Financial Glossary T
When a broker places your order for a security, and then immediately places an order for his or her own account for the same security, the broker is tailgating.Although this practice isn’t illegal, it is considered unethical, because the assumption is that the broker is trying to profit from information the broker believes you have about the stock. A broker will typically tailgate only when you buy stock in a sufficient quantity to potentially affect the price of the security.
Target date fund
A target date fund is a fund of funds that allows you to link your investment portfolio to a particular time horizon, typically your expected retirement date. In fact, a target date fund characteristically has a date in its name, such as a 2015 Fund or a 2030 Fund. A target fund aiming at a date in the somewhat distant future tends to have a fairly aggressive asset allocation, with a focus on growth. As the target date approaches, the fund is designed to become more conservative to preserve the assets that have accumulated and eventually to provide income. Each fund company formulates its own approach to risk, so that the allocation of one 2025 Fund may be noticeably different from the allocation of a 2025 Fund from a different company. You can find model portfolios and statements of investment strategy in the fund’s prospectus. Each mutual fund company that offers target date funds tends to offer a series, with dates five or ten years apart. Most companies populate their funds of funds with individual funds from their fund family, though some companies add mutual funds or exchange traded funds from other investment companies.Like other funds of funds, the fees you pay for a target date fund may be higher than you would pay to own each of the individual funds separately. However, these fees pay for an additional level of professional oversight.
Target risk fund
A target risk fund is a fund of funds that maintains a specific asset allocation in order to provide an essentially level exposure to investment risk. You may find a target risk fund attractive if you want a professional manager to keep your portfolio aligned with your risk tolerance as you pursue specific investment goals.Target risk funds are generally available with conservative, moderate, and aggressive portfolios, and some mutual fund companies offer even more finely tuned approaches. Like other funds of funds, the fees you pay for a target risk fund may be higher than you would pay to own each of the individual funds separately. However, these fees pay for an additional level of professional oversight.
A tax bracket is a range of income that is taxed at a specific rate. In the United States there are six brackets, taxed at 10%, 15%, 25%, 28%, 33%, and 35% of the amount that falls into each bracket. For example, if your taxable income was high enough to cross three brackets, you’d pay tax at the 10% rate on income in the lowest bracket, at the 15% rate on income in the next bracket, and at the 25% rate on the rest.The rates remain fixed until they are changed by Congress, but the dollar amounts in each bracket change slightly each year to adjust for inflation. In addition, the income that falls into each bracket varies by filing status, so that if you file as a single taxpayer you may owe more tax on the same taxable income as a married couple filing a joint return.
A tax credit is an amount you can subtract from the tax you would otherwise owe. Unlike a deduction or exemption, a credit is a dollar-for-dollar reduction of your tax bill.For example, if you pay someone to care for your young children or for elderly or disabled relatives, you may be able to subtract that money, up to a set limit. Among the other tax credits for which you may qualify are the Hope Scholarship and Lifetime Learning education credits, a credit for purchasing a hybrid car, or a credit for adopting a child. The list changes from time to time.Some but not all credits are available to people whose income is less than the ceilings Congress sets. Other credits are available to anyone who has spent the money.
A tax-deferred account allows you to postpone income tax that would otherwise be due on employment or investment earnings you hold in the account until some point the future, often when you retire. For example, you can contribute pretax income to employer sponsored retirement plans, such as a 401(k) or 403(b). You owe no tax on any earnings in these plans, or in traditional individual retirement accounts (IRAs), fixed and variable annuities, and some insurance policies until you withdraw the money. Then tax is due on the amounts you take out, at the same rate you pay on your regular income.A big advantage of tax deferral is that earnings may compound more quickly, since no money is being taken out of the account to pay taxes. But in return for postponing taxes, you agree to limited access to your money before you reach 59 1/2.
Some investments are tax exempt, which means you don’t have to pay income tax on the earnings they produce.For example, the interest you receive on a municipal bond is generally exempt from federal income tax, and also exempt from state and local income tax if you live in the state where the bond was issued. However, if you sell the bond before maturity, any capital gain is taxable.Similarly, dividends on bond mutual funds that invest in municipal bonds are exempt from federal income tax. And for residents of the issuing state for single-state funds, the dividends are also exempt from state and local taxes. Capital gains on these funds are never tax exempt.Earnings in a Roth IRA are tax exempt when you withdraw them, provided your account has been open for five years or more and you’re at least 59 1/2 years old. And earnings in 529 college savings plans and Coverdell education savings accounts (ESAs) are also tax exempt if the money is used to pay qualified education expenses.When an organization such as a religious, educational, or charitable institution, or other not-for-profit group, is tax-exempt, it does not owe tax of any kind to federal, state, and local governments. In addition, you can take an income tax deduction for gifts you make to such organizations.
When a mutual fund minimizes the income earnings and capital gains it distributes to its shareholders, it may be described as a tax-efficient fund. In general, the smaller a fund’s turnover, or the less buying and selling it does, the more tax-efficient it has the potential to be. That’s one reason why index funds, which buy and sell investments only when the composition of the index they track changes, are generally tax-efficient. In addition to reducing turnover, actively managed funds may increase tax efficiency by emphasizing investments expected to grow in value over those that produce current taxable income, or yield. And they may postpone the sale of certain investments until they qualify as long-term capital gains, making them subject to a lower tax rate. Funds that emphasize tax efficiency generally include that goal in their statement of investment objectives.
A teaser rate is a low introductory interest rate on a credit card or an adjustable rate mortgage (ARM). The lender must tell you how long the teaser rate lasts and what the real cost of borrowing will be at the end of the introductory period.
Technical analysts track price movements and trading volumes in various securities to identify patterns in the price behavior of particular stocks, mutual funds, commodities, or options in specific market sectors or in the overall financial markets. The goal is to predict probable, often short-term, price changes in the investments that they study, which allows them to choose an appropriate trading strategy. The speed and accuracy with which the analysts create their tracking charts has been enhanced by the development of increasingly sophisticated software.
When two or more people own property as tenants-in-common (TIC), they share in the property’s tax benefits, any income it generates, and its growth in value, as well as expenses of ownership. If one owner dies, that owner’s share of the property becomes part of his or her estate, to be sold or distributed among heirs as the owner instructs.TIC arrangements are a popular way to structure the ownership of real estate investments, in which two or more parties buy commercial property to generate income. However, siblings might also own family property in this way, as might business partners.
When a corporation or other investor offers to buy a large portion of outstanding shares of another company, called the target company, at a price higher than the market price, it is called a tender offer. The tender is usually part of a bid to take over the target company. Current stockholders, individually or as a group, can accept or reject the offer.If the tender offer is successful and the corporation accumulates 5% or more of another company, it has to report its holdings to the Securities and Exchange Commission (SEC), the target company, and the exchange or market on which the target company’s shares are traded.
A term is the length of time between when a fixed-income security, such as a bond or note, is offered for sale and its maturity date.When the term ends, the issuer repays the par value of the security, often along with the final interest payment. In general, the longer the term, the higher the rate of interest the investment pays, to offset the increased risk of tying up your money for a longer period of time.Term is also the lifespan of a certificate of deposit (CD), called a time deposit. If you hold a CD for the entire term, which may run from six months to five years, you collect the full amount of interest the CD has paid during the term and are free to roll the principal into a new CD or use the money for something else.
A term life insurance policy provides a guaranteed death benefit for a set period of time, such as five, ten, or 20 years, provided you continue to pay the premiums as they are due. At the end of the term, the coverage ends unless you renew the policy or switch to another one.Term life insurance policies have either a level term, which means that the annual premium remains the same for the life of the policy, or a graduated term, which means that the premium is smaller in the early years and grows larger each year. In most cases, level term policies cost less if you keep the policy in force for the entire term. Term policies don’t accumulate a cash value, so you get nothing back if you end your coverage before the end of the term. However, term insurance may be less expensive than a permanent policy providing the same coverage, although the cost of coverage increases as you get older.
A thin market is one where securities trade infrequently. The term can refer to an entire securities market, such as one in an emerging nation, a specific class of securities, such as micro-cap stocks, or an individual security.
A particular stock, sector, or market is said to be thinly traded if transactions occur only infrequently, and there are a limited number of interested buyers and sellers. Prices of thinly traded securities tend to be more volatile than those traded more actively because just a few trades can affect the market price substantially.It can also be difficult to sell shares of thinly traded securities, especially in a downturn, if there is no ready buyer. Shares of small- and micro-cap companies are more likely to be thinly traded than those of mid- or large-cap stocks.
Exchange-listed securities, such as those that are traded on the New York Stock Exchange (NYSE) or the American Stock Exchange (AMEX), may also be bought and sold off the exchange, or over-the-counter (OTC), in what is known as the third market. Typically, third-market transactions are large block trades involving securities firms that may or may not be members of the exchange and institutional investors, such as investment companies and pension funds.With the advent of electronic communications networks (ECNs) more institutional investors are buying and selling in this way. Among the appeals of the third market are speed, reduced trading costs, and anonymity.
A tick is the minimum movement by which the price of a security, option, or index changes. With stocks, a tick may be little as one cent. With US Treasury securities, the smallest increment is 1/32 of a point, or 31.25 cents. An uptick represents an increase over the last different price, and a downtick a drop from the last different price.
While the stock markets are in session, there is a running record of trading activity in each individual stock. Today’s computerized system, still referred to as the ticker, actually replaces the scrolling paper tape of the past.
A ticker symbol, also known as a stock symbol, is a unique string of letters that identifies a particular stock on one of two electronic tapes that report market transactions. The consolidated tape includes companies that trade on the New York Stock Exchange (NYSE), the American Stock Exchange (AMEX), regional exchanges and other markets, such as Instinet. A second tape includes companies that trade on the NASDAQ Stock Market.Most corporations have a say in what their symbol will be, and many choose one that’s clearly linked to their name, such as IBM or AMZN for Amazon.com. Various letters may be added to a ticker symbol to indicate where the trade took place or that there was something atypical about the transaction. For example, IBM.Pr would indicate that the trade involved preferred stock.
When you put money into a bank or savings and loan account with a fixed term, such as a certificate of deposit (CD), you are making a time deposit. Time deposits may pay interest at a higher rate than demand deposit accounts, such as checking or money market accounts, from which you can withdraw at any time.But if you withdraw from a time deposit account before the term ends, you may have to pay a penalty — sometimes as much as all the interest that has been credited to your account. Some other time deposits require you to give advance notice if you plan to withdraw money.
Time value of money
The time value of money is money’s potential to grow in value over time. Because of this potential, money that’s available in the present is considered more valuable than the same amount in the future. For example, if you were given $100 today and invested it at an annual rate of only 1%, it could be worth $101 at the end of one year, which is more than you’d have if you received $100 at that point.In addition, because of money’s potential to increase in value over time, you can use the time value of money to calculate how much you need to invest now to meet a certain future goal. Many financial websites and personal investment handbooks help you calculate these amounts based on different interest rates.Inflation has the reverse effect on the time value of money. Because of the constant decline in the purchasing power of money, an uninvested dollar is worth more in the present than the same uninvested dollar will be in the future.
A title is a legal document proving ownership of a piece of property. If you are buying real estate you authorize a title search, or examination of property records, to insure that the seller holds the title and has the right to transfer it. In most cases, if you’re taking a mortgage to buy the property, the lender will require you to arrange title insurance to protect its interest until the full amount of the loan has been repaid. You may also arrange for your own title insurance to protect you from losing your property if your ownership is successfully contested.
Title insurance protects your lender’s interest in your home and real property in case its ownership is contested in court. Before you close on any property purchase, your lender will require a title search — an examination of all the property records by an attorney or title company, to ensure that the seller owns the property and has the right to sell it. But just in case something is not revealed in the title search, your lender will usually require you to obtain title insurance as added protection until you have paid off your mortgage. You may also choose to purchase additional insurance to protect your own title and claim to the property. Usually, you pay for title insurance as a one-time cost at closing. While some states regulate title insurance costs, others don’t.
A title search is an examination of property records by a title company or attorney to ensure that the person from whom you are buying a piece of property is its legal owner, and that there are no outstanding legal claims against the property. Your lender will require you to pay for a title search before the closing, or settlement, on your new home.The title search consists of a close examination of public records, such as deeds, wills, court judgments, and trusts, to make sure that the seller has the right to sell the property to you and that all prior mortgages, liens, and judgments have been settled. Sometimes the title search uncovers pending legal actions, undisclosed easements, or even claims on the property by heirs to prior owners. Since title examiners might miss problems and public records can contain errors, most lenders will require you to purchase title insurance at closing to protect their interest in the property.
A toehold purchase is one in which an individual investor or investment firm caps holdings in a potential target company at less than 5% of the company’s outstanding stock. Presumably that’s because once an investor has acquired 5% or more of the stock, the investor must notify the company, the market where the company is listed, and the Securities and Exchange Commission (SEC). That notification must explain the next steps the investor intends to take, such as a possible takeover bid.
Total return is your annual gain or loss on an equity or debt investment. It includes dividends or interest, plus any change in the market value of the investment. When total return is expressed as a percentage, it’s figured by dividing the increase or decrease in value, plus dividends or interest, by the original purchase price. On bonds you hold to maturity, however, your total return is the same as your yield to maturity (YTM).Calculating total return is more complex if your earnings have been reinvested, as they often are in a mutual fund, to buy more shares. But fund companies do that calculation on a regular basis.
Total return index
A total return index is an equity market index that’s calculated using the assumption that all of the dividends that the stocks in the index pay are reinvested in the index as a whole. Since an index is not an investment, but a statistical computation, the reinvestment occurs only on paper, or, more precisely, in a software program.
Some corporations issue tracking stock, a type of common stock whose value is linked to the performance of a particular division or business within a larger corporation rather than to the corporation as a whole. Tracking stock separates the finances of the division from those of the parent company, so that if the division falters or takes time to become profitable, the value of the traditional common stock won’t be affected.If you own tracking stock, you actually are invested in the parent company, since it continues to own the division that’s being tracked, though typically you have no shareholder’s voting rights in the corporation.
The trade date is the day on which you buy or sell a security, option, or futures contract. The settlement date, on which cash and securities are delivered, occurs one or more days after the trade date, depending on the type of security that you’re trading. Options and futures contracts settle on T+1, or one business day after the trade date, and stocks settle on T+3, or three business days after the trade.
Traders who are dealers or market makers select the securities in which they will specialize and provide quotes on those securities in the marketplace. They commit their firm’s capital by taking positions in those securities and are ready to buy and sell at the prices they quote. Traders known as competitive or floor traders buy and sell securities for their own accounts. They don’t pay commissions, so they can profit on small differences in price, but they must abide by the rules established by the exchange or market on which they trade. The term trader also describes people who execute transactions at brokerage firms, asset management firms, and mutual fund companies.
The trading floor is the active trading area of a stock exchange, such as the New York Stock Exchange (NYSE). Securities are traded auction-style on an exchange trading floor. That means the prices are set by competitive bidding between brokers representing buyers and brokers representing sellers, following a series of clearly established exchange rules.Many market maker firms refer to the space in their offices that they have allocated for trading as their trading floor. The same term is used to describe the trading areas in banks and brokerage firms.
A trading range means different things on different types of markets. On a stock exchange or over-the-counter market, it’s the spread between the highest and lowest prices at which a particular stock or market as a whole has been trading over a period of time. Some of the commodities exchanges set a trading range for each commodity because of the minimum margin required to maintain a position. If the market price moves above or below the trading range, trading is halted to give the member firms the opportunity to issue margin calls and collect the required money from customers whose account values are below the margin requirements.
All companies listed on the New York Stock Exchange (NYSE), the American Stock Exchange (AMEX), or the NASDAQ Stock Market are represented by a unique combination of one to five letters of the alphabet. Some, but not all, trading symbols are easily associated with their companies, such as GE for General Electric or YHOO for Yahoo!.Sometimes, the exchange trading symbol varies slightly from the way the company is designated on the ticker.
Trading volume is the quantity of stocks, bonds, futures contracts, options, or other investments that are bought sold in a specific period of time, normally a day. It’s an indication of the interest that investors have in that particular security or product at its current price.
Certain securities, such as collateralized mortgage obligations (CMOs), are made up of a number of classes, called tranches, that differ from each other because they pay different interest rates, mature on different dates, carry different levels of risk, or differ in some other way.When the security is offered for sale, each of these tranches is sold separately. Similarly, a large certificate of deposit (CD) may be subdivided into smaller certificates for sale to individual investors. Each smaller certificate, or tranche, matures on the same date and pays the same rate of interest, but is worth a fraction of the total amount.
In a transfer, a 401(k) or IRA custodian or trustee moves the assets in your existing account directly to the custodian or trustee of your new account. With a transfer, you don’t risk failing to deposit the full amount of your withdrawal within the 60-day deadline for rollovers. And, in the case of a transfer from a 401(k) or similar retirement savings plan, nothing is withheld for income taxes. In contrast, if you handle the rollover yourself, your employer must withhold 20% of the account value. When securities are sent to a transfer agent for reregistration of the ownership name, this process is also known as a transfer. Securities may be registered in the actual, or beneficial, owner’s name, or in the name of a nominee, known as street name. Most stocks that are held by brokerage firms for their clients are registered in nominee name on the transfer agent’s books.
A transfer agent is responsible to a corporation for keeping track of who owns the corporation’s stock and bonds and whether those securities are registered in the name of an individual investor or a brokerage firm, which is known as street name registration.In some cases, stocks can be registered directly on the books of an issuer or its transfer agent using the Direct Registration System (DRS).Increasingly, ownership records are electronic, though a transfer agent may issue stock and bond certificates to new owners if they request them. The transfer agent also receives certificates that represent securities that have been sold or returned to be reregistered.
A securities or brokerage account titled transferable-on-death (TOD) lets you name one or more beneficiaries, to whom the account assets are transferred when you die. TOD accounts are available only in some states, and laws may vary. Nonetheless, TOD accounts can be useful estate planning tools where they are available, since the assets in the account can pass to your beneficiaries directly, outside the probate process. A similar type of registration is available in some states for bank accounts. They’re known as payable-on-death, or POD, accounts.
Transparency is a measure of how much information you have about the markets where you invest, the corporations whose stocks or bonds you buy, or the mutual funds or other investments you select. For example, in order to achieve maximum transparency in US markets, the Securities and Exchange Commission (SEC) requires corporations to disclose all information that might have an impact on their financial status so that investors can make fully informed decisions.Real-time trading information, increasingly available to individuals as well as institutional investors, and linked pricing systems are other steps toward complete transparency.
Treasury bill (T-bill)
Treasury bills are the shortest-term government debt securities. They are issued with a maturity date of 4, 13, or 26 weeks. The 13- and 26-week bills are sold weekly by competitive auction to institutional investors, and to noncompetitive bidders through Treasury Direct for the same price paid by the competitive bidders.
Treasury bonds are long-term government debt securities with a maturity date of 30 years that are issued in denominations of $1,000. You can buy any number of these bonds at issue in $1,000 increments, but not more than $5 million. Those purchases as well as sales can be made through a Tresaury Direct account. Existing bonds trade in the secondary market.While interest on Treasury bonds is federally taxable, it is exempt from state and local taxes. Treasury bonds are considered among the most secure investment in the world, since they are backed by the federal government.However, like all debt securities, they are subject to market risk. This means their prices change to reflect supply and demand.
Treasury Direct is a direct investment system, offered through the US Department of the Treasury, lets you make competitive or noncompetitive bids for new issues of US Treasury issues.Once you open a Treasury Direct account, you can buy, sell, or roll over your investments by mail, telephone, or online. Interest paid on your investments, and the value of any securities you redeem at maturity or by sale, are deposited directly into the bank account you designate.
Treasury inflation-protected securities (TIPS)
TIPS, or Treasury inflation-protected securities, are inflation-indexed Treasury bonds and notes. They protect you against deflation as well.TIPS pay a fixed rate of interest like traditional Treasurys, but their principal, to which the interest rate is applied, is adjusted twice a year to reflect changes in inflation as measured by the Consumer Price Index (CPI). Twice a year the interest rate is multiplied by the new principal, so the interest you receive will increase or decrease as well. Interest is federally taxable, as are any increases in the value of your principal. However, those increases are not paid until the end of the term.At maturity, you’re repaid the inflation-adjusted principal or par value, whichever is more.
Like US Treasury bills, Treasury notes are debt securities issued by the US government and backed by its full faith and credit. They are available at issue through Treasury Direct in denominations of $1,000 to $5 million and are traded in the secondary market after issue.Notes are intermediate-term securities, with a maturity dates of two, three, five or ten years. The interest you earn on Treasury notes is exempt from state and local, but not federal, taxes. And while the rate at which the interest is paid is generally less than on long-term corporate bonds, the shorter term means less inflation risk.
Treasury stock is stock that an issuing company repurchases from its shareholders. A company may buy back its stock for a number of reasons, ranging from preventing a hostile takeover to having shares available if employees exercise their stock options. It may also choose to resell the shares or use them to meet the demand for shares from holders of convertible securities. The company may choose to repurchase if it has cash available, as an alternative to investing it in expanding the business. Or it may issue bonds to raise the money it needs to repurchase, which changes the company’s debt-to-equity ratio. In most cases, the company offers to pay a premium, or more than the market price, to build its cache of Treasury stock.Reducing the number of outstanding shares boosts the per-share value of the remaining shares and tends to increase the market price of the stock. That results, in part, because no dividends are paid on Treasury stock and it’s not included in earnings-per-share calculations, boosting that ratio.
When you create a trust, you transfer money or other assets to the trust. You give up ownership of those assets in order to accomplish a specific financial goal or goals, such as protecting assets from estate taxes, simplifying the transfer of property, or making provision for a minor or other dependents.When you establish the trust, you are the grantor, and the people or institutions you name to receive the trust assets at some point in the future are known as beneficiaries. You also designate a trustee or trustees, whose job is to manage the assets in the trust and distribute them according to the instructions you provide in the trust document.
A trustee is a person or institution appointed to manage assets for someone else’s benefit. For example, a trustee may be responsible for money you have transferred to a trust, or money in certain retirement accounts. Trustees are entitled to collect a fee for their work, often a percentage of the value of the amount in trust. In turn, they are responsible for managing the assets in the best interests of the beneficiary of the trust. That’s known as fiduciary responsibility.
The Truth-in-Lending Act requires every lender to provide a complete and clear disclosure of the key terms of any lending or leasing arrangement, plus a statement of all costs, before the agreement is finalized.The statement must include the finance charges stated in dollars and as an annual percentage rate (APR). For most loans, it must also include the total of the principal amount being financed, all the interest, fees, service charges, points, credit-related insurance premiums, payment due date and terms, and any other charges.The consumer lending section of the Act, which was first passed in 1968 and then simplified and reformed in 1980, is also known as Regulation Z. The consumer leasing section is known as Regulation M.
A mutual fund’s turnover ratio measures the percentage of holdings that the fund sells, or turns over, in a year. For example, if a stock fund manager has a portfolio of 100 stocks at the beginning of the year, sells 75 of them and buys 75 different stocks, the turnover rate of the fund is 75%. Some investors look for funds with lower turnover ratios, since limited trading may help to minimize capital gains taxes and trading costs. However, a high turnover ratio can also produce strong returns, which can offset the added costs and produce a net gain.
Last Updated: December 26th, 2014