capital appreciation: an increase in the value of a stock or other investment, as opposed to income from dividends or interest. See also capital growth.
Capital Bank and Trust Company (CB&T): a non-depository federal savings bank that provides trust services for retirement plans invested in American Funds.
capital gain: an increase in the value of a capital asset, calculated by the difference between the purchase price and the sale price of the investment. When an asset is sold, any capital gain that is realized from the sale is taxable.
capital gain distribution: the net long-term capital gain amount generated by a mutual fund from the sale of stocks or bonds, paid to shareholders on a per-share basis. Many shareholders elect to reinvest capital gain distributions, rather than take them in cash. American Funds shareholders can reinvest capital gains with no sales charge.
capital growth: an increase in the value of a stock or other investment, as opposed to income from dividends or interest. See also capital appreciation.
Capital Research and Management Company (Capital Research): investment adviser to American Funds. Founded in 1931, Capital Research ranks among the world’s largest investment firms, overseeing assets of more than $950 billion for individuals, corporations, banks, trusts, insurance companies and retirement plans.
The Capital SystemSM: a unique investment management system whereby assets of each of the American Funds are divided for investment among a number of portfolio managers at Capital Research and Management CompanySM. Portfolio managers manage their individual portions as if they were an entire fund; this allows the counselors to act on their own convictions. The system provides consistency, continuity, diversity and flexibility. A portion of fund assests is also managed by a group of investment analysts.
capitalization: see market capitalization.
cash and cash equivalents: short-term, highly liquid investments that are virtually as good as cash, such as corporate short-term notes and commercial paper. Cash equivalents generally have a maturity of less than three months.
certificate of deposit (CD): a negotiable debt instrument issued by a commercial bank to repay funds deposited for a defined period of time (usually from 14 days to several years). In addition to repaying the principal at maturity, a CD pays a market-determined interest rate. Individual CDs start at $100 and institutional CDs are issued in denominations of $100,000 or more.
Class 529 shares: named after the section of the Internal Revenue Code that created them, these shares were created to help investors save for higher education expenses through a tax-advantaged account.
Class B shares: shares sold without an up-front sales charge that carry higher annual expenses for a fixed period (typically eight years). In addition, if shareholders sell shares during the first few years (typically six years), they may be subject to a redemption fee, known as a contingent deferred sales charge, which declines over time. American Funds no longer offers Class B and 529-B shares.
Class C shares: shares sold without an up-front sales charge that carry higher annual expenses for a fixed period (typically 10 years). In addition, if shareholders sell shares during the first year, they may be subject to a redemption fee, known as a contingent deferred sales charge.
Class F shares: shares sold without an up-front sales charge that carry higher annual expenses. No commissions or sales charges are charged. Broker-dealers generally charge a separate annual fee for advice, which usually ranges from 0.5% to 3.0% of assets. Share classes F-1 and F-2 may be offered depending upon the broker-dealer’s fee-based program.
collateralized mortgage obligation (CMO): a multi-class debt instrument backed by a pool of mortgage pass-through securities or mortgage loans. The issuer’s obligation to make interest and principal payments is secured by the underlying portfolio.
commercial paper: short-term debt obligations (IOUs) issued by banks, corporations and other borrowers. Maturities range from two days to nine months. Though commercial paper is unsecured, it is generally backed by bank lines of credit and only issued by financially secure companies. Like bonds, commercial paper is rated by Moody’sSM and Standard & Poor’sSM.
common stock: a class of securities representing ownership and control in a corporation. Common stockholders are generally entitled to vote on certain matters, such as election of directors, and may be entitled to dividends.
compounding: the ability of an asset to generate interest that is then added to principal and interest earned earlier. For example, if an investor puts $1,000 in a mutual fund that returns 10% each year, the account will be worth $1,100 at the end of the first year and $1,210 at the end of the second year. The extra $10 earned on the $100 return from the first year is the compound interest.
Consumer Price Index (CPI): used to measure changes in the general price level or inflation, the CPI measures prices of a fixed basket of goods bought by a typical consumer, including food, transportation, shelter, utilities, clothing and other items. It is widely used as a cost-of-living benchmark to adjust Social Security payments, tax brackets and other payment schedules. See also purchasing power.
contingent deferred sales charge (CDSC): an exit fee imposed on shares sold within a specified period by a mutual fund shareholder or a variable annuity contractholder. These charges are usually assessed on a sliding scale, such as 6% of amounts redeemed the first year, 5% the second year, 4% the third year, and so on. Also known as a back-end load.
convertible security: preferred stocks or bonds offering the right to exchange them for another security, usually common stock of the same company. Convertibles generally offer higher income than is available from common stock, together with greater appreciation potential than regular bonds.
correction: a sudden, temporary decline in stock or bond prices following a period of market strength. Because markets do not move straight up or down, corrections can be expected over a long-term investment horizon.
cost basis: the original price of an investment, used to determine capital gains.
coupon rate: the stated, fixed rate of interest paid by a fixed-income security, expressed as a percentage of the par value of the security. A bond with a par value of $1,000 that pays $80 a year has a coupon rate of 8%. Also called the nominal yield. See also yield.
Coverdell Education Savings Account (formerly Education IRA): an education savings account that allows parents, grandparents and others to contribute for the K-12 and higher education expenses of a child. Contributions are not tax-deductible, but withdrawals are tax-free if used for qualified expenses such as required room and board and tuition.
credit rating: see bond rating.
currency futures: contracts in the futures markets for delivery in a major currency, such as the U.S. dollar, the Japanese yen or the British pound. The buyer of a currency futures contract acquires the right to purchase a particular amount of that currency by a specific date at a fixed exchange rate. These contracts are traded on exchanges throughout the world. Often used as a hedging mechanism to offset currency or interest rate risk.
custodial account: an account created for the benefit of a minor, usually at a bank, mutual fund or brokerage, with an adult as custodian. The custodian manages cash and other property gifted to minors under the Uniform Gifts to Minors Act or the Uniform Transfers to Minors Act.
custodian of assets: an agent, bank, trust company or other organization that holds and safeguards the assets of a mutual fund. See custodial account.
cyclical stocks: stocks of companies whose earnings are tied to the business cycle. When economic and business conditions are good, a cyclical company prospers; when there is an economic downturn, the company suffers. Examples of cyclical stocks include housing and automobiles. Stocks of noncyclical industries such as food, insurance and pharmaceuticals are not as directly affected by economic changes.