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Appendix A. Glossary - Pg. 86

86 Appendix A. Glossary alternative minimum tax The alternative minimum tax is a special tax that comes into play when a taxpayer avoids paying the tax on certain transactions that most taxpayers pay. Capital gains tax is a special tax rate that applies to profits from investments. If you own an investment for more than one year, you qualify for the lower rate. Common stock is the primary unit of ownership in a corporation. Holders of common stock are owners of the corporation with cer- tain rights including voting on major issues concerning the corpo- ration. Shareholders, as they are known, have liability limited to the value of stock they own. Compounding is the mathematical means by which the principal earns interest during one period, and then the next period earns interest on the resulting principal plus interest in the first period. Another way to say this is interest-earning interest. A defined benefit plan is a retirement program, like a pension plan. A defined benefit plan spells out how much the plan will pay on retirement. Defined contribution plans specify the contribution but not the ben- efit. These plans focus on what goes into the plan and who con- tributes what. How much the plans will pay on retirement is de- pendent on the return earned by the plan. Disposition refers to the sale of stock acquired through an incentive stock option (ISO), although the tax code acknowledges transfers, gifts, or exchanges. Diversification is an investment strategy that spreads your invest- ments over a group of stocks or mutual funds representing different industry groups. Diversification seeks to protect you from sudden reversals by one group of stocks. Dividends are portions of a company's profits paid to its owners, the stockholders. Companies usually pay dividends quarterly. Not all companies pay dividends. The board of directors makes that decision. Companies that don't pay dividends reinvest the profits back into the company to finance additional growth. An ESOP is a qualified retirement plan that provides a way for an owner to sell the company to its employees. capital gains tax common stock compounding defined benefit plan defined contribution plan disposition diversification dividends employee stock ownership plan