• Definitions

    Terms and Definitions and FAQs

    Explore this resources page to find definitions of commonly used terms in the field along with answers to FAQs.

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  • Investments and Wealth Management Definitions


    Durable Power of Attorney for Financial Matters: A legal document that authorizes another person to assume responsibility for his or her financial affairs. 

    Durable Power of Attorney for Health Care: A written power of attorney authorizing an individual to make health care decisions on behalf of the principal when the principal is unable to make the decisions regarding his or her health. 

    Estate Planning: the process of developing a plan to administer and distribute your assets after death, specifying your wishes, needs of your survivors, and minimizing taxes. 

    Estate Taxes: a tax levied on the value of property transferred at the owner’s death. 

    Will: A written and legally enforceable document expressing how a person’s assets should be distributed on his or her death.

    Emergency Fund: An account that is used to set aside funds to be used in an emergency, such as the loss of a job, an illness, or a major expense. The purpose of the fund is to improve financial security by creating a safety net of funds that can be used to meet emergency expenses as well as reduce the need to use high-interest debt, such as credit cards, as a last resort.

    Rate of Return: An investment's percentage gain or loss.

    Risk: From an investment perspective, risk is the likelihood that an investment's actual return will deviate from its expected return.

    Risk Tolerance: The amount of fluctuations in investment returns that an investor is comfortable experiencing.

    Wealth Management: A professional service that can combine providing advice on finance, accounting, and estate issues such as investment and portfolio planning, and tax and estate planning.

    Load: The commission paid on mutual funds.

    Front Load Commission: The commission is paid at purchase and is deducted from the total invested immediately.

    Back Load Commission: There is no commission paid upon purchase, rather the commission is paid at liquidation and includes a commission on any appreciation in the fund.

    Administration Fees: The annual fees paid to the insurance company or the mutual fund company for ongoing management of the fund.

    Round Lot: 100 shares.

    Odd lot: Less than 100 shares. If 130 shares are purchased, a commission+ an odd lot charge may occur.

    Round Trip: Commission to buy stock + commission to sell stock.

    Margin Loan: A loan on the value of the portfolio-may be as small as $1000 and can increase up to 50 percent of the value of the portfolio.

    Frequently Asked Questions

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     1. What is present value? 

    Present value is today's value of all future cash flows. It is found by discounting future cash flows back to today. The formula for present value is: PV = FV/(1+r)t, where r is the discount rate and t is the number of time periods.

    2. How much of my assets should be held in stocks?

    Portfolio mix largely depends on the risk preferences of the investor as well as the time horizon. Young investors willing to take on moderate risk will likely invest the majority of their money in the stock market or other higher yield instruments.  Older investors or those with lower risk tolerances will likely prefer to hold a larger portion of bonds or other relatively safer instruments.

    3. What are the advantages of buying a corporate bond versus stock?

    Bonds are debt instruments. They are a promise for a bond issuer to repay the bond holder under specific terms. One advantage is that cash flows related to bonds are usually easier to estimate than those associated with stock. Bonds also tend to be safer, so conservative investors may prefer this type of instrument.

    4. Will social security survive until my retirement?

    Experts predict that the social security account will stop running a surplus in 2014. At this time, the amount of social security payments being paid by current workers will be less than the social security benefits being paid to retired workers. With small changes in contributions and payments, the social security system will survive into your retirement.

    5. Is 6 months of an emergency fund really enough?

    This is a general guideline. It's best for each individual to determine how much he or she needs to save in an emergency fund. Consider your areas of expertise and marketability and also the demand for your skills in the marketplace. Assessing this will allow you to determine a potential time frame to replace your income.

    6. How do I begin to plan for my retirement?

    The best way to do so is to meet with a professional financial planner or CPA to assess where you currently stand financially and what your goals are. From there, you will assess the different investing options that you may have, whether they are through your employer in the form of a 401K or individually through a Roth IRA or Traditional IRA. Based on your goals, an advisor will help you determine how much money is necessary to contribute on a monthly basis and help you figure out where to cut some expenses.

    7. If a beginner wants to get started buying individual stocks how should they pick their first stocks?

    The best way to get started buying stocks is to think of the products or services you use every day.  Which ones do you like most?  Which ones do you recommend to others? If you feel that way about the company's products then others probably buy the product also.  This is a great way to buy stocks.  If you buy and love the company's products, you will have more fun following the company's progress in the market.

    8. If I buy individual stocks is there a minimum amount of shares that I need to buy?

    Although you can buy any amount of shares you want, most companies charge higher commissions on odd lots.  If you want the lowest commission possible then you should buy shares in round lots which are multiples of 100 shares. 

    9. When buying mutual funds what is the best way to pay the commission?  Are you better paying the fee up front, during the term of ownership, or when you sell?

    In most cases you will find you pay less commission if you pay a fee for only the money invested rather than a fee that also includes fund appreciation. So the short answer to this question is pay the front end fee (load).

    10. What is a margin loan?

    This is actually a loan where you borrow money against the stock you hold in your brokerage account.  The brokerage company will lend you up to 50% of the value in the account at a very low interest rate. Be careful here, because if the value of your portfolio drops, you could get a margin call which will require you to pay down the loan immediately to the new 50 percent value of the portfolio.

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