Glossary of Financial Terms

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Assets
Anything owned that has monetary value or can be exchanged for monetary value (for example, a house or car).

Capital
Money available for investment purposes.

Capital Gain (or Loss)
An increase (or decrease) in value, for example, of a stock or mutual fund, resulting from favorable (or unfavorable) investment performance. This may also be expressed as appreciation (or depreciation).

Diversification¹
Spreading your money among different kinds of investments such as stocks, bonds, or cash equivalents.

Dividend
A payment to shareholders which represents their share of a fund's or a company's earnings available for distribution.

Earnings
A company's or fund's profit after paying all costs, expenses, and taxes.

Expense Ratio
The total cost an investor pays annually, expressed as a percentage of assets, for investing in an investment option.

Growth Investment Option
An equity portfolio with growth or capital appreciation as its primary goal.

Income
Interest or dividends earned from an investment. Income is automatically reinvested in a participant's plan account.

Index
A benchmark against which financial or economic performance may be measured, such as the S&P 500^® or the Consumer Price Index.

Investment Objective/Goal
A statement of the goals an investment option wants to achieve through its investments. Generally, investors match their financial objectives with investment options that have similar goals, balanced with an investor's risk tolerance.

Liquidity
A market is liquid when it has a high level of trading activity, allowing buying and selling with minimum price disturbance. A liquid asset is easily turned into cash.

Market Capitalization (Market Cap)
The current value or price of a stock multiplied times the number of shares outstanding. For example, if a company has 10,000,000 shares available and the price is $50 per share, market cap is $500,000,000. Typically, small-cap is defined as $1 billion or less; mid-cap as $1 to $5 billion; and large-cap as $5 billion or more.

Price-to-Earnings (P/E) Ratio
The most common measure of how expensive a stock is. Equal to a stock's market capitalization divided by its after-tax earnings over a 12-month period.

Price-to-Book (P/B) Ratio
The ratio of stock price to per share stockholder's equity.

Principal
The original amount invested, not counting interest or dividends on that amount.

Total Return
The profit or loss on an investment over a specific period of time. Total return includes income and share price appreciation and depreciation. Total return assumes that all dividends and capital gains paid during the period are reinvested to buy additional shares.

Value Investment Option
An equity portfolio seeking to make investments that are believed to be at a discount to their 'fair value' and sell them at or in excess of that value. Often a value stock has a low price-to-book (P/B) ratio.

Volatility
A measure of price or interest rate fluctuations over a given period of time.

 

1. Diversification of an investment portfolio does not assure a profit and does not protect against loss in declining markets.