifetime.

Adjusted Gross Income

Also known as AGI, this is the amount upon which your federal income tax liability is based after certain adjustments have been made, but before deductions and exemptions. AGI can be found on the last line on the front side of the IRS 1040 income tax form.


The gradual elimination of a debt, such as a mortgage, over a period of time. Each loan payment consists of a portion of principal and interest until the total amount of the debt is paid.


The conversion of an amount of money into a guaranteed income stream through an annuity contract.


A contract offered by a life insurance company designed to provide payments to the owner for a specified period of time, usually beginning after retirement. Prior to withdrawal of funds, any earnings from variable investments or interest paid on fixed accounts accumulate income tax-deferred, meaning they are not taxed until withdrawn.

Asset Allocation

A common investment strategy that involves spreading investments among different kinds of assets, such as stocks, bonds, real estate and cash, with the objective of maximizing return while minimizing risk. The proper mix of investments for each individual varies based on each person’s investment objectives and time horizon.

Asset-Backed Securities

Investment securities that are backed by other assets, such as mortgage-backed securities.

Asset Class

A broad group of individual securities or investments that have similar characteristics, such as stocks, bonds, real estate or cash.

Back-end Load

Sales charge applied to an investment when the shares in the investment are sold.

Bear Market

An extended period in which investment prices fall, accompanied by widespread investor pessimism. Bear markets commonly occur during periods of rising inflation or during recessions when unemployment is high. A sudden or sharp downturn in investment prices or a downturn that is short-lived is known as a market correction. Bear market is the opposite of bull market.


An individual, company, trustee, or estate that receives, or may become eligible to receive, payments or benefits from an insurance policy, retirement plan, annuity, trust, will, or other contract.


A measurement of relative investment risk, it compares the volatility of an investment to that of some relevant benchmark (often the S&P 500 stock index). A beta less than 1.0 indicates less volatility than the index; a beta greater than 1.0 indicates greater volatility than the index, and a beta equal to 1.0 means the fund is as volatile as the benchmark itself.

Blue Chip Stock

The stock of a large, national company with a solid record of stable earnings and/or dividend growth and a reputation for high quality management and/or products.More generally, anything of very high quality.


A debt instrument issued by corporations, federal, state or local governments or other institutions for the purposes of raising capital. Bonds are issued for periods longer than one year, and the issuer agrees to pay back both principal and interest due or the face amount of the bond in the case where interest is not due. The purchaser of the bond becomes a creditor to the issuer but does not hold any ownership interest in the issuer.


An individual or company that effects securities trades for itself or on behalf of customers. When effecting trades on behalf of customers, the firm is said to be acting in the capacity of a broker. When trading for its own account, the firm is acting as a dealer.

Bull Market

An extended period in which investment prices rise faster than their historical averages. Bull markets are commonly the result of economic recovery, or positive investor psychology. This is the opposite of a Bear Market.

Callable Bond

A bond issued with a feature that permits the issuer to redeem the bond prior to the maturity date.

Capital Gain (Loss)

The difference between the purchase price of an asset and its selling price.

Cash Value

The amount of cash available to a policy owner upon surrender of certain life insurance policies.Also known as surrender value.

Certificate of Deposit

A savings instrument issued by a bank that usually pays a fixed amount of interest over a fixed period of time, usually from a few weeks to several years, and matures on a stated date. Bank Certificates of Deposit are insured by the FDIC.

Certified Financial Analyst (CFA)

A professional designation focusing on investing and portfolio management. The designation is granted by the Association for Investment Management and Research, and candidates must pass exams covering topics such as financial accounting and quantitative analysis.

Certified Financial Planner (CFP)

Administered by the College for Financial Planning, the CFP is one of the most popular professional financial designations. Candidates have to pass a rigorous exam administered by the CFP Board of Standards covering insurance, taxation, investments, retirement and estate planning.

Certified Public Accountant (CPA)

A professional designation that indicates the individual has been certified at the state level to practice accounting, which includes complete tax preparation and the reporting and analysis of financial transactions.

Chartered Financial Consultant (ChFC)

The ChFC designation is granted by The American College, and candidates must pass a total of 8 exams covering a wide range of topics in the areas of insurance, investments and financial planning. ChFC is generally considered to be a peer designation to the Certified Financial Planner.

Chartered Life Underwriter (CLU)

The CLU designation is granted and administered by The American College. Candidates must pass a total of 8 exams covering a range of topics focused on life insurance and its application in advanced situations.


An asset (such as real property) that backs a financial security.

Common Stock

Units of ownership in a public corporation represented by shares that constitute a claim on the corporation’s earnings and assets. Shareholders of common stock can vote in the election of directors and other issues that arise at shareholder meetings, and may be entitled to receive dividends on their holdings. Common stock tends to have more potential for appreciation than some other classes of stock (i.e., preferred stock).

Compound Interest

Interest that is calculated by applying the stated percentage rate to both the original capital amount and the accumulated interest of previous periods.

Consumer Price Index (CPI)

A measure of the change in prices consumers pay for certain goods, measured by the Bureau of Labor Statistics.

Contingent Beneficiary

Legally appointed recipient of insurance or annuity proceeds who receives contract benefits in the event the primary beneficiary is deceased or defunct.

Contingent Deferred Sales Charge

Also known as a back-end load, it is a sales charge incurred upon surrender of an investment or insurance contract. May also be referred to as a surrender charge or redemption fee.


The interest payment due on a bond. A bond with a 6% coupon pays 6% interest.

Coverdell Education Savings Account

Formerly known as the Education IRA, it is a savings vehicle designed for the express purpose of funding a college education. Contributions are not federally tax deductible, but earnings used for qualified education expenses receive beneficial income tax treatment.

Credit Risk

The possibility that the issuer of bonds or other debt obligations may not repay principal and/or interest and that loss will result.

Currency Risk

The risk of losing money on an investment due to changes in the exchange rate of foreign currencies. This risk typically affects investments held in foreign countries or purchased in foreign currencies. Also called Exchange Rate Risk.


An individual or company charged with providing physical care and custody for investments or property.

Death Benefit

An amount payable upon the death of the owner of a qualified plan, life insurance policy, variable annuity, or other financial instrument. Payment is made to the named beneficiaries on the contract or plan or to the estate of the deceased in the event that no beneficiary exists. Methods of payment can vary, depending upon the terms of the plan/contract and applicable tax laws.

Decreasing Term Insurance

Life insurance in which the premiums remain level each year, but the death benefit decreases annually.


The failure of the borrower (issuer) to make required interest or principal payments on a debt, such as a bond or mortgage loan.

Default Risk

The investment risk associated with the possibility of default of the issuer of a bond on payment of interest and/or principal.

Deferred Annuity

An annuity contract issued with the intent to receive payments or an income stream at some time in the future.

Deferred Sales Charge

Also known as a back-end load, it is a sales charge incurred upon surrender of an investment or insurance contract. May also be referred to as a surrender charge or redemption fee.

Defined Benefit Plan

A type of employer-sponsored qualified retirement plan that pays a certain, or defined, amount of income at retirement. Retirement benefit payments are usually based on a formula of salary and years of service. Contributions to the plan are driven by the amount of benefits to be paid out for each employee.

Defined Contribution Plan

A type of employer-sponsored qualified retirement plan that specifies the contributions made to the plan, either as a flat dollar amount or as a percent of compensation. The employee, the employer or both may make contributions to the plan. Unlike a defined benefit plan, where retirement benefits are pre-determined, in a defined contribution plan, benefits are determined based on the contributions and investment performance of the plan.


A period of decline of general price levels within the economy. It is the opposite of inflation.

Direct Rollover

A rollover from an IRA or employer-sponsored qualified plan effected directly between the plan trustees or custodians. Also known as a trustee-to-trustee transfer, the funds in the plan never pass into the hands of the plan owner. Direct rollovers avoid the onerous income tax withholding requirement generally associated with a 60-day rollover in which funds are handed over to the plan owner. Direct rollovers can only be done once per year per account.

Discount Broker

Individual or firm that effects the purchase and sale of securities on behalf of customers at a commission rate lower than that typically charged by full-service brokers. Discount brokers also typically provide fewer services than full-service brokers.

Discretionary Account

A brokerage account in which the owner has authorized another individual to effect trades on behalf of the owner. Some individuals choose to give their brokers discretionary trading authority to buy and sell securities to achieve certain overall investment objectives. Discretionary accounts can be set up with certain restrictions on trading authority as a means to protect the interest of the customer.


The practice of spreading investments within a portfolio across different types of investments that react to market and economic changes differently, such as stocks, bonds, cash or real estate. Investors diversify in an attempt to reduce overall portfolio risk. The way in which a portfolio is diversified varies with each individual investor and of itself, does not guarantee that portfolio risk is in fact reduced.


Corporate earnings paid out to investors on a per share basis. In the case of an individual stock, the dividend is declared by the individual company on a per share basis.

Dollar Cost Averaging

The process of purchasing securities or shares at regular intervals with a set dollar amount. When share prices are lower, the investor buys more units or shares, and fewer when prices are higher. Over time, this seeks to net the investor a better average price for all shares purchased over the life of the investment. It is best employed during times of volatility and price fluctuation. Dollar cost averaging does not ensure a profit nor guarantee against loss. Investors should consider their financial ability to continue purchases through periods of low price levels.

Double Indemnity

A provision in some life insurance contracts whereby the death benefits payable are doubled in the event of accidental death. Also known as accidental death insurance.

Dow Jones Industrial Average

The price-weighted average of 30 actively-traded blue chip stocks, primarily industrial. It is the most widely quoted indicator of the overall condition of the stock market.

Early Withdrawal Penalty

The penalty charged for taking funds from an account or contract before maturity as with a certificate of deposit. In a qualified plan, IRA or non-qualified tax-deferred annuity, it is the 10% federal excise tax charged for non-qualified withdrawals made prior to age 59.5.

Earnings per Share

The amount of earnings paid out by a company divided by the total number of shares outstanding for that company. A company’s earnings per share can be used as one factor in determining the investment value of a company.

Economic Indicator

Any one of several statistical measures that provide information on economic trends. Some of the more popular indicators include Gross Domestic Product, Housing Starts and the Consumer Price Index.

Education IRA

Now known as the Coverdell Education Savings Account, it is a savings vehicle designed for the express purpose of funding a college education. Contributions are not federally tax deductible, but earnings used for qualified education expenses receive beneficial income tax treatment.

Effective Annual Interest Rate

The actual interest rate that accrues on an investment or loan after taking into account the effects of compounding.

Emerging Market

A new financial market opportunity in a developing country.

Employer Matching Contribution

In an employer-sponsored retirement plan, it is the amount of money contributed to the plan by the employer calculated as a portion of the employee’s contribution.

Equity Securities

Any security representing ownership in the underlying investment.

Exchange Rate Risk

The risk of losing money on an investment due to changes in the exchange rates of foreign currencies. This risk typically affects investments held in foreign countries or purchased in foreign currencies. Also called Currency Risk.

Exclusion Ratio

An actuarial calculation that determines the portion of an annuity income payment that is not subject to income tax because it is deemed to be a return of principal. After annuitization, each annuity payment consists of a portion of interest, which is income-taxable, and a portion of principal, which is not income-taxable. The exclusion ratio determines the value of that amount for income tax purposes.

Face Amount

The benefit amount of a life insurance policy paid upon death of the insured.

Fee-based Financial Planning

A form of financial planning in which the planner charges a flat fee or hourly rate for creating the plan itself. Fee-based financial planners may or may not also provide product solutions to fulfill the plan.


Any person who exercises discretionary authority or control over the assets of another person or company. This control includes having the legal authority to make investment and financial decisions about those assets.


Abbreviation for the National Association of Securities Dealers. The FINRA is a securities industry self-regulatory agency charged with regulating the NASDAQ and over-the-counter securities markets. The FINRA also establishes the testing requirements and administers the registration of individuals who want to sell different types of securities to the public.

Financial Risk

The risk of financial loss on a bond due to the issuer not being able to pay the principal or interest due.Also called credit or default risk.

Fixed Income Securities

An investment that pays a fixed or stated interest rate as in the case of some bonds, annuities, or money market securities.

Fundamental Analysis

A method of analyzing the investment value of a company by reviewing that company’s financials, including their assets, revenues, debt, management and products. It reviews data pertinent to the company itself and does not include a review of the general economy or market conditions.

Guaranteed Investment Contract (GIC)

Also called a GIC. A contract issued by an insurance company that promises to pay a fixed rate of interest. Commonly used as investments in pension plans.

Guaranteed Renewable

A life or health insurance policy that requires the insurer to renew the policy for a certain amount of time regardless of the current health or condition of the insured.

Illiquid Asset

An asset that is generally considered not easily converted to cash. This typically includes things such as art and collectibles and some real estate.

Immediate Annuity

An annuity contract that is immediately annuitized into an income stream.

Income Stock

The stock of a company that has a consistent record for paying relatively high dividends.

Individual Retirement Account (IRA)

A personal retirement savings account that permits investors to save up to $3,000 (or 100% of compensation, whichever is less) per year. Some or all of the $3,000 contribution to the account may be income tax deductible in a traditional IRA, and the earnings in the account are income tax-deferred. Withdrawals may be taken without penalty after age 59½.


The persistent and appreciable rise in the general level of prices of goods and services (as measured by the CPI) and the resulting loss in the purchasing power of money.

Inflation Risk

The danger of rising costs. If an investment’s return is lower than the rate of inflation, its earnings may actually reflect a net negative return or a real loss measured in today’s dollars. This applies especially to the less aggressive income-type investment options.

Insurable Interest

In the case of life insurance, it is the individual(s) who would suffer a loss if the insured died, establishing eligibility to be beneficiaries on the policy. If there is no insurable interest, the insurance company will not issue the policy.


A contract with a company or individual establishing a promise to pay for some pre-defined potential future loss in exchange for periodic payments.


The individual, group or physical property for which an insurance policy is issued.

Interest Rate Risk

The inverse relationship between market interest rates and bond prices. As interest rates rise, bond prices decline because an investor seeking to sell an 8% bond in a 9% market will have to sell the bond at a discount to provide a competitive return to the purchaser of the bond.

Internal Revenue Service

An agency of the U.S. Department of the Treasury charged with enforcing tax laws, issuing interpretations of the tax law, auditing tax returns and making criminal investigations.

Investment Objective

Stated goal of a portfolio or fund, such as growth, income or tax-free income.

Investment Policy

The stated investment strategy intended to achieve the investment objective. The investment policy may define some of the specific investment tactics that the investment managers will or will not engage in to achieve their goals.


In conjunction with insurance contracts, it is a provision that is not able to be changed without express written permission of another party or the court. For example, on a life insurance contract an irrevocable beneficiary cannot be changed without the beneficiary’s written permission.

Issue Date

The date when a contract is issued by the company and officially in force.

vJoint and Survivor Annuity

An annuity contract issued on the lives of two individuals. Annuity payments continue in whole or in part until both annuitants are deceased. May also be called a Joint Life Annuity.

Joint Life Annuity

A single annuity contract issued on the lives of two individuals, such as a husband and wife. Annuity payments continue in whole or in part until both annuitants are deceased. May also be called a Joint and Survivor Annuity.

Joint Tenancy with Right of Survivorship

A legal property ownership arrangement between two or more individuals whereby the surviving owners inherit the deceased owner’s interest in the property at death.

Junk Bond

Bond with a credit rating of BBB or lower by rating agencies. Although commonly used, the term has a pejorative connotation, and issuers and holders prefer the securities to be called high-yield bonds. These bonds carry the potential for higher returns and higher risks.

Large Cap

A company with a market capitalization of sufficient size to be considered large. Although not a hard and fast rule, a large cap company generally has more than $5 billion in market capitalization.

Legal Risk

The risk of potential loss due to some legal uncertainty or proceeding such as bankruptcy.

Legislative Risk

The risk of potential loss due to a change in the law that may affect the value of the investment.

Life Annuity

An annuity contract set up to pay out an income stream over the life of a single individual. Payments cease when the annuitant dies.

Life Expectancy

The length of time an individual is expected to live based on mortality experience. An individual’s life expectancy will affect insurance premium costs and the value of annuity payments.

Life Insurance

An insurance contract based on the life of an individual that pays out a benefit to a named beneficiary or an estate upon death of the insured.

Line of Credit

An extension of credit to a borrower by a financial institution whereby the borrower can draw upon available funds as needed up to a maximum approved amount. A home equity line of credit typically uses the borrower’s home equity as collateral for the loan.


The ability to convert assets into cash or cash equivalents without significant loss in the value of those assets. For instance, investments in money market funds and listed stocks are generally considered to offer greater liquidity than real estate.

Liquidity Risk

The potential risk associated with the need to turn an asset into cash quickly if needed.

Living Benefits

An additional benefit available for purchase on some life insurance policies that provides for benefits to be paid out while the insured is still alive.


A sales charge or commission charged to an investor for investing in or redeeming an investment.

Lump Sum Distribution

A distribution or withdrawal from an investment taken in the form of a single large payment.

Market Capitalization

In reference to investing, it is the market value of a company, calculated by multiplying the price per share of the company’s stock by the total number of outstanding shares.

Market Risk

The investment risk associated with simply being invested in the market and being subject to its daily ups and downs.

Market Timing

An investment strategy whereby investors attempt to predict market directions or trends and then time their transactions to effect a profit.


In certain employer-sponsored retirement plans, the employer is permitted to match the employee’s contribution to the plan up to certain limits.

Maturity Date

The date on which the principal amount of a debt instrument, such as a note or bond, or an annuity contract becomes due and payable.

Mid Cap

While there is no hard and fast rule, it is a company with a market capitalization generally between $1 billion and $5 billion. Also known as medium cap.

Minimum Distribution

In an IRA, the IRS requires that the owner begin taking minimum annual payments at the owner’s age of 70 1/2. If the minimum payment amount is not taken, there are IRS income tax penalties due on the amount that should have been taken from the account. Also known as the Required Minimum Distribution or RMD.

Money Market Instruments

Debt securities, typically with a maturity date of one year or less. A money market fund invests in these securities.

Money Purchase Pension Plan

An employer-sponsored retirement plan where the employer contributes to the plan on behalf of the employee. The amount contributed is a percentage of the employee’s salary and under this type of plan, annual contributions to the plan are mandatory.


A loan used to purchase real estate. The interest rate charged on a mortgage may be fixed or variable, and the property is used as collateral for the loan.

Mortgage-Backed Securities

Securities whose payments to the investor are based on payments of principal and interest of an underlying pool of mortgages.

Mortgage Insurance

Insurance that protects a lender from a mortgage-holder’s default. Mortgage insurance is commonly required by the lender when the borrower puts down less than 20% of the purchase price as a deposit.

Mortgage Interest Deduction

A federal income tax deduction permitted for interest paid on a mortgage used for purchase, construction or remodeling a home.

Mortgage Life Insurance

A life insurance policy purchased for the express purpose of paying the balance of a mortgage loan if the borrower dies before the loan is paid.

Municipal Bond

Debt instruments issued by states, counties, cities, to fund projects such as roads and bridge construction. The interest paid on muni bonds is typically exempt from federal income tax.

Net Worth

An individual’s financial worth calculated by taking all of his or her assets and subtracting all of his or her liabilities.

Nominal Yield

The percentage return on a fixed-income security, such as a bond. It is calculated by taking the amount of income earned divided by the face value, or par value of the security.

Nondeductible Contribution

Contribution made to a qualified retirement plan or IRA that is not eligible for deduction from the contributor’s income taxes for that year.

Non-diversifiable Risk

The risk associated with an entire class of assets or industry sector. This type of investment risk can sometimes be mitigated through asset allocation or diversification because different asset classes and industries will commonly respond differently under the same market and economic conditions.

Nonqualified Retirement Plan

A retirement plan that does not meet IRS rules for deductibility or favorable tax treatment of contributions or withdrawals.


In life insurance, it is a contract that cannot be renewed, or may require that the insured go through additional medical underwriting in order to renew the policy.

Normal Retirement Age

The age defined in a retirement plan when full retirement benefits can be received by the employee. Early retirement from most plans usually results in a reduction of benefits.


In reference to a security, it is one not traded on an exchange; broker/dealers trade these securities directly over the phone and computer.

Passive Management

An investment management strategy in which the portfolio is structured to attempt to mimic the performance of a certain benchmark or index. Portfolio managers effect trades only when necessary to keep the portfolio on track, but not as part of an active management strategy.


An agreement between you and your employer under which your employer contributes a certain amount of money to a retirement plan during the years you work. Pension plans fall under two main categories: A defined benefit plan, which guarantees you will receive a fixed, pre-determined amount upon retirement, and a defined contribution plan, which does not guarantee a fixed pension amount.

Pension Benefit Guaranty Corporation

A federal corporation created under ERISA to insure vested benefits of pension plan participants. Also referred to as PBGC.


The owner of a life insurance policy. Although not required, the policyholder is also commonly the insured on the contract.

Policy Loan

A loan taken by a policy holder against the available cash value of a life insurance contract.

Policy Surrender

The cancellation or liquidation of a life insurance or annuity contract. Any available cash, also called surrender value, is paid out at time of surrender.

Political Risk

The investment risk associated with making investments in overseas companies or securities. Changes in the political climate of the foreign country of origin can negatively affect the value of that investment, independent of other market or economic conditions.


A collection of assets or investments, commonly assembled to meet a certain investment objective or financial goal.

Preferred Stock

Equity ownership in a corporation that is given preferential treatment over common stock in terms of dividend payments and payout in the event of liquidation of the company. When dividends are declared, preferred stock pays a fixed dividend amount stated as a percentage. While preferred stock receives preferential treatment with regards to payment, generally it does not provide any voting rights as does common stock.

Prepayment Penalty

A fee or penalty charged for paying back the principal of a loan or mortgage ahead of schedule.

Present Value

The current worth of an amount or series of amounts payable or receivable in the future after discounting each such amount at a specified rate of interest (the discount rate).

Price-Earnings Ratio

A stock’s market price divided by its current or estimated future earnings. It is a measure of the attractiveness of a particular security versus all other securities as determined by the investing public. The P/E ratio gives investors an idea of how much they are paying for earning power.


The amount invested or borrowed. It does not include earnings on the investment or interest paid on a loan.

Prudent Man Rule

Used in conjunction with many types of fiduciary relationships such as retirement plan accounts or custodial accounts, it is the investment principal that suggests that the person or company responsible for the account should act in a manner consistent with that of a ‘prudent man,’ taking into account both the safety of capital along with the opportunity for income.

Qualified Retirement Plan

An employer-sponsored retirement plan designed to provide retirement benefits for employees that qualifies for special tax treatment under the Internal Revenue Code. These plans have been created to encourage employers to provide retirement benefits for employees, as well as encourage individuals to save for their own retirement.

Rate of Return

The percentage change in the value of an investment in an asset (or portfolio of assets) over a specified time period. It may include interest, dividends or capital gains or losses.

Real Estate

Raw land and other forms of real property, such as apartments, office buildings, retail stores, and warehouses.

Real Return

The gain or loss of an investment after inflation has been accounted for. If an investment returns 8% and inflation is 4%, your real return would be 4%.


In an investment portfolio, over time, gains and losses in the investments within the portfolio will change the mix of investments in the portfolio. For example, a portfolio that was originally 40% stocks, 40% bonds and 20% cash may now be 60% stocks, 30% bonds and 10% cash. Rebalancing is the process of making adjustments within an investment portfolio to bring that mix of investments back to within the original parameters. In the example used, adjustments would be made to restore the original 40/40/20 balance.

Registered Investment Adviser (RIA)

An individual who registers with the SEC or state Securities Division to hold himself or herself out as an investment advisor or financial planner. This registration permits an individual to give advice, make recommendations, perform analysis and create reports and publications pertaining to securities investing. An individual may register as an RIA with permission from his or her broker/dealer. However, more commonly, the broker/dealer will secure a firm registration that will allow all registered representatives working in the firm, who meet specific requirements, to affiliate with the firm’s RIA. Such persons may then hold themselves out as an Investment Adviser Representative.

Registered Representative

An individual who has passed appropriate exams to sell securities to the public in the capacity of an agent. These individuals specifically have passed the Series 7 General Securities and have met state securities requirements and are currently employed by an NASD member broker/dealer.

Regulatory Risk

The risk that there may be changes in laws pertinent to a certain industry or segment of the economy that may adversely affect investments in those affected industries.

Reinvestment Risk

The risk that proceeds from an investment, such as interest, dividends or return of principal may not be able to be reinvested at the same rate of return as the original investment due to changes in the market.

Required Minimum Distribution

In an IRA, the IRS requires that the owner begin taking minimum annual payments at the owner’s age of 70 1/2. If the minimum payment amount is not taken, there are IRS income tax penalties due on the amount that should have been taken from the account. Also known as RMD.


A measure of profit or loss from an investment, usually expressed as a percentage.

Reverse Mortgage

A financial arrangement between a homeowner and a lender where the homeowner borrows against the equity of his/her home in exchange for a stream of regular monthly income payments. Typically set up as a means to fund a retirement income while allowing the homeowner to remain in the home, the property then reverts ownership to the lender at the end of the mortgage term or death of the homeowner.

Right of Rescission

A consumer’s legal right to cancel or rescind a contract, such as a loan, within three business days of signing the loan agreement, without risk of penalty or loss.


In investing, it is the likelihood of loss or poor returns.

Risk Tolerance

The willingness and ability of an investor to accept the uncertainty regarding possible loss from an investment.

Rollover IRA

An IRA account typically set up to hold assets from another qualified retirement plan, such as a 401(k), when you change employers. The funds can stay in this rollover IRA indefinitely or you may again roll these funds into the 401(k) of your new employer if the new plan permits, and as long as the funds in the rollover IRA were not co-mingled with other IRA dollars.

Roth IRA

A type of IRA account that allows investors to save for retirement using after-tax dollars; however, the money accumulates and can be withdrawn income tax-free, subject to certain rules. Roth IRAs may only be established by individuals within certain income limits and, similar to a traditional IRA, includes annual contribution limits as well.

Rules of Fair Practice

A group of rules established by the NASD (National Association of Securities Dealers) designed to define grounds for proper ethical conduct and customer treatment by registered representatives.

Russell 2000 Index

A market value-weighted index consisting of the stock of the smallest 2,000 companies of the largest 3,000 U.S. companies by market capitalization. The index return includes the reinvestment of dividends and is considered to be representative of the performance of small companies.

Second-to-Die Insurance

A life insurance policy covering the lives of two individuals. The death benefit is payable upon the death of the last, or second, person to die. Commonly used as an estate planning tool by married couples, it is also known as survivorship life.

Section 529 Plan

A college savings plan sponsored by individual states and administered by investment companies.Each state’s 529 plan varies by contribution limit, deductibility of contributions, availability to non-residents, and investment choices. Proceeds from the plan may only be used for qualified educational expenses. Non-qualified withdrawals are income taxable and are also subject to a 10% penalty. The investment company administering the plan may charge a separate fee for the account.

Securities Investor Protection Corporation

The SIPC was created by Congress and provides insurance protection for investors with accounts in brokerage firms up to $500,000 ($100,000 cash) against bankruptcy of the firm. It is funded by premiums paid by member broker/dealers. It is important to note that the insurance protection afforded only protects the investor in the event the broker/dealer becomes insolvent, but does not protect the investor against any market or investment losses.


Under securities law: an investment made in a common enterprise with the reasonable expectation of deriving profits solely from the actions of others. Stocks, bonds and variable annuities all are securities.


An acronym for Simplified Employee Pension IRA, it is a retirement program for self-employed individuals and small business owners permitting the business to set up IRA accounts for the benefit of the owners and employees. SEP-IRAs typically have higher contribution limits than individually owned traditional or Roth IRAs.

SIMPLE Retirement Plan

A qualified retirement savings plan designed for employers with fewer than 100 employees. It is an acronym for Savings Incentive Match Plan for Employees. It may be structured similarly to a 401(k) or IRA, but is designed to reduce or eliminate some of the fees and administration required of similar plans for larger employers that can be cumbersome or too expensive for small employers.

Single Life Annuity

An annuity contract for which payments are based on the mortality of just one individual. This is in contrast to a joint or joint and survivor annuity.

Single Premium Immediate Annuity (SPIA)

An annuity contract that is purchased using a lump sum or single premium and which is immediately converted, or annuitized, into some contractually permitted income stream.

Small Cap

A company with a market capitalization of lesser size is said to be a small cap company. Although not a hard and fast rule, a small cap company generally has between $250 million and $1 billion in market capitalization.

Standard & Poor’s (S&P) 500 Index

A market value-weighted index covering the stocks of 500 utility, industrial, transportation and financial companies. A very popular and commonly quoted index, it is considered to be representative of the performance of large capitalization companies of the US markets.

Standard Deviation

A measurement of relative risk in investing intended to show much the investment’s short term return tends to deviate from its average return –in other words, how volatile it has been.


A share of ownership in a corporation. When you own stock, you usually have a right to vote on certain corporate matters, such as members of the Board of Directors. Because stocks represent ownership, they are also commonly referred to as equities.

Stock Dividend

A dividend payable in shares of stock and generally disbursed in lieu of cash by corporations wishing to conserve capital for expansion or other purposes.

Systematic Investment Plan

A means of depositing funds in a financial product, investment account or plan whereby the investor makes regular payments at pre-determined intervals, such as monthly.


An item or expense permitted by law to be subtracted from your gross or adjusted gross income, thereby reducing the amount of taxable income on which federal income taxes are applied.


Delaying the payment of income taxes until some later point in time as permitted by federal income tax law. On some financial products and certain tax qualified plans, the interest and earnings on those products are not taxed until withdrawn from the product or the plan. Examples include IRAs, qualified retirement plans such as 401(k), annuities or savings bonds.

Tenancy in Common

A legal form of ownership between two or more parties that stipulates that each tenant’s interest in the property will pass to his or her own heirs at death and not necessarily to the surviving owners of the property.

Time Horizon

Also known as the investment horizon, it is the amount of time an investor expects to keep a certain sum of money invested. An investor’s time horizon should have an influence over the types of securities selected for investment of those funds.

Total Return

The net sum of return on an investment for a given period of time, including interest on bonds, dividends from stocks and any appreciation or depreciation in the value of the investment.

Trading Costs

The cost associated with effecting a securities transaction. This may include commissions and other expenses such as the spread between the bid and ask price on the security.

Treasury Bill (T-Bill)

Treasury bills are short-term U.S. government debt securities with maturities of one year or less. They are backed by the full faith and credit of the U.S. government. Interest is exempt from state and local income taxes.

Treasury Bond

A marketable debt obligation issued by the U.S. Government, backed by its full faith and credit and with a term-to-maturity greater than ten years. Interest is paid semiannually and principal is returned at maturity. Interest is free from state and local income taxes and available in denominations of $1,000 to $1 million.

Treasury Note

A marketable debt obligation issued by the U.S. Government, backed by its full faith and credit with a term-to-maturity between one and ten years. Interest is paid semiannually and principal is returned at maturity.

Uniform Gift to Minors Act (UGMA)

A law that permits the establishment of savings and investment accounts for the benefit of a minor child. The investments in the account are purchased in the name of the minor but the account is managed by the named adult custodian on the account. The adult custodian is charged with managing the funds in the account in a prudent manner and upon the minor child reaching age of majority, the assets in the account become the full property of the child. Income and capital gains earned in UGMA accounts are taxed at the child’s lower tax rate. These assets can be a detriment to the child’s ability to secure financial aid for college because the assets of the child are considered and weighed more heavily than those of the parent.

Uniform Transfer to Minors Act (UTMA)

An extension of the Uniform Gift to Minors act that expands the definition of acceptable gifts.

Variable Annuity

A long-term insurance contract designed for investing for retirement whose value fluctuates with that of an underlying investment portfolio selected by the contract owner. Available investment options often range from conservative fixed accounts to aggressive stock and high yield bond fund options. They offer the opportunity to allocate premiums among the fixed and variable investment options that have the potential to grow income tax-deferred, with an option to receive a stream of income at a later date. The contract owner assumes all investment risk with a variable annuity, and may lose principal.

Variable Death Benefit

A life insurance contract whose death benefit can vary based on the performance of an underlying investment portfolio. Contracts with variable death benefits generally provide for a minimum death benefit guarantee in the event of poor investment performance.

Variable Life

Life insurance policy in which the death benefit varies based on the performance of available variable investment options chosen by the policyholder. Premiums generally remain fixed, and if the underlying investments perform well, the death benefit on the contract will increase in value. Conversely, poor investment performance will lower the death benefit; however, there is a minimum guaranteed death benefit below which the policy will not fall regardless of the performance of the investment portfolio.

Variable Universal Life

A type of cash value life insurance that combines the features of universal life insurance, such as flexible premiums and death benefit, with the features of variable life insurance, including the ability to select from available variable investment options for the cash value portion of the policy. The number and type of investment options available vary by policy. Variable insurance products are subject to investment risk, and cash values, which are not guaranteed, will fluctuate in value.


The percentage amount of retirement benefits in a pension fund, profit-sharing plan or employee stock ownership plan owned by the employee. As an incentive to employees to remain with the employer, many retirement benefits include a vesting schedule that stipulates the percentage of benefits that are the actual property of the employee. In the event the employee leaves the company, only the vested percentage of the plan is available to the employee at termination. There are strict rules surrounding employee vesting and when that employee must be 100% vested in the plan.


A measure of the rate of change in value of a security over time. A security that fluctuates a lot is said to be highly volatile as opposed to one whose price history is relatively stable.

Waiver of Premium

A clause available on some insurance policies that pays the policy’s premium in the event the insured cannot pay premiums due to serious illness, disability or unemployment of the insured. This benefit is usually provided at an additional cost to the insured.

Whole Life Insurance

The most basic form of cash value life insurance, whole life insurance provides life insurance protection for the insured and accrues a cash value. The insurance company controls both the insurance and savings components of the policy, paying a fixed rate of return to the insured on the savings portion of the policy.

Wrap Account

An investment account opened through a brokerage firm where the firm provides a professional money manager to manage the customer’s portfolio for a fee that pays for the management and administration of the customer’s account.


The annual rate of return on an investment, expressed as a percentage.

Yield to Maturity

The yield on a bond or fixed income investment calculated to the maturity date on the instrument. If the bond is currently selling at a discount, or less than par, the yield to maturity will be higher than its stated coupon rate. If the bond is selling at a premium, or higher than par, then the yield to maturity will be lower than the stated coupon on the instrument.

Zero Coupon Bond

A bond that does not include coupons for regular interest payments, but is sold at a deep discount from its face, or par value. The bond then matures at full face value and the bondholder’s earnings are realized at that time. Although these bonds do not pay out regular interest payments, the bondholder is taxed annually on the imputed value of accrued interest for that year.

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