Tons of people avoid personal finance because it makes as much sense as hieroglyphics, not ANYMORE! Here are some very common terms/phrases that you’ll read in finance books, sites, etc. I try to keep things as simple as possible,personal finance doesn’t have to be difficult.
What They Forgot To Teach Us in School
401K: A retirement savings plan through your employer. Employees can save & invest a percentage of their paycheck before taxes are taken out. Employees can change their contribution amount usually between pay cycles and taxes are not paid until the money is withdrawn. For more info see here.
403B: Same as a 401K but these plans are only available to employees of tax-exempt organizations. These are usually either hospitals, schools or religious groups.
Active Investing: An investment strategy where the portfolio is managed “actively” with the goal to beat the market or benchmark index. Basically the investment (usually a fund) has a team of people (or hundreds of them) that choose your investments. It sounds cool but in reality more people equals more salaries equals more expenses to fund = LESS MONEY YOU GET 🙁
****This is the opposite of passive (index) investing, see below.
Asset Allocation: How you choose to diversify your portfolio between stocks, bonds, mutual funds, etc. This will be dependent upon your risk tolerance and ability to balance and manage risk/reward ratio.
Bear Market: The stock market is decreasing and share prices are falling.
Bond: An investment that investors loan funds to a corporation or government and expect a return on the investment in the form of interest over a given time period.
Bond Fund: This fund invested in bonds that can include corporate, municipal, government or convertible bonds. They typically pay dividends.
Brokerage Account: An account that an investor uses at a licensed brokerage firm (i.e. Vanguard, E-Trade, Scottrade, etc) that allows the investor to deposit funds and place orders through the brokerage to be carried out.
Bull Market: The stock market is increasing and share prices are rising.
Dividend: A distribution of money that is paid regularly to investors by a corporation to its shareholders out of profits.
DIJA (Dow Jones Industrial Average): The “Dow” is comprised of 30 large, publicly traded US companies & how they trade in a normal trading session. This is one of the three major indices along with the S&P 500 and the Nasdaq.
Dollar Cost Averaging: A strategy investors use to purchase an investment on a consistent schedule. The investment usually takes place on the same time every month/quarter/year regardless of the overall market condition. This ensures that when the price of an investment declines they can purchase more shares and if the investment increases they will purchase fewer shares (essentially equaling out the overall price you bought the investment. For a complete example see here.
Exchange Traded Fund (ETF): Most simply put it is like a mutual fund that trades like a stock. They can track bonds, stocks, commodities or other assets like an index fund. They are bought and sold throughout the day on the market and typically have lower fees & lower investment minimums than mutual funds.
Expense Ratio: The annual fee that ETF’s or mutual funds charge shareholders. It is a % of the assets deducted each fiscal year for the fund to operate (usually admin fees, operating costs, etc.). YOU WANT TO KEEP THIS AS LOW AS POSSIBLE…….the lower the fee, the more money you keep
Long Term Capital Gain: If you are able to hold your assets (i.e. stock) for longer than one year, you can benefit from a reduced tax rate on your profits. For 2015, the long-term capital gains tax rates are 0, 15, or 20% for most taxpayers.
Mutual Fund: A fund made of up a group of investors money to invest in stocks, bonds, and other securities. Unlike ETF’s mutual funds are only traded once a day, once the market has closed.
Nasdaq: The Nasdaq Composite Index is made primarily of technology & internet stocks. It tends to be the most volatile of all indexes based on the type of stocks that it is composed of.
Passive Management (Index Investing): This is the opposite of active management, with this style you are trying to track a specific market (i.e. the S&P 500). With this style investors usually get good diversification and costs are lower as there is no additional manager fees.
****This is the opposite of active investing, see above.
Roth IRA: An “Individual Retirement Account” that is similar to a traditional IRA but contributions are not tax deductible & the money invested is post-tax income. The advantage over a traditional IRA is that the money has already been taxed so it can continue to grow tax free over time. For annual limits & more info on IRA’s see here.
Short Term Capital Gain: These gains have no tax advantage & taxed as ordinary income.
i.e. I buy Apple stock for $70, sell 6 months later for $75. My profit is taxed as income (investment short term gains are investments held >1 year)
Stock: Investors purchase stock for ownership into a corporation and represent a portion of the corporation. The two main kinds of stock are preferred and common stock.
S&P 500: The S&P 500 index is made of 500 of the most widely held (not 500 largest) companies in the US. Changes are made every year to the companies. It offers more diversification and accounts for nearly 70% of the US Market. It tries to span all segments of the US economy.
Traditional IRA: An “Individual Retirement Account” is similar to a 401K but not through your employer. It allows investors to contribute pretax income towards investments to grow tax deferred. For annual limits and more info on IRA’s see here