Management fee. Fee paid to mutual fund managers to compensate them for services, pay the rent, brokerage commissions on portfolio transactions, and so forth. Some funds also charge 12b-1 fees, which compensate for the cost of advertising and marketing the fund directly from the funds asset.
Margin buying. The act of financing the purchase of securities partly with money borrowed from the brokerage firm. Regulations permit buying up to 50% "on margin," meaning an investor can borrow up to half the purchase price of an investment. See l everaging.
Money-market fund. A mutual fund that invests in short-term corporate and government debt and passes the interest payments on to shareholders. A key feature of money-market funds is that their market value doesn't change, making them an ideal place to earn current market interest with a high degree of liquidity.
Mutual fund. A professionally managed portfolio of stocks and bonds or other investments divided up into shares. Minimum purchase is often $500 or less, and mutual funds stand ready to buy back their shares at any time. The market price of the fund 's shares, called the net-asset value, fluctuates daily with the market price of the securities in its portfolio.
Mutual fund manager. These individuals do the specialized work of selecting which securities to buy, keep and sell. The result of their decisions determine the returns the fund pays.
Nasdaq. Pronounced Naz-dak, the acronym for the National Association of Securities Dealers Automated Quotations System, a computerized price-reporting system used by brokers to track over the counter securities as well as some exchange-listed issues.
Net assets. The value of a mutual fund determined by subtracting its total liabilities (such as management and operating costs) from its total assets.
Net asset value (NAV). This is the price at which mutual fund shares are bought and sold by investors. The number represents the value of the fund's holdings, minus management expenses, divided by the number of fund shares outstanding. Most funds calculate the net asset value after each trading day.
Odd lot. A stock trade involving fewer than 100 shares. For contrast, see round lot.
Open-end fund. A mutual fund open to any investor with the money to make a minimum initial purchase. The fund issues new shares to accommodate new purchases and retires shares when investors redeem them by selling them back to the fund. Most funds opperate this way.
Opportunity cost. The cost of passing up one investment in favor of another. For instance, if you pull money out of a money-market fund, where it is earning 7% interest, to invest it in a stock that has promise but yields just 4%, your opportunity cost while you're waiting is 3%.
Option. The right to buy or sell a security at a given price within a given time. The right to buy the security is called a "call." Calls are bought by investors who expect the price of the stock to rise. The right to sell a stock is called a "put. " Puts are purchased by investors who expect the price of the stock to fall. Investors use puts and calls to bet on the direction of price movements without actually having to buy or sell the stock. One option represents 100 shares and sells for a fractio n of the price of the shares themselves. As the time approaches for the option to expire, its price will move up or down depending on the movement of the stock price.
Options can also be used to wring a little income out of stock you own without selling it. By writing (selling) a "covered call," you collect the premium and, assuming the stock price stays under the call price, get to keep the stock. The risk, of course, is that the stock will get called away and you will miss out on the price rise. Return to Call.
Over the counter. The place where stocks and bonds that aren't listed on any exchange (such as the New York or American stock exchange) are bought and sold. Despite the small-stock, small-town image conjured up by its name, in reality the over-the- counter market (OTC) is a high-speed computerized network called