Brokerage Glossary of Terms

401(k):† You participate in a 401(k) retirement savings plan by deferring part of your salary into an account set up in your name. Any earnings in the account are federal income tax deferred. If you change jobs, 401(k) plans are portable, which means that you can move your accumulated assets to a new employer's plan, if the plan allows transfers, or to a rollover IRA. With a traditional 401(k), you defer pretax income, which reduces the income tax you owe in the year you made the contribution. You pay tax on all withdrawals at your regular rate. With the newer Roth 401(k), which is offered in some but not all plans, you contribute after-tax income. Earnings accumulate tax deferred, but your withdrawals are completely tax free if your account has been open at least five years and youíre at least 59 1/2. In either type of 401(k), you can defer up to the federal cap, plus an annual catch-up contribution if youíre 50 or older. However, you may be able to contribute less than the cap if youíre a highly compensated employee or if your employer limits contributions to a percentage of your salary. Your employer may match some or all of your contributions, based on the terms of the plan you participate in, but matching isnít required. With a 401(k), you are responsible for making your own investment decisions by choosing from among investment alternatives offered by the plan. Those alternatives typically include separate accounts, mutual funds, annuities, fixed-income investments, and sometimes company stock. You may owe an additional 10% federal tax penalty if you withdraw from a 401(k) before you reach 59 1/2. You must begin to take minimum required distributions by April 1 of the year following the year you turn 70 1/2 unless youíre still working. But if you prefer, you can roll over your traditional 401(k) assets into a traditional IRA and your Roth 401(k) assets into a Roth IRA.

529 college savings plan:† Each 529 college savings plan is sponsored by a particular state or group of states, and while each plan is a little different, they share many basic elements. When you invest in a 529 savings plan, any earnings in your account accumulate tax free, and you can make federally tax-free withdrawals to pay for qualified educational expenses, such as college tuition, room and board, and books at any accredited college, university, vocational, or technical program in the United States and a number of institutions overseas. Some states also exempt earnings from state income tax, and may offer additional advantages to state residents, such as tax deductions for contributions. You must name a beneficiary when you open a 529 savings plan account, but you may change beneficiaries if you wish, as long as the new beneficiary is a member of the same extended family as the original beneficiary. In most cases, you may choose any stateís plan, even if neither you nor your beneficiary live in that state. There are no income limits restricting who can contribute to a plan, and the lifetime contributions are more than $300,000 in some states. You can make a one-time contribution of $60,000 without incurring potential gift tax, provided you donít make another contribution for five years. Or, you may prefer to add smaller amounts, up to the annual gift exclusion.

Annuity:† A regular periodic payment made by an insurance company to a policyholder for a specified period of time.

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 recipientís 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.

Beneficiary:† Term used to refer to the person who receives the benefits of a trust or the recipient of the proceeds of a life insurance policy.

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.

Behavioral finance:† Behavioral finance combines psychology and economics to explain why and how investors act and to analyze how that behavior affects the market. Behavioral finance theorists point to the market phenomenon of hot stocks and bubbles, from the Dutch tulip bulb mania that caused a market crash in the 17th century to the more recent examples of junk bonds in the 1980s and Internet stocks in the 1990s, to validate their position that market prices can be affected by the irrational behavior of investors. Behavioral finance is in conflict with the perspective of efficient market theory, which maintains that market prices are based on rational foundations, like the fundamental financial health and performance of a company.

Beta: Beta is a measure of an investment's relative volatility. The higher the beta, the more sharply the value of the investment can be expected to fluctuate in relation to a market index. For example, Standard & Poor's 500-stock Index (S&P 500) has a beta coefficient (or base) of 1. That means if the S&P 500 moves 2% in either direction, a stock with a beta of 1 would also move 2%. Under the same market conditions, however, a stock with a beta of 1.5 would move 3% (2% increase x 1.5 beta = 0.03, or 3%). But a stock with a beta lower than 1 would be expected to be more stable in price and move less. Betas as low as 0.5 and as high as 4 are fairly common, depending on the sector and size of the company. However, in recent years, there has been a lively debate about the validity of assigning and using a beta value as an accurate predictor of stock performance.

Blue Chip Stock:† Used in the context of general equities. Large and creditworthy company. Company renowned for the quality and wide acceptance of its products or services, and for its ability to make money and pay dividends. Gilt Edged Security.

Bid/Ask Spread:† the bid-ask spread which is the difference between what buyers are willing to pay and what sellers are asking for in terms of price.

Bond:† Bonds are debt and are issued for a period of more than one year. The U.S. government, local governments, water districts, companies and many other types of institutions sell bonds. When an investor buys bonds, he or she is lending money. The seller of the bond agrees to repay the principal amount of the loan at a specified time. Interest-bearing bonds pay interest periodically.

Breakpoint:† A breakpoint is the level at which your account balance in a mutual fund company or the size of a new investment in the company's funds qualifies you to pay a reduced sales charge. Fund companies that charge a percentage of the amount you invest as a front-end load, or sales charge, may offer this cost saving. They are not required to do so, but if they do use breakpoints, they must ensure that all clients who qualify get the discount. In most cases, the first breakpoint is $25,000, with further reductions for each additional $25,000 or $50,000 purchase. For example, if the standard load were 5.5%, it might drop to 5.25% at $25,000, to 5% at $50,000, and perhaps to as low as 2.5% with an investment of $250,000.In calculating breakpoints, some fund companies will combine the value of all of your investments in the mutual funds they offer. Other companies count the investments of all of the members of your household or give you credit for purchases you intend to make in the future.

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. The duration of a bull market, the severity of the falling market that follows, and the time that elapses until the next upturn are also different each time. Well-known bull markets began in 1923, 1949, 1982, and 1990.

Dividend:† A portion of a company's profit paid to common and preferred shareholders. A stock selling for $20 a share with an annual dividend of $1 a share yields the investor 5%.

Capital appreciation:† Any increase in a capital asset's fair market value is called capital appreciation. For example, if a stock increases in value from $30 a share to $60 a share, it shows capital appreciation. Some stock mutual funds that invest for aggressive growth are called capital appreciation funds.

Capital gain:† When you sell an asset at a higher price than you paid for it, the difference is your capital gain. For example, if you buy 100 shares of stock for $20 a share and sell them for $30 a share, you realize a capital gain of $10 a share, or $1,000 in total. If you own the stock for more than a year before selling it, you have a long-term capital gain. If you hold the stock for less than a year, you have a short-term capital gain. Most long-term capital gains are taxed at a lower rate than your other income while short-term gains are taxed at your regular rate. There are some exceptions, such as gains on collectibles, which are taxed at 28%. The long-term capital tax rates are 15% for anyone whose marginal federal tax rate is 25% or higher, and 5% for anyone whose marginal rate is 10% or 15%.You are exempt from paying capital gains tax on profits of up to $250,000 on the sale of your primary home if you're single and up to $500,000 if you're married and file a joint return, provided you meet the requirements for this exemption.

Credit score:† Your credit score is a number, calculated based on information in your credit report, that lenders use to assess the credit risk you pose and the interest rate they will offer you if they agree to lend you money. Most lenders use credit scores rather than credit reports since the scores reduce extensive, detailed information about your financial history to a single number. There are actually two competing credit scoring systems, FICO, which has been the standard, and VantageScore, which was developed by the three major credit bureaus. Their formulas give different weights to particular types of credit-related behavior, though both put the most emphasis on paying your bills on time. They also have different scoring systems, ranging from 300 to 850 for FICO to 501 to 999 for AdvantageScore. The best ó or lowest ó interest rates go to applicants with the highest scores. Because your credit score and credit report are based on the same information, itís very unlikely that they will tell a different story. Itís smart to check your credit report at least once a year, which you can do for free at www.annualcreditreport.com or by calling 877-322-8228. It may be a good idea to review your score if you anticipate applying for a major loan, such as a mortgage, in the next six months to a year. That allows time to bring your score up if you fear itís too low.

Current yield:† Current yield is a measure of your rate of return on an investment, expressed as a percentage. With a bond, current yield is calculated by dividing the interest you collect by the current market price. For example, if a bond paying 5% interest, or $50, is selling for $900, the current yield is 5.6%. If the market price is $1,200, the current yield is 4.2%. And if bond is selling exactly at par, or $1,000, the current yield is 5%, the same as the coupon rate. If you own a stock, its current yield is the annual dividend divided by its market price

Dollar cost averaging:† Dollar cost averaging means adding a fixed amount of money on a regular schedule to an investment account, such as a mutual fund or a dividend reinvestment plan (DRIP). Since the share price of the investment fluctuates, you buy fewer shares when the share price is higher and more shares when the price is lower. The advantage of this type of formula investing, which may also be called a constant dollar plan, is that, over time, the average price you pay per share is lower than the actual average price per share. But to get the most from this approach, you have to invest regularly, including during prolonged downturns when the prices of the investment drop. Otherwise you are buying only at the higher prices. Despite its advantages, dollar cost averaging does not guarantee a profit and doesn't protect you from losses in a falling market.

Dow Jones Industrial Average (DJIA):† The Dow Jones Industrial Average (DJIA), sometimes referred to as the Dow, is the best-known and most widely followed market indicator in the world. It tracks the performance of 30 blue chip US stocks. Though it is called an average, it is actually a price-weighted index. That means the gains and losses of the highest priced stocks are counted more heavily than gains and losses of lower priced stocks. The DJIA is quoted in points, not dollars. It's computed by totaling the weighted prices of the 30 stocks and dividing by a number that is regularly adjusted for stock splits, spin-offs, and other changes in the stocks being tracked. The companies that make up the DJIA are changed from time to time. For example, in 1999 Microsoft, Intel, SBC Communications, and Home Depot were added and four other companies were dropped. The changes were widely interpreted as a reflection of the emerging or declining impact of a specific company or type of company on the economy as a whole

Education savings account (ESA):† You can put up to $2,000 a year into a Coverdell education savings account (ESA) that you establish in the name of a minor child. The assets in the account can be invested any way you choose. There is no limit on the number of accounts you can set up for different beneficiaries, but no more than a total of $2,000 can be contributed in a single beneficiaryís name in any one year. If you choose, you may switch the beneficiary of an ESA to another member of the same extended family. Your contribution is not tax deductible. But any earnings that accumulate in the account can be withdrawn tax free if they're used to pay qualified educational expenses for the beneficiary until he or she reaches age 30. The costs can be incurred at any level, from elementary school through a graduate degree, or at a qualified post-secondary technical or vocational school. There are no restrictions on using ESA money in the same year the student uses other tax-free savings, or the student, parent, or guardian uses tax credits for educational expenses. But you canít take a credit for expenses you covered with tax-free withdrawals. To qualify to make a full $2,000 contribution to an ESA, your modified adjusted gross income (MAGI) must be $95,000 or less, and your right to make any contribution at all is phased out if your MAGI is $110,000 if youíre a single taxpayer. The comparable range if youíre married and file a joint return is $190,000, phased out at $220,000.

Emerging market:† Countries in the process of building market-based economies are broadly referred to as emerging markets. However, there are major differences among the countries included in this category. Some emerging-market countries, including Russia, have only recently relaxed restrictions on a free-market economy. Others, including Indonesia, have opened their markets more widely to overseas investors, and still others, including Mexico, are expanding industrial production. Their combined stock market capitalization is less than 3% of the worldwide total.

Ex-Dividend Date:† The first day of trading when the seller, rather than the buyer, of a stock will be entitled to the most recently announced dividend payment. The date set by the NYSE (and generally followed on other U.S. exchanges) is currently two business days before the record date. A stock that has gone ex-dividend is denoted by an x in newspaper listings on that date.

Financial Advisor:† A professional offering financial advice to clients for a fee and/or commission.

Financial Plan:† A blueprint relating to the financial future of a firm or person.

FINRA: In the United States, the Financial Industry Regulatory Authority, Inc., or FINRA, is a private corporation that acts as a self-regulatory organization (SRO). FINRA is the successor to the National Association of Securities Dealers, Inc. (NASD). Though sometimes mistaken for a government agency, it is a non-governmental organization that performs financial regulation of member brokerage firms and exchange markets. The government organization which acts as the ultimate regulator of the securities industry, including FINRA, is the Securities and Exchange Commission.

Health savings account (HSA):† A health savings account is designed to accumulate tax-free assets to pay current and future healthcare expenses. To open an HSA, you must have a qualifying High Deductible Health Plan (HDHP) either through your employer or as an individual. If you have an employerís plan, your contributions to the HSA are made with pretax income, and your employer may contribute as well. If you have an individual plan, you may deduct your contributions in calculating your adjusted gross income (AGI). Congress sets an annual limit on the amount you can contribute to an HSA, which you set up with a financial institution such as a bank, brokerage firm, insurance company, or mutual fund company that offers these accounts. No tax is due on money you withdraw from the HSA to pay qualified medical expenses such as doctor's visits, hospital care, eyeglasses, dental care, and medications for yourself, your spouse, and your dependents. Any money thatís left over in your HSA at the end of the year is rolled over and continues to accumulate tax-free earnings, which you can use for future healthcare costs. Once you're 65, you can use the money in the HSA for non-medical expenses without paying a penalty, but you'll owe income taxes on those withdrawals. If you are younger than 65, you can also spend from your HSA on non-medical expenses, but you'll owe income taxes plus a 10% tax penalty on the amount you take out.

High deductible health plan (HDHP):† A high deductible health plan (HDHP) requires substantially higher than average out-of-pocket expenses before the insurance company will start paying for your medical expenses. However, the premiums for an HDHP are generally lower than the premiums for traditional fee-for-service, participating provider organization (PPO), or a health maintenance organization (HMO) plan. The HDHP may also pay a larger percentage of your expenses once you have satisfied the deductible. If you have an HDHP, you may be eligible for a health savings account (HSA), which allows you to make tax-free withdrawals to pay for medical care thatís not covered by your plan. Money you put in an HSA or that an employer contributes to your account and that you donít spend for qualified expenses can be rolled over and used in later years.

High-yield bond:† High-yield bonds are bonds whose ratings from independent rating services are below investment grade. As a result, to attract investors, issuers of high-yield bonds must pay a higher rate of interest than the rates that issuers of higher-rated bonds with the same maturity are paying. The higher rate translates to more income, which is the higher yield. High-yield bonds may also be described, somewhat more graphically, as junk bonds.

IRA (Individual Retirement Account): A retirement account that may be established by an employed person. IRA contributions are tax deductible according to certain guidelines, and the gains in the account are tax-deferred.

Inflation-protected security (TIPS):† US Treasury inflation-protected securities (TIPS) adjust the principal twice a year to reflect inflation or deflation measured by the Consumer Price Index (CPI). The interest rate is fixed and is paid twice a year on the adjusted principal. So if your principal is larger because of inflation you earn more interest. If it's lower because of deflation, you earn less. You can buy TIPS with terms of 5, 10, or 20 year at issue using a Treasury Direct account or in the secondary market. At maturity you receive either the adjusted principal or par value, whichever is greater. You owe federal income tax on the interest you earn and on inflation adjustments in each year they're added even though you don't receive the increases until the security matures. However, TIPS earnings are exempt from state and local income taxes. These securities provide a safeguard against deflation as well as against inflation since they guarantee that you'll get back no less than par, or face value, at maturity.

Investment objective:† An investment objective is a financial goal that helps determine the type of investments you make. For example, if you want a source of regular income, you might select a portfolio of high-rated bonds and dividend-paying stocks. Each mutual fund describes its investment objective in its prospectus, along with the strategy the fund manager follows to meet that objective. Mutual fund investors often look for funds whose stated objectives are compatible with their own goals.

Laddering:† Laddering is an investment strategy that calls for establishing a pattern of rolling maturity dates for a portfolio of fixed-income investments. Your portfolio might include intermediate-term bonds or certificates of deposit (CDs). For example, instead of buying one $15,000 CD with a three-year term, you buy three $5,000 CDs maturing one year apart. As each CD comes due, you can reinvest the principal to extend the pattern. Or, you could use the money for a preplanned purchase, have it available to take advantage of a new investment opportunity, or use it to cover unexpected expenses. You can use laddering to pay for college expenses, with a series of zero coupon bonds coming due over four years, in time to pay tuition each year. And if you ladder, you can avoid having to liquidate a large bond investment if you need just some of the money or reinvest your entire principal at a time when interest rates may be low.

Market risk:† Market risk, also known as systematic risk, is risk that results from the characteristic behavior of an entire market or asset class. One example of this type of risk is that the market prices of existing bonds generally fall as interest rates rise because investors are not willing to pay par value to own a bond that pays less interest than other bonds available in the marketplace. So if you wanted to sell your existing bonds, you would probably have to settle for less than you paid to buy them. Asset allocation is generally considered the antidote for market risk, since if your portfolio includes multiple asset classes it tends to be less vulnerable to a downturn in any one class.

SEC: Securities Exchange Commission

LPL Financial:† A broker/dealer that utilizes office space within Cornerstone Bank.

Portfolio: †A collection of investments, real and/or financial.

Prospectus:† A formal written document to sell securities that describes the plan for a proposed business enterprise, or the facts concerning an existing one, that an investor needs to make an informed decision. Prospectuses are used by mutual funds to describe fund objectives, risks, and other essential information.

Real Estate Investment Trust (REIT):† REITs invest in real estate or loans secured by real estate and issue shares in such investments.

Record Date (Dividend):† (1) Date by which a shareholder must officially own shares in order to be entitled to a dividend. For example, a firm might declare a dividend on Nov. 1, payable Dec. 1 to holders of record Nov. 15. Once a trade is executed, an investor becomes the "owner of record" on settlement, which currently takes five business days for securities and one business day for mutual funds. Stocks trade ex-dividend the fourth day before the record date, since the seller will still be the owner of record and is thus entitled to the dividend. (2) The date that determines who is entitled to payment of principal and interest due to be paid on a security. The record date for most MBS is the last day of the month, although the last day on which an MBS may be presented for the transfer is the last business day of the month. The record dates for CMOs and asset-backed securities vary with each issue.

Risk:† Often defined as the standard deviation of the return on total investment. Degree of uncertainty of return on an asset.

P/E Ratio:† Current stock price divided by trailing annual earnings per share or expected annual earnings per share. Assume XYZ Co. sells for $25.50 per share and has earned $2.55 per share this year; $25.50 = 10 times $2.55. XYZ stock sells for ten times earnings.