Financial Terms Glossary
A
– Accrued Interest: Interest that has accumulated on a bond or loan but has not yet been paid.
– Alternative Investment: An investment outside traditional assets (stocks, bonds, cash), including real estate, commodities, private equity, and hedge funds.
– Amortization: The process of gradually paying off debt over time in regular payments that cover both principal and interest.
– Annuity: A financial product that provides a stream of payments to an individual, usually for life, often used for retirement income.
– Appreciation: An increase in the value of an asset over time.
– Asset Allocation: The process of dividing investments among different asset categories, such as stocks, bonds, and cash, to balance risk and return.
B
– Bear Market: A market condition where prices are falling, often by 20% or more, signaling a downturn.
– Beneficiary: A person designated to receive assets from a retirement account, life insurance policy, or estate.
– Blue Chip Stock: Stock in a large, reputable company with a history of financial stability and steady growth.
– Bond: A fixed-income investment where an investor loans money to an entity (like a government or corporation) that borrows the funds for a defined period at a fixed interest rate.
– Bond Rating: A grade given to a bond that indicates its credit quality, issued by rating agencies like Moody’s, S&P, and Fitch.
C
– Callable Bond: A bond that can be redeemed by the issuer before its maturity date.
– Capital Gains: The profit earned from the sale of assets like stocks, bonds, or real estate.
– Capital Loss: The loss incurred when an investment is sold for less than its purchase price.
– Certificate of Deposit (CD): A savings account with a fixed interest rate and maturity date, offered by banks and credit unions.
– Compound Interest: Interest calculated on both the initial principal and the accumulated interest from previous periods.
– Credit Default Swap (CDS): A financial derivative that functions like insurance, protecting lenders against the risk of default by a borrower.
D
– Debt-to-Equity Ratio: A financial ratio indicating the relative proportion of shareholders’ equity and debt used to finance a company’s assets.
– Depreciation: The reduction in the value of an asset over time due to wear and tear or obsolescence.
– Diversification: A risk management strategy that mixes a wide variety of investments within a portfolio.
– Dividend: A portion of a company’s earnings distributed to shareholders, typically in cash or additional stock.
– Distribution: The payment of assets from a retirement or other type of account, such as a 401(k) or IRA, to the account holder or beneficiaries.
E
– Earnings Per Share (EPS): A company’s profit divided by its number of outstanding shares, used to measure profitability.
– Economic Indicator: A statistic about the economy, such as unemployment rates or GDP growth, used to gauge economic health.
– Equity: Ownership interest in a corporation in the form of common or preferred stock.
– Estate Planning: Preparing for the transfer of a person’s wealth and assets after their death.
– Exchange-Traded Fund (ETF): A type of investment fund and exchange-traded product, meaning it is traded on stock exchanges.
F
– Federal Reserve (Fed): The central bank of the United States, responsible for setting monetary policy and regulating the banking system.
– Fiduciary: An individual or organization that acts in the best interest of another party, often in financial or legal matters.
– 401(k): A retirement savings plan sponsored by an employer, allowing employees to save and invest a portion of their paycheck before taxes.
– Fixed-Income Security: An investment that pays regular income, such as bonds or annuities.
– Fixed-Rate Mortgage: A mortgage with an interest rate that remains the same throughout the loan term, offering predictable payments.
G
– GDP (Gross Domestic Product): The total value of goods and services produced in a country over a specific time period, a key indicator of economic health.
– Growth Fund: A mutual fund or ETF that focuses on investing in companies with above-average growth potential.
– Growth Stock: A stock in a company expected to grow at an above-average rate compared to other companies.
H
– Hedge Fund: An alternative investment fund that uses various strategies to earn returns for investors, often requiring higher minimum investments and fees.
– High-Yield Bond: A bond that offers higher interest rates due to its higher risk of default.
– Home Equity Loan: A loan that allows homeowners to borrow against the equity in their homes, typically for large expenses.
– Holding Period: The amount of time an investment is held before being sold, which can impact tax treatment on gains.
I
– Index Fund: A type of mutual fund or ETF that aims to replicate the performance of a specific market index.
– Individual Retirement Account (IRA): A tax-advantaged account that individuals use to save and invest for retirement.
– Inflation: The rate at which the general level of prices for goods and services rises, eroding purchasing power.
– Inflation-Adjusted Return: The return on an investment after accounting for the effect of inflation.
J
– Joint Account: A financial account shared by two or more individuals, often used for family finances.
– Junk Bond: A high-yield bond with a lower credit rating, meaning it carries higher risk but offers potential for higher returns.
K
– K-1 Form: A tax document used to report income, losses, and dividends from partnerships, LLCs, and S corporations to individual partners or shareholders.
– Keogh Plan: A retirement plan for self-employed individuals and their employees, allowing tax-deferred contributions.
L
– Liability: An obligation or debt owed by an individual or business.
– Limit Order: An order to buy or sell a stock at a specific price, giving more control over transaction prices.
– Liquidity: The ability to quickly convert assets into cash without significant loss in value.
– Long-Term Capital Gain: Profit from the sale of an asset held for more than one year, typically taxed at a lower rate than short-term gains.
M
– Market Capitalization: The total market value of a company’s outstanding shares, calculated by multiplying the current stock price by the total number of shares.
– Money Market Account: A type of savings account with higher interest rates and limited check-writing capabilities.
– Mutual Fund: An investment vehicle that pools money from multiple investors to purchase a diversified portfolio of stocks, bonds, or other securities.
– Municipal Bond (Muni): A bond issued by local governments, often exempt from federal taxes and sometimes state taxes.
N
– NAV (Net Asset Value): The value per share of a mutual fund or ETF, calculated by dividing the fund’s total assets by the number of outstanding shares.
– Net Worth: The value of all assets minus liabilities; a measure of personal or business wealth.
– Non-Qualified Account: An investment account that does not receive special tax treatment, such as a brokerage account.
– Nominee: A person or firm acting on behalf of another, especially concerning financial accounts.
O
– Option: A financial derivative that gives the buyer the right, but not the obligation, to buy or sell an asset at a specific price on or before a certain date.
– Over-the-Counter (OTC): A decentralized market where securities are traded directly between parties, not on a formal exchange.
– Overweight: An investment term describing an allocation that is higher than the typical amount, often in a specific stock or sector.
P
– P/E Ratio (Price-to-Earnings Ratio): A valuation measure that compares a company’s stock price to its earnings per share, used to assess stock value.
– Portfolio: A collection of financial assets, like stocks, bonds, and cash, owned by an individual or institution.
– Preferred Stock: A type of stock that gives holders preferential treatment regarding dividends and assets if the company is liquidated.
– Principal: The original sum of money invested or loaned, excluding any interest or earnings.
Q
– Qualified Dividend: A dividend taxed at a lower capital gains tax rate if specific conditions are met.
– Qualified Retirement Plan: A retirement plan that meets IRS requirements for tax-advantaged status, like a 401(k) or pension plan.
– Quick Ratio: A financial ratio that measures a company’s ability to pay its short-term obligations with its most liquid assets.
R
– Real Estate Investment Trust (REIT): A company that owns or finances income-producing real estate, allowing investors to access real estate investments without direct ownership.
– Required Minimum Distribution (RMD): The minimum amount a retirement account owner must withdraw annually starting at age 72.
– Roth IRA: A retirement account where contributions are made after-tax, and qualified distributions are tax-free.
– Risk Tolerance: The degree of variability in investment returns that an investor is willing to withstand.
S
– SEP IRA: Simplified Employee Pension Individual Retirement Account, a retirement plan for self-employed individuals or small business owners.
– Small-Cap Stock: Stock in a company with a relatively small market capitalization, often with higher growth potential but more volatility.
– Stop-Loss Order: An order to sell a security when it reaches a certain price, used to limit an investor’s loss.
T
– Target-Date Fund: A mutual fund structured to grow more conservative as it nears a specified retirement date.
– Tax-Deferred Account: An account that allows taxes on income, dividends, or gains to be postponed until funds are withdrawn.
– Tax-Loss Harvesting: A strategy where investors sell securities at a loss to offset capital gains taxes.
U
– Underwriting: The process by which an institution evaluates the risk of insuring, lending to, or investing in a client.
– Unrealized Gain/Loss: The increase or decrease in value of an asset that hasn’t yet been sold.
V
– Value Investing: An investment strategy that involves buying securities that appear underpriced based on fundamental analysis.
– Vesting: The process by which an employee accrues non-forfeitable rights over employer contributions to a retirement plan.
W
– Weighted Average Cost of Capital (WACC): A calculation of a firm’s cost of capital, weighted based on the relative proportion of equity and debt.
– Wash Sale: A sale of a security at a loss, followed by the repurchase of a substantially identical security within 30 days, often impacting tax deductions.
– Wealth Management: A service providing financial planning and investment advice to individuals or families with high net worth.
X
– Expense Ratio: The annual fee that all mutual funds or ETFs charge their shareholders, expressed as a percentage of assets under management.Lorem ipsum dolor sit amet, consectetur adipiscing elit. Ut elit tellus, luctus nec ullamcorper mattis, pulvinar dapibus leo.
Y
– Yield to Maturity (YTM): The total return expected on a bond if it is held until maturity, accounting for its current price and interest payments.
– Yield Curve: A graph that shows the relationship between interest rates and bonds of different maturities.
Z
– Zombie Company: A company that earns just enough to continue operating but is unable to grow or pay down debt.