Glossary of terms used on this site

1) A security market index, such as the Standard & Poor’s 500 Index, is a statistical composite that tracks the price level and performance of a basket of many securities, typically within a specific investment asset class. Indexes exist for various stock and bond markets and are typically set at a round number such as 100 at a particular point in time. See also Dow Jones Industrial Average and Russell 2000.

2) The index can also refer to the measure of the overall level of interest rates that a lender uses as a reference to calculate the specific interest rate on an adjustable-rate loan. The index plus the margin is the formula for determining the interest rate on an adjustable- rate mortgage.

An index fund is a type of mutual fund with a portfolio constructed to match or track the components of a financial market index, such as the Standard & Poor's 500 Index (S&P 500). An index mutual fund is said to provide broad market exposure, low operating expenses and low portfolio turnover. These funds follow their benchmark index no matter the state of the markets.

The technical term for a general rise in prices in the economy. Inflation usually occurs when too much money is in circulation and not enough goods and services are available to spend it on. As a result of this excess money, prices rise. A link is present between inflation and interest rates: If interest rates do not keep up with inflation, no one will invest in bonds issued by the government or corporations. When the interest rates on bonds are high, it usually reflects a high rate of expected inflation that will eat away at your return.

The first time a company offers stock to the investing public. An IPO typically occurs when a company wants to expand more rapidly and seeks additional money to support its growth. A number of studies have demonstrated that buying into IPOs in which the general public can participate produces subpar investment returns. A high level of IPO activity may indicate a cresting stock market, as companies and their investment bankers rush to cash in on a “pricey” marketplace.

An institutional investor is an entity which pools money to purchase securities, real property, and other investment assets or originate loans. Institutional investors include banks, insurance companies, pensions, hedge funds, REITs, investment advisors, endowments, and mutual funds. Operating companies which invest excess capital in these types of assets may also be included in the term. Activist institutional investors may also influence corporate governance by exercising voting rights in their investments.

The rate lenders charge you to use their money. The higher the interest rate, the higher the risk entailed in the loan. With bonds of a given maturity, a higher rate of interest means a lower quality of bond — one that’s less likely to return your money.

An investor is any person or other entity (such as a firm or mutual fund) who commits capital with the expectation of receiving financial returns. Investors utilize investments in order to grow their money and/or provide an income during retirement, such as with an annuity.