Glossary

Valuation is the process of estimating the value, or worth, of an asset or investment.

Sometimes it means determining a fixed amount, such as establishing the value of your estate after your death. Other times, valuation means estimating future worth.

For example, fundamental stock analysts estimate the outlook for a company's stock by looking at data such as the stock's price-to-earnings (P/E), price-to-sales, and price-to-book (net asset value) ratios.

In general, a company with a high P/E is considered overvalued, and a company with a low P/E is considered undervalued.

When a mutual fund manager buys primarily undervalued stocks for the fund's portfolio with the expectation that these stocks will increase in price, that fund is described as a value fund.

A value fund may be limited to stocks of a certain size, such as those included in a small-cap value fund, or it may include undervalued stocks with different levels of capitalization.

Value Line, an independent investment research service, tracks the performance of approximately 1,700 common stocks in its composite index. The index, which is equally weighted, is considered a reliable indicator of overall market trends.

Value Line is an investment research company that provides detailed analysis on a range of stocks, mutual funds, and convertible investments.

Their publications include The Value Line Investment Survey and The Value Line Mutual Fund Survey, which contain regularly updated rankings of specific investments that the company covers.

The company uses a dual ranking system in its evaluations. For example, Value Line ranks stocks for their safety and timeliness, and mutual funds both for their overall performance and for their risk-adjusted performance.

Value stocks, also known as undervalued stocks, trade at a lower price than the company's reputation, earnings outlook, or financial situation would seem to merit.

Investors who seek them out expect the company's fortunes to turn around, and the price of the stock to increase accordingly.

A variable annuity is an insurance company product designed to allow you to accumulate retirement savings.

When you purchase a variable annuity, either with a lump sum or over time, you allocate the premiums you pay among the various separate account funds offered in your annuity contract.

The tax-deferred return on your variable annuity fluctuates with the performance of the underlying investments in your separate account funds, sometimes called investment portfolios or subaccounts.

You may purchase qualified variable annuities, which are offered as options within an employer sponsored retirement savings plan, or nonqualified variable annuities. Nonqualified annuities are those you purchase on your own, often to supplement other retirement savings.

You can also choose an individual retirement annuity, which resembles an individual retirement account except that the underlying investments are separate account funds.

Among the appeals of both qualified and nonqualified variable annuities are the promise of a stream of income for life if you annuitize the assets in your account and the right to make tax-exempt transfers among separate account funds.

If you purchase a nonqualified annuity, there are no federal limits on the annual amounts you can invest, no requirement that you purchase the annuity with earned income, and no minimum required withdrawals beginning at age 70 1/2.

However, with both types of variable annuities, withdrawals before you reach age 59 1/2 may be subject to a 10% early withdrawal tax penalty.

Variable life insurance policies are cash-value policies that allow you to choose how your premium is invested from among a package of alternatives offered by the insurer.

In many variable life policies, the face value of your policy depends on how well the investments you've chosen are performing.

Venture capital is financing provided by wealthy independent investors, banks, and partnerships to help new businesses get started, reach the next level of growth, or go public.

In return for the money they put up, also called risk capital, the investors may play a role in the company's management as well as receive some combination of equity, profits, or royalties.

Some venture capital also goes into bankrupt companies to help them turn around, or to companies that the management wants to take private by buying up all the outstanding shares.

If you are part of an employer pension plan or participate in an employer sponsored retirement plan, such as a 401(k), you become fully vested -- or entitled to the contributions your employer has made to the plan, including matching and discretionary contributions -- after a certain period of service with the employer.

Qualified plans must use one of the standards set by the federal government to determine that period.

If you become entitled to full benefits gradually over several years, the process is called graded vesting. But if you have are entitled only when the full waiting period is up, the process is called cliff vesting. If you leave your job before becoming fully vested, you forfeit all or part of your employer-paid benefits.

However, you are always entitled to all the contributions you make to a retirement plan yourself through salary reduction or after-tax payments.

Technically speaking, a viatical settlement occurs when a life insurance policy is sold for cash to a third party before the original owner dies.

Most viatical settlements involve terminally ill people with life expectancies of less than two years who choose to sell their life insurance policies to raise money for their medical care.

In a viatical settlement, the third party pays the former policy owner an amount that is typically more than the surrender value of the policy, but less than the death benefit. When the insured person dies, the new policy owner collects the death benefit and makes a profit on the difference between the amount paid to the insured and the amount paid on the claim.

Some businesses specialize in viatical settlements, and may resell them as investments, arrangements that are regulated by the state in which the policies are sold.

Because viaticals are controversial, more complex than they seem, and have been aggressively and sometimes misleadingly marketed, both people considering selling their policies and people considering investing in them are advised to proceed with caution.

A virtual bank offers of some or all the same types of accounts and services that traditional bricks-and-mortar banks do, but virtual banks exist only online. They typically charge lower fees and pay higher interest because of low overhead.

Virtual bank transactions can be checked in real time, as they happen, rather than at the end of the banking day or the end of the month -- though those services may also be available through the online branches of traditional banks.

Virtual banks don't have branches or own ATM machines, so you make deposits electronically or by mail. Your virtual bank may reimburse your ATM fees for using other banks' machines. However, there may be a limit to the number of transactions a virtual bank will cover each month.

The term volatility indicates how much and how quickly the value of an investment, market, or market sector changes.

For example, because the stock prices of small, newer companies tend to rise and fall more sharply over short periods of time than stock of established, blue-chip companies, small caps are described as more volatile.

The volatility of a stock relative to the overall market is known as its beta, and the volatility triggered by internal factors, regardless of the market, is known as a stock's alpha.

Volume is the number of shares traded in a company's stock or in an entire market over a specified period, typically a day.

Unusual market activity, either higher or lower than average, is typically the result of some external event. But unusual activity in an individual stock reflects new information about that stock or the stock's sector.

Investors who own shares of a common stock or shares in a mutual fund typically have voting rights, which allow them to participate in the election of boards of directors.

These shareholders can also vote for or against certain propositions put forward by management or by other stockholders. In contrast, investors who own preferred shares or corporate bonds have no voting rights.

Like the scavenging bird of prey that lends its name to the fund, a vulture fund seeks out depressed or endangered investments.

Many vulture funds focus on real estate, but others invest in bonds that have been downgraded or are in default and other high-risk securities.

The strategy behind vulture investing is that such troubled securities have the potential to provide a large return eventually, in spite of their current vulnerable position. Most vulture funds are limited partnerships, but some are retail mutual funds that are open to individual investors.