Glossary
401(k) A retirement program offered by private industry involving contributions from the employee and (frequently) matching funds contributed by the employer.
403(b) A retirement program offered by schools, universities, and (often) other nonprofits.
529 plan A state-sponsored savings plans designed specifically for college savings. The earnings grow tax-free, and withdrawals are tax-free if used for qualified educational expenses. There is no minimum investment, and anyone can contribute, regardless of income.
active management When the manager of a mutual fund uses personal judgment to select investments.
annualized return The average return of an investment over a period of years, averaged per year.
annuity An insurance investment that can provide a lifetime income.
asset allocation A plan to invest your assets according to a specific distribution of types.
assets Your money or other possessions or investments of value.
assets under management (AUM) The method for charging for financial planning or investment management where fees are based on a percentage of your total assets being managed by the adviser. An adviser may charge fees based on the value of AUM.
avalanche method A method of debt repayment in which you pay the minimum on all debts, then concentrate extra payments on the debt with the highest interest rate.
balanced fund A mutual fund designed to maintain a specific balance between stocks and bonds—for example, 60 percent stocks and 40 percent bonds.
bear A pessimist who believes the market or the investment is deteriorating.
beta A measure of how much the stock swings compared to the overall market.
bond An IOU for a loan you’ve given a company or government. This may guarantee you an interest payment or a specific amount returned to you after a specific period.
brokerage A firm that handles buy or sell orders for investments, charging a commission or fee for the service.
bull An individual or analyst who is optimistic about an investment or the market as a whole.
call A feature of investments where the investment can be terminated and money reimbursed earlier than the original term.
capital gain The difference between your purchase price and your selling price (minus any dividends or interest).
CERTIFIED FINANCIAL PLANNER™ (CFP®) A financial planner who has passed a recognized set of courses, experience requirements, and a certifying exam administered by the Certified Financial Planner Board of Standards.
Certified Public Accountant (CPA) An accountant who has passed the CPA exam as well as meeting state certification and experience requirements.
closed-end fund A mutual fund that issues a specific number of shares when originated; the shares are subsequently traded based on market value.
COLA (cost of living adjustment) An increase or decrease in a payment based on the rate of inflation.
commodity A raw material or product that’s traded, such as oil or pork bellies.
consignment An arrangement whereby a dealer or shop owner agrees to attempt to sell your item, paying you a portion in return only if it sells.
Consumer Price Index (CPI) A measure of the typical price paid by consumers of a market basket of goods and services.
copay The share of a bill you must pay, either as part of the payment (with the remainder applied to your deductible) or your share of medical bills after you have met your deductible.
correlation A measure of how much different investments move in the same way (positive correlation) or opposite to each other (negative correlation).
cost of attendance All the estimated charges and budget items your student will have to pay to complete each year at college.
Coverdell savings plan An individual account in which earnings grow tax-free and withdrawals for qualified educational expenses are tax-free. You can contribute a maximum of $2,000 per child, and must have an income under certain limits to contribute.
current yield The yield on a bond based on the price the bond is currently selling for.
deductible The amount you must pay before insurance will pay anything on a claim or medical charges.
deferred annuity Similar to a SPIA in that you invest a lump sum (or a series of payments) with the promise that at some future date you can turn it into an annuity payout. Rather than beginning immediately, theoretically the investment continues to grow and provide larger future payments.
discretionary Those expenses for which you have some choice as to how much you spend.
diversification Distributing your assets among different types of investments.
dividend Money paid by a company to its investors based on the company’s profits or from reserves.
Dow Jones Industrial Average An index of the price-weighted average of 30 stocks used as an indicator of the rise or fall of the market.
duration A calculation using present value, yield, maturity, and call features.
efficient market hypothesis (EMH) A theory that the market reflects all known information about a security in its pricing.
emerging market A country that shows developing economic activity but does not meet standards for a developed market.
equity When used to describe real estate investments means the amount of investment or ownership you have in the property above the liability (loan).
equity fund A mutual fund entirely or primarily composed of stocks.
exchange-traded fund (ETF) A mutual fund that trades like a stock.
face value The printed value of a bond, note, coin, or other investment.
fallen angel An investment that has fallen substantially from its usual price, worth, or quality rating.
fee-based Financial adviser charges you a fee based on assets and can also charge commissions or management fees on the investments you purchase.
fee-only Financial adviser charges you only for the time spent on your project, or by retainer or fee based on the amount of assets managed. No commissions or referral fees are paid or accepted.
fiduciary A financial professional who is legally required to act in your best interests.
fixed expense An expense you must pay every month and cannot eliminate, such as mortgage, health insurance, and utilities.
flash crash A market event during which prices change suddenly then return rapidly to former prices.
fund of funds A mutual fund whose investment holdings are made up of other funds.
futures contract An agreement to buy or sell a particular product or commodity in the future at a predefined price.
general obligation Bonds backed by the general revenues (taxes) of a state or municipality.
gross income The total you earn before any federal, state, local, or Social Security taxes are deducted.
growth company A company that aims to increase in value by growing its business rather than paying dividends.
hedged The foreign bond fund has invested in currency instruments to protect against the blow if the dollar varies significantly, so that returns are only dependent on changes in the actual bond.
index A model collection of investments designed to represent a specific segment of the market.
index fund A mutual fund that seeks to replicate a specific index.
individual retirement account (IRA) A type of investment account individual investors can establish that offers tax benefits.
industry A subdivision of a sector.
life strategy fund A mutual fund that contains investments designed to produce a specific level of risk or safety.
load fund A mutual fund that charges a sales commission in addition to management fees.
long-term care-insurance (LTCI) Insurance designed to pay the cost of nursing care, either at home or in a nursing facility.
long-term disability Income insurance coverage for when your illness or injury is expected to be permanent or result in death.
long-term gain or loss A gain (or loss) on an investment owned for more than 1 year.
management fee A charge imposed by an investment company to cover staff salaries, advertising, and the costs of doing business.
market capitalization (cap) The dollar amount value of all the outstanding shares of a publicly traded company; a measure of the size of the company.
match (employer’s match) An employer’s contribution to a workplace retirement fund, often based on the employee’s salary or contributions to the fund.
maturity The amount of time by which an investment will end.
money market fund A fund that invests in short-term bonds and other debt securities. Each share usually has a value of $1.
Moody’s An investment rating and research service.
mutual fund An investment in which people pool their money to buy a collection of investments.
NASDAQ (National Association of Securities Dealers) A computerized exchange that enables investors to trade securities.
necessary expense A bill you’d have to pay even if you were unemployed or disabled. You can estimate what the rock-bottom figure is by looking at your fixed expenses, then adding a minimum of discretionary expenses.
Net Asset Value (NAV) The total value of the investments contained in a mutual fund, minus any fund liabilities, divided by the amount of shares outstanding.
net income Your income after federal, state, local, and Social Security taxes are deducted.
no-load fund A mutual fund that’s sold without a sales commission.
NYSE (New York Stock Exchange) The largest stock exchange in the United States.
open-ended mutual fund A mutual fund the price of which is determined at the end of each trading day by its net asset value.
option The right to purchase or sell an investment at a future time.
out-of-pocket limit How much money you must pay before your insurance will pay 100 percent of the remaining charges.
over the counter (OTC) Stocks not listed on any exchange but may be bought and sold through a brokerage or dealer network.
paper trading The process of choosing a stock or even a whole portfolio and tracking performance on a regular basis, without actually purchasing the investment.
passive management When the manager of a mutual fund selects investments to replicate a specific index.
penny stock Stocks sold over the counter for a very low price, often only a few cents.
PLUS A loan for education taken out by parents.
present value The value of an investment today, as opposed to some point in the future.
price-to-earnings (P/E) ratio A ratio calculated by dividing the current price of the stock by the current earnings per share.
principal, interest, taxes, and insurance (PITI) The amount that represents the payment for the required costs of purchasing a home with a mortgage.
Ponzi scheme A type of investment fraud wherein the promoter continually sells shares, using the money from newer investors to pay illusory returns to previous investors.
pretax profit A measure of how much of a company’s earnings is actually in excess of expenses.
principal The money you originally invested.
real estate agent A salesperson who sells real estate.
real estate broker A real estate agent with additional education who can supervise agents.
real estate investment trust (REIT) A share in a partnership that owns a property or collection of properties.
Realtor A real estate agent or broker who is a member of the National Association of Realtors.
return The money you make from your investments. It can take the form of interest, dividends, or capital gains (from selling your investment).
return on equity A measure of how much return shareholders are getting for their investment.
revenue bond A bond used to raise money for a specific project, such as a toll road, which will then produce its own income.
Roth IRA An individually owned and managed retirement account. While there is no tax deduction for contributing, earnings grow tax-free, and withdrawals are tax-free if you’re over 59½ and have owned the account for 5 years.
secondary market A place or service where an original investment can be resold.
sector The general area of a company’s business—e.g., health care, technology, industrials, energy.
securities Any financial instrument that gives you ownership in a publicly traded corporation (stocks), shows that you are a creditor of a government or a corporation (bonds), or have a future right (options).
segment A specific characteristic by which investments are grouped.
SEP-IRA An IRA for self-employed people and small businesses; it allows higher contribution limits than other types of IRAs.
short-term disability Insurance coverage for when you can’t work for up to 6 months.
short-term gain or loss A gain (or loss) on an investment held less than 1 year.
signature guarantee A guarantee by a bank that they know you are who you claim to be.
single premium fixed income annuity (SPIA) An insurance investment product designed to provide lifetime income. You purchase the annuity in a single lump-sum payment. The insurance annuity provider guarantees you will receive a specific monthly check as long as you live.
snowball method A method of debt repayment in which you pay the minimum on all debts, then concentrate extra payments on the smallest debt until it is paid off.
speculate To gamble on future profits.
spinoff Occurs when a larger company decides to create a new, independent company from one of its divisions or business segments.
S&P 500 An index developed by Standard & Poor’s of 500 large companies, considered a measure of the market.
Standard & Poor’s An investment rating and research service.
stock A share in a company.
stop-limit order Sells a security at a specific price.
stop-loss order Sells a security once it reaches or drops below a specific price.
stop-market order Sells a security at a specific price or below.
street name Used when securities are held electronically at a stock brokerage, custodian, or bank.
takeover An attempt by one company to purchase another.
target fund A retirement-oriented fund that rebalances investments to be increasingly conservative as the year of retirement nears.
term The length of time for which a bond is issued.
term insurance Life insurance for a specific amount for a specific number of years.
ticker symbol An abbreviation for stocks or mutual funds that represents the investment on an exchange.
traditional IRA An individual retirement account contributions to which are deductible if you meet income limits.
Treasury bill A debt maturing in 3 to 12 months.
Treasury bond A bond that matures in more than 10 years.
Treasury Inflation Protected Securities (TIPS) A type of Treasury security pegged to the inflation rate.
Treasury note An intermediate-term debt (1- to 10-year term).
unhedged The foreign bond fund has no protection in place against currency fluctuation risks.
unit investment trust (UIT) An investment comprised of a specific set of securities issued for a specific period of time.
value company A company that might be undervalued by the market. Value companies often pay a dividend to attract investors.
year to date (YTD) return The return an investment has produced as of today.
yield The interest or dividends paid on a security.
yield to call The yield if the bond were to be called on the earliest possible date.
yield to maturity A combination of the current income generated by the bond, plus any change in its value when it’s held until maturity.