GLOSSARY OF INVESTMENT TERMS

by Ernesto R. Martin

Appreciation: The increase in value of an investment, such as stocks or real estate, over time.

Blue Chip: Blue chips are companies that have a long history of good earnings, good balance sheets, and even regularly increasing dividends. These are solid companies that may not be exciting, but they are likely to provide reasonable returns over time.

Bond: Your loan to a government or a company, which pays you interest periodically and promises to return the principal at maturity.

Capitalization: One way of sizing a company is to determine its capitalization, which is the value of the company's shares times the number of shares outstanding, in other words, what it would cost to buy all the shares from all the shareholders of that company. Also referred to as Market Capitalization, or Market Cap.

Compounding: In an investment which is growing every year, the growth (whether it's interest or the gains of the investment) gets applied to ever larger amounts. If your $10,000 investment in stocks is growing at an annual rate of 6%, then that 6% applies to your initial investment the first year, but to $10,600 the 2nd year, and to $11,236 the third year, etc. Like a snowball gaining size as it rolls down a mountain.

Depreciation: Typically used in a real-estate investment, it's the reduction that is allowed for tax purposes in the value of an asset with the passage of time, even though the property may be appreciating. Depreciation of an investment property can be used to reduce the investor's taxable income.

Diversification: Choosing to buy investments in different companies, sectors, industries, or geographic locations to minimize risk.

Dividends: In some cases a company will pay shareholders a fraction of their profits in the form of dividends, typically on a periodic basis.

Dow Jones Industrial Average: This average includes a capitalization-weighted list of 30 blue chip (high quality) stocks selected each year to be representative of the U.S. large-corporation stock market. The Dow is often used as a gauge of the health of the stock market as a whole, even though it is only a very small portion.

Equities: Another term for stocks.

Index Funds: Mutual funds that simply try to mirror the overall market, not beat it.

Leverage: The increased return on an investment that results from having bought the investment partially with borrowed money. Because of leverage, the return on real estate bought partially with borrowed money is typically higher than the return if the property had been bought with cash.

Liquidity: The ability to sell an investment quickly. Stocks and bonds are considered liquid. Real estate is not.

Managed Funds: These are the conventional mutual funds that try to beat the overall market.

Mutual Funds: These funds, available from mainline investment organizations, pool money from investors to invest widely. So stock mutual funds use the money to buy the stock of many companies, bond mutual funds buy the bonds of many companies or governments, etc.

Passive funds: Another term for index mutual funds, which try to mirror the overall market, not beat it.

Return: The gain generated by an investment.

S&P 500 Index: A measure of the value of the 500 largest U.S. companies on a capitalization-weighted basis.

S&P 500 Index Funds: Mutual funds that invest in the 500 largest U.S. companies on a capitalization-weighted basis.

Shares: See "Stocks".

Stocks: A stock represents ownership in a company. Companies divide their ownership stakes into shares of stock. Investors buy stock in the hopes that the company will be successful, and more people will want a stake, so that they can sell it later at a higher price.

Volatility: The ups and downs over time of an investment. An investment, such as a stocks, exhibits volatility if it can gain or lose value; an investment whose value remains constant or whose value is always increasing is not volatile.