Investor Education

Reflects the percentage of a fund's movements that can be explained by movements in its benchmark index. An R-squared of 100 indicates that all movements of a fund can be explained by movements in the index.

A preliminary prospectus for securities to be offered publicly by a corporation or underwriter. It is the only form of written communication allowed between a broker/dealer and a potential purchaser before the effective date of the offering. The Securities Act of 1933 requires a red-lettered caveat on the front page, hence the derivation of the name.

A transaction in which the issuer returns the principal amount represented by an outstanding security (plus, in certain cases, an additional amount). Redemptions can be made under several different circumstances: at maturity of the security, as a result of the issuer's call of the securities, or (in rare cases) as a result of the security holder's election to exercise a put or tender option privilege. *

The amount per share that the mutual fund shareholder receives when cashing in his/her shares (also known as "bid price"). The value of the shares depends upon the market value of the fund's portfolio securities at the time. This is usually the net asset value next calculated after receipt of the redemption request.

A service provided by most mutual funds for the automatic reinvestment of a shareholder's income dividends and capital gains distributions in additional shares.

The risk that a purchaser of a fixed income security incurs that interest rates will be lower when the purchaser seeks to reinvest income received from the security. *

A transaction between a securities dealer and an investor in which the dealer sells the security to the investor with an agreement to repurchase the security back from the investor at a specified time and at a price that will result in a predetermined yield to the investor. The investor is providing the dealer with short-term funds, while the dealer is providing the investor with short-term securities.

A bond which is payable from a specific source of revenue and to which the full faith and credit of an issuer with taxing power is not pledged. Revenue bonds are payable from identified sources of revenue, and do not permit the bondholders to compel taxation or legislative appropriation of funds not pledged for payment of debt service. Pledged revenues may be derived from operation of the financed project, grants, and excise or other specified non-ad valorem taxes. Generally, no voter approval is required prior to issuance of such obligations. Compare: General Obligation Bond. *

A privilege offered by some investment companies that allows the investor to include the total market value of shares already owned in calculating sales charges when a new investment is made in additional shares.

The simplest definition of risk is uncertainty. Here are the most important types of risk:

• Market or Systematic risk - the uncertainty that a particular security may fluctuate in price solely due to investor sentiment in the "market." Sometimes called Systematic Risk. This is best observed when bad news hits Wall Street and almost all stocks go down regardless of their earnings strength.
• Business or Financial risk - the risk that the business in which you have invested money will not do well. If the company's products don't sell and earnings plummet, you can expect the stock price to do so as well.
• Credit risk - a risk that applies to debt securities (bonds). The investor has extended credit to the issuer when he buys their bonds. Just as in our own personal lives, if we loan money to someone, there is always the chance that they will not be able to pay us back. Lower rated bonds, called "junk bonds" carry a great deal of credit risk.
• Liquidity risk - just how marketable is the investment you are holding. Some investments, like real estate, are not easily sold quickly, we say that they are not very liquid. There is no liquidity risk with mutual funds or variable annuities as Federal Law requires redemption by the issuer within 7 days after tender of a redemption request.
• Money rate or interest rate risk - as interest rates go UP, the prices of securities sold primarily for their fixed income features (like bonds and preferred stock) go DOWN. Since the investor has no control over interest rate movements, this is a real risk.
• Purchasing power or inflation risk - the uncertainty that a dollar will not purchase as much in the future as it does now. This risk is found in all FIXED dollar securities such as bonds and fixed annuities. It was primarily due to this risk that variable annuities and variable life insurance policies were developed since their portfolios, consisting largely of common stock provide a hedge against inflation.

Named for Senate Finance Committee Chairman William Roth, the Roth IRA offers investors the opportunity for tax-free income in retirement. While contributions to a Roth IRA are not tax deductible, all earnings are tax free, provided that you hold your account at least five years and are age 59 ½ or older when withdrawals begin.