Words to Watch on Wall Street
Here’s your guide to the terms you need to know before you invest:
Do you know the difference between a “load” a “no-load” fund? What does it mean when a fund labels itself a “growth and income fund?” Even within the mutual funds industry, there is disagreement about what some terms mean. Definitions for different types of mutual funds, described below, are from the Investment Company Institute, the trade association for the mutual fund industry.
However, interpretations of terms, such as “aggressive growth,” may vary from fund to fund. Before picking a mutual fund, read its prospectus for a precise explanation of the fund’s strategy and investment objective. Included below are definitions of some of the other terms that you’re likely to stumble across when reading a prospectus of a mutual fund:
Aggressive growth fund: A fund that seeks maximum capital gains. Current income is not a significant factor. Some may invest in business somewhat out of the mainstream, such as fledling companies, new industries, companies fallen on hard times, or industries temporarily out of favor. Some may also use specialized investment techniques such as option writing or short-term trading.
Buck-and-Load: A sales commission charged when you sell your shares in a mutual fund. Usually ranges from 0.5 to 6.0 percent.
Balanced fund: Generally has a three-part investment objective: to conserve investors’ initial principal; to pay current income; and to promote long-term growth of both principal and income. Balanced funds mix bonds, preferred stocks, and common stocks.
Convertible securities fund: Invests primarily in debt securities that can be converted into equity securities of the issuing corporation.
Corporate bond fund: Purchases bonds of corporations for the majority of portfolio. The rest of the portfolio may be in U.S. Treasury bonds or bonds issued by a federal agency.
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| The Quebec Bank. Photo by Elena |
Derivatives: Financial instruments with values linked to some underlying asset, such as a bond, stock, or index.
Emerging markets fund: Invests primarily in the equity securities of companies in, or doing business in, emerging countries and markets.
Energy stock fund: Invests in the energy sector, which may include companies developing new energy-efficient technologies.
Environmental securities fund: Generally invests in environment-related firms. May include companies involved in hazardous waste treatment, waste recycling, and other related areas. Such funds may or may not screen companies to determine whether they also meet specific social objectives.
Flexible portfolio fund: A fund that may be 100 percent invested in stocks, bonds or money market instruments, depending on market conditions. These funds give the money managers the greatest flexibility in anticipating or responding to economic changes.
Front-end Load: A sales commission charged when you buy your shares. Some funds charge up to 8.5 percent. Usual range: 1 to 3 percent of your investment.
Ginnie Mae or GNMA fund: Invests in mortgage securities backed by the Government National Mortgage Association (GNMA). To qualify for this category, the majority of the portfolio must always be invested in mortgage-backed securities.
Global bond fund: Invests in bonds of companies and countries worldwide.
Global equity fund: Invests in securities traded worldwide, including the United States. Compared to direct investments, global funds offer investors an easier avenue to investing abroad. Professional money managers handle trading and record-keeping details and deal with differences in currencies, languages, time zones, regulations, and business customs. In addition to another layer of diversification, global funds add another layer of risk – the exchange rate factor.
Growth and income fund: Invests mainly in the common stock of companies that have had increasing share value as well as a solid record of paying dividends, Attempts to combine long-term capital growth with a steady stream of income.
Health and biotechnology securities fund: Invests in stocks of companies in the medical industry individual funds may emphasize a limited portion of the broad health care and biotechnology field, which ranges from large pharmaceutical companies to hospitals, to start-up medical research firms.
High-yield bond fund: Maintains at least two-third of its portfolio in lower-rated corporate bonds (BAA or lower by Moody’s rating service and BBB or lower by Standard and Poor’s rating service). In return for generally higher yield, investors bear a greater degree of risk than for higher-rated bonds.
Income-bond fund: Seeks a high level of current income by investing at all times in a mix of corporate and government bonds.
Income-equity fund: Invests primarily in equity securities of companies with good dividend-paying records.
Income-mixed fund: Invests in income-producing securities, including both equities and debt instruments.
Index funds: Constructs portfolios to mirror a specific market index. They are expected to provide a rate of return that will approximate or match, but not exceed, that of the market they are mirroring. Index funds offer a number of investment choices that include various stock market indexes or indexes of international or bond portfolios.
International fund: Invests in equity securities of companies outside the United States. Two-thirds of its portfolio must be so invested at all times to be categorized as international.
Load: A fee or commission imposed by a mutual fund. Some loads are a flat percentage, others are based on the amount you invest or how long you remain in the fund. A load can be as high as 8.5 percent. Low loads run between 1 and 3 percent.
Management fee: A yearly charge for managing the fund. Ranges from 0.2 to 1.6 percent of fund assets.
Mutual fund: Pools shareholder cash to invest in a variety of securities, including stocks, bonds, and money market instruments.
NAV or net asset value: The market value of one share of a mutual fund, calculated at the close of each business day.
No load fund: Mutual fund that doesn’t charge a fee or commission to buy or sell its shares.
Redemption fee: One to two percent charge when you sell your shares. Often waived if you hold shares for given number of years.
Small company growth fund: Seeks aggressive growth of capital by investing primarily in equity securities of small companies – usually in the developing stages of their life cycle – with rapid-growth potential. Shares of such companies are often thinly traded and may be subject to more abrupt market movements than those of larger firms.
Specific social objectives fund: Screens companies for compliance with certain social or ethical criteria, in addition to using traditional measures of financial value when choosing securities for their portfolios.
Taxable money market fund: Invests in the short-term, high-grade securities sold in the money market. Generally the safest, most stable securities available, including Treasury bills, certificates of deposit of large banks and commercial paper (the short-term IOUs of large U.S. corporations.) Money market funds limit the average maturity of their portfolio to 90 days or less.
Tax-exempt money market fund: Invests in municipal securities with relatively short maturities. Investors who use them seek tax-free investments with minimum risk.
U.S. Government income fund: Invests in variety of government securities, including U.S. Treasury bonds, federally guaranteed mortgage-backed securities, and other government notes.
Utilities fund: Generally invests about two-thirds of its portfolios in securities issued by companies in the utilities industry.
Variable annuities: Insurance products, mainly used for retirement income, that offer investors some advantages of mutual funds, in addition to tax-deterred earnings.
