Glossary of Terms

The information presented here is not intended as financial, investment, tax or legal advice and is provided for educational purposes only.
Income Funds
Mutual funds that invest in income-producing securities. They seek to provide a high level of monthly income while also maintaining relative stability of principal.
Income Risk
The possibility that the income provided by a fund will fluctuate due to changing interest rates. Money market funds and short-term bond funds are most subject to income risk.
The formal contract governing a corporate bond that explains the bond's maturity, coupon rate, call privileges, and other rights.
A measure of something's performance — often, the performance of the stock or bond markets. Funds use indexes to compare their performance with the broad market as well as their peers — competitors with similar investment styles and objectives. In the U.S., closely followed equity indexes include the Standard & Poor's 500 Index, the Dow Jones Industrial Average and the Nasdaq Composite Index. Hundreds of indexes exist to measure the performance of stocks, bonds, foreign stock markets, etc. An investment cannot be made directly in an index.
Index Fund
A fund that seeks to mirror the performance of an index, often the Standard & Poor's 500 Index. Not actively managed, index funds buy and hold the same securities, in the same proportion, as the index.
Index Shares
A category of stock issued by exchange traded funds to represent ownership. This allows investors to have a stake in an index without having to purchase each individual stock that comprises it. There are two classes of index shares, portfolio depositary receipts and index fund shares.
Index Tracking
A reference to the correlation between a portfolio's return and the return on a benchmark index, or, alternately, to the portfolio's tracking error relative to the index. Many equity index funds and enhanced index portfolios are managed with close attention to index tracking. See also Tracking Error.
(1) A relatively passive investment strategy that attempts to replicate the return of a benchmark index in a fund. (2) The practice of linking the coupon on a debt security to an index of inflation.
Individual Account
An account in which one person has control over the investments and transacts on the account.
Individual Retirement Account (IRA)
A personal, tax-deferred savings account that is established by an employed person or their spouse and has a yearly contribution limit. IRA assets can be invested in stocks, bonds, mutual funds, certificates of deposit, annuities and precious metals; physical real estate cannot be held in an IRA. Eligibility requirements, contribution limits, investment options, tax treatment and withdrawal regulations are subject to change; a financial adviser can provide more complete information. Two broad categories of IRAs exist: traditional and Roth. Traditional IRAs are funded with pretax dollars; they grow tax-deferred; and withdrawals are taxed as ordinary income. Roth IRAs are funded with after-tax dollars; they grow tax-deferred; and withdrawals are not subject to tax. See Spousal IRA.
A rise in the price of goods and services, resulting from increased spending relative to the supply of goods and services available. When "too much money chases too few goods", the value or purchasing power of currency declines. In the U.S., the Consumer Price Index is commonly used to measure the rate of inflation. See Consumer Price Index (CPI).
Initial Offering Date
The date a portfolio is first available for sales.


Initial Public Offering (IPO)
A corporation's first sale of common stock to the public. Subsequently, the corporation's common stock trades among individual buyers and sellers and the corporation receives no proceeds. See Secondary Market.
Initial Sales Charge
The sales charge paid by the investor at the time of purchase.
Directors, officers and others with access to confidential corporate information not available to the public. Securities and Exchange Commission regulations prohibit insiders from trading stock based on non-public information. A violation of those regulations is called insider trading.
Institutional Investor
A non-bank person or organization that trades securities in large enough share quantities or dollar amounts that they qualify for preferential treatment and lower commissions. Institutional investors face fewer protective regulations because it is assumed that they are more knowledgeable and better able to protect themselves.
Assets that are neither physical nor financial in nature, but which nevertheless have value to a company. Examples include goodwill, patents, trademarks, copyrights, licenses and franchises.
Compensation paid for the use of borrowed money.
Interest Coverage
A measure of a company's ability to make interest payments on its long-term debt, calculated by dividing its earnings from continuing operations (before interest and taxes) over the past year by its interest expense over the past year. A low-coverage ratio can indicate a company is over-leveraged. A high ratio indicates a margin of safety from default.
Interest Rate
The annual rate, expressed as a percentage of principal, charged for the use of borrowed money.
Interest Rate Risk
The risk that bond prices generally fall as interest rates rise, and vice versa.
Interest-Only Obligation (or IO Obligations)
A tranche of mortgage-backed securities whose owner receives only the interest (or a portion of the interest) on the underlying mortgages. During a period of falling interest rates, rapid repayments of principal by mortgage holders reduces the value of the interest-only obligations.
Generally limited within a fund’s taxable year to the excess of the amount of "qualified interest income" of the fund over allocable expenses.
Intermediate Term Bonds
Fixed income debt obligations having maturities of between one and ten years.
Internal Rate of Return (IRR)
A means of measuring and comparing the profitability of investments. The internal rate of return on an investment is the annualized effective compounded rate of return that can be earned on invested capital. When the internal rate of return is greater than the required return, an investment represents a good opportunity.
International Funds
Mutual funds that invest the bulk of their assets in non-U.S. securities. Diversified international funds may invest in securities from around the globe and may hold securities from companies in developed and developing markets. Other international funds may focus on a single country or region. Foreign securities have special risks, including exchange rate changes, potential political and economic instability, less availability of information, relatively low market liquidity, and the potential lack of strict financial and accounting controls and standards.
Intrinsic Value
The estimated value of a company's stock, separate and apart from its market price. Market analysts or fund managers may use a variety of data to determine whether a stock's current market price fairly values a company's tangible assets and growth prospects. If estimated intrinsic value is greater than the stock's current market price, the stock may be considered undervalued and a candidate for purchase. There is no guarantee that a stock's estimated intrinsic value will ever be reflected in its market price.
Merchandise bought for resale of supplies and raw materials purchased for use in revenue-producing operations. A company with excess inventory on its balance sheet could indicate a slow-down in sales and a lack of pricing power.
Inventory Turnover
A measure of the velocity with which merchandise moves through a company, calculated by dividing the revenues by the average of inventories over the past four quarters. Low inventory turnover is a sign of inefficiency. Also called inventory turns, or turnover.
Invested Capital
The total amount, borrowed or owned, a company used to generate its profits. Invested capital is equal to a company's long-term debt plus preferred equity (plus common equity, taken from its most recently reported balance sheet.
Investment Adviser
As defined by the Investment Advisors Act of 1940, any person or group that makes investment recommendations or conducts securities analysis in return for a fee, whether through direct management of client assets or via written publications. See Financial Adviser.
Investment Advisers Act
A 1940 law regulating investment advisers. With certain exceptions, the Act requires that firms or sole practitioners compensated for advising others about securities investments must register with the Securities and Exchange Commission and conform to regulations designed to protect investors.
Investment Club
A group of investors who pool their money and knowledge to make investments, learn about investing and diversify their portfolios.
Investment Company Act of 1940
A 1940 law regulating the organization of companies, including mutual funds, that engage primarily in investing, reinvesting and trading securities — and whose own securities are offered to the investing public. The Act is designed to minimize conflicts of interest that arise in these complex operations. The Act requires such companies to disclose their financial condition and investment policies to investors when stock is initially sold, and subsequently, on a regular basis. The focus of the Act is on disclosure to the investing public of information about the fund and its investment objectives, as well as on investment companies' structures and operations.
Investment Company Shares
The technical name for many closed-end fund, open exchange-traded fund and preferred fund shares which are governed by rules established in the Investment Company Act of 1940.
Investment Grade Bonds
A credit rating given to a government or corporate bond that indicates that the agency giving the rating (for example, Standard & Poors, Moodys or Fitch) thinks the issuer has strong creditworthiness and is unlikely to default. The grades used by two of the leading agencies are as follows: Moodys AAA / S&P AAA for the highest quality, lowest risk bonds, down to Moodys Baa / S&P BBB for quality bonds with an adequate capacity to pay interest and principal but which are more vulnerable to adverse economic conditions. All those at Baa/BBB or above are adjudged investment grade. See Bond Rating.
Investment Horizon
The length of time an investor expects to keep a sum of money invested.
Investment Manager
A fiduciary (other than a trustee or named fiduciary under Sec. 402 of the IRC) who has the power to manage, acquire or dispose of certain plan assets and who has acknowledged in writing that he is a fiduciary with respect to the plan.
Investment Objective
Formally, a provision in the prospectus of a fund that states the principal requirements and limitations that constrain the investment advisor's range of action in management of the fund portfolio. Investment objectives are generally stated in broad terms such as growth of capital or investment income, but they are occasionally highly specific, particularly when they pertain to restrictions on investment flexibility.
Investment Style
A broad indicator of a fund's investment emphasis. For stock funds, the investment style indicates whether a fund emphasizes stock of large-, medium, or small-capitalization companies and whether it emphasizes stocks with growth or value characteristics or a blend of these characteristics.