The Motley Fool Glossary

H

High-yield bonds

Bonds that are rated as below investment grade. The issuers of these bonds -- which are judged to be at a higher risk of default -- have to pay an attractive dividend to compensate investors for the additional risk.

High-yield fund

A mutual fund that invests in bonds with low credit ratings. Because of the risky nature of high-yield bonds, high-yield funds have greater volatility than the average bond fund.

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I

Income

See Earnings.

Income fund

A mutual fund that invests in bonds and stocks with higher-than-average dividends.

Index

An unmanaged selection of securities whose collective performance is used as a standard to measure investment results. Examples include the Dow Jones Industrial Average, the Standard & Poor's 500, the Wilshire 5000, and the FOOL 50.

Index fund

A passively managed mutual fund that seeks to match the performance of a particular market index. Partially due to lower expenses, index funds outperform the majority of actively managed mutual funds. See The Truth About Mutual Funds.

Individual Retirement Account (IRA)

A tax-deferred retirement account set up with a financial institution such as a bank, broker, or mutual fund in which contributions may be invested in many types of securities such as stocks, bonds, money market funds, CDs, etc. See IRA Glossary and All About IRAs.

Inflation

A rise in the prices of goods and services.

Initial public offering (IPO)

A company's first offering of common stock to the public.

Insider trading

Trading done by a person with access to key non-public information.

Institution investors

Institutions investors include pension funds, insurance funds, mutual funds, and hedge funds. Although institutions hold about 40% to 50% of all stock owned, they account for as much as 90% of daily trading volume.

International fund

A mutual fund that invests in securities traded in foreign markets.

Inventory

Finished or near-finished products that a company has not yet sold. It's considered an asset because it can be sold or liquidated for money. But, from an investor's point of view, inventory is often more like a liability because it represents a momentary failure on the company's part to convert its business into cash. Investors ideally like to see inventory growth comparable to, or less than, sales growth.

Investment adviser

An entity that makes the recommendations and/or decisions regarding a portfolio's investments. Alternatively called a portfolio manager.

Investment grade

A bond whose credit quality is considered to be among the most secure by any independent bond-rating agency. A rating of Baa or higher by Moody's Investors Service or a rating of BBB or higher by Standard & Poor's is considered investment grade.

IPO

See Initial public offering.

IRA

See Individual retirement account.

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J

Junk bond

See High-yield bonds.

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K

Keogh plan

A qualified retirement plan that may be set up by self-employed persons, partnerships, and owners of unincorporated businesses as either a defined benefit or defined contribution plan. As defined contribution plans, they may be structured as a profit sharing, a money purchase, or a combined profit sharing/money purchase plan.

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L

Large-capitalization ("large-cap") stocks

Large caps are stocks of companies whose market value is above a designated minimum, usually in the neighborhood of $10 billion. See the Rule Maker Portfolio for daily discussion of some representative large-cap stocks.

Liabilities

Outstanding debts.

Life insurance

See Term insurance and Whole-life insurance.

Limit order

An order to buy or to sell a security at a specific price or better. Example: "Buy 200 shares of Microsoft at $65." This would be placed when Microsoft is trading above $65 a share, and the purchaser is interested in waiting for a better price, and accepting the possibility that his preferred price will not ever be available, in which case the order will not be filled. See Market order.

Liquidity

A measure of how quickly a stock can be sold at a fair price and converted to cash. Illiquid stocks are stocks that don't trade in high volume. Thus, having too many shares of a stock that doesn't trade frequently would make for a position that cannot necessarily be sold. See The Fool FAQ: Liquidity.

Load

A sales commission paid when purchasing shares of a mutual fund (called a front-end load) or when redeeming shares of a mutual fund (called a back-end load). For example, if the fund has a front-end load of 5%, for every $100 you place into the fund, only $95 is invested, with $5 going to the salesperson and/or mutual fund company. Avoid mutual funds with loads. See The Truth About Mutual Funds: Loads.

Long-term capital gain

A profit on the sale of stock, mutual fund shares, or other securities that have been held for more than one year. Taxes owed on long-term capital gains are lower than those on short-term capital gains.

Long-term assets

A long-term asset is one that is consumed or used over a number of accounting cycles, from more than one year to 40 years. The long-term asset accounts include assets such as land, buildings, equipment, and intangibles such as goodwill and accrued organizational expenses. It appears on the balance sheet.

Lump-sum distribution

A single payment that amounts to the entirety of a retiree's interest in a qualified retirement plan. Severe tax consequences apply to receiving a lump-sum distribution without retiring (or otherwise being separated from employment). See Managing Your Retirement.

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