Glossary

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Basis

Basis is the total cost of buying an investment or other asset, including the price, commissions, and other charges. If you sell the asset, you subtract your basis from the selling price to determine your capital gain or capital loss. If you give the asset away, the recipient's basis is the same amount as yours. But if you leave an asset to a beneficiary in your will, the person receives the asset at a step up in basis, which means the basis of the asset is reset to its market value as of the time of your death.When your investment is in real estate, basis is generally called cost basis.

Basis point

Yields on bonds, notes, and other fixed-income investments fluctuate regularly, typically changing only a few hundredths of a percentage point. These small variations are measured in basis points, or gradations of 0.01%, or one-hundredth of a percent, with 100 basis points equaling 1%. For example, when the yield on a bond changes from 6.72% to 6.65%, it has dropped 7 basis points.Similarly, small changes in the interest rates charged for mortgages or other loans are reported in basis points, as are the fees you pay on various investment products, such as annuities and mutual funds. For example, if the average management fee is 1.4%, you might hear it expressed as 140 basis points. Your percentage of ownership in certain kinds of investments may also be stated in basis points, and in this case each basis point equals 0.01% of the whole investment.

Bear market

A bear market is sometimes described as a period of falling securities prices and sometimes, more specifically, as a market where prices have fallen 20% or more from the most recent high. A bear market in stocks is triggered when investors sell off shares, generally because they anticipate worsening economic conditions and falling corporate profits. A bear market in bonds is usually the result of rising interest rates, which prompts investors to sell off older bonds paying lower rates.

Benchmark

Originally a benchmark was a surveyor's mark indicating a specific height above sea level, but it has come to have a much broader meaning in the world of investing. A stock market benchmark, for example, is an index whose movement tracks a particular segment of the market and is considered a general indicator of the strength or weakness of that segment. For example, the Standard & Poor's 500 Index (S&P 500) and the Dow Jones Industrial Average (DJIA) are the most widely followed benchmarks, or indicators, of the US market for large company stocks.There are other indexes that serve as benchmarks for both broader and narrower segments of the US equities markets, of international markets, and of other types of investments such as bonds, mutual funds, and commodities. Individual investors and financial professionals often gauge their market expectations and judge the performance of individual investments or market sectors against the appropriate benchmarks.In a somewhat different way, the changing yield on the 10-year US Treasury bond is considered a benchmark of investor attitudes. For example, a lower yield is an indication that investors are putting money into bonds, driving up the price, possibly because they expect stock prices to drop. Conversely, a higher yield indicates investors are putting their money elsewhere.

Beneficiary

A beneficiary is the person or organization who receives assets that are held in your name in a retirement plan, or are paid on your behalf by an insurance company, after your death. If you have established a trust, the beneficiary you name receives the assets of the trust.A life insurance policy pays your beneficiary the face value of your policy minus any loans you haven't repaid when you die. An annuity contract pays the beneficiary the accumulated assets as dictated by the terms of the contract. A retirement plan, such as an IRA or 401(k), pays your beneficiary the value of the accumulated assets or requires the beneficiary to withdraw assets either as a lump sum or over a period of time, depending on the plan.You may name any person or institution - or several people and institutions - as beneficiary or contingent beneficiary of a trust, a retirement plan, annuity contract, or life insurance policy. A contingent beneficiary is one who inherits the assets if the primary beneficiary has died or chooses not to accept them. Some retirement plans require that you name your spouse as beneficiary unless you get his or her written permission to name someone else.

Blue chip stock

Blue chip stock is the common stock of a large, well-regarded US company. The companies in that informal category are collectively known as blue chips companies. Blue chips have a reputation for producing quality products and services and a long-established record of earning profits and paying dividends regardless of the economic climate. They take their name from the most valuable poker chips. In the United Kingdom, in contrast, comparable firms are called alpha companies.

Bond

Bonds are debt securities issued by corporations and governments. Bonds are, in fact, loans that you and other investors make to the issuers in return for the promise of being paid interest, usually but not always at a fixed rate, over the loan term. The issuer also promises to repay the loan principal at maturity, on time and in full. Because most bonds pay interest on a regular basis, they are also described as fixed-income investments. While the term bond is used generically to describe all debt securities, bonds are specifically long-term investments, with maturities longer than ten years.

Bull market

A prolonged period when stock prices as a whole are moving upward is called a bull market, although the rate at which those gains occur can vary widely from bull market to bull market. So can the duration of a bull market, the severity of the falling market that follows, and the time that elapses until the next upturn. Well-known bull markets began in 1923, 1949, 1982, and 1990.

Buy down

When you make an up-front cash payment to reduce your monthly payments on a mortgage loan, it's called a buy down. In a temporary buy down, your payments during the buy-down period are calculated at a lower interest rate than the actual rate on your loan, which makes the payments smaller.For example, if you prepay $6,000, your rate might be reduced by a total of six percentage points, or one percent for each thousand dollars, spread over three years. Instead of an 8% rate in the first year, it would be 5%. In the a 30-year term a reduction from 8% to 5% would reduce your monthly payments in the first year from about $734 to about $535. Note that pre-payments on amortizing mortgage loans after the loan has been made usually have no effect on the interest rate or the monthly payments, but are applied to shorten the term of the loan.The extra cash you prepaid would be used to make up the difference between the amounts due calculated at the lower rates and the actual cost of borrowing - in this case about $200 a month in the first year. Then, in the fourth year, you would begin to pay at the actual loan rate and your payments would increase. In a permanent buy down, which is less common, your rate might be reduced by about 0.25% for each thousand dollars, or point, you prepaid, but the reduction would last for the life of the loan.You might choose to do a buy down if you had extra cash at the time you were ready to buy but a smaller income than would normally allow you to qualify to buy the home you want. In most cases, lenders require that your housing costs be no more than 28% of your income. You might be able to reach that level if your initial payments were less at the time of purchase.
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