Index. A statistical composite that tracks the ups and downs in one or more financial markets.
Individual retirement account. A tax-sheltered account ideal for retirement investing because it permits investment earnings to accumulate untaxed until they are withdrawn. The contribution limit is $2,000 per year, and penalties usually apply for withdrawals before age 59 1/2. Taxpayers whose income is below certain levels can deduct all or part of their IRA contributions, making the IRA a double tax shelter for them.
Initial public offering. A corporation's first public offering of an issue of stock. Also called an IPO.
Institutional investors. Mutual funds, banks, insurance companies, pension plans and others that buy and sell stocks and bonds in large volumes. Institutional investors account for 70% or more of market volume on an average day.
Investment Company Act of 1940. Requires mutual fund companies to register with the Securities and Exchange Commission, which also regulates the industry. The Act sets the standards by which mutual funds and other investment vehicles of investment companies operate, in such areas as promotion, reporting requirements, pricing of securities for sale to the public, and allocation of investments within a fund portfolio.
Junk bond. A high-risk, high-yield bond rated BB or lower by Standard & Poor's or Ba or lower by Moody's. Junk bonds are issued by relatively unknown or financially weak companies, or they have only limited backing from reasonably solvent companies .
Keogh plan. A tax-sheltered retirement plan into which self-employed individuals can deposit up to 20% of earnings and deduct the contributions from current income. Investments within the Keogh grow untaxed until they are withdrawn. Withdrawals from the plan are restricted before age 59 1/2.
Leveraging. Investing with borrowed money in the hope of multiplying gains. If you buy $100,000 worth of stock and its price rises to $110,000, you've earned 10% on your investment. But if you leveraged the deal by putting up only $50,000 of your o wn money and borrowing the rest, the same $10,000 increase would represent a 20% return on your money, not counting interest on the loan. The flip side of leverage is that it also multiplies losses. If the price of the stock goes down by $5,000 on the all -cash deal, your loss would be 5% of your $100,000 investment. On the leveraged deal, your loss would be 10% of the money you put up and you'd still have to pay back the $50,000 you borrowed.
Leveraged buyout. The use of borrowed money to finance the purchase of a firm. Often, an LBO is financed by raising money through the issuance and sale of junk bonds.
Limited partnership. A business arrangement put together and managed by a general partner (which may be a company or an individual) and financed by the investments of limited partners, so called because their liability is limited to the amount of m oney they invest in the venture. Limited partnerships can invest in virtually anything, but real estate is the most common choice. They have often been characterized by high fees for the general partners, complicated tax reporting requirements and elusive payouts for the limited partners.
Limit order. An order to buy or sell a security if it reaches a specified price. A stop-loss order is a common variation.
Liquidity. The ability to quickly convert an investment portfolio to cash without suffering a noticeable loss in value. Stocks and bonds of widely traded companies are considered highly liquid. Real estate and limited partnerships are illiquid.
Load. See back-end load and front-end load.