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Glossary of Terms |
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Published by InvestCatholic.com
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Thursday, 06 March 2008 |
We have compiled a list of some of the frequently used terms in Catholic investing. If you have a suggestion not listed, please feel free to contact us .
401(k): A retirement plan
that allows employees in private companies to make contributions of pre-tax
dollars to a company pool that is then invested in stocks, bonds, or money
markets.
403(b): A retirement plan available to employees of
qualifying non-profit organizations, featuring tax-deferred contributions and
growth.
529 PLAN: A state sponsored college education savings
plan where assets grow tax free. The maximum annual contribution varies by
plan.
ACCOUNT VALUE: The value of each mutual fund account is
measured by multiplying the most recent Net Asset Value (NAV) by the number of
shares owned.
ACTIVE FUND
MANAGEMENT: Managing a mutual fund
by making judgments about market movements instead of relying on automatic
adjustments such as indexation.
ACTIVE OWNERSHIP
is the process whereby an investor seeks to influence a company to become a
better, more responsible corporate citizen.
This process typically includes proxy voting, corporate dialogue, and
shareholder resolutions.
ADVISOR: The organization employed by a mutual fund
sponsor to manage a particular fund's assets.
ANNUITY: A type of investment that
guarantees payment of specific amounts at specific times, or a single lump sum payment. Annuities are sponsored by
insurance companies and other financial institutions
and sold by agents, banks, savings and loans, stockbrokers, and financial
planners. Fixed annuities work like certificates of deposit (CDs). Variable
annuities let you direct your investment into fund-like portfolios of stocks, bonds, and cash equivalents. Your return,
as with a fund, depends on the performance of the portfolios you choose.
Variable annuities come with annual charges.
ASSET: Anything having value that is owned by an
individual, institution or business.
Personal assets include cars, houses, savings, and investments.
ASSET ALLOCATION: The diversification of investments among
categories of assets, such as short-term investments, stocks and bonds, as well
as tangible assets, such as real estate, precious metals, and collectibles. Asset allocation is useful in balancing risk
and return in pursuit of various investment goals.
ASSET CLASS: Types of investments. The primary asset classes are stocks, bonds,
and cash.
AUTOMATIC INVESTMENT
PLAN (AIP): A program that allows an
individual to transfer money on a specified frequency from one account to
another. For example, from a checking
account into a mutual fund.
BLACKLIST is a
list of companies eliminated for purchase consideration due to their violation
of certain core beliefs.
BOND: Bonds are securities representing debt owed
by companies to investors. They denote a
contract which commits a borrower (the company) to pay a bondholder (the
investor) fixed interest payments and to return the bondholder's principal
amount by a specified maturity date.
Companies pay bondholders interest on the money borrowed.
CAPITAL GAINS
DISTRIBUTION: Mutual fund payments
to shareholders resulting from the sale of stocks or bonds within a mutual fund
portfolio. The determination of whether
it is a long or short term capital gain distribution depends on the length of
time the stock is held by the mutual fund, not how long the individual investor
has held shares of the mutual fund.
CLASS A SHARE: A mutual fund's A Shares charge a front-end
load at the time of purchase. This is a sales fee that is charged as a
percentage of the total investment and is used to compensate the financial
representative who sells the fund. The amount of the front-end load is
subtracted from the original investment.
CLASS C SHARE: Class C shares
typically do not impose a front-end load, but will often charge a nominal fee
if the shares are sold within one year. Class C shares often impose a high
asset-based sales charge, but will not convert to A shares when the load reverts
to zero.
COMMON GOOD is
the situation of having social systems, institutions and environments on which
we all depend, work together in a manner that benefits all people.
COMMON STOCK: An equity security that represents
ownership in a corporation. This is usually the first security a corporation
issues to raise capital. Such shares may pay dividends. Owners typically are
entitled to vote on the corporation's board members and policies.
CUSTODIAN: A financial institution that has the legal
responsibility for a customer's securities.
This implies both management and safekeeping.
DEFINED BENEFIT PLAN:
An employer-sponsored retirement plan
where employee benefits are sorted out based on a formula, using factors such
as salary history and duration of employment. Investment risk and portfolio
management are entirely under the control of the company. There are
also restrictions on when and how you can withdraw these funds without
penalties.
DEFINED CONTRIBUTION
PLAN: Any of several plans, such as
a 401(k) or 403(b), set up by employers so that their employees may take
advantage of tax-deferral on retirement savings. Some employers match employee savings or make
other contributions to the plan.
DIVIDEND: In stock market terms, dividends are the
payments to shareholders from profits on a per-share basis. In mutual fund terms, dividends are paid out
of the income generated from the fund's investments.
DOLLAR COST
AVERAGING: An investment strategy
designed to reduce volatility in which securities, typically mutual funds, are purchased in fixed dollar
amounts at regular intervals, regardless of what direction the market is
moving. Thus, as prices of securities rise, fewer units are bought, and as
prices fall, more units are bought
DUE DILIGENCE: The process of investigation, performed by
investors, into the details of a potential investment, such as an examination of
operations and management and the verification of material
facts.
EDUCATION SAVINGS PLAN (ESA): A type of account that allows
eligible parents, family members, and students to contribute up to
$2,000 per year (until the child turns age 18) toward qualified
education expenses at any college, university, vocational, elementary,
or secondary school. Participants can benefit from tax-deferred growth
and tax-free withdrawals when the proceeds are used for qualified
education expenses. The account can be held in stocks, bonds, or a
mutual fund.
EQUITY: A synonym for stock, or shared ownership in a
firm, as opposed to "debt", which is a loan to the firm. Equity represents the positive difference
between assets (amounts owned) and liabilities (amounts owed.)
ERISA: Employee Retirement Income Security Act. All employers who engage in interstate
commerce and provide defined benefit plans to their employees must abide by
ERISA guidelines. The provisions of ERISA do not apply to defined compensation
plans.
EXPENSE RATIO: The percentage of total investment that
shareholders pay annually for mutual fund management fees and operating
expenses.
FIDUCIARY: A relationship in which one party has to act
for the benefit of the other, highlighted by good faith, loyalty, and trust.
FIXED INCOME
SECURITY: Any security that pays a
stated or predetermined rate of interest over time. Bonds, notes and money market instruments are
all considered fixed-income securities.
GROSS DOMESTIC
PRODUCT (GDP): The market value of
goods and services produced by labor and property in the United States, regardless of
nationality.
GROWTH FUND: A mutual fund that invests in stocks whose
primary objective is capital (price) appreciation. Growth funds typically experience greater
share-price volatility than more conservative funds, such as growth and income
funds, bond funds, or money market funds.
GROSS EXPENSE RATIO:
Gross expense ratio is the most recent fiscal year end audited expense ratio
before expense reimbursements.
HOLDING: Legally owned property, such as land,
capital, or stocks.
INCOME FUND: A mutual fund which emphasizes current income
in the form of dividends or coupon payments from bond and/or preferred stocks,
as opposed to capital (price) appreciation.
INDIVIDUAL RETIREMENT
ACCOUNT (IRA): An account that
enables individuals to set aside some earned income each year toward
retirement. The amount is set by the IRS
and increases each year. For tax year
2007, the maximum amount is $4,000 ($5,000 if over 50 years old). All dividends and capital gains earned on an
IRA investment compound tax free until they are withdrawn.
INDEX FUND: Index funds aim to achieve the same return as
a particular market index, such as the S&P 500 Composite Stock Price Index,
by investing in all - or perhaps a representative sample - of the companies
included in an index.
INTEREST: Money, like any other commodity, has a
price. Money's price is called the
interest rate, which represents the cost a borrower incurs for borrowing money,
and the earnings a lender receives for lending money.
INFLATION: A general and progressive increase in the
level of consumer prices.
INVESTMENT ADVISOR: An individual or organization that manages a
portfolio and makes day-to-day investment decisions involving the purchases or
sales of securities.
INVESTMENT POLICY
STATEMENT: A document drafted
between a portfolio manager and a client that outlines general rules for the
manager. This statement provides the
general investment goals and objectives of a client
and describes the strategies that the manager should employ to meet these
objectives. Specific information on matters such as asset allocation, risk
tolerance, and liquidity requirements would also be included in an IPS.
LARGE CAP STOCK: Refers to a stock with a large market
capitalization, generally over $10 billion.
MARKET
CAPITALIZATION: The value of a publicly traded firm; found by multiplying
the number of its outstanding shares by the current market price per share.
MID CAP STOCK: The stock of a company with a median market
capitalization between $1 billion and $10 billion.
MUTUAL FUND
refers to an investment vehicle that gives small investors access to a
well-diversified portfolio of equities, bonds and other securities. Each
shareholder participates in the gain or loss of the fund. Shares are issued and
can be redeemed as needed. The fund's
net asset value (NAV) is determined each day. Each mutual fund portfolio is
invested to match the objective stated in the prospectus.
NET ASSET VALUE (NAV):
The value of one share in a mutual fund company computed daily. In general, it is calculated by summing the
values of all the fund's investments, subtracting its expenses and liabilities,
and dividing by the number of shares outstanding.
NO-LOAD MUTUAL FUND:
A mutual fund that does not charge a fee, or "load" for the purchase or sale of
its shares. They are bought and sold at
their Net Asset Value (NAV).
NON-QUALIFIED: Money that does not qualify for any special
tax treatment. In a non-qualified account,
the funds are not tax deductible, tax-deferred or tax free. There are no tax penalties from non-qualified
accounts.
PASSIVE INVESTMENT
STRATEGY: Buying a well diversified
portfolio to represent a broad-based market index without attempting to search
out under-priced securities.
PRICE/EARNINGS RATIO
or P/E RATIO: The most common
measure of how expensive a stock is. The
P/E ratio is equal to a stock's market capitalization divided by its after-tax
earnings over a 12 month period.
PLAN DOCUMENT: The written plan under which a 403(b) plan is
maintained. The document defines the
terms and conditions of the plan and allocates responsibility for
administrative functions.
PORTFOLIO: A list of all investments owned by a mutual
fund. Shareholders can diversify their
investments and build their own portfolios by investing in a number of mutual
funds.
PORTFOLIO MANAGER: The person responsible for managing a mutual
fund's assets.
POSITIVE PURCHASING
refers to the purchase of stocks of companies who are doing positive things for
their employees, the environment, and society.
In general, these companies are following the social justice teachings
of the Catholic Church.
PRINCIPAL: The amount of money that an individual
invests in a mutual fund.
PROSPECTUS: A legal document filed with the SEC detailing
a mutual fund's objective, history, manager background, and financial
statements.
PROXY VOTING is
the process used by corporations to solicit input from their shareholders about
issues specific to the company. A mutual
fund votes a proxy for all shareholders of the fund.
RATE OF RETURN: From an individual investor's perspective,
the dividend or interest earnings generated by an investment divided by the
original investment amount.
REINVESTMENT: An arrangement whereby distributions of
mutual fund dividends or capital gains are used to purchase additional shares
of the mutual fund.
RESPONSIBLE CORPORATE
CITIZENSHIP refers to a company's responsibility to their employees,
customers, communities, and the environment.
RETURN: Represents the change in value of an
investment over time. It is calculated
by dividing the current market value by the cost of the initial investment,
assuming that all income (dividends or interest) and capital gains are
reinvested. This is the same as economic return.
RISK: The volatility of returns associated with a
given asset.
ROTH IRA: A personal retirement savings vehicle created
by the Tax Payer Relief Act of 1997. A
Roth IRA allows certain investors to make non-deductible contributions
annually, and provided certain requirements are met, offers tax-free and
penalty-free withdrawals for important financial needs in addition to
retirement.
SECURITIES: General name for stocks, bonds, or
ownership rights, such as options or futures, usually sold through a broker.
SECURITIES AND
EXCHANGE COMMISSION (SEC): The
government agency responsible for administering federal securities laws in the US.
SHAREHOLDER: A
person who owns shares of stock in a corporation or mutual fund.
SHAREHOLDER ACTIVISM: A mechanism for shareholders to influence the
policies and behavior of the companies that they own. Activism can include proxy voting, corporate
dialogue, and shareholder resolutions.
SHAREHOLDER
RESOLUTION: A shareholder's or group of shareholders' recommendation or
request that a company and/or its Board of Directors take a particular action
relevant to company policy. Resolutions
are voted on by all shareholders at annual board meetings.
SMALL CAP STOCK: The stock of a company whose market
capitalization is less than $1 billion.
SOCIALLY RESPONSIBLE
INVESTING (SRI): An investment
process that uses screens to select or avoid investing in certain companies to
reflect religious, economic, environmental, or political beliefs.
SOCIAL RETURN is
the positive impact that occurs when a corporation changes its policies to more
closely follow the social justice teachings of the Catholic Church.
SPOUSAL IRA: An account for a non-working spouse to set
aside some earned income each year toward retirement. The amount is set by the IRS and increases
each year. For tax year 2007, the
maximum amount is $4,000 ($5,000 if over 50 years old). All dividends and capital gains earned on an
IRA investment compound tax free until they are withdrawn.
STANDARD AND POOR'S
500 INDEX (S&P 500): A closely
followed index of 500 widely-traded industrial, transportation, financial, and
utility stocks. The S&P 500 is used
as an overall measure of stock market conditions and as a performance
benchmark.
STATEMENT OF
ADDITIONAL INFORMATION: A document
that conveys information about a mutual fund that is not necessarily needed by
investors to make an informed investment decision, but that some investors find
useful.
STOCK FUND: A mutual fund which predominantly holds
stocks and is designed for growth, or capital appreciation.
TAXABLE ACCOUNT:
Any savings or investment account in which the earnings are fully taxable.
TAX-DEFERRED
RETIREMENT PLANS: A retirement plan
that allows the investor to postpone current income taxes on pre-tax money
invested or any earnings in an account until it is withdrawn from the plan.
THIRD PARTY
ADMINISTRATOR (TPA): Independent
company responsible for managing a 403(b) plan for an employer to ensure that
they satisfy regulatory requirements and provide fiduciary due diligence.
TICKER SYMBOL: Letters that identify a security for trading
purposes.
TOTAL RETURN: The annual return on an investment composed
of two sources: income from dividends
(stocks) or coupon payments (bonds), and appreciation or depreciation in the
market price of the investment during a given time period.
USCCB: United States
Conference of Catholic Bishops
YIELD: Generally, the return on investment. In bond terminology, yield is the coupon
payment divided by the bond's face value if held to maturity.
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