Glossary

F

Fair market value is the price you would have to pay to buy a particular asset or service on the open market. The concept of fair market value assumes that both buyer and seller are reasonably well informed of market conditions, that neither is under undue pressure to buy or sell, and that neither intends to defraud the other.

The finance charge, or total dollar amount you pay to borrow, includes the interest you pay plus any fees for arranging the loan. A finance charge is expressed as an annual percentage rate (APR) of the amount you owe, which allows you to compare the costs of different loans. The Truth-in-Lending Law requires your lender to disclose the APR you'll be paying and the way it is calculated before you agree to the terms of the loan.

A financial planner evaluates your personal finances and helps you develop a financial plan to meet both your immediate needs and your long-term goals. Some, but not all, planners have credentials from professional organizations.

Some well-known credentials are Certified Financial Planner (CFP), Chartered Financial Consultant (ChFC), Certified Investment Management Analyst (CIMA), and Personal Financial Specialist (PFS). A PFS is a Certified Public Accountant (CPA) who has passed an exam on financial planning. Some planners are also licensed to sell certain investment or insurance products.

Fee-only financial planners charge by the hour or collect a flat fee for a specific service, but don't sell products or earn sales commissions. Other planners don't charge a fee but earn commissions on the products they sell to you. Still others both charge fees and earn commissions but may offset their fees by the amount of commission they earn.

A fixed annuity is a contract that allows you to accumulate earnings at a fixed rate during a build-up period. You pay the required premium, either in a lump sum or in installments. The insurance company invests its assets, including your premium, so it will be able to pay the rate of return that it has promised to pay.

At a time you select, usually after you turn 59½, you can choose to convert your account value to retirement income. Among the alternatives is receiving a fixed amount of income in regular payments for your lifetime or the lifetimes of yourself and a joint annuitant. That's called annuitization. Or, you may select some other payout method.

The contract issuer assumes the risk that you could outlive your life expectancy and therefore collect income over a longer period than it anticipated. You take the risk that the insurance company will be able to meet its obligations to pay.

Some variable annuities offer a fixed rate account with a guarantee of principal, such as an interest accou

Fixed-income investments typically pay interest or dividends on a regular schedule and may promise to return your principal at maturity, though that promise is not guaranteed in most cases. Among the examples are government, corporate, and municipal bonds, preferred stock, and guaranteed investment contracts (GICs).

The advantage of holding fixed-income securities in an investment portfolio is that they provide regular, predictable income. But a potential disadvantage of holding them over an extended period, or to maturity in the case of bonds, is that they may not increase in value the way equity investments may. As a result, a portfolio overweighted with fixed-income investments may make you more vulnerable to inflation risk. In addition, the issuer of a bond may fail to make interest or principal payments, so there is a risk of loss in fixed income products.

Some employers offer flexible spending accounts (FSA), sometimes called cafeteria plans, as part of their employee benefits package. You contribute a percentage of your pretax salary, up to the limit your plan allows, which you can use to pay for qualifying expenses. Qualifying expenses include medical costs that aren't covered by your health insurance, childcare, care for your elderly or disabled dependents, and life insurance.

The amount you put into the plan is not reported to the IRS as income, which means your taxable income is reduced. However, you have to estimate correctly the amount you'll spend during the year when you arrange to have amounts deducted from your paycheck. Once you decide on the amount you are going to contribute to an FSA for a year, you cannot change it unless you have a qualifying event, such as marriage or divorce.  If you don't spend all that you had withheld within the year, you may be entitled to a two-and-one-half month extension or be able to spend up to $500 of what remains in the following year.

Futures contracts, when they trade on regulated futures exchanges, obligate you to buy or sell a specified quantity of the underlying product for a specific price on a specific date. The underlying product could be a commodity, stock index, security, or currency. Because all the terms of a listed futures contract are structured by the exchange, you can offset your contract and get out of your obligation by buying or selling an opposing contract before the settlement date.

Futures contracts provide some investors, called hedgers, a measure of protection from price volatility on the open market. For example, wine manufacturers are protected when a bad crop pushes grape prices up on the spot market if they hold a futures contract to buy the grapes at a lower price. Grape growers are also protected if prices drop dramatically - if, for example, there's a surplus caused by a bumper crop - provided they have a contract to sell at a higher price.

Unlike hedgers, speculators use futures contracts to seek profits on price changes. For example, speculators can make (or lose) money, no matter what happens to the grapes, depending on what they paid for the futures contract and what they must pay to offset it.