Financial glossary

A fee, paid directly from the assets of a mutual fund, to reimburse the broker-dealer for certain marketing and distribution expenses. It is included in the fund's expense ratio.

A defined contribution plan offered by a company to its employees that allows them to defer income for retirement. Sometimes, employers will match employee contributions. A 10% tax penalty may apply for withdrawals from tax-qualified products before age 59 ½.

Internal Revenue Service (IRS) form that reports proceeds from sales and exchanges of shares. This form helps determine the gains and losses on the sales and exchanges made during the year. The IRS has extended the due date to furnish 1099-B forms to taxpayers from January 31 to February 15.

The adjusted cost basis calculation required by the IRS includes adjustments made to the account for events like wash sales.

Any item of economic value owned by a person or entity. Examples are cash, securities, accounts receivable, inventory, office equipment, a house, a car and other property. On a balance sheet, assets are equal to the sum of liabilities and an owner's equity.

The process of spreading your assets among different types of investments such as stocks, bonds, cash, etc.

A type of investment, such as stocks, bonds, real estate or cash.

A common accounting method for valuing the cost of shares in a mutual fund account. It is calculated by dividing the total cost of all shares owned by the total number of shares. The basis of the shares redeemed is determined by multiplying the shares redeemed by the average cost per share.

A portfolio allocation strategy designed to provide both income and an increase in the value of the portfolio (capital appreciation) while avoiding excessive risk.

An individual, institution, trustee or estate that receives, or may become eligible to receive, benefits under a will, insurance policy, retirement plan, annuity, trust or other contract, upon the death of a certain person.

The risk that is associated with investing in bonds. Although these risks include short-term and prolonged price declines, such price declines in the bond market have historically been less severe than stock declines.

Debt securities or investments essentially loans funds to a government or business for a certain period of time. Generally, the principle along with interest is paid back to the investor on a specified date(s). It's often secured and has priority over shareholders if the company becomes insolvent and assets are distributed.

A business that is legally and completely separate from its owners to limit the owners' liabilities. Most publicly-traded companies fall under this classification. In the U.S., a C-Corporation is required to pay taxes on its income. Dividends to shareholders are also taxed (double-taxation).

Call risk is when during periods of falling interest rates, a bond issuer will call or repay its bonds with higher interest yields before the maturity date of the bond. If this happens, the fund may have to reinvest the proceeds in an investment that provides a lower yield than the called bond.

Distributions (usually annually) paid to mutual fund shareholders from gains realized on the sale of portfolio securities.

The profit realized when a capital asset is sold for a higher price than the purchase price.

Loss incurred when a capital asset is sold for a lower price than the purchase price.

The risk that the issuer of the security fails to make principle or interest payments when due or that the credit quality of the issuer falls.

Term refers to identifying the actual cost of an asset or security for income tax purposes. In Non-Tax Qualified accounts, the investor has already paid taxes on the money invested (including reinvested dividends and capital gains). When shares are sold, the cost basis represents a return of capital and is not taxed again.

A specific process used to determine the cost basis of a shareholder's account. Different methods can produce different cost bases, which can result in different gain/loss calculations. You have the option to choose from several cost basis accounting methods.

Shares purchased/obtained on or after January 1, 2012 that require cost basis and gain/loss reporting to both the shareholder and to the IRS. Also known as Post-effective Date Shares.

An account that is administered by a person or entity (the custodian) for the benefit of another person. Accounts are usually at a bank, mutual fund or brokerage.

A bank or trust company that oversees a mutual fund's assets, including its portfolio of securities or some record of them. The custodian has no role in portfolio management.

Obtaining funding by selling bonds, bills or notes to individuals or institutions.

When the shareholder has not elected an accounting cost basis method, the broker or transfer agent's default cost basis method will be used. State Farm Mutual Funds' default method is the average cost method. Also known as Fund Default Accounting Method.

A tax-free movement of funds from a qualified plan (e.g. 401k) to another qualified plan/IRA. A check would be made payable to the receiving custodian for the benefit of the shareowner. In some instances, the check could be mailed to the shareowner's address.

Payment in the form of dividends or capital gains of the portfolio. Distributions may be paid in cash or reinvested to purchase additional shares.

A method of portfolio asset allocation that spreads investments over a broad range of securities and/or asset classes. The goal of diversification is to reduce risk exposure to a specific security, sector or asset class by balancing the portfolio's risk and return potential.

A distribution of cash from a fund's net income to its shareowners. Dividends can be reinvested to purchase additional shares.

An index that tracks the performance of companies in Europe, Australia, New Zealand and the Far East. The EAFE Free Index is the exclusive property of Morgan Stanley Capital International, Inc.

Distribution from a qualified retirement plan that is eligible to be rolled into another retirement plan/IRA.

A qualifiying event must occur to be eligible. Qualifying events include, but are not limited to: separation from service, disability, death (spouse is the beneficiary); or a qualified domestic relations order (QDRO).

The sale of shares in one fund to purchase shares in another fund.

An accounting method for valuing the cost of shares sold in an account that assumes shares acquired first (i.e. the oldest shares) are the first shares redeemed when determining the shareholder's cost basis, gain/loss and holding period.

Investing in foreign securities involves higher trading and custody costs than investing in U.S. companies. Accounting, legal and reporting practices may be different than in the U.S. and regulation is often less strict. Potential political or economical instability presents risks, as does the fluctuation in currency exchange rates and the possible burden of exchange control regulation or currency restrictions that could prevent the conversion of local currencies into U.S. dollars.

An increase in the value of shares that results in a higher worth than the purchase price. A gain is not realized until shares are sold. Also known as Capital Gains, this should not be confused with the capital gains that are reinvesting into a shareholder's account or paid in cash to a shareholder at the Fund level.

An accounting method for valuing the cost of shares sold in an account that assumes shares that were purchased for the highest price of all owned shares are the first shares redeemed when determining the shareholder's cost basis, gain/loss and holding period.

The length of time a share is owned which begins on the day after it is acquired and ends on the day it is disposed. The law currently provides for two holding periods: short-term and long-term. Short-term describes shares held exactly 12 months or less. Long-term describes shares held more than 12 months.

The risk that the income from a fund's investments will decline because of falling market interest rates.

The risk that the income from a fund's investments will decline because of falling market interest rates.

A distribution from a qualified plan (e.g. 401k) or IRA into another IRA where a check is made payable from the surrendering custodian to the shareowner. The shareowner then has 60 days to roll the funds into an IRA.

The increase in the price of goods and services in an economy is usually measured by the Consumer Price Index and the Producer Price Index. Over time as the cost of goods and services increase, the value of a dollar falls because a person won't be able to purchase as much with that dollar as he or she previously could.

The risk of a decline in market value of an interest-bearing instrument due to changes in interest rates. For example, a rise in interest rates typically will cause the value of a fixed-rate security to fall. On the other hand, a decrease in interest rates will cause the value of a fixed-rate security to increase.

An accounting method for valuing the cost of shares sold in an account that assumes shares acquired last (i.e. shares purchased most recently) are the first shares redeemed when determining the shareholder's cost basis, gain/loss and holding period.

A legal obligation, debt, claim or potential loss.

Being easily converted to cash.

The risk that the fund manager may have difficulty selling securities of a fund at a particular time and at the value the fund has placed on those securities.

Gains from the sale of shares that have been held longer than 12 months. When shares are sold for a price higher than what was paid for them, a gain results. Long-term gains are taxed at lower rates than short-term gains.

A decrease in the value of shares that results in a lower worth than the purchase price. A loss is not realized until shares are sold. Also known as Capital Losses.

An accounting method for valuing the cost of shares sold in an account that depletes losses before gains consistent with the objective of minimizing taxes. LGUT redeems in this order:

• Short-term losses
  
  
• Long-term losses
  
  
• Long-term gains
  
  
• Short-term gains

A group of shares of a similar kind that have a common set of characteristics, such as a number of shares owned by an account that were all acquired on the same day at the same price. Also known as a Tax Lot.

An accounting method for valuing the cost of shares sold in an account that assumes shares acquired with the lowest cost per share are the first shares depleted when determining the shareholder's cost basis, gain/loss and holding period.

A fee paid directly from the assets of a mutual fund to compensate the fund's investment advisor for managing the fund's investments.

The risk when the fund manager handling the fund results in losses or poor performance even in a rising market.

The risk that share prices may fluctuate widely over time in response to company, market or economic news. Markets also tend to move in cycles of rising and falling prices.

Risk that occurs when a model used to manage a fund's assets does not perform as it should. Though the model may have been developed and refined over many years, there is no assurance that the recommended allocation will either maximize returns or minimize risks.

Money market accounts are insured by the federal government and offer many of the same services as checking accounts with some limited transactions. It can be a convenient place to store money and are highly liquid but may offer a lower interest rate than other investments.

Money market funds are different than money market accounts. While money market accounts are insured by the federal government, investments in a money market fund are not guaranteed by the Federal Deposit Insurance Corporate or any other government agency. These funds offer stability and an investment in the cash portion of an asset allocation program, 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.

Mortgage-backed securities (MBS) are secured by a mortgage or a group of mortgages, most commonly on residential property. Essentially an investor is lending money to an individual building a home or business.

The risk that the value of a municipal security may decrease because of changes in politics, taxation and legislation. It also involves the risks associated with the conditions of economic sectors that municipal securities are normally issued for such as education, health care and transportation.

An investment that pools the money of many investors with similar investment goals and invests that money in a number of securities on their behalf.

The current price of a share - calculated daily by taking the value of the fund's total assets, subtracting liabilities and then dividing the balance by the number of outstanding shares.

A process which allows a customer to present securities transaction documents to an authorized guarantor who validates the good order of the document(s) and the customer's signature is valid. This enables the transfer agent to accept the approval from the guarantor and reduces the amount of documentation needed to perform the transaction.

A plan administrator is the person or company who manages a plan, ensures the money is contributed into the fund, appropriate asset allocation decisions are made and payouts are promptly distributed to plan participants or beneficiaries.

A group of securities managed by a professional money manager who decides which securities to buy and sell in order to achieve the investment goal of the portfolio.

The risk of an early return of principle on a fixed-income security. If the principle is returned early, the investor will not receive future interest payments. This may also negatively impact the bond's yield.

The return on an investment calculated as a percentage of the total amount invested.

In general, a capital gain (or loss) is realized when the shareowner sells or exchanges shares from his or her account for more (or less) than the purchase price. Unrealized gains (or losses) are reflected in the net asset value of the unredeemed shares in the account.

The sale of mutual fund shares.

Dividends the shareowner reinvests by purchasing additional shares in a mutual fund. These dividends are fully taxable and become part of the cost basis of shares held in the account.

A tax-free movement of funds, depending on the type of rollover, from a qualified retirement plan into an IRA or other qualified plan within 60 days (indirect) orfrom one tax-qualified account to another (direct). Rollovers can happen when an employee leaves a job with an employer who offered a retirement plan such as a 401(k). (See "Direct Rollover" or "Indirect Rollover").

A type of IRA which allows taxpayers subject to certain income limits, to save for retirement while allowing the savings to grow tax free. Contributions are not tax deductible, but withdrawals subject to certain rules are not taxed at the federal level.

An index that tracks the performance of 2,000 small U.S. companies. The Russell 2000 Index is a trademark/service mark of The Frank Russell Company. Russell™ is a trademark of The Frank Russell Company.

An S-Corporation is a regular corporation that has up to 100 shareholders. In general, S-Corps do not pay any federal income taxes. Instead the corporation's income or losses are divided among and passed through to its shareholders. The shareholders must then report the income or loss on their own individual income tax returns.

Any investment vehicle including stocks, bonds, derivatives and money market instruments.

A fee paid directly from the assets of a mutual fund to reimburse the broker-dealer for certain expenses related to servicing shareholders' accounts.

Gains from the sale of shares that have been held for less than 12 months. A gain result is when shares are sold for a price higher than what was paid for them. Short-term gains are taxed at higher rates than long-term gains.

A short-term capital gain or loss is realized if the investment was owned for one year or less. A long-term capital gain or loss is realized if the investment was owned for more than one year. In general, a capital gain (or loss) is realized when the shareowner redeems (sells) or exchanges shares from his or her account for more (or less) than the purchase price.

A written representation signed by an officer or authorized employee of the guarantor, showing that the signature of a shareowner is genuine. A commercial bank, broker-dealer, or other authorized guarantor can provide this service. A notary cannot be accepted.

The risk of investing in securities of small capitalization companies. These securities are often more difficult to value or dispose of, more difficult to obtain information about, and more volatile than stocks of larger, more established companies. In addition the markets for the fund's investments may not be actively traded which increases the risk that the fund manager may have difficulty selling securities the fund holds.

The disability or retirement programs established under the federal Social Security Act.

An accounting method for valuing the cost of shares sold in an account in which the shareholder designates specific shares to be redeemed each time shares are sold.

An unmanaged, weighted index of the average performance of 500 widely held common stocks. It is considered one of the more accurate measures of overall stock market performance because it includes approximately 75% of the market value of all publicly traded equities. The S&P 500 Index is the exclusive property of The McGraw-Hill Companies, Inc. (McGraw-Hill). "S&P 500" is a trademark of McGraw-Hill.

A security that denotes ownership called equity in a corporation and represents a claim in its dividends and net assets. In a corporation with a single class of stock, ownership in the company is determined by the number of shares a person owns divided by the total number of shares outstanding. For example if a company has 1000 shares of stock outstanding and a person owns 50 of them, then he or she owns 5% of the company.

The risk of investing in stocks. These include both short-term and prolonged price declines.

Delay of taxes on income until a later date. Examples include IRA, 401(k), annuity, and employee-stock-ownership plans.

The annualized rate of return for a mutual fund including reinvested income from dividends and capital gains and the capital appreciation/depreciation of the securities within the fund's portfolio.

A retirement account that allows individuals to save for retirement. Earnings are tax-deferred until withdrawals begin at age 59 ½ or later.

A tax-free movement of funds from an IRA to another IRA. The shareowner does not receive the money since the check is made payable to the receiving custodian for the benefit of the shareowner. In most cases the check is mailed directly to the receiving custodian.

A means for one person, called the trustee, to own and control property for the benefit of him/herself or another person, the beneficiary.

The legal owner of trust assets who has authority over the assets and the investments and must exercise that authority for the benefit of the beneficiary.

Shares purchased/obtained prior to the effective date - Jan. 1, 2012 - that do not require cost basis and gain loss reporting. Also known as Non-Covered Shares or Pre-effective Date Shares.

When selling shares at a loss, if substantially identical shares are purchased within 30 before or after the sale, it is considered a wash sale and no loss can be claimed.