A haircut, in the financial industry, is a percentage discount that’s applied informally to the market value of a stock or the face value of a bond in an attempt to account for the risk of loss that the investment poses. So, for example, a stock with a market value of $30 may get a haircut of 20%, to $24, when an analyst or money manager tries to anticipate what is likely to happen to the price.Similarly, when a broker-dealer calculates its net capital to meet the 15:1 ratio of debt to liquid capital permissible under Securities and Exchange Commission (SEC) rules, it typically gives volatile securities in its portfolio a haircut to reduce the potential for being in violation.The only securities that consistently escape a haircut are US government bonds because they are considered free of default risk.
Hard assets are the tangible property of a company or partnership, such as the buildings, furniture, real estate, and other equipment it owns.When you make a direct investment in hard assets, as you do when you invest in a direct participation program (DPP), you have an ownership interest in the actual assets rather than in shares of the corporation. The profit, if any, that you realize from hard assets is dependent on their ability to produce revenue, as a rental property or a leased airplane might.
A hardship withdrawal, also known as a hardship distribution, occurs when you take money out of your 401(k) or other qualified retirement savings plan to cover pressing financial needs. You must qualify to withdraw by meeting the conditions your plan imposes in keeping with Internal Revenue Service (IRS) guidelines. For example, you may have to demonstrate how urgent the situation is and prove you have no other resources. Some allowances are purchasing your primary home, covering out-of-pocket medical expenses for yourself or a dependent, and paying college tuition for yourself or a dependent. However, if you're younger than 59 1/2, you must pay a 10% penalty plus income tax on the amount you withdraw. You also may not be permitted to contribute to the plan again for six months.
Head of household is an IRS filing status that you can use if you are unmarried or considered unmarried on the last day of a tax year and provide at least half the cost of maintaining a home for one or more qualifying dependents. That may be your child, grandchild, or other relative who lives in that home for more than half the year, or a parent whether or not he or she lives in your home.The advantage of filing as head of household is that you can take a higher standard deduction than if you filed as a single taxpayer and you owe less federal income tax than you would as a single, assuming all other details were the same. Filing as head of household also means you qualify for certain deductions and credits that would not be available to you if you used the married filing separate returns status.
Health insurance covers some or all of the cost of treating an insured person’s illnesses or injuries. In some cases, it pays for preventive care, such as annual physicals and diagnostic tests. You may have health insurance as an employee benefit from your job or, if you qualify, through the federal government’s Medicare or Medicaid programs. You may also buy individual health insurance directly from an insurance company or be eligible through a plan offered by a group to which you belong. As you do with other insurance contracts, you pay premiums to purchase coverage and the insurer pays some or all of your healthcare costs, based on the terms of your contract. Some health insurance requires that you meet an annual deductible before the insurer begins to pay. There may also be co-insurance, which is your share, on a percentage basis, of each bill, or a copayment, which is a fixed dollar amount, for each visit.Health insurance varies significantly from plan to plan and contract to contract. Generally, most plans cover hospitalization, doctors’ visits, and other skilled care. Some plans also cover some combination of prescription drugs, rehabilitation, dental care, and innovative therapies or complementary forms of treatment for serious illnesses.
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 employer’s 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 dependants.Any money that’s 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.
Hedge funds are private investment partnerships open to institutions and wealthy individual investors. These funds pursue returns through a number of alternative investment strategies.Those might include holding both long and short positions, investing in derivatives, using arbitrage, and speculating on mergers and acquisitions. Some hedge funds use leverage, which means investing borrowed money to boost returns. Because of the substantial risks associated with hedge funds, securities laws limit participation to accredited investors whose assets meet or exceed Securities and Exchange Commission (SEC) guidelines.
Hedgers in the futures market try to offset potential price changes in the spot market by buying or selling a futures contract. In general, they are either producers or users of the commodity or financial product underlying that contract. Their goal is to protect their profit or limit their expenses. For example, a cereal manufacturer may want to hedge against rising wheat prices by buying a futures contract that promises delivery of September wheat at a specified price.If, in August, the crop is destroyed, and the spot price increases, the manufacturer can take delivery of the wheat at the contract price, which will probably be lower than the market price. Or the manufacturer can trade the contract for more than the purchase price and use the extra cash to offset the higher spot price of wheat.
Hedging is an investment technique designed to offset a potential loss on one investment by purchasing a second investment that you expect to perform in the opposite way. For example, you might sell short one stock, expecting its price to drop. At the same time, you might buy a call option on the same stock as insurance against a large increase in value.
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 that’s not covered by your plan.Money you put in an HSA or that an employer contributes to your account and that you don’t spend for qualified expenses can be rolled over and used in later years.
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.
Highly compensated employees are people whose on-the-job earnings are higher than the level the government has established to differentiate this category of worker. In 2007, that amount is $100,000. It is increased from time to time to reflect the impact of inflation. The major consequence of being a member of this group is that the percentage of earnings that highly compensated employees may contribute to their 401(k) or similar plan is determined by the contribution rates of other plan participants who earn less. If lower-paid employees contribute an average of 2% or less, higher-paid employees may contribute up to twice that percentage. If the average is 3% to 8%, higher-paid employees may contribute two percentage points more than the average. And if the average is 8% or higher, the maximum for highly compensated employees is 1.25 times that average.
A securities analyst’s recommendation to hold appears to take a middle ground between encouraging investors to buy and suggesting that they sell. However, in an environment where an analyst makes very few sell recommendations, you may interpret that person’s hold as an indication that it is time to sell.Hold is also half of the investment strategy known as buy and hold. In this context, it means to keep a security in your portfolio over an extended period, perhaps ten years or more.The logic is that if you purchase an investment with long-term potential and keep it through short-term ups and downs in the marketplace, you increase the potential for building portfolio value.
By acquiring enough voting stock in another company, a holding company, also called a parent company, can exert control over the way the target company is run without actually owning it outright.The advantages of this approach, provided that the holding company owns at least 80% of the voting shares, are that it receives tax-free dividends if the subsidiary prospers and can write off some of the operating losses if the subsidiary falters.Yet it is insulated to some extent from the target company’s liabilities because of its shareholder status.
A holding period is the length of time you keep an investment. In some cases, a specific holding period is required in order to qualify for some benefit. For example, you must hold US savings bonds for a minimum of five years to collect the full amount of interest that has accrued.
Sometimes referred to as a HELOC, a home equity line of credit lets you borrow against the equity you’ve built in your home, usually by using a debit card or writing checks against your available balance. Your credit line, or limit, is fixed, but you can draw against it up to that limit rather than receive the entire loan amount as a lump sum. Whatever you borrow reduces your available balance until you repay it. Then you can borrow it again. Home equity lines of credit have variable interest rates. The terms of repayment vary and are spelled out in your agreement. In some cases, you begin to repay principal and interest as soon as you borrow. In others, you pay interest only and make a one-time full payment of principal at some set date. Or, you may make interest-only payments for a specific period, and then begin to repay principal as well.It’s important to keep in mind that because your home serves as collateral for the line of credit, your home could be at risk if you default, or fall behind on repayment.
A home equity loan, sometimes called a second mortgage, is secured by the equity in your home. You receive the loan principal, minus fees for arranging the loan, in a lump sum. You then make monthly repayments over the term of the agreement, just as you do with your first, or primary, mortgage.The interest rates on home equity loans are generally lower than the rates on unsecured loans. However, when you borrow against your equity you run the risk of foreclosure if you default on the loan, even if you have continued to make the required payments on your first mortgage.
Homeowners insurance is a contract between an insurance company and a homeowner to cover certain types of damage to the property and its contents, theft of personal possessions, and liability in case of lawsuits based on incidents or events that occur on the property. To obtain the insurance, which is based on the value of the home and what is covered in the policy, you pay a premium set by the insurance company. For each claim there’s generally a deductible — a dollar amount — that you must pay before the insurer is responsible for its share. If you have a mortgage loan, your lender will require you to have enough homeowner’s insurance to cover the amount you owe on the loan. Homeowner insurance policies vary substantially from contract to contract and from insurer to insurer as well as from region to region. Almost all policies have exclusions, which are causes of loss that are not covered. All of the coverage and exclusions of a particular policy are spelled out in the terms and conditions.
You may qualify for a Hope scholarship tax credit for money you spend on qualified educational expenses for yourself, your spouse, or a dependent child.To qualify, the student must be enrolled at least halftime in the first or second year of a qualified higher education institution pursuing a degree or other credential.Qualified institutions include liberal arts colleges, universities, and vocational, trade, or technical schools. If two qualifying students are enrolled at the same time, you may take two Hope tax credits.To qualify for this credit, your modified adjusted gross income must fall within the annual limits that Congress sets. Those amounts tend to increase slightly each year.If you claim the credit while you're taking withdrawals from tax-free college savings plans such as a Section 529 plan or an education savings account (ESA), you'll have to plan carefully. Your withdrawals will lose their qualified status and be subject to tax and penalty if you use them to pay for the same expenses for which you claim the tax credit. You can’t take the credit, though, if you claim a tuition and fees deduction in calculating your adjusted gross income.
If a newly issued security rises steeply in price after its initial public offering (IPO) because of intense investor demand, it is considered a hot issue.
With a hybrid annuity, you allocate part of your annuity’s assets to providing fixed income payments and part to making variable income payments. For example, you could buy a hybrid immediate annuity with a lump sum of $50,000, and allocate $35,000 to fixed payments and $15,000 to variable payments. The fixed portion would lock in a specific yearly income, while income from the variable portion would depend on the performance of the underlying investments you selected. This approach allows you to combine the advantages of both types of annuities — regular income from the fixed and growth potential from the variable — in a single package.
Sometimes called an intermediate ARM, a fixed-period ARM, or a multiyear mortgage, a hybrid mortgage combines aspects of fixed-rate and adjustable-rate mortgages.The initial rate is fixed for a specific period — usually three, five, seven, or ten years — and then is adjusted to market rates. The adjustment may be a one-time change, or more typically, it changes regularly over the balance of the loan term, usually once a year. In many cases, the interest rate changes on a hybrid mortgage are capped, which can help protect you if market rates rise sharply.One advantage of the hybrid mortgage is that the interest rate for the fixed-rate portion is usually lower than with a 30-year fixed-rate mortgage. The lower rate also means it’s easier to qualify for a mortgage, since the monthly payment will be lower. And if you move or refinance before the interest rate is adjusted — the typical mortgage lasts only seven years — you don’t have to worry about rates going up.However, some hybrid mortgages carry prepayment penalties if you refinance or pay off the loan early. While prepayment penalties are illegal in many states, they are legal in others.
Hypothecation means pledging an asset as collateral for a loan. If you use a margin account to buy on margin or sell short, for example, you pledge securities (stocks, bonds, or other financial instruments) as collateral for the debt. If the brokerage firm issues a margin call that you don’t meet, it can sell those securities to cover its losses. Similarly, if you arrange a mortgage on your home, you give the lender the right to sell your home if you fail to meet your obligation to make mortgage payments. Hypothecation may make it easier for you to secure a loan, but you do run the risk of losing the asset, if for some reason you default on your obligation to repay according the terms of the agreement.