This glossary is designed to help you learn more about investing and about the mutual funds and retirement plans offered by American Funds.
Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.
Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses, which can be obtained from your plan’s financial professional or and should be read carefully before investing.
Some words may have additional meanings in another context.
active management: an investment management approach that aims to meet investor objectives such as growth, income and preservation of capital through informed, independent investment judgment. Compare with passive management, or indexing, which seeks to replicate market results through a portfolio that mirrors the composition of a market index such as the Standard & Poor’s 500 Composite Index. See also index fund.
adjusted gross income (AGI): the income amount on which an individual’s federal income tax is figured. AGI is calculated by making adjustments to gross, or total, income from taxable sources minus certain deductions.
advisor: a financial professional who helps investors meet their needs and objectives through investments, tax planning, asset allocation, risk management, retirement planning and estate planning. See also financial professional. Also, an organization employed by a mutual fund to manage assets or provide investment advice. See investment advisor.
affiliate: defined under the Investment Company Act of 1940 as a company in which there is any direct or indirect ownership of 5% or more of the outstanding voting securities. An affiliated issuer is one in which a mutual fund owns 5% or more of its outstanding voting securities.
alternative minimum tax (AMT): a federal tax aimed at ensuring that wealthy individuals, trusts, estates and corporations pay at least some income tax in spite of deductions and credits claimed.
American Depositary Receipt (ADR): a certificate representing ownership of a specific number of shares of a foreign stock. ADRs allow U.S. investors to buy and trade shares of foreign companies on U.S. exchanges rather than in overseas markets. ADRs trade in U.S. dollars and are bought and sold just like U.S. securities.
American Funds®: among the nation’s largest mutual fund families with assets of more than $900 billion and nearly 50 million shareholder accounts as of December 31, 2012. The American Funds and American Funds Target Date Retirement Series are managed by Capital Research and Management Company. Target date funds designed for retirement accounts are also available. Since 1931, Capital Research has invested with a long-term focus based on thorough research and attention to risk.
American Funds Portfolio SeriesSM: funds of funds that invest in a mix of underlying American Funds in different combinations and weightings. Portfolio Series funds are designed to help investors pursue a wide range of needs and goals.
American Funds Target Date Retirement Series®: target date funds that invest in a mix of American Funds and are available through tax-advantaged retirement plans and IRAs. The funds’ retirement target dates are offered in five-year increments. Typically, an investor chooses a target date fund with the date closest to his or her expected retirement. The funds are managed to move from a more growth-oriented strategy to a more income-oriented focus as each gets closer to its target date, although they continue to invest in growth funds beyond the target date.
analyst: a research specialist who develops a detailed understanding of an industry or region. Capital Research and Management Company has more than 175 analysts based around the world. Many are part of a larger research "cluster," a group of analysts who cover different parts of the same industry. Examples of clusters include technology, telecommunications and health care. See also research analyst and research portfolio.
annual rate of return: the annual rate of gain or loss on an investment expressed as a percentage.
annual report: a yearly record of a mutual fund’s financial status that must be distributed to shareholders under Securities and Exchange Commission regulations. The report includes a review of the fund’s operations as well as various financial statements.
annuity: a contract that provides an income for a specified period of time, such as a number of years or for life. The periodic payments provided under an annuity contract.
asset: anything with commercial or exchange value owned by a business, institution or individual. Examples include cash, real estate and investments. Mutual fund assets are the market value of the securities held in the portfolio. Compare with a liability.
asset allocation: the mix of assets in which money is invested, including stock and fixed-income investments, cash equivalents and tangible assets such as real estate and collectibles. A central concept in financial planning and investment management, asset allocation affects both risk and return: Investing in a combination of investments may reduce volatility through diversification.
asset-backed security: securities backed by payments received from a specified pool of receivables, such as mortgages, automobile loans or credit card accounts. The structure is intended to isolate the issuer of the securities from the bankruptcy risk of the originator of the receivables (for example, a bank or another provider of credit).
asset class: a group of securities or investments that have similar characteristics and behave similarly in the marketplace. Three common asset classes are equities (e.g., stocks), fixed-income (e.g., bonds), and cash equivalents (e.g., money market funds).
audit: the examination of an entity’s accounting documents and financial statements by a professional accounting firm to verify their accuracy and conformity with generally accepted accounting principles.
auditor’s report: the declaration of a professional accountant following the review of a mutual fund’s financial statements. The report describes the scope and the findings of the review and is an important assurance to a lender or investor. The opinion of an auditor can be unqualified or qualified, depending on the extent of the audit performed and the auditor’s confidence in the accuracy of the financial statements.
automatic investment plan: a program enabling mutual fund investors to accumulate funds automatically. For example, American Funds shareholders can have a fixed amount from a bank savings or checking account debited to buy fund shares on a weekly, monthly, quarterly or annual basis. Investing at regular intervals allows shareholders to engage in dollar cost averaging. A program of regular investing does not assure a profit or protect against loss. Investors should consider their willingness to continue purchases during periods of declining prices.
average: a weighted and adjusted arithmetic mean (a simple average obtained by dividing the sum of two or more items by the number of items) of selected securities designed to represent the market or important segments of the market. The Dow Jones Industrial Average, the best known market average, is price-weighted.
average annual compound return: the annualized rate of return, including reinvestment of distributions, earned over a specific period of time.
averaging: an investment strategy that involves making regular dollar investments on a specified time schedule, regardless of price or direction of the market. Over time, the investor theoretically buys more shares when the price is lower, so that the overall cost is lower than if all the shares were bought at once. Also known as dollar cost averaging or cost averaging. A program of regular investing does not assure a profit or protect against loss. Investors should consider their willingness to continue purchases during periods of declining prices.
balanced fund: a mutual fund that invests primarily in a combination of stocks, bonds and cash-equivalent investments. Over the long term, balanced funds seek growth of both capital and income. These funds tend to produce more income than growth funds; such income can help buffer returns during a stock market downturn. At the same time, balanced funds also tend to have lower returns than growth funds during a stock market upturn. American Funds offers the following balanced funds: American Balanced Fund® and American Funds Global Balanced FundSM.
basis point: a unit used to measure expenses and changes in interest rates and bond yields. One basis point equals .01%, or 1/100 of 1%; 100 basis points equal 1%. If a bond’s yield increased from 8.00% to 8.50%, it would have risen 50 basis points.
bear market: a prolonged period of falling prices, typically defined as a 20% or greater drop from a market peak. A bear market in stocks is usually prompted by investors anticipating a decline in economic activity, while a bear market in bonds is caused by rising interest rates.
benchmark: an index or group of funds used to measure the performance of a mutual fund. Widely used benchmarks include Standard & Poor’s 500 Composite Index (for large-company funds), Russell 2000 Index (small-company funds), Morgan Stanley Capital International EAFE (Europe, Australasia, Far East) and World indexes (international and global funds), and Barclays Aggregate Bond Index (bond funds). (Barclays Aggregate Bond Index was formerly known as Lehman Brothers Aggregate Bond Index.)
beneficiary: a person (or entity) designated to receive the proceeds from a mutual fund account or retirement plan account after the death of the account owner or plan participant. See primary beneficiary and contingent beneficiary
blue chip: describes the stock of a company with a long record of profit growth and steady dividend payments and a reputation for high-quality management, products and services.
board of directors: a group of individuals elected by the shareholders of a mutual fund or other corporation who are empowered to carry out certain tasks defined in the fund’s charter, such as appointing senior management, issuing additional shares and declaring dividends. The board also has primary oversight responsibility for the mutual fund’s operations. Also called a board of trustees.
bond: a debt security issued by a corporation or government that obligates the bond issuer to pay regular interest payments and return the principal when the bond reaches maturity. A secured bond is backed by certain assets of the issuer (known as collateral), while an unsecured bond, or debenture, is not backed by any specific collateral. Bondholders do not have any of the corporate ownership privileges of stockholders. There are many types of bonds, including corporate bonds, convertible bonds, high-yield bonds, mortgage-backed bonds, municipal bonds and zero-coupon bonds.
bond fund: a mutual fund that invests in bonds and is designed to provide regular income from interest paid by the bonds it holds. Since bond investments seek to produce income, they typically help investors ride out stock market downturns. But they also tend to have lower returns than growth funds during a stock market upturn. The American Funds offers the following taxable bond funds — American Funds Inflation Linked Bond FundSM, American Funds Mortgage Fund®, American High-Income Trust®, The Bond Fund of America®, Capital World Bond Fund®, Intermediate Bond Fund of America®, Short-Term Bond Fund of America® and U.S. Government Securities Fund®. American Funds also offers municipal bond funds.
bond rating: an evaluation of the quality of a bond, reflecting the financial strength of its issuer and the likelihood of default. Agencies such as Standard & Poor’s and Moody’s Investors Service issue ratings for different bonds, ranging from AAA (highly unlikely to default) to D (in default). Bonds rated BBB/Baa or above are considered investment grade.
breakpoint: refers to the asset level required to achieve a sales charge discount on your investments. As long as the value of all of your accounts with the American Funds (excluding money market funds) exceeds a particular breakpoint, all subsequent investments may be purchased at the reduced sales charge.
broker: a person who acts as an intermediary between the buyer and seller of a security or mutual fund, usually paid by commission. Also, a financial professional who helps investors formulate financial plans with specific objectives (see financial professional). Since many brokerage firms operate both as brokers and as dealers, the term broker-dealer is often used.
brokerage window: a plan feature that permits participants to purchase investments that are not included among the plan’s general menu of designated investment alternatives.
bull market: a prolonged period of rising prices of stocks, bonds or commodities, generally prompted by investor optimism about company earnings and economic growth.
buy-and-hold: an investing strategy that calls for buying shares of a mutual fund or other security and holding them for a long period. This allows the investor to participate in the long-term growth of companies and to pay favorable capital gain tax rates on any realized appreciation.
Capital Bank and Trust CompanySM (CB&T): as a trustee, CB&T establishes and maintains retirement plans. CB&T follows employer and participant instructions with respect to the investment and administration of these accounts.
capital gain: an increase in the value of a capital asset, calculated by the difference between the purchase price and the sale price of the investment. When an asset is sold, the capital gain is taxable. Capital gains taxes don’t affect tax-deferred retirement accounts.
capital gains distribution: the amount paid by a mutual fund from realizing gains on the sale of stocks or bonds, paid to shareholders on a per-share basis. Many shareholders elect to reinvest capital gains distributions — to purchase additional shares — rather than take them in cash. American Funds shareholders can reinvest capital gains with no sales charge. In a retirement plan, capital gains distributions are automatically reinvested.
capital loss: the loss in the value of an investment, calculated by the difference between the purchase price and the net sale price.
capital preservation: an investment goal or objective to keep the original investment amount (the principal) from decreasing in value.
Capital Research and Management CompanySM (Capital Research): investment advisor to The American Funds. With roots tracing back to 1931, Capital Research ranks among the world’s largest investment firms, overseeing assets as of December 31, 2012 of more than $950 billion for individuals, corporations, banks, trusts, insurance companies and retirement plans.
The Capital SystemSM: the American Funds investment management system, in which each of the funds’ assets are divided for investment among a number of the portfolio managers at Capital Research and Management Company. Each portfolio manager manages his or her portion as if it were an entire fund, allowing the portfolio manager to act on his or her own convictions. The system has provided consistency, continuity, diversity and flexibility. A portion of fund assets is also managed by a group of research analysts.
capitalization (cap): the total market value of a company’s outstanding equity.
cash-equivalent fund: a mutual fund that invests in money market securities such as commercial paper, certificates of deposit, Treasury bills and other low-volatility and liquid securities. Cash-equivalent funds, also known as money market funds, typically have low expense ratios and pay interest monthly to shareholders. Although American Funds Money Market Fund® seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the fund. Cash-equivalent funds are not insured or guaranteed.
certificate of deposit (CD): a negotiable debt instrument issued by a commercial bank to repay funds deposited for a defined period of time (usually from 14 days to several years). In addition to repaying the principal at maturity, a CD pays a market-determined interest rate. Individual CDs start at $100 and institutional CDs are issued in denominations of $100,000 or more.
Certified Financial Planner (CFP): an individual who has experience in and has passed a series of accredited examinations in investments, risk management, tax shelters and estate planning.
Class A shares: mutual fund shares sold with an up-front sales charge, which declines as the amount invested increases. Many retirement plans qualify to purchase the American Funds without an up-front sales charge.
Class B shares: mutual fund shares sold without an up-front sales charge that carry higher annual expenses, typically for a fixed period (for example, eight years in the case of the American Funds). In addition, if you sell shares during the first few years, you may be subject to a back-end load, known as a contingent deferred sales charge, which declines over time. American Funds Class B shares are no longer available for purchase.
Class C shares: mutual fund shares sold without an up-front sales charge that carry higher annual expenses for a fixed period (typically 10 years). If you sell shares within one year of purchase, you may be subject to a redemption fee known as a contingent deferred sales charge. American Funds Class C shares convert to Class F-1 shares 10 years after purchase. Class C shares are not available in retirement plans.
Class F-1 and F-2 shares: mutual fund shares sold without a sales charge, generally through fee-based programs of participating investment firms. The firms charge a separate annual fee for advice, which usually ranges from 0.5% to 3.0% of assets. Class F shares are generally not available in retirement plans.
Class R shares: an American Funds share class series sold exclusively for retirement plans. Share classes R-1 through R-6 are offered based on plan requirements and recordkeeping preferences.
collective investment fund: investments created by a bank or trust company for employee benefit plans, such as 401(k) plans, that pool the assets of retirement plans for investment purposes. They are governed by rules and regulations that apply to banks and trust companies instead of being registered with the SEC. These funds are also referred to as collective or commingled trusts.
commercial paper: short-term debt obligations (IOUs) issued by banks, corporations and other borrowers. Maturities range from two days to nine months. Though commercial paper is unsecured, it is generally backed by bank lines of credit and is only issued by financially secure companies. Like bonds, commercial paper is rated by Moody’s and Standard & Poor’s.
common stock: a share of ownership in a corporation. Owners of common stock receive dividends and are generally entitled to vote on the election of directors and other important matters.
company stock fund: a fund that invests primarily in employer securities that may also maintain a cash position for liquidity purposes.
competing funds: an investment fund that is identified by the investment manager of another fund and which is subject to special rules relating to an investor’s ability to buy and sell investments between the two funds. See equity wash restriction.
compounding: an asset’s increased value over time, based on earnings being reinvested, and the reinvested earnings in turn producing more earnings. For example, if you invest $1,000 that earns a return of 8% each year, the account will be worth $1,080 at the end of the first year and $1,166 at the end of the second year. The extra $6 earned on the $80 return from the first year is the compound earnings.
Consumer Price Index (CPI): used to measure changes in the general price level or inflation, the CPI measures prices of consumer goods, including food, transportation, shelter, utilities and clothing. It is widely used as a cost-of-living benchmark to adjust Social Security payments, tax brackets and other payment schedules. See also purchasing power.
contingent beneficiary: the individuals chosen to secondarily receive proceeds from a mutual fund account or retirement plan account after the death of the account owner or plan participant if there are no surviving primary beneficiaries.
contingent deferred sales charge (CDSC): a sales charge imposed at the time shares are redeemed, if sold within a specified period by a mutual fund shareholder or a variable annuity contractholder. These charges are usually assessed on a sliding scale, such as 6% of amounts redeemed the first year after purchase, 5% the second year, 4% the third year, and so on. Also known as a back-end load.
convertible security: preferred stocks or bonds that may be exchanged for another security, usually common stock of the same company. Convertibles generally offer higher income than is available from common stock, and have greater appreciation potential than regular bonds.
correction: a sudden, temporary decline in stock or bond prices following a period of market strength. Because markets do not move straight up or down, corrections can be expected in the long term.
coupon rate: the stated, fixed rate of interest paid by a fixed-income security, expressed as a percentage of the par value of the security. A bond with a par value of $1,000 that pays $80 a year has a coupon rate of 8%. Also called the nominal yield. See also yield.
Coverdell education savings account (formerly known as an Education IRA): an education savings account that allows parents, grandparents and others to contribute for the K-12 and higher education expenses of a child. Contributions are not tax-deductible, but withdrawals from a Coverdell education savings account are tax-free to the student if used for qualified expenses such as required room and board and tuition.
cross-reinvesting: reinvesting dividends and/or capital gains from one fund to another in the same mutual fund family.
currency futures: contracts in the futures markets for the delivery of a currency, such as the U.S. dollar, the Japanese yen or the British pound. The buyer of a currency futures contract acquires the right to purchase a particular amount of that currency on a specific future date at a fixed exchange rate. These contracts are traded on exchanges throughout the world. Often used as a hedging mechanism to offset currency or interest rate risk.
current yield: the current rate of return of an investment calculated by dividing its expected income payments by its current market price.
CUSIP number: a number identifying all stocks, registered bonds and mutual funds, using the Committee on Uniform Securities Identification Procedures (CUSIP).
custodian: the organization (usually a bank) that holds in custody and safekeeping the securities and other assets of a mutual fund or trust. The bank does not have fiduciary responsibility.
cyclical stocks: stocks of companies whose earnings are tied to the business cycle. When economic and business conditions are good, a cyclical company prospers; when there is an economic downturn, the company suffers. Examples of cyclical stocks include housing and automobiles. Stocks of noncyclical industries such as food, insurance and pharmaceuticals are not as directly affected by economic changes.
defined benefit plan: a tax-deferred company retirement plan in which the benefit to participants is defined in advance, based on criteria such as salary history and years of service, and in which the employer bears the investment risk.
defined contribution plan: an individual account plan, such as a 401(k), that provides a benefit based solely on the amount contributed to the participant’s account plus or minus any income, expenses, gains and losses, and forfeitures that may be allocated to the account.
depreciation: a decrease in the value of an investment.
designated investment alternative: the investment options picked by your plan into which participants can direct the investment of their plan accounts.
developing markets: also known as emerging markets, developing markets are generally defined as those in countries having a low-to-middle per capita income and in the process of developing existing or newly created market-based economies.
distribution: the payment of a dividend or capital gain realized by a mutual fund. Also, the payment of funds from a retirement or pension plan.
diversification: an investment strategy designed to reduce exposure to risk by spreading assets among a variety of investments, such as U.S. stocks, international stocks, bonds and cash equivalents, which are unlikely to all move in the same direction at the same time. Holding mutual funds with different objectives can help investors achieve diversification through the broad range of investments held in fund portfolios.
dividend: a distribution of investment income to shareholders. Dividends are generally taxable in the year they are received unless they are held in a tax-deferred account such as an IRA or in qualified retirement plans. The amount of a mutual fund dividend is declared by the fund’s board of directors.
dollar cost averaging: an investment strategy that involves making regular dollar investments on a specified time schedule, regardless of price or direction of the market. In the long run, the investor tends to buy more shares when the price is lower, so that the overall cost is lower than if a constant number of shares were bought at set intervals. Also known as averaging or cost averaging. A program of regular investing does not assure a profit or protect against loss. Investors should consider their willingness to continue purchases during periods of declining prices.
Dow Jones Industrial Average (DJIA): the price-weighted average of 30 actively traded blue chip stocks traded on the New York Stock Exchange®, primarily industrial companies such as Boeing and DuPont. Popularly known as the Dow, the DJIA is the most widely used indicator of movements in the U.S. stock market. The Dow is calculated by adding the trading prices of the component stocks and adjusting for factors such as stock splits and dividends.
earnings: an important factor in determining a stock’s price, earnings represent a company’s revenues minus cost of sales, operating expenses and taxes. Earnings per share are the portion of a company’s profit allocated to each outstanding share of common stock. See also price-to-earnings ratio.
Employee Retirement Income Security Act (ERISA): the 1974 federal law governing the operation of most private pension, retirement and benefit plans. The law imposed pension eligibility, vesting and funding rules and established guidelines for the management of pension and welfare funds.
employer securities: securities issued by an employer of employees covered by a retirement plan that may be used as a plan investment option.
equity-income fund: a mutual fund that invests primarily in dividend-paying stocks and bonds. Because equity-income funds don’t place a primary emphasis on growth, they tend to produce lower returns during strong upswings in the stock market, compared to growth funds. The emphasis on income, however, can soften the impact of a stock market downturn. American Funds offers two equity-income funds: Capital Income Builder® and The Income Fund of America®.
equity wash restriction: a provision in certain stable value or fixed-income products under which transfers made from the stable value or fixed income product are required to be directed to an equity fund or other non-competing investment option of the plan for a stated period of time (usually 90 days) before those funds may be invested in any other plan-provided competing fixed-income fund (such as a money market fund).
euro: the single currency adopted by many European countries. Since January 1, 1999, the trading of securities and goods has been conducted only in euros. The European Central Bank oversees monetary policy.
exchange privilege: enables a shareholder to exchange shares from one mutual fund to another in the same family, usually at no additional charge. The IRS treats an exchange as a sale and subsequent purchase for tax purposes, except in the case of an IRA or qualified retirement plan.
exchange rate: the price at which one currency can be converted into another currency. Most exchange rates fluctuate from day to day; others are fixed or pegged to the movement of a major currency.
expense ratio: the amount that shareholders pay annually for mutual fund expenses. Includes management fees, distribution or 12b-1 fees, administrative fees and operating costs. Expense ratios tend to vary with the fund category; for example, a money market fund will generally have a lower expense ratio than a global equity fund, which has higher costs.
face value: the value of a bond, note, mortgage or other security. Most corporate bonds have a face value of $1,000, municipal bonds $5,000 and federal government bonds $10,000. Bonds fluctuate in price after they are issued, but the face value (or principal) is returned to the bondholder at maturity. Also known as par value.
Fannie MaeSM: a government-sponsored enterprise that primarily buys mortgages from lenders for cash or pools them and sells them as mortgage-backed securities to investors on the open market. Securities issued by Fannie Mae are generally sponsored by, but are not direct obligations of or guaranteed by, the U.S. government. Fannie Mae is currently under the conservatorship of the Federal Finance Housing Agency. Equity shares of Fannie Mae are traded on the New York Stock Exchange. Fannie Mae was formerly called the Federal National Mortgage Association.
federal agency notes and bonds: debt instruments issued by an agency of the federal government such as Fannie Mae. Though not general obligations of the U.S. Treasury, they are sponsored by the government and have relatively high bond ratings.
Federal Deposit Insurance Corporation (FDIC): a federal agency that insures funds on deposit (currently up to $250,000) in member banks and thrift institutions. Mutual fund assets are not FDIC-insured.
Federal Reserve Board: the seven-member governing board that oversees Federal Reserve Banks, establishes monetary policy (interest rates, availability of credit, etc.) and monitors the economic health of the country. Also called the Fed.
fiduciary: under ERISA, any person who 1) exercises any discretionary authority or control over the management of a plan or the management or disposition of plan assets; 2) renders investment advice for a fee or other compensation with respect to the funds or property of a plan, or has the authority to do so; 3) has any discretionary authority or responsibility in the administration of a plan.
Financial Industry Regulatory Authority (FINRA®): a non-governmental organization that regulates firms selling securities in the United States. The organization’s objectives are to protect investors and ensure market integrity. Operating under the supervision of the Securities and Exchange Commission, FINRA educates investors, creates rules, enforces laws and regulations, examines securities firms and reviews their sales materials, and settles disputes. FINRA was created through the consolidation of the National Association of Securities Dealers (NASD) and the regulatory entities of the New York Stock Exchange. It also regulates The Nasdaq Stock Market.®
financial professional: a financial representative who helps investors develop strategies designed to meet their needs and objectives through investments, tax planning, asset allocation, risk management, retirement planning and estate planning.
financial statements: the written record of the financial status of a mutual fund or company, usually published in the annual report. Includes a statement of assets and liabilities, a statement of operations and a statement of changes in net assets.
fiscal year: an accounting period of 365 days (366 in leap years), at the end of which the corporate books are closed and profit or loss is determined. A fiscal year is not necessarily the same as the calendar year.
fixed annuity: an annuity contract in which the insurance company makes fixed (or guaranteed) dollar payments to the annuitant for the term of the contract (usually until the annuitant dies).
fixed-return investment: an investment that provides a specific rate of return to the investor.
floating rate note: a debt instrument with a variable interest rate. Interest adjustments are made periodically and are tied to a money market index such as Treasury bill rates. Floating rate notes provide holders with some protection against rising interest rates, but pay lower yields than fixed rate notes of the same maturity.
Form 1099-DIV: a statement showing the dividends and capital gains distributions received by an account holder in the most recent tax year, sent by mutual fund companies to shareholders for tax return purposes. Not used for tax-deferred accounts.
401(k) plan: a retirement plan that accepts employee contributions. Traditional, tax-deferred 401(k) contributions are made before income taxes are applied, and earnings and contributions are not taxable until withdrawn. Roth 401(k) contributions are made with after-tax dollars, but withdrawals, including earnings, are tax-free if certain conditions are met. Many companies encourage participation in the plan by matching employee contributions. See also Roth 401(k).
403(b) plan: a retirement plan that accepts contributions from employees of nonprofit or educational organizations. Traditional, tax-deferred 403(b) contributions are made before income taxes are applied, and earnings and contributions are not taxable until withdrawn. Roth 403(b) contributions are made with after-tax dollars, but withdrawals, including earnings, are tax-free if certain conditions are met. Contributions can only be invested in mutual funds or annuities. See also Roth 403(b).
457 plan: a nonqualified tax-deferred retirement plan that accepts pretax contributions from employees of state or local governments or agencies and certain tax-exempt organizations. Plans sponsored by state or local governments or agencies must be funded and plan assets must be held in trust for participants.
Freddie MacSM: a government-sponsored enterprise that primarily buys mortgages from lenders for cash or pools them and sells them as mortgage-backed securities to investors on the open market. Securities issued by Freddie Mac are generally sponsored by, but are not direct obligations of or guaranteed by the U.S. government. Freddie Mac is currently under the conservatorship of the Federal Finance Housing Agency. Freddie Mac was formerly called the Federal Home Loan Mortgage Corporation.
fund family: a group or “complex” of mutual funds, each typically with its own investment objective, and managed and distributed by the same company. A fund family also could refer to a group of collective investment funds or a group of separate accounts managed and distributed by the same company.
fund inception date: the date the fund began operations.
fund of funds: a mutual fund, collective investment fund or other pooled investment that invests primarily in other mutual funds, collective investment funds or pooled investments rather than investing directly in individual securities (such as stocks, bonds or money market securities).
Global Depositary Receipt (GDR): a negotiable certificate held in the bank of one country representing a specific number of shares of a stock traded on an exchange of another country. While American Depositary Receipts allow international companies to offer shares to U.S. citizens, GDRs allow companies in Europe, Asia, the United States and Latin America to offer shares in markets around the world. Also called European Depositary Receipt.
global fund: a mutual fund that invests in stocks or bonds throughout the world, including the United States. An international fund, on the other hand, invests only outside the U.S. The American Funds offers six global funds: New Perspective Fund®, New World Fund®, SMALLCAP World Fund®, Capital World Growth and Income Fund, American Funds Global Balanced Fund and Capital World Bond Fund®.
Government National Mortgage Association (GNMA): a government-owned agency, popularly known as Ginnie Mae, that guarantees certain mortgage-backed securities backed by federally insured and guaranteed loans. Ginnie Mae does not buy or sell loans or issue mortgage-backed securities. Rather, Ginnie Mae guarantees the timely payment of interest and principal payments on qualifying securities. Such payments are backed by the full faith and credit of the U.S. government.
gross domestic product: the value of all goods and services produced nationwide. It includes consumer and government purchases, private domestic investment and net exports of goods and services. Inflation-adjusted GDP, or real GDP, is frequently used to measure economic growth and trends in the domestic economy.
group annuity contract: an annuity contract entered into between an insurance company and an owner for the benefit of a designated group, such as retirement plan participants.
growth fund: a mutual fund that invests primarily in the stocks of companies that have the potential for above-average gains. These companies often pay small or no dividends, and their stock prices tend to have the most ups and downs from day to day. American Funds offers the following growth funds: AMCAP Fund®, EuroPacific Growth Fund®, The Growth Fund of America®, The New Economy Fund®, New Perspective Fund, New World Fund® and SMALLCAP World Fund®.
growth-and-income fund: a mutual fund that typically invests in stocks of companies that pay dividends and have good prospects for earnings growth. Growth-and-income funds can also invest in bonds, which provide income. They’re generally less risky than growth investments because the income from dividends and bond interest helps cushion the ups and downs of stock prices. American Funds offers the following growth-and-income funds: American Funds Developing World Growth and Income FundSM, American Mutual Fund®, Capital World Growth and Income Fund, Fundamental Investors®, International Growth and Income FundSM, The Investment Company of America and Washington Mutual Investors FundSM.
growth investing: an investment style that emphasizes stocks with strong earnings and/or revenue growth or growth potential. Different from value investing, which favors buying stocks with lower price-to-earnings ratios and relatively high dividend yields, such as cyclical companies and mature industries.
growth stock: a stock that tends to provide higher returns than other stocks, such as blue chips, though they are also more volatile since they typically have high price-to-earnings ratios and pay little or no dividends. Growth stocks are often found in technology industries.
guaranteed interest account: an account within a fixed annuity or a variable annuity that is guaranteed by the insurance company to earn at least a minimum rate of interest while invested in the contract.
guaranteed investment contract, or GIC: a type of annuity contract offered by insurance companies to defined benefit and defined contribution retirement plans that guarantees the principal and a rate of return. The amount deposited can be either a single sum or a series of deposits over a specified and limited period of time. The deposit plus guaranteed interest can be paid in a single sum or in installments, though there may be restrictions on distributions. Also, GICs aren’t backed by the government, only by the insurer.
high-yield bond: a bond rated BB/Ba or lower that pays a higher yield to compensate for its greater risk. These bonds are generally issued by companies without long track records of sales and earnings or by those with questionable credit strength. Also known as a junk bond.
inception date: the date that a fund began operations.
income fund: a mutual fund that seeks to provide current income for shareholders. Examples include bond funds, which invest in corporate and government securities, and municipal bond funds, which invest in securities issued by state or local governments and provide tax-free income. Equity-income funds seek income as their primary objective by investing in a mixture of stocks and bonds.
income stock: a stock paying relatively high and regular dividends. Industries known for issuing income stocks include utilities, banks and insurance companies.
index: a statistical measure that shows changes in the economy or financial markets and serves as a benchmark against which economic and financial performance is measured. Examples include the Consumer Price Index and stock market indexes such as Standard & Poor’s 500 Composite Index and Russell 2000® Index, which are weighted by market capitalization. An index is distinct from an average, such as the price-weighted Dow Jones Industrial Average, which represents an arithmetic mean that is weighted and adjusted to represent market behavior.
individual retirement account (IRA): a tax-advantaged retirement account in which individuals can invest. Contributions to Traditional IRAs are deductible against earned income under certain circumstances, depending on income levels and retirement plan participation. Income taxes on contributions and earnings are deferred until withdrawn. Roth IRA contributions are made with after-tax dollars, but withdrawals, including earnings, are tax-free if certain conditions are met. A 10% penalty generally applies to taxable amounts withdrawn from either type of IRA before age 59-1/2. Withdrawals from Traditional IRAs must begin by age 70-1/2. See Traditional IRA, Roth IRA, Simplified Employee Pension (SEP) IRA and SIMPLE IRA.
inflation: the overall general upward price movement of goods and services in an economy, usually measured by the Consumer Price Index in the U.S. Inflation is one of the major risks to investors over the long term because it erodes the purchasing power of their investments, especially slow-growing investments such as savings accounts and money market instruments.
interest rate: the rate of interest charged for the use of money, usually expressed at an annual rate. The rate is derived by dividing the amount of interest by the amount of principal borrowed. For example, if a bank charged $50 a year in interest to borrow $1,000, the loan would have a 5% interest rate.
interest rate risk: the possibility that a bond’s or bond fund’s market value will decrease due to rising interest rates. When interest rates (and bond yields) go up, bond prices usually go down and vice versa.
Internal Revenue Code (IRC): a compilation of federal tax laws, including income, estate and gift taxes.
international fund: a mutual fund that invests outside the United States (a global fund, on the other hand, invests in stocks and bonds throughout the world, including the United States). American Funds offers two international funds, International Growth and Income FundSM and EuroPacific Growth Fund®.
investment advisor: a person or organization employed by an individual or mutual fund to manage assets or provide investment advice. The investment advisor to the American Funds is Capital Research and Management Company. See also advisor.
investment company: a firm that pools the assets of shareholders and invests in securities that meet stated investment objectives for individual or institutional clients. An investment company offers participants benefits such as diversification and professional money management. There are two types of investment companies: an open-end, or mutual fund, which continuously offers its shares and will redeem shares at any time at net asset value; and a closed-end, or investment trust, which has a fixed number of shares traded like a stock.
Investment Company Act of 1940: the federal law that regulates the registration and activities of investment companies, enforced by the Securities and Exchange Commission. The act sets the standards by which mutual funds operate in areas such as disclosure, reporting requirements, pricing and diversification of investments.
investment objective: the goal that an investment fund or investor seeks to achieve (e.g., growth or income).
investment risk: the possibility of losing some or all of the amounts invested or not gaining value in an investment.
junk bond: a bond with a rating of BB/Ba or lower that pays a higher yield to compensate for its greater risk. These bonds are generally issued by companies without long track records of sales and earnings or by those with questionable credit strength. Also known as a high-yield bond.
Lipper: a leading provider of data and analysis on mutual funds. Lipper publishes a number of indexes and averages for different categories of funds, as well as individual rankings of mutual funds in each category.
liquidity: the ability to buy or sell an asset quickly and in large volume without substantially affecting the asset’s price. Shares in large blue chip stocks tend to be very liquid because they are actively traded in large volume; conversely, shares in small companies are less liquid because prices can move up or down sharply in response to large buy or sell orders.
load: a sales charge applied to the purchase of a mutual fund. Load funds are typically sold through brokers and financial professionals. See contingent deferred sales charge, front-end load and no-load.
lump sum: a payment within one taxable year of the entire balance payable to a recipient from a qualified retirement plan on account of death, separation from service or reaching age 59-1/2.
market: a public place where buyers and sellers make transactions, directly or via intermediaries. Sometimes refers to markets where securities are traded, or to the New York Stock Exchange in particular.
market capitalization: the value of a corporation, calculated by multiplying the number of outstanding shares of common stock by the current share price. Mutual funds and institutional investors often use capitalization as an investment yardstick, sometimes requiring that a company has a market capitalization of $100 million or more to qualify for investment.
market timing: buying or selling securities based on economic factors such as the direction of interest rates or market indicators such as trends in stock prices and trading volume.
maturity: the date when a debt becomes due for payment. A bond due to mature on June 1, 2014, will return the bondholder’s principal and final interest payment on that date. Also, a "mature" company or sector of the economy is one that is well-established and has little room for significant growth.
mid cap: defined by Lipper’s U.S. Diversified Equity Fund Characteristics as a company with a market capitalization between $4.2 billion and $12.2 billion as of 12/31/12. See also large cap and small cap.
money market: the market for short-term debt securities, such as commercial paper, certificates of deposit and Treasury bills, with a maturity of one year or less. Typically, these are stable, highly liquid investments.
money market fund: a mutual fund that invests in money market securities such as commercial paper, certificates of deposit, Treasury bills and other low-volatility and liquid securities. Money market funds, also known as cash-equivalent funds, typically have low expense ratios and pay interest monthly to shareholders. An investment in the money market fund is not insured or guaranteed by the FDIC or any other government agency. Although the fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the fund.
money market instruments: short-term debt securities, such as commercial paper, certificates of deposit and Treasury bills, with a maturity of one year or less. Typically, these are safe, highly liquid investments.
Morgan Stanley Capital International indexes: indexes maintained and produced by Morgan Stanley Capital International, which tracks equity markets throughout the world. MSCI indexes are weighted by market capitalization and include various regions and industries in both developed and emerging markets. The primary indexes are the MSCI EAFE Index and the MSCI World Index.
Morningstar: a leading provider of data and analysis on mutual funds. Morningstar publishes reviews and commentary of mutual funds for individuals and corporations.
mortgage: a loan to finance the purchase of real estate, usually with specified payment periods and interest rates.
mortgage-backed security: a security backed by mortgages, such as those issued by Fannie Mae and Freddie Mac. Investors receive payments from the interest and principal on the underlying mortgages. The growth of mortgage-backed securities has helped keep mortgage money available for home financing. A type of pass-through security.
MSCI EAFE Index: the acronym for the Europe, Australasia, Far East index produced by Morgan Stanley Capital International (MSCI). Markets are represented in the index according to their approximate share of world market capitalization, and individual stocks are screened and weighted accordingly. The index is a widely used benchmark for managers of international stock fund portfolios. See Morgan Stanley Capital International indexes.
MSCI World Index: an index of major world stock markets, including the U.S., produced by Morgan Stanley Capital International (MSCI). Markets are represented in the index according to their approximate share of world market capitalization, and the weights are adjusted to reflect foreign currency fluctuations relative to the U.S. dollar. The index is a widely used benchmark for managers of global stock fund portfolios. See Morgan Stanley Capital International indexes.
multinational corporation: a company with production facilities or other assets in more than one country that makes business decisions in a global context.
municipal bond: a bond issued by a state, city or local government to finance operations or special projects such as construction of public facilities. Interest from municipal bonds is often free of federal income taxes and/or state and local income taxes.
municipal bond fund: a mutual fund that invests in municipal bonds. Municipal bond funds are popular with investors who want to reduce their tax burdens, because interest paid by municipal obligations is often free of federal income taxes and/or state and local income taxes. American Funds offers the following municipal bond funds: American Funds Short-Term Tax-Exempt Bond Fund®, American Funds Tax-Exempt Fund of New York®, American High-Income Municipal Bond Fund®, Limited Term Tax-Exempt Bond Fund of America®, The Tax-Exempt Bond Fund of America, The Tax-Exempt Fund of California®, The Tax-Exempt Fund of Maryland and The Tax-Exempt Fund of Virginia®.
mutual fund: an entity that pools the assets of individuals and invests in one or more categories of assets, including stocks, bonds and money market instruments. All shareholders participate in the gains and losses generated by the fund on an equal basis, proportional to the amount invested. Investors can redeem mutual fund shares on demand at net asset value. Mutual funds offer investors diversification and professional money management. A management fee is charged for these services, and there may be other fees and expenses, such as 12b-1 fees and transfer agency expenses. Funds with a sales charge are called load funds and those sold without a sales load or other asset-based sales charges by the fund companies are called no-load funds.
Nasdaq®: The Nasdaq Stock Market® is the world’s largest electronic stock exchange. The Nasdaq Composite®Index is a broad-based measurement of all of the companies traded on The Nasdaq Stock Market. The stock price quotations provided by the Nasdaq system are published in many newspapers.
nest egg: assets set aside for a large future expense, such as college tuition or retirement.
net contributions: total investments (contributions plus, if applicable, converted balances, rollovers and loan repayments) less the amounts withdrawn and any plan fees.
New York Stock Exchange®(NYSE): the oldest and largest stock exchange in the U.S., located on Wall Street in New York City. Stocks, bonds and other securities are bought and sold at trading posts on the floor of the exchange. The NYSE is regulated by the Financial Industry Regulatory Authority. Also known as the Big Board and the Exchange.
nominal yield: the annual income received from a fixed-income security, expressed as a percentage of the par value of the security. A bond that pays $80 a year and has a par value of $1,000 has a nominal yield of 8%. Also called the coupon rate. See also yield.
notes to financial statements: explanations attached to the financial statements of a mutual fund or corporation. The notes include information about accounting policies, taxation, fees and expenses, investment transactions and transactions with affiliates.
operating expenses: the expenses associated with running or operating an investment fund. Operating expenses may include custody fees, management fees, and transfer agent fees. See expense ratio and total annual operating expenses.
over-the-counter (OTC): a security that is not traded on an organized exchange (also called an unlisted security). Over-the-counter stocks and bonds are bought and sold by brokers and dealers negotiating directly over the phone and by computer. The rules of OTC stock trading are written and enforced by the NASD. Over-the-counter also refers to a market in which securities are traded through a telephone and computer network rather than on the floor of an exchange.
par value: the value of a bond, note, mortgage or other security at the time it is issued. Generally, corporate bonds are issued with a par value of $1,000, municipal bonds with a par value of $5,000, and federal government bonds with a par value of $10,000. Bonds fluctuate in price after they are issued, but the par value (or principal) is returned to the bondholder at maturity. Also known as face value.
participant fund position: Each fund that a participant has invested in.
pass-through security: a security representing pooled debt obligations that passes income from debtors to its investors. One common type is a mortgage-backed security. Pass-throughs can also represent other assets, such as student, credit card or automobile loans.
passive management: the process or approach to operating or managing a fund in a passive or non-active manner, typically with the goal of mirroring an index. These funds are often referred to as index funds and differ from investment funds that are actively managed.
personal rate of return: a rate of return that takes into account not only the returns of the funds you own, but also when and how much you contributed or withdrew. It also reflects any fees or expenses you or your plan paid. Your personal rate of return is just one measure of whether your investment strategy is on track.
plan administrator: an entity or person assigned to manage a company’s retirement savings plan. The plan administrator is responsible for all decisions relating to the operation of the plan.
plan document: a comprehensive document that provides details on all the features, benefits and rules of your retirement plan. A summary version of the document, called a summary plan description, includes the key features and rules. Participants must be given a copy of the SPD when they enroll in the plan.
plan sponsor: an organization or entity that offers a retirement plan to an employee group. For example, in the case of a plan maintained by a single employer, the plan sponsor is the employer. In the case of a plan maintained by one or more employers or organizations, the plan sponsor is the association, committee, joint board of trustees or other similar group of representatives of the parties involved.
portfolio: a collection of stocks, bonds and/or other investments owned by an individual, organization or mutual fund.
portfolio manager: an investment professional, such as those at Capital Research and Management Company, who invests the assets of shareholders. The American Funds investment management approach is known as The Capital SystemSM. Each portfolio manager manages his or her portion of fund assets as if it were an entire fund, allowing the manager to act on his or her own convictions. This system has historically provided continuity, diversity and flexibility to the management of the fund.
portfolio turnover rate: the portion of a mutual fund’s holdings that is sold and replaced with new securities annually, usually expressed as a percentage of the fund’s total assets. A fund with a portfolio turnover of 25%, for example, holds assets for an average of about four years, while a fund with a portfolio turnover of 100% holds assets for an average of one year.
preferred stock: a type of stock that provides a specific dividend that is paid before any dividends are paid to holders of common stock and which takes precedence over common stock in the event of a company liquidation. Preferred stockholders do not usually have the voting rights that common stockholders do.
price-to-earnings ratio (P/E): the current price of a stock divided by its earnings per share. It reflects the cost of a given stock per dollar of current annual earnings and is the most common measure of how expensive a stock is. The higher the P/E, the more investors are paying, and therefore the more earnings growth they expect. High P/E stocks are typically young, fast-growing companies (growth stocks) that pay little or no dividends, while low P/E stocks tend to be low-growth, out-of-favor, or blue chip companies with long records of stable earnings and dividends. See also valuation.
primary beneficiary: the individuals chosen to first receive proceeds from a mutual fund account or retirement plan account after the death of the account owner, plan participant or policyholder.
private placement: a nonpublic sale of securities, often directly to institutional investors such as banks, mutual funds, insurance companies and pension funds. Unlike a public offering, a private placement does not have to be registered with the Securities and Exchange Commission, provided the securities are bought for investment purposes rather than for resale.
prospectus: a disclosure document describing the investment objectives and operating policies of a mutual fund. The prospectus discloses the background of fund managers and key financial data such as expenses and fund assets. It is designed to provide the information an individual needs in order to make an informed decision about investing in a mutual fund.
public offering: the sale of new securities to public investors through an underwriting agreement. All public offerings must meet the registration requirements of the Securities and Exchange Commission. Distinct from a private placement of new securities.
purchasing power: the value of money, as measured by the quantity and quality of products and services it can buy. As prices tend to move upward, purchasing power erodes over time. Purchasing power is frequently measured by the Consumer Price Index, which reflects the price of goods bought by a typical consumer, including food, transportation, shelter, utilities, clothing and other items. Also called buying power. See also inflation.
qualified tuition program (QTP): also known as a 529 plan. A state- or private-institution-sponsored education savings plan that has tax-free distributions (if used for qualified purposes). A QTP can include prepaid tuition or education savings. Privately sponsored plans can only include prepaid tuition, however.
rate of return: the gain or loss on an investment over a period of time. The rate of return is typically reported on an annual basis and expressed as a percentage.
recordkeeper: a service provider that tracks participant records for a retirement plan.
redemption fee: a fee, generally charged by a mutual fund, to discourage certain trading practices by investors, such as short-term or excessive trading. If a redemption fee is charged it is done when the investment is redeemed or sold.
research analyst: an investment research specialist whose primary responsibility is to develop a thorough understanding of an industry or region. Capital Research and Management Company has more than 175 analysts based all over the world. Many are part of a larger research "cluster," a group of analysts who cover different parts of the same industry. Examples of clusters include technology, telecommunications and health care. See also analyst and research portfolio.
research portfolio: the portion of a Capital Research and Management Company mutual fund that is managed by a group of research analysts. The research portfolio generally accounts for about 25% of a fund’s assets.
return: the annual gain or loss made on an investment. For stock mutual funds, the rate of return is determined by the level of interest, dividends and capital appreciation earned by the fund during the year. For fixed-income securities, the return represents the coupon payment divided by the purchase price of the security and any appreciation in the security. See also total return.
right of accumulation: the right of a mutual fund shareholder to receive a reduced sales charge based on previous investments in the same family of funds. For American Funds shareholders, the total value of existing accounts (excluding money market funds) is used to determine the sales charge on subsequent purchases. Once the value of a shareholder’s account reaches and maintains a particular breakpoint, each subsequent investment will receive the appropriate reduced sales charge.
risk: there are many types of investment risk, but the most common meaning is the possibility of an investment losing value. The risk level of a mutual fund typically depends on the types of securities held in the fund’s portfolio. For example, a growth fund has more risk (and also historically higher returns) than a bond fund. Risk is often measured by looking at the volatility of an investment. Other risks include inflation risk, interest rate risk, credit risk and exchange rate risk.
rollover: the reinvestment of money or property received in a distribution from a retirement plan or IRA that meets certain requirements. If the reinvestment is made within 60 days of receiving the distribution, the income tax benefits continue. (See direct rollover.)
Roth 401(k): a salary deferral option that employers may offer in their 401(k) plans. Employee contributions are made with after-tax dollars. Qualified withdrawals, including earnings, are tax-free if the account was established at least five years before, and if the participant is at least 59-1/2, is disabled or has died. The earnings portion of nonqualified withdrawals may be subject to income taxes and a 10% early withdrawal penalty. Withdrawals from Roth accounts must begin by age 70-1/2; however, Roth assets can be rolled into Roth IRAs, which are not subject to required minimum distributions. Employer matches are excluded from income when made to the plan and are taxable when withdrawn.
Roth 403(b): a salary deferral option that nonprofit or educational organizations may offer in their 403(b) plans. Employee contributions are made with after-tax dollars. Qualified withdrawals, including earnings, are tax-free if the account was established at least five years before, and if the participant is at least 59-1/2, is disabled or has died. The earnings portion of nonqualified withdrawals may be subject to income taxes and a 10% early withdrawal penalty. Withdrawals from Roth accounts must begin by age 70-1/2; however, Roth assets can be rolled into Roth IRAs, which are not subject to required minimum distributions. Employer matches are excluded from income when made to the plan and are taxable when withdrawn. Contributions can only be invested in mutual funds or annuities.
Roth IRA: a type of individual retirement account. Contributions are not deductible. Qualified withdrawals, including earnings, are tax-free if the account was established at least five years before; and if the participant is at least 59-1/2, is disabled or has died. The earnings portion of nonqualified withdrawals may be subject to income taxes and a 10% early withdrawal penalty. Exceptions may apply. Unlike a Traditional IRA, there is no requirement to begin taking distributions at age 70-1/2.
round-trip restriction: a policy that limits the number of times an investor can exchange into and out of a fund within a given time frame. This is intended to discourage frequent trading that increases the costs to all the fund’s investors.
Russell 2000® Index: a widely used benchmark for mutual funds that invest in small-cap companies. The Russell 2000 represents 2,000 small companies with an average market capitalization of approximately $1.3 billion. (Weighted average set as of 12/31/12.)
Securities and Exchange Commission (SEC): a federal regulatory agency responsible for promoting full disclosure in the securities industry and for protecting investors against fraudulent and manipulative practices. All issues of securities for distribution to the public must be registered with the SEC, and all national securities exchanges, investment firms, investment companies, financial professionals and over-the-counter brokers and dealers are supervised by the SEC. The SEC is responsible for enforcing federal laws regulating the securities industry, including the Investment Company Act of 1940.
share class: some investment funds and companies offer more than one type or group of shares, each of which is considered a class (e.g., “Class A,” “advisor” or “institutional” shares). For most investment funds each class has different fees and expenses but all of the classes invest in the same pool of securities and share the same investment objectives.
shareholder: an owner of shares of a mutual fund or corporation. Mutual fund shareholders have the right to vote in the election of fund directors and on other business conducted at shareholder meetings, often voting by proxy.
shareholder of record: the individual or entity registered as the owner of shares in a mutual fund or corporation. Shareholders generally hold accounts in their own names or in the name of their brokerage firms.
shareholder-type fees: any fee charged against your investment for purchase and sale, other than the total annual operating expenses.
signature guarantee: a stamp or seal from a member firm of a domestic stock exchange or the National Association of Securities Dealers, a bank, savings association or credit union that is an eligible guarantor to authenticate a signature. A signature guarantee is typically required by a transfer agent to conduct certain transactions, such as making a large redemption of shares. A notary public is not an acceptable signature guarantor.
SIMPLE IRA: a retirement plan for small organizations (fewer than 100 employees) that allows employees to contribute on a pretax basis and requires the employer to make either matching contributions or a nonelective contribution for all eligible employees.
Simplified Employee Pension (SEP) IRA: a pension plan for small organizations that allows company contributions to be made to an IRA for the benefit of eligible employees. Grandfathered SAR-SEPs also allow employees to make pretax contributions to their IRAs.
small capitalization (cap): a reference to either a small-company stock or an investment fund that invests in the stocks of small companies.
stable value investment: an investment vehicle that holds assets such as high-quality bonds and guaranteed investment contracts. Stable value investments are typically less volatile than bond funds or money market funds.
Standard & Poor’s 500 Composite Index (S&P 500): a widely used index of 500 blue chip stocks, mainly industrial, transportation, financial and utility stocks. Companies are weighted in the index according to market capitalization. It is considered a benchmark for the overall stock market and for the performance of large cap stocks; many index funds are designed to replicate the composition and performance of the S&P 500.
statement of assets and liabilities: the portion of a mutual fund’s financial statement that details the fund’s net assets, equal to the assets minus the liabilities of the fund. The net asset value of a share is calculated by dividing net assets by the number of shares outstanding.
statement of changes in net assets: the portion of a mutual fund’s financial statement that shows the change in value of the fund’s net assets from the previous year. Includes a summary of the statement of operations, dividends paid to shareholders and fund shares sold and repurchased by the fund during the fiscal year.
Statement of Intention: a nonbinding agreement to invest a certain amount in American Funds shares (excluding money market funds) over a 13-month period. This allows shareholders to take advantage immediately of a reduced sales charge based on the total amount the shareholder intends to invest. If the shareholder has not invested the amount intended at the end of the 13-month period, the applicable sales charge must be paid.
statement of operations: the portion of a mutual fund’s financial statement that shows the change in the fund’s assets resulting from operations during the fiscal year. Includes sources of investment income received from dividends and interest, a breakdown of fund expenses and a statement of realized gain and unrealized appreciation on investments.
stock: a security representing shares of ownership in a corporation, as distinct from a bond, which represents a loan to the issuer. Owners of common stock receive dividends and are generally entitled to vote on the selection of directors and other important matters. Holders of preferred stock receive a specific dividend that is paid before any dividends are paid to holders of common stock, but they do not have voting rights. See also equity.
stock exchange: a central location where securities are bought and sold. Brokers and dealers meet on the floor of the exchange to execute orders from investors to buy and sell securities. Each stock exchange sets its own requirements for membership. See New York Stock Exchange.
stock fund: a mutual fund holding stocks. Many stock funds are designed to meet certain financial objectives, such as capital growth or dividend income. Some funds specialize in a category of stocks, such as large cap or international companies. American Funds offers seven growth funds and five growth-and-income funds. The American Funds’ balanced fund and equity-income funds hold stocks as well as bonds in diversified portfolios.
stock split: an increase in the number of shares outstanding of a company’s stock. For example, if a stock with a par value of $200 splits 2-for-1, the price per share drops by half, to $100. At the same time, a shareholder is given twice as many shares, so that his or her proportionate equity remains the same. The overall market capitalization of the company does not change (in this example, $5 billion: 25 million shares x $200 or 50 million shares x $100). A stock with a very high share price is often split to make it more accessible to small investors.
stock symbol: a system of letters used to identify a stock or mutual fund. Symbols with up to three letters are used for stocks that trade on an exchange. Symbols with four and five letters are used for Nasdaq stocks. Symbols with five letters ending in X are used for mutual funds. Also called ticker symbol. See also CUSIP number.
summary prospectus: a short-form prospectus that mutual funds generally may use with investors if they make the long-form prospectus and additional information available online or on paper upon request.
target date fund: a fund designed to serve as an investor’s sole retirement investment, with asset allocations tailored to the investor’s planned retirement date. Typically, the investment manager adjusts the fund’s portfolio periodically to make the fund’s holdings more income-oriented over time. See American Funds Target Date Retirement Series.
target-risk fund: a fund that maintains a predetermined asset mix and generally uses words such as “conservative,” “moderate,” or “aggressive” in its name to indicate the fund’s risk level. Often used interchangeably with “lifestyle fund.”
tax-deferred: the term used to describe an investment on which taxes on earnings (interest, dividends and capital gains) is deferred until the investor begins to withdraw from the account. Examples of tax-deferred investments include IRAs, 401(k)s and annuities.
tax-equivalent yield: the yield before taxes that a taxable bond would have to pay to be equal to the tax-free yield of a municipal bond. The tax-equivalent yield depends on an investor’s tax bracket. The higher the tax bracket, the more attractive the tax-free income of a municipal bond becomes. For example, a tax-free yield of 7% is equivalent to a taxable yield of 9.3% for an investor in the 25% tax bracket, and to a taxable yield of 10.4% for an investor in the 33% tax bracket.
tax-exempt fund: a mutual fund that invests in municipal bonds, which pay interest free from federal and/or state taxation. American Funds offers six tax-exempt funds: American High-Income Municipal Bond Fund, Limited Term Tax-Exempt Bond Fund of America, The Tax-Exempt Bond Fund of America, The Tax-Exempt Fund of California, The Tax-Exempt Fund of Maryland and The Tax-Exempt Fund of Virginia.
ticker symbol: a system of letters used to identify a stock or mutual fund. Symbols with up to three letters are used for stocks that trade on an exchange. Symbols with four and five letters are used for Nasdaq stocks. Symbols with five letters ending in X are used for mutual funds. Also called stock symbol. See also CUSIP number.
time horizon: the amount of time that an investor expects to hold an investment before taking money out.
total annual operating expenses: a measure of what it costs to operate an investment, expressed as a percentage of its assets, as a dollar amount, or in basis points. These are costs the investor pays through a reduction in the investment’s rate of return. See expense ratio and operating expenses.
total return: the gain or loss made on an investment over a certain time period, expressed as a percentage of the total amount invested. For stock mutual funds, the total return is determined by the level of interest, dividends, capital gains distributions and capital appreciation of the holdings in the fund’s portfolio. For bonds, total return represents the present value of all future coupon payments and the principal due back at maturity. See also return and real rate of return.
Traditional IRA: a type of individual retirement account. Contributions may be deductible under certain circumstances, depending on income levels and retirement plan participation. Taxes on contributions and earnings are deferred until withdrawn. A 10% penalty generally applies to amounts withdrawn before age 59-1/2. Withdrawals from Traditional IRAs must begin by age 70-1/2. See also Roth IRA, Simplified Employee Pension (SEP) IRA and SIMPLE IRA.
transfer agent: an agent employed by a corporation or mutual fund to maintain shareholder records, including purchases, sales and account balances. American Funds Service Company serves as the transfer agent for American Funds.
Treasuries: debt securities issued by the U.S. government and secured by its full faith and credit. Income from Treasury securities is exempt from state and local taxes. See Treasury bill, Treasury bond and Treasury note.
Treasury bill: a short-term debt security with a maturity of 1 year or less issued by the U.S. government and secured by its full faith and credit. Treasury bills are issued at a discount from face value, usually $10,000, and do not pay interest. Their yields are watched closely by investors as a signal of interest rate trends. Also known as T-bills.
Treasury bond: a long-term debt security with a maturity of 10 years or more issued by the U.S. government and secured by its full faith and credit. Treasury bonds are issued in minimum denominations of $1,000, pay interest semiannually and are exempt from state and local taxes.
Treasury note: an intermediate-term debt security with a maturity of 1 to 10 years, issued by the U.S. government and secured by its full faith and credit. Treasury notes are issued in denominations ranging from $1,000 to $1 million or more and, like other Treasuries, are exempt from state and local taxes.
treasury stock: shares that have been issued and subsequently repurchased by a mutual fund or company. They are known as treasury stock because the shares are held in the corporate treasury until they are reissued or retired. Treasury shares are not considered outstanding for the purposes of voting, or for dividends or earnings per share calculations.
trust: a legal entity that is created when a person or organization transfers assets to a trustee for the benefit of the designated persons.
trustee: an individual or entity holding assets in trust for the benefit of another person, called a beneficiary. In the case of a retirement plan, the trustee holds the assets of the plan on behalf of its participants.
12b-1 fee: a fee assessed on certain mutual funds or share classes permitted under an SEC rule to help cover the costs associated with marketing the fund. 12b-1 fees may also be used to cover shareholder servicing expenses.
underwriter: an investment bank or securities firm that serves as the intermediary between an issuer of a security and the investing public. Generally, a group of investment banks assume the risk of buying a new issue of securities from a corporation or government entity and resells it to the public. Underwriters make a profit on the difference between the price paid to the issuer of the security and the price offered to the public.
Uniform Gifts to Minors Act (UGMA): legislation that allows the transfer of assets to a minor, defined by most states as an individual under the age of 18. A custodian appointed by the donor controls the assets of an UGMA account until the child reaches majority age.
Uniform Transfers to Minors Act (UTMA): a law that extends the Uniform Gifts to Minors Act’s definition of a gift to include other forms of transfers in addition to gifts. The law also raises the age for taking control of these assets to 21 in most states.
U.S. Treasury securities: debt securities issued by the U.S. government and secured by its full faith and credit. Income from Treasury securities is exempt from state and local taxes. Also known as Treasuries. See Treasury bill, Treasury bond and Treasury note.
valuation: the process of determining the value of an asset or company. Stock analysts often determine the value of a company based on current and future earnings, the market value of the company’s assets and the balance sheet. A company with a high price-to-earnings ratio is said to have a high valuation or to be highly valued. Bond analysts determine the value of a bond based on projections of future interest rates. Analysts use their valuations to determine whether a bond should be bought or sold at its current price.
value investing: an investment style that favors buying stocks with lower price-to-earnings ratios and relatively high dividend yields, such as those issued by cyclical companies and businesses in mature industries. Different from growth investing, which emphasizes stocks with strong earnings and/or revenue growth or growth potential.
variable annuity: an annuity contract under which the insurance company promises to make payments beginning immediately or at some future date. The value of the annuity and amount of the benefits paid by the insurance company will vary depending on the performance of the investment options.
variable return investment: investments for which the return is not fixed. This term includes stock and bond funds as well as investments that seek to preserve principal but do not guarantee a particular return, e.g., money market funds and stable value funds.
vested balance: the portion of your account balance that you can take with you if you leave the company. Vesting is usually tied to length of service; however, vesting schedules vary, so contact your employer for details about your particular plan. Of course, the contributions you make to the plan are always 100% vested.
vesting: entitles employees to employer-provided benefits or contributions (e.g., matching contributions in a 401(k) plan or company profit-sharing contributions) from a retirement plan within a certain amount of time. Some employers use graduated vesting, which gives employees increased benefits over time based on length of service. Others use cliff vesting, which gives employees benefits all at once after a specified length of service. Employees can take vested benefits with them when they leave an employer.
volatility: the size and frequency of fluctuations in the price of a security or mutual fund. Funds that hold stocks are generally more volatile than bond funds, since stocks generally have more frequent and pronounced price movements than bonds. Volatility is a key measure of the risk of a security or mutual fund. The more volatile the security, the greater the risk of losing money, although the greater risk is generally compensated by the potential for higher returns.
withdrawal plan: a program that allows mutual fund investors to redeem money from a fund at regular intervals. Shareholders with nonretirement accounts can withdraw money penalty-free at any time. Shareholders with retirement accounts may have to wait for a qualifying event (e.g., turning 59-1/2) before withdrawing money or to avoid incurring a penalty and appropriate taxes (in the case of Traditional and Roth IRAs).
wrap fee: a fee or expense that is added to or “wrapped around” an investment to pay for one or more product features or services.
yield: the annual income return on an investment, expressed as a percentage of the price. For stocks, yield is the annual dividend divided by the purchase price, also known as a dividend yield. For bonds, it is the coupon rate divided by the market price, called current yield. For example, a bond selling for $1,000 with a 10% coupon ($100 coupon payment) offers a 10% current yield; if the bond’s price rises to $1,500, the yield would fall to 6.7%.
zero-coupon bond: a government or corporate bond that has no coupon payments and is sold at a deep discount on its face value, which the bondholder receives at maturity. The return on a zero-coupon bond is the appreciation of the security over time. Under U.S. tax law, a holder of zero-coupons owes income tax on the interest that has accrued each year, even though the bondholder does not receive any cash until maturity.
Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses, which can be obtained from a financial professional or downloaded and should be read carefully before investing.