Glossary

8-K: Current report of material events or corporate changes (financial statement filed with the SEC)

10-K: Annual report (financial statement filed with the SEC)

10-Q: Quarterly report (financial statement filed with the SEC)

Annual Interest Rate: The annual interest rate is the rate of interest that the bank actually pays on the investment, ignoring the benefits of compounding. If the bank compounds interest more than once a year (annually), the APY will be higher than the annual interest rate.

Annual Percentage Yield (APY): APY is the one year rate of return of an investment. The concept of APY assumes that compounding has occurred during the course of the investment, hidden from the view of the person using the APY. So, if I put $100 in a CD for one year with 6% APY, at the end of the year, I would have $100 * 1.06 = $106.

Certificate of Deposit (CD): A CD is a loan that a consumer makes to a bank. The consumer gives the bank money for a predetermined period of time, at a fixed interest rate. During that period of time, the consumer cannot retrieve the money in the CD without paying a financial penalty.

Compounding: If your investments produce a positive return, after a period of time, you will have more money to invest than when you began investing. During the next period of investing, you will be able to get a return both upon your initial investment, and upon the proceeds from your previous investment. The concept of reinvesting interest is known as compounding.

Consumer Price Index (CPI): The Consumer Price Index is a measure of the average cost of purchasing a bundle of goods typically purchased by American consumers. The bundle includes expenses such as food, petroleum, clothing, and medical care. When used to calculate the inflation rate, the average Consumer Price Index for the nation is used.

Corporation: A corporation is a “fictional person”. It is assigned a Tax ID Number (TIN), and must file taxes returns. (Real people, unlike corporations, have Social Security Numbers, which also act as TINs.) As a fictional person, a corporation can take out loans, sign contracts, and can have a credit rating that is independent of that of its owners. In some cases, it can also utilize various laws to offer its employees benefits (health insurance, pensions, etc.) using pre-tax income.

Correlation: The strength and direction of a linear relationship between two random variables (historical prices of two assets).

Exchange-Traded Fund (ETF): An ETF is a fund that is traded on a stock exchange, like any company. (Mutual funds are not openly traded on stock exchanges.) All ETFs disclose all of their holdings at all times, unlike closed end funds and mutual funds which do not regularly do so. ETFs often contain several assets, such as shares of stock, which are jointly owned by the fund. They may contain assets mirroring a pre-existing index, or may consist of assets in a particular sector, or of a particular nature. While it is common for ETFs to cover nations, such as FXI, which covers China, it is also possible for them to cover resources, like GLD, which covers the price of gold.

Financial Statements: The accounting documents [10-Ks (annual financial statements), 10-Qs (quarterly financial statements), etc.] that companies have to file with the Securities Exchange Commission (SEC) or create for their own internal use

Individual Retirement Account (IRA): An IRA enables you to save money towards your retirement, and pay less taxes on that money than if you were to keep it in a savings account or standard stock brokerage account. The government wants you to save money, and gives you a tax break as an incentive to do so. One of the great things about an IRA, unlike many types of pension, is that it is individually held. If you lose your job or change jobs, you can maintain the same IRA.

Inflation Rate: The Inflation Rate is a measure of the rate of change in the Consumer Price Index. The formula for inflation is (Today’s CPI – Last Year’s CPI) / Last Year’s CPI. Thus, the larger the increase in the price of goods overall, the higher the inflation rate.

Leverage: Using borrowed money to finance an investment.

Pink Sheets: Pink Sheets are stocks listed by Pink Sheets LLC. They tend to be small, closely held companies with large bid-ask spreads. Many companies listed on Pink Sheets do not file audited financial statements with the SEC. If you receive spam mentioning a company with a low share price and a ticker that ends in .P or .PK, you have received a spam message about a stock listed on Pink Sheets.

Price-to-Earnings (P/E) Ratio: The P/E ratio is determined by taking the current share price of the stock, and then dividing it by the amount of earnings per share.

The Sarbanes-Oxley Act of 2002 (SOX): An act created to require the independent auditing of financial statements, enhance civil and criminal liability for falsifying financial statements, and create the Public Company Accounting Oversight Board. The act also does a number of other things, such as prohibiting insider trading during pension fund blackout periods, preventing executives from receiving personal loans from their companies, and providing protection for whistle-blowers who wish to report fraud.

Term insurance: This is the cheapest, simplest kind of life insurance. Buy a policy for a set term (typically 10 or 20 years) and if you die during that time, your beneficiary will receive the benefit.

Universal life: This has the same basic features as whole life, but is a bit more flexible. If you choose, you can pay in amounts above your regular premium, and adjust the death benefit relative to the cash value amount.

Variable life: With a variable policy, you get a choice of different funds where the company will invest your money for you. Generally, if the investments do well you’ll have a higher death benefit and greater cash value. It they don’t do well, you’ll have a lower death benefit and cash value, though some policies guarantee a minimum death benefit.

Variable universal life: This combines the flexibility of adjusting the amount of the death benefit and premium (as in universal life) with the ability to take a little more risk in investment choices in the hope of getting a bigger return (as in variable life).

Variance: Variance is a measure of the dispersion of outcomes of a random variable (i.e. the price of an asset).

Whole life: This is the simplest type of permanent life insurance. Your premiums remain the same throughout the life of the policy, and a portion of each premium is invested by the company, allowing you to accumulate this money (the cash value) on a tax-deferred basis.