Glossary of Terms

While searching for a financial advisor to meet your needs and goals, you are likely to hear some terms that you do not often encounter in daily conversation. We have listed some of them here in the hopes that a simple definition of each will make your search a little easier.

Advanced/Decline Line. A technical analysis tool considered a good measure of the overall market's direction. Equal to the number of stocks which rose divided by the number of stocks which fell during some specified period. Considered bullish if greater than 1, or bearish if less than 1.

Asset Classes. Categories of assets such as stocks, bonds, and money markets. Categories can be further broken down into growth and value stocks, large company and small company stocks, domestic and foreign. Asset classes can also consist of specific industry groups such as technology, finance, or energy.

Bear Market. Any market in which prices exhibit a declining trend for a prolonged period, usually falling by 20 percent or more.

Bull Market. A market in which prices of a certain group of securities are rising or are expected to rise. In 1999, there was the largest Bull Market ever with the Nasdaq 100 Index going up 82 percent for the year.

Cash Account. A brokerage account in which the customer is required by Regulation T to pay the full amount due by the settlement date for securities purchased; buying on margin and borrowed money are not permitted. also called special cash account. Some types of accounts, such as Individual Retirement Accounts and Custodian for Minor accounts, must be cash accounts.

Correction. Downward movement in the price of an asset class after it has been rising. Corrections are usually defined by a 10-20 percent price decline from the maximum price reached. A more serious decline is a Bear Market.

Correlation. The degree to which the prices of two assets move in the same direction at the same time. Positive correlation describes two assets whose prices move up or down together. Negative correlation describes two assets whose prices do not move together (when one asset goes up in price, the other asset tends to go down in price at the same time).

Currency Risk.The risk that a business' operations or an investment's value will be affected by changes in exchange rates. For example, if money must be converted into a different currency to make a certain investment, changes in the value of the currency relative to the American dollar will affect the total loss or gain on the investment when the money is converted back. This risk usually affects businesses, but it can also affect individual investors who make international investments.

Drawdown. A reduction in account equity from a trade or series of trades.

Dynamic Asset Allocation. An asset allocation strategy in which the asset mix is shifted actively and frequently in response to changing market conditions. An asset allocation strategy decides how an investor's funds should be divided among various asset classes.

Hedge Fund. A fund, usually used by wealthy individuals and institutions, which is allowed to use aggressive strategies that are unavailable to mutual funds, including selling short, leverage, program trading, swaps, arbitrage, and derivatives. Hedge funds are exempt from many of the rules and regulations governing other mutual funds, which allows them to accomplish aggressive investing goals. They are restricted by law to no more than 100 investors per fund, and as a result most hedge funds set extremely high minimum investment amounts, ranging anywhere from $250,000 to over $1 million. As with traditional mutual funds, investors in hedge funds pay a management fee; however, hedge funds also collect a percentage of the profits (usually 20%).

Institutional Fund. A mutual fund that targets pension funds, endowments, and other high net worth entities and individuals. Institutional funds usually have lower operating costs and higher minimum investments than retail funds. Often their main objective is to reduce risk, so they invest in hundreds of different securities, which makes them among the most diversified funds available. They also do not tend to trade securities very often, so they are able to keep operating costs to a minimum. Although in the past investors typically needed at least $1 million in order to invest in an institutional fund, nowadays some discount brokers offer access to these funds for smaller amounts.

Momentum. The amount of acceleration or deceleration in an asset's price over time. Momentum can be both to the upside (prices increase at an accelerating or decelerating rate) or to the downside (prices decline at an accelerating or decelerating rate).

Positive Yield Curve. A situation in which long-term debt instruments have higher yields than short-term debt instruments. This is the usual condition, and happens because investors demand a higher return for taking on the additional risk of the longer-term investment. It is also called a normal yield curve.

Relative Strength. Measurement comparing the movement of an asset class over a specific time period to the movement of another asset class over that same time period. Asset classes that outperform other asset classes in return usually have higher relative strength.

Seasonality. The tendency for asset classes to move in a characteristic way at specific times of the month or year.

Sector Fund. A mutual fund whose objective it is to invest in a particular industry or sector of the economy to capitalize on returns. Because most of the stocks in this type of fund are all in the same industry, there is a lack of diversification.

Tax Lot. A record of all transactions and their tax implications involving a particular security in a portfolio. Recording the taxable purchase date provides the holder with the option of specifying exactly which shares to sell at a later date in order to reap tax advantages.

^Return to Top