Financial Dictionary




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C

Call

A demand for the immediate pay-off of an outstanding loan amount.

Callable

A provision in a bond agreement that allows the issuer to redeem the bond prior to its scheduled maturity. The issuer may offer to pay the holders a premium price. Bonds are usually called when interest rates fall enough that issuers can save money by issuing new bonds at lower rates.

Call Protection

The length of time that a security cannot be redeemed by the issuer.

Capital Asset Pricing Model

Sophisticated model that is based on expected risk and expected return. The theory is rational investors will not take risks unless there is sufficient return to justify taking the risks. If the return premium isn't available, rational investors will invest in a risk-free alternative such as Treasury Bills.

Capital Gain

When an asset is sold for a profit, selling price is greater than purchase price, there is a capital gain. If the holding period is greater than 12 months, the gain is long-term and taxed at a lower rate.

Capital Gains Distribution

Mutual fund's distribution to shareholders of the profits that are derived from the sale of stocks and bonds.

Capital Gains Tax

Tax on the profits from the sale of assets, for example, stocks. Short-term gains are sales that occur in less than 12 months from the purchase date and long-term gains are sales that occur after 12 months.

Capital Market Efficiency

The prices of securities are supposed to be efficiently priced in relation to each other because everything that can be known about a security is simultaneously known by everyone. Also called Efficient Market Theory.

Capital Markets

Markets where financial assets, including equity and fixed income securities, are traded.

Cash Basis

An accounting method that recognizes revenues when cash is received and expenses when cash is paid out. The accrual method recognizes revenue at the time of the sale and expenses when obligations are incurred.

Cash Equivalents

Investments that can be converted to cash in 30 days or less with no reduction in the principal amount. For example money market funds and 30 day Treasury Bills.

Central Registration Depository (CRD)

The National Association of Securities Dealers (NASD) maintains a database of 650,000 representatives who are licensed to sell investments to the public. The database contains the compliance records of the representatives and is accessible to the public. All representatives have CRD numbers that can be used to view their compliance information.

Certified Financial Planner - CFP(r)

A certification that is issued by the College for Financial Planning and the Certified Financial Planner Board of Standards. The program content is very broad and it includes financial, retirement, tax, and estate knowledge.

CFA Institute

A professional organization that issues the CFA (r) designation and includes more than 64,000 current charter holders. Program knowledge focuses on security analysis.

Charitable Remainder Trust

An irrevocable trust that enables donors to make a future gift to charity and take current tax deductions. It is the only provision in the tax code that allows investors to sell appreciated property tax free. Donors receive income from the trust, usually until the death of the surviving spouse, then the principal reverts to the charity of the donor's choice. Donors are supposed to be motivated by philanthropy and not tax avoidance.

Chartered Financial Analyst - CFA(r)

A designation that is awarded by the CFA Institute. Subject matter takes three years to complete and includes economics, financial accounting, portfolio management, security analysis, and standards of conduct. Three complex examinations must be passed to earn the designation.

Chartered Financial Consultant (ChFC)

Designation awarded by American College to financial planners who complete a four-year program that covers economics, insurance, taxation, real estate, and other areas related to finance and investing. American College is associated with the insurance industry.

Chartered Life Underwriter (CLU)

Designation granted by American College to insurance agents and other professionals. Designation requires completion of ten college-level courses, three years of qualifying experience, and adherence to a strict code of ethics.

Churning

Excessive trading in an investor account. Churning increases the broker's commissions, but usually damages investors after trading costs are deducted from investment returns.

Closed End Fund

A mutual fund that has a fixed number of shares and is listed on a major stock exchange. The funds trade like securities.

Closet Indexing

An investment strategy that is based on replicating an index with an actively managed portfolio. This strategy eliminates the risk of underperforming the index, but charges active management fees for an index fund return. Index funds charge substantially lower fees than actively managed funds.

Collectibles

High value objects that are collected by investors. For example: rare cars, stamps, coins, oriental rugs, antiques, Chinese porcelain, baseball cards, photographs, etc. Frequently considered to be a hedge against inflation.

Commercial Paper

Short-term obligations with maturities ranging from 2 to 270 days that are issued by banks, corporations, and other borrowers and sold to investors.

Commissions

Compensation that is paid to licensed representatives when they sell financial products: stocks, mutual funds, variable annuities, etc. The compensation is usually paid within 30 days of the sale. Commissions are paid by companies that manufacture investment and insurance products, and by broker/dealers for securities transactions.

Common Stocks

Units of ownership of a public corporation. Owners of these stocks vote on the selection of directors and other important matters as well as receive dividends for each share of stock that they own. Primary type of security that is held for appreciation.

Compliance Department

Broker-Dealers have departments that oversee the compliance of their representatives in regard to all regulations that apply to licensed representatives. Regulations include those that are issued by the NASD, SEC, and state commissions.

Compliance Record

All licensed or registered advisors have compliance records that are maintained by the NASD and state regulators. Investors should always check the compliance records of advisors before hiring them.

Compound Interest

Interest that is earned on principal plus the interest that is earned on previous interest payments. For example, if $100 is deposited in an account at 10%, the investor will have $110 at the end of the first year and $121 at the end of the second year. The extra $1 is the compound interest that was earned on the $10 of interest from year one.

Conflicts of Interest

When the interests of a financial advisor or company supersede the interests of their clients. For example, the advisor's need for income or a company's need for profit is more important than their clients' needs to achieve their financial goals.

Consumer Price Index (CPI)

The most popular measurement of price inflation in the U.S. economy. Published by the Bureau of Labor Statistics.

Contingent Deferred Sales Charge (CDSC)

Sales charges associated with the early sale of investment products that were sold with back-end loads. For example, if a person invested in a back-end loaded mutual fund with a seven year CDSC period, then sells the product in the first year, the investor is liable for a 7% penalty that is deducted from assets. The penalty declines 1% per year over a seven year period. CDSCs are designed to discourage investors from selling investments before the product company can recover the commissions that are paid to sales representatives.

Contrarian

An investor or professional who invests in out of favor securities. Contrarians buy stocks when they are cheap in relation to other stocks. This investment strategy is the equivalent of betting against the herd instinct that dominates the thinking of most investors.

Convertibles

Convertible securities can be exchanged for another class of securities, usually common stock, at a previously established price. Convertibles are used by investors who want higher income than is available from common stocks, but also want the greater appreciation potential that's associated with underlying common stocks.

Core Competency

A financial professional's primary area of expertise. In the financial services industry that could be one of the planning disciplines or the investment of assets in securities or mutual funds.

Corporate Bond

Debt instruments issued by private companies versus those that are issued by government entities.

Correction

A correction is price movement in the opposite direction of recent price movement. For example, a stock has been declining for months and suddenly reverses direction and begins climbing.

Cost Basis

The original price that investors pay for an asset. Cost basis determines the tax payment, if any, that is due when the asset is sold.

Coupon

The interest rate on a debt security that the issuer promises to pay until maturity. Coupons are expressed as an annual percentage of face value. For example, a bond with a 6% coupon will pay $60 of annual interest for $1,000 of face value.

Current Market Value

Present value of an investors holdings. Based on the current trading price in the securities markets.

Current Maturity

The amount of time between the present and the maturity date of a bond issue. For example, a bond was issued in 2000 and matures in 2020. In 2006, the current maturity is 14 years.

Current Yield

Annual bond interest amount divided by the current market price. For example, a 6% coupon bond with a face value of $1,000 is bought at a market price of $600. The annual income from the bond is $60. Since the investor paid $600 for the bond, the current yield is 10% and not 6%.