MarketMinder

Investment Principles

A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

An Optimal Debt Level for Countries Is NOT Zero Many investors fear government debt, believing economic performance would improve if a nation had little or no debt. But basic economics and history teaches this isn’t so. Just as corporations can responsibly use leverage to grow and increase profits, so can developed nations. When a government incurs debt, capital is eventually passed to private corporations and individuals who use it as they see fit, and our economy benefits. Further (as we can check history to see), even at higher levels of debt as a percent of GDP, America has experienced healthy GDP growth and market returns. By contrast, when America has had lower relative levels of debt, economic growth hasn’t been as robust.

Asset Allocation Is the Most Important Decision In its simplest form, asset allocation is the decision to hold stocks, bonds, or cash—and in what percentages—in a portfolio. Asset allocation historically has influenced portfolio returns more than any other single factor; potentially upwards of 90 percent of portfolio performance.

Average Returns Aren’t Normal. Normal Returns Are Extreme. Yearly market returns rarely meet long-term market averages. Rather, they are most often extreme. Though US stocks have historically averaged about 10% yearly over long time periods, only rarely does the US stock market post an annual return of about 10%—and the same is true for global stocks. Source: Global Financial Data

Financial Terms

A B C D E F G H I J K L M N O P Q R S T U V W X Y Z #

A (1 of 20)

A shares

Mutual fund shares of a class that carries a front-end load.

abandon

To choose not to exercise or sell an option. Abandonment occurs when the option is out of the money on the expiration date.

To voluntarily relinquish the rights of property ownership, usually real estate.

abandonment option

The option to close out an investment prior to the fulfillment of the original conditions for termination.

abatement

A reduction in or reprieve from a tax, debt or any other payment obligation. An abatement is sometimes included in a contract; for example, abatement of rent in the event that a building is destroyed by fire, flood or other accident.

ABC agreement

An agreement between a brokerage firm and an employee detailing the rights of the firm when it purchases an NYSE membership for the employee. It is believed to be known as an ABC agreement because the employee can: A) keep the seat if he/she leaves, but must buy another seat for an individual named by the firm; B) sell the seat but return the proceeds to the firm; or C) transfer the seat to another employee of the firm.

abeyance

The suspension of a title to real estate while lawful ownership is being determined.

abnormal return

The difference between the return on a stock (or an entire portfolio) and the performance of an index, such as the S&P 500. The abnormal return is equal to the market return – the normal return.

For example, a stock that provided a return of 10% over the same period of time in which an index provided a 6% return would have an abnormal return of 10% – 6% = 4%. If the abnormal return is negative, it has underperformed the index.

above par

Having a current price above face value. This would generally be the case if the coupon paid on the bond exceeds the discount rate applicable, or if market interest rates fall after the bond is bought. If the bondholder had bought at a price above par, then he/she will suffer a capital loss upon maturity since the bond will only be redeemed at face value.

absolute advantage

The name for the ability of one entity to engage in more efficient production than another entity. Assuming equal inputs, the entity with an absolute advantage will have a greater output.

absolute priority rule

The idea that creditors' claims take precedence over shareholders' claims in the event of a liquidation or reorganization. Shareholders are compensated only after debtors have been fully paid off.

absorbed

Treated as an expense, rather than passing the cost on to customers.

A business that is merged into another company due to acquisition.

In the equities market, the process of trading securities without affecting the market price.

absorption rate

The rate at which properties are able to be leased or sold in a given area.

abstract of title

A set of documents which record the ownership of a property through time.

abusive tax shelter

A tax shelter which the IRS feels is being used to claim illegal deductions, such as inflating the value of acquired property above its market value.

accelerated benefits

In some life insurance policies, benefits available before death in such events as long-term, catastrophic or terminal illness.

This benefit first became available when companies offering viatical settlements purchased the life insurance policies of terminally ill individuals from the insurance companies which issued the policies. After extracting a portion of the value of the policy for costs and profits, these companies offered the remainder of the death benefit to terminally ill policy holders.

Insurance companies have different rules about how much money can be extracted and how close to death the holder must be to receive benefits early. The remainder of the value of the policy, minus interest charges, is awarded to the beneficiaries upon the death of the holder. Also called living benefits.

Accelerated Cost Recovery System

ACRS. Depreciation methods applied to limited partnership assets placed in service in 1986 or before. Replaced by the less-favorable Modified ACRS.

Accelerated Depreciation

A depreciation method which allows faster write-offs than the straight line method. These methods provide a greater tax shield effect than straight line depreciation, so companies with large tax burdens may prefer to use accelerated depreciation methods, even if it reduces the income shown on a financial statement.

Accelerated depreciation methods are popular for writing off equipment that might be replaced before the end of its useful life since the equipment might be obsolete (e.g. computers). One example of an accelerated depreciation method is the Modified Accelerated Cost Recovery System (MACRS).

acceleration clause

A provision that allows a lender to demand payment of the total outstanding balance or demand additional collateral under certain circumstances, such as failure to make payments, bankruptcy, nonpayment of taxes on mortgaged property, or the breaking of loan covenants.

Agree to specified terms, as in a contract.

acceptance

The contractual agreement entered into when the drawee of a time draft writes "accepted" on the document and specifies a payment date. The drawee, thereby known as the acceptor, is responsible for making the payment at maturity.