NASDAQ

Created in 1971, the Nasdaq was the world’s first electronic stock market. The Nasdaq is a computerized system that facilitates trading and provides price quotations on some 5,000 of the more actively traded over-the-counter stocks.

The term “Nasdaq” used to be capitalized “NASDAQ” as an acronym for National Association of Securities Dealers Automated Quotation. In recent times, the acronym was dropped, and Nasdaq is now used as a proper noun.

The Nasdaq is traditionally home to many high-tech stocks. The big ones include Microsoft, Intel, Dell and Cisco.

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Municipal Bond

A debt security issued by a state, municipality, or county, in order to finance its capital expenditures. Municipal bonds are exempt from federal taxes and from most state and local taxes, especially if you live in the state the bond is issued.

Such expenditures might include the construction of highways, bridges, or schools. “Munis” are bought for their favorable tax implications, and are popular with people in high income tax brackets.

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London Interbank Offered Rate – LIBOR

An interest rate at which banks can borrow funds, in marketable size, from other banks in the London interbank market. The LIBOR is fixed on a daily basis by the British Bankers’ Association. The LIBOR is derived from a filtered average of the world’s most creditworthy banks’ interbank deposit rates for larger loans with maturities between overnight and one full year.

The LIBOR is the world’s most widely used benchmark for short-term interest rates. It’s important because it is the rate at which the world’s most preferred borrowers are able to borrow money. It is also the rate upon which rates for less preferred borrowers are based. For example, a multinational corporation with a very good credit rating may be able to borrow money for one year at LIBOR plus 4 or 5 points.

Countries that rely on the LIBOR for a reference rate include the United States, Canada, Switzerland and, of course, England.

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Keogh Plan

A defined-benefit plan or defined-contribution plan established by a self-employed individual for him/herself and his/her employees.

Like earnings in regular qualified plans, earnings in a Keogh accrue on a tax-deferred basis.

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Jumbo Loan

Any residential or commercial mortgage with a loan amount exceeding the guidelines of Fannie Mae and Freddie Mac. Rates tend to be slightly higher on jumbo loans because lenders generally have a higher risk.

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Index Fund

A portfolio of investments that is weighted the same as a stock-exchange index in order to mirror its performance.

This process is also referred to as “indexing”. Investing in an index fund is a form of passive investing. The primary advantage to such a strategy is the lower management expense ratio on an index fund. Also, a majority of mutual funds fail to beat broad indexes such as the S&P 500.

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Hedge Fund

An aggressively managed portfolio of investments that uses advanced investment strategies such as leverage, long, short and derivative positions in both domestic and international markets with the goal of generating high returns (either in an absolute sense or over a specified market benchmark).

Legally, hedge funds are most often set up as private investment partnerships that are open to a limited number of investors and require a very large initial minimum investment. Investments in hedge funds are illiquid as they often require investors keep their money in the fund for a minimum period of at least one year.

For the most part, hedge funds (unlike mutual funds) are unregulated because they cater to sophisticated investors. In the U.S., laws require that the majority of investors in the fund be accredited. That is, they must earn a minimum amount of money annually and have a net worth of over $1 million, along with a significant amount of investment knowledge. You can think of hedge funds as mutual funds for the super-rich. They are similar to mutual funds in that investments are pooled and professionally managed, but differ in that the fund has far more flexibility in its investment strategies.

It is important to note that hedging is actually the practice of attempting to reduce risk, but the goal of most hedge funds is to maximize return on investment. The name is mostly historical, as the first hedge funds tried to hedge against the downside risk of a bear market with their ability to short the market (mutual funds generally can’t enter into short positions as one of their primary goals). Nowadays, hedge funds use dozens of different strategies, so it isn’t accurate to say that hedge funds just “hedge risk”. In fact, because hedge fund managers make speculative investments, these funds can carry more risk than the overall market.

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Going Public

The process of selling shares that were formerly privately held to new investors for the first time. Otherwise known as an initial public offering (IPO).

When a company “goes public,” it is the first time the general public has the ability to buy shares.

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FICO Score

A standard credit score which makes up a substantial portion of a credit report that credit bureaus sell to lenders so they can asses an applicant’s credit risk and whether to extend them credit.

It is an acronym for the creators of the FICO score, Fair Isaac Credit Organization.

Using mathematical models, the FICO score takes into account various factors in each of these five areas: payment history, current level of indebtedness, types of credit used and length of credit history and new credit in determining credit risk.

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No, I am not talking about the ear on the side of your head.

Effective Annual Interest Rate

An investment’s annual rate of interest when compounding occurs more often than once a year. Calculated as the following:

Consider a stated annual rate of 10%. Compounded yearly, this rate will turn $1000 into $1100. However, if compounding occurs monthly, $1000 would grow to $1104.70 by the end of the year, rendering an effective annual interest rate of 10.47%. Basically the effective annual rate is the annual rate of interest that accounts for the effect of compounding.

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