Glossary

401(k) & 403(b): retirement savings plans offered by many American employers that have tax advantages to the saver, including tax deductibility and tax-free growth; taxes are due when the money is withdrawn.

After-Tax Dollars: money invested after taxes have been taken out (See "Pre-Tax Dollars,"  "Deductibility," and "Roth IRA").

Annual Return: the profit (gain) or loss on an investment over a one-year period.

Asset: an investment expected to grow in value.

Asset Classes: types of assets: stocks, bonds, real estate, commodities, cash, etc.

Asset Allocation: dividing your investments among different asset “classes,” such as stocks, bonds, and cash to reduce risk; for example: 60% stocks, 30% bonds, 10% cash.

Bear Market: decreasing prices of the stock market, usually 20% or more. The term, some say, comes from how a bear fights with its paws in a downward motion (See also "Bull Market").

Benchmark: a standard (or index) against which the performance of an investment can be measured, such as the S&P 500 Index.

Blue Chip: a very large public company with an exceptional reputation: e.g., IBM, Coca-Cola, NIKE.

Bond: a loan to a company or government that pays back a fixed rate of interest.

Broker: a person who buys and sells goods or assets for others.

Brokerage Account: an investment account that allows you to buy and sell a variety of investments, such as stocks, bonds, and index funds. Taxes are owed each year on any income earned.

Bull Market: increasing prices of the stock market, usually 20% or more. The term, some say, comes from how a bull fights with its horns in an upward motion (See also "Bear Market").

Capital: money or assets put to economic use, such as investing and manufacturing.

Capital Gains (Capital Appreciation): the profit that comes from selling an investment for more than you paid for it. Taxes on Capital Gains are often lower than taxes on Ordinary Income. (See "Ordinary Income")

Capital Loss: the loss that comes from selling an investment for less than you paid for it.

Certificate of Deposit (CD): Savings tool with a fixed maturity date and fixed interest rate.

Commission: a fee that a broker earns for processing stock trades.

Commodities: raw materials or agricultural products, such as gold, silver, oil, and wheat.

Compound Interest: interest earned on both the principal amount and any interest already earned (accrued).

Custodial Account: an investment account that an adult opens on behalf of a minor.

Debt-to-Income Ratio (DTI): the percentage of your income that goes towards debt payments (mortgage, credit cards, student loans, etc.). It is calculated by dividing monthly total debt payments by monthly gross income.

Deductibility: money contributed to a 401(k) or traditional IRA (not a Roth IRA) can be deducted from a person’s taxes resulting in a lower income tax payment.

Diversification: a financial strategy where you invest in different types of assets (stocks, bonds, or cash), or in stocks of different companies instead of just one, in order to reduce risk.

Dividend: part of a company's profits (earnings) that it pays to stockholders.

Dollar-Cost Averaging: an investment strategy of purchasing a security over a period of time rather than all at once; instead of purchasing shares at a single price, you buy in smaller amounts at regular intervals, regardless of price. Over the long term, dollar cost averaging can help lower your investment costs and boost your returns.

Dow ("The Dow"): the Dow Jones Industrial Average: a group of stocks of 30 large and prominent companies.

Drawdown: the decline in value of an investment from its peak to its lowest point over a specific period. Drawdowns may indicate the risk level of an investment.

Earnings: a worker’s salary, a company’s profit, or an investment’s increase in value.

Equities: another word for stocks, or ownership in a company. (See also "Share")

ETF (Exchange-Traded Fund): a type of security, like an Index Fund, that combines the trading flexibility of stocks with the diversification of mutual funds.

Expense Ratio: the annual fee charged to investors who own mutual funds and ETFs. 

Gross Income: (Gross Pay) the total amount of income a person earns before taxes and other deductions are taken out. (See also "Net Income").

Index: a method to track the performance of a group of assets; e.g., the S&P 500.

Index Fund: a group of stocks or bonds designed to mimic the assets in, and performance of, a financial market index.

Inflation: a general increase in prices and a decrease in the purchasing power of money.

Interest: a fee charged by a lender, and paid by a borrower, for the use of money.

Investing: to put money toward earning a financial gain; it’s delayed spending.

IPO (Initial Public Offering): the first sale of stock issued by a company to the public.

IRA (Individual Retirement Account): an investment account that allows a person to save for retirement with tax-free growth (See also "Roth IRA").

Large-Cap (Mid-Cap, Small-Cap): Large-Cap refers to a company with a market capitalization (calculated as the price per share x number of shares) of more than $10 billion (Apple), Mid-Cap is a market capitalization of $2 billion to $10 billion (Dunkin’ Brands), Small-Cap is a market capitalization of less than $2 billion (Office Depot).

Liability: something that is owed to somebody else, such as a loan.

Liquidity: the ease with which an asset can be converted into ready cash without affecting its market price. For example, a checking account is liquid, a house is not liquid.

Market Capitalization: (See "Large Cap")

Maturity Date: the date when the final payment is due for a loan, bond or other financial product, such as a Certificate of Deposit (CD).

Mid-Cap: (See "Large Cap")

Money Market Fund: a type of mutual fund that invests in cash and high-quality, short-term debt (bonds).

Mortgage: a loan to purchase property.

Mutual Fund: a company that brings together money from many people and invests it in a mix of stocks, bonds, or other assets.

NASDAQ: National Association of Securities Dealers Automated Quotations (pronounced “naz-dak") is the second-largest stock exchange in the U.S., after the NYSE. The stocks of companies such as Apple, Costco, and PepsiCo are traded on the NASDAQ.

Net Income: (Net Pay, Take-home Pay) the amount an employee earns after taxes and other items are deducted from Gross Income.

Nominal Returns vs. Real Returns: The nominal return on an investment is the money made without including inflation, taxes, and fees. The real return on an investment is the gain or loss made on an investment after subtracting costs, such as inflation, taxes, and fees.

NYSE: the New York Stock Exchange is the largest stock market in the U.S. The stocks of companies such as Walmart, Home Depot, and McDonalds are traded on the NYSE.

Opportunity Cost: when you buy an item, you can’t spend the money on something else; opportunity cost is the thing you didn’t buy; you gave up the opportunity to buy the other item.

Ordinary Income: income that is taxed at personal income rates set by the IRS. These sources of income include salaries, tips, bonuses, commissions, interest income, and others. Personal income rates are different, and often lower, than Capital Gains tax rates. (See also "Capital Gains")

Pre-Tax Dollars: money invested in a retirement account, such as an IRA or 401(k), before taxes are taken out (See "Deductibility").

Principal: the original money used to purchase an asset.

Profit: a company’s income (earnings) left over after expenses are subtracted.

Portfolio: a group of securities (stocks and bonds).

Price/Earnings (P/E) Ratio: the ratio of a company’s current share price compared to its per-share earnings.

Private Mortgage Insurance (PMI): insurance purchased by a borrower to help protect a mortgage lender in the event a borrower cannot make payments. PMI is often required if a down payment is less than 20% of the home’s purchase price.

Rally: a period of sustained increases in the prices of stocks, bonds, or related indexes, such as the Dow Jones Industrial Average or the S&P 500 Index.

Realized Gain or Loss & Unrealized Gain or Loss: a realized profit or loss occurs when an investment is actually sold. (See "Capital Gain" and "Capital Loss"). An unrealized gain or loss is a theoretical profit or loss that appears in your account before it is sold; it’s also called a paper loss or gain because it only appears on the paper of your account statement.

Rebalancing: buying and selling your shares in an investment to get back to your original asset allocation.

Reinvestment: income from an investment (often called "dividends") used to buy more of the investment rather than received as cash.

Return: the money made or lost on an investment.

Rate of Return: the profit (or gain) of an investment, shown as a percentage.

Real Estate: property consisting of land and buildings.

Risk: the potential for financial loss associated with an investment decision.

Risk Tolerance: the amount of loss in investment returns that an investor is willing to withstand.

Roth IRA: an Individual Retirement Account to which you contribute after-tax dollars, and approved withdrawals are taken out tax-free. It is named after one of the U.S. senators who created it.

S&P 500: the Standard & Poor's 500 is a stock market index that tracks the performance of 500 of the largest companies in the United States.

Savings: money set aside in a secure place, such as in a bank account, that you can use for future emergencies or to make purchases.

Securities: a general term for stocks, bonds, mutual funds, exchange-traded funds (ETFs) or other types of investments you can buy or sell.

Share: a unit of ownership, often in a company’s stock or in a mutual fund. (Also called “equity”).

Small-Cap: (see "Large-Cap")

Stock: an investment that gives people a share of ownership in a company (See also "Share" and "Equities").

Stock Market: Where you can buy, sell, and trade stocks: NY Stock Exchange, NASDAQ, etc. “The Stock Market” doesn’t exist; the term usually refers to a stock index such as the S&P 500 or The Dow.

Stock (or Ticker) Symbol: abbreviation used to identify a company’s stock or mutual fund; a ticker is the display of stock prices throughout a trading day; a “tick” is a change in the price of a stock, up or down.

Taxable Account: A brokerage account that holds investments that can be taxed.