Fund Vocabulary. Demystifying important investing terms

Written by Donny Donny

Last Updated: October 11th, 2008

Now that you’re familiar with mutual funds, you’ll want to get comfortable with some of the common terms used when dealing with them.

As a reminder, a mutual fund is a large compilation of individual stocks.

Stocks – Shares a company sells to fund future business growth. When you purchase a share of stock, you own a fraction of the company.

Diversification – Different kinds of stocks: growth and value, as well as stock representing large, small, and mid caps.

Money manager/portfolio manager – A person or team of people who decide what stock to purchase, sell, and hold.

Index funds –Funds not managed by a financial professional. Instead these funds track existing marketing indexes such as the Dow Jones Industrial Average and Standard & Poors 500 Stock Index. Note: Index funds traditionally out-perform managed mutual funds because investors don’t have to pay fees and other costs that reduce earnings.

The Dow Jones Index – An index composed of thirty stocks.

Standard & Poors Index – is made up of 500 stocks of big companies

Portfolio – A compilation of stocks, bonds, and cash equivalents held by the investor (aka saver) and/or managed professionally by money managers.

Load – The commission paid to the adviser who sold you the fund. Avoid purchasing these funds because your initial investment has to climb above the load (sales commission) before you break even.

Back-end load – a deferred sales charge that investors pay when they sell a mutual fund. The fee is highest the first year and then declines one percent until it reaches zero.