Commonly Used Wealth Management Terminology

Working in this business day after day, we tend to forget that some of the verbiage we use in our reports and documents may not be recognizable. So we figured we’d try to make it easier on you by defining some commonly used wealth management terminology.

Asset Allocation – Investment strategy that aims to balance risk and reward by apportioning a portfolio’s assets according to an individual’s goals, risk tolerance and investment horizon.

Commodities – Any good exchanged during commerce, which includes goods traded on a commodity exchange. Examples of commodities include corn, oil, gold, live cattle, and coffee.

Consumer and Business Confidence – Consumer confidence is a measure of the level of optimism consumers have about the performance of the economy. Generally consumer confidence is high when the unemployment rate is low and gross domestic product (GDP) growth is strong. Business confidence is a measure of the level of optimism businesses have about the performance of the economy. Generally business confidence is high when GDP growth is strong and business leaders feel good about the prospects of their companies.

Consumer Price Index (CPI) – A measure that examines the weighted average prices of a basket of consumer goods and services (such as transportation, food and medical care). Changes in CPI are associated with the cost of living.

Corporate Bonds – A debt security issued by a company. The backing for the bond is usually the payment ability of the company’s earnings from future operations. In some cases, the company’s physical assets may be used as collateral for bonds. Corporate bonds are considered higher risk than government bonds, thus interest rates are almost always higher.

Credit Risk – The risk of loss of principal stemming from a borrower’s failure to repay a loan or otherwise meet a contractual obligation. Credit risk arises whenever a borrower is expecting to use future cash flows to pay a current debt. Investors are compensated for assuming credit risk by way of interest payments from the borrower or issuer of a debt obligation. Credit risk is closely tied to the potential return of an investment, the most notable being that the yields on bonds correlate strongly to their perceived credit risk.

Developed Markets – Developed markets are nations that have met all of the following criteria: they are a high-income economy, as defined by the World Bank, having a gross national income per capita of $12,196; they have a formal market and regulatory environment, a stable and transparent financial system; and a broad depth to their markets.

Dividend Yield – A financial ratio that shows how much a company pays out in dividends each year relative to its share price. In the absence of any capital gains, the dividend yield is the return on investment for a stock. Dividend yield is calculated as follows: Annual Dividends Per Share divided by Price Per Share.

Duration Risk – Measure of the sensitivity of the price (the value of principal) of a fixed-income investment to an inverse change in interest rates. The longer period of time to maturity of a security, the more sensitive it is. Duration risk is associated with Interest Rate Risk and Reinvestment Risk.

Emerging Markets – Emerging markets are nations with social or business activity in the process of rapid growth and industrialization. Emerging markets generally do not have the level of market efficiency and strict standards in accounting and securities regulation to be on par with advanced economies (such as the United States, Europe and Japan), but emerging markets will typically have a physical financial infrastructure including banks, a stock exchange and a unified currency.

Equity – A stock or any other security representing an ownership interest. In terms of investment strategies, equity (stocks) is one of the principal asset classes. The other two are fixed-income (bonds) and cash/cash-equivalents. These are used in asset allocation planning to structure a desired risk and return profile for an investor’s portfolio.

Equity Risk Premium – The excess return that an asset or the overall market provides over a risk-free rate. This excess return compensates investors for taking on the relatively higher risk of the asset. The size of the premium will vary as the risk in a particular asset, or in the market as a whole, changes; higher-risk investments are compensated with a higher premium.

Euro – The official currency of the European Union (EU), currently in use in 16 of the 27 States. Participating in the Eurozone are: Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia and Spain. Other member states of the EU are: Bulgaria, the Czech Republic, Denmark, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Sweden, and the United Kingdom.

Fixed Income – Any investment paying a fixed interest rate such as a money market account, a certificate of deposit, a bond, a note, or a preferred stock. A fixed investment is the opposite of a variable investment.

Gross Domestic Product (GDP) – The total of goods and services produced by a nation over a given period, usually one year. Gross Domestic Product measures the total output from all the resources located in a country, wherever the owners of the resources live.

Government-Credit Index – An index produced by Barclays Capital that is a market capitalization-weighted index, meaning the securities in the index are weighted according to the market size of each bond type. Most U.S. traded investment grade bonds are represented including U.S. Treasuries, government agencies, corporate bonds, other non-corporate debt, and a small amount of foreign bonds traded in U.S. Municipal bonds, and Treasury Inflation-Protected Securities (TIPS) are excluded due to tax treatment issues.

Intermediate – An index of intermediate term has maturities from one to ten years. Intermediate Treasury and Intermediate Corporate are subindices containing only those asset classes indicated.

Long – An index of long-term has maturities beyond ten years.

High Yield – A subset of corporate bonds characterized by having a rating below Investment Grade (below BBB- or Baa3) or no rating at all. High yield bonds typically have a significantly higher interest rate because of their historically higher default rates.

Inflation – Increase in the overall level of prices over an extended period of time.

Leading Economic Indicators – A measurable economic factor that changes before the economy starts to follow a particular pattern or trend. Leading indicators are used to predict changes in economic growth.

Market Capitalization (Large-Cap, Mid-Cap Small-Cap) – Market capitalization is the total value of the tradable shares of a publicly traded company; it is equal to the share price times the number of shares outstanding. As outstanding stock is bought and sold in public markets, capitalization could be used as a proxy for the public opinion of a company’s net worth and is a determining factor in some forms of stock valuation.

  • Large-Cap: Greater than $10 billion
  • Mid-Cap: $5 – $10 billion
  • Small-Cap: Less than $5 billion

Municipal 1-10 Year Index – An index produced by Barclays Capital that is a market capitalization-weighted index, meaning the securities in the index are weighted according to the market size of each bond type. The index is of intermediate term meaning maturities from one to ten years and contains the tax-exempt municipal bonds commonly held by bond portfolio managers.

Municipal Bonds – A debt security issued by a state, county, or municipality to finance its capital expenditures. Municipal bonds can be exempt from federal, state, and local taxes, especially if you live in the state in which the bond is issued.

Option Adjusted Spread (OAS) – Mainly used for fixed-income products, OAS measures the yield spread that is not directly attributable to the security’s characteristics. This is a measurement tool for evaluating price differences between similar products with different embedded options (call/put, etc). A larger OAS implies a greater return for credit risk taken.

Payout Ratio – The amount of earnings paid out in dividends to shareholders or through share buyback programs. It is calculated as dividends plus repurchases per share divided by earnings per share. A low payout ratio indicates that a company is primarily focused on retaining its earnings.

Personal Consumption Expenditures (PCE) – Personal consumption expenditures is a measure of data pertaining to spending on goods and services targeted toward individuals and consumed by individuals.

Price to Earnings (P/E) – Price-to-earnings is a ratio calculated by taking the current stock price and dividing it by the earnings per share (EPS).

  • Historical P/E uses actual earnings data for the past 12 months.
  • Forward P/E uses earnings estimates (forward EPS) for the next four quarters.

Real Disposable Income – The amount of money that households have available for spending and saving. It is calculated as: wages minus inflation minus taxes.

Real Economic Growth – A measure of economic growth from one period to another expressed as a percentage and adjusted for inflation (sc. expressed in “real terms”).

Recession – A significant decline in activity across the economy, lasting longer than a few months. It is visible in industrial production, employment, real income and wholesale-retail trade. The technical indicator of a recession is two consecutive quarters of negative economic growth as measured by a country’s gross domestic product (GDP).

Real Estate Investment Trust (REIT) – A security that sells like a stock on the major exchanges and invests in real estate directly, either through properties or mortgages. REITs receive special tax considerations and typically offer investors high yields, as well as a highly liquid method of investing in real estate.

Standard & Poor’s 500 (S&P 500) Index – An index of 500 stocks chosen for market size, liquidity, and industry grouping, among other factors. The S&P 500 is designed to be a leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large cap universe. Companies included in the index are selected by the S&P Index Committee, a team of analysts and economists at Standard & Poor’s. The S&P 500 is a market value weighted index where each stock’s weight is proportionate to its market value.

Share Buyback – The repurchase of outstanding shares (repurchase) by a company in order to reduce the number of shares in the market. Companies will buy back shares either to increase the value of shares still available (reducing supply), or to eliminate any threats by shareholders who may be looking for a controlling stake.

Unemployment Rate – The percentage of the total labor force that is unemployed but actively seeking employment and willing to work.

Sources: Investopedia;; Wikipedia; Federal Reserve Bank of Cleveland

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