Financial Terminology

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Dictionary of Financial Terms
(Source : www.pathtoinvesting.com)

[ Explanation of some words may terms which are relevant for US Financial System only. For eg. 401(k) plan.]

A
Account balance Your account balance is the amount of money you have in one of your financial accounts. For example, your bank account balance refers to the amount of money in your bank accounts. Your account balance can also be the amount of money outstanding on one of your financial accounts. Your credit card balance, for example, refers to the amount of money you owe a credit card company.

With your 401(k), your account balance, also called your accrued benefit, is the amount your 401(k) account is worth on a date that it's valued. For example, if the value of your account on December 31 is $250,000, that's your account balance.

You use your account balance to figure how much you must withdraw from your retirement savings plan each year once you start taking required distributions after you turn 70 1/2. Specifically, you divide the account balance at the end of your plan's fiscal year by your life expectancy to determine the amount you must take from your account during the next fiscal year. Accumulation unit Accumulation units are the shares you own in variable annuity subaccounts (also called investment portfolios or annuity funds) while you're putting money into your annuity.

If your 401(k) plan includes an annuity, each time you make a pretax contribution, that amount is added to one or more subaccounts to buy additional accumulation units. The value of your account is figured by multiplying the number of units you own by the dollar value of each unit. That value changes to reflect the changing performance of the underlying investments in the subaccount. Acquisition If a company buys another company outright, or accumulates enough shares to take a controlling interest, the deal is described as an acquisition. The acquiring company's motive may be to expand the scope of its products and services, to make itself a major player in its sector, or to fend off being taken over itself.

To complete the deal, the acquirer may be willing to pay a higher price per share than the price at which the stock is currently trading. That means shareholders of the target company may realize a substantial gain, which is one reason that some investors are always on the lookout for companies that seem ripe for acquisition.

Sometimes acquisitions are described, more bluntly, as takeovers and other times, more diplomatically, as mergers. Collectively, these activities are referred to as mergers and acquisitions, or M&A, to those in the business. Actively managed fund Managers of actively managed mutual funds buy and sell investments to achieve a particular goal, such as providing a certain level of return or beating a relevant benchmark. As a result, they generally trade much more frequently than managers of passively managed funds whose goal is to mirror the performance of the index the fund tracks. While actively managed funds may provide stronger returns than index funds, they often have higher management fees and provide more taxable income. Adjustable rate mortgage (ARM) An adjustable rate mortgage is a long-term loan you use to finance a real estate purchase, typically a home. Unlike a fixed-rate mortgage, where interest rate remains the same for the term of the loan, the interest rate on an ARM is adjusted, or changed, during its term.

The initial rate on an ARM is usually lower than the rate on a fixed-rate mortgage for the same term, which means it may be easier to qualify for an ARM. You take the risk, however, that interest rates may rise, increasing the cost of your mortgage. Of course, it's also possible that the rates may drop, decreasing your payments.

The rate adjustments, which are based on changes in one of the publicly reported indexes that reflect market interest rates, occur at preset times, typically once a year but...
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