401(k) plan - a retirement savings plan offered by many American employers that has tax advantages for the saver. The employee who signs up for a 401(k) agrees to have a percentage of each paycheck paid directly into an investment account. The employer may match part or all of that contribution. The employee gets to choose among a number of investment options, usually mutual funds.
403(b) plan - The term 403(b) plan refers to a retirement account designed for certain employees of public schools and other tax-exempt organizations. Participants may include teachers, school administrators, professors, government employees, nurses, doctors, and librarians. The 403(b) plan, which is closely related to the better-known 401(k) plan, allows participants to save money for retirement through payroll deductions while enjoying certain tax benefits. There's also an option for the employer to match part of the employee's contribution.
457 plan - A 457 plan is a tax-advantaged retirement savings plan offered to employees of many state and local governments and some nonprofit organizations. Like the better-known 401(k) plan in the private sector, the 457 plan allows employees to deposit a portion of their pre-tax earnings in an account, reducing their income taxes for the year while postponing the taxes due until the money is withdrawn after they retire.
529 plan - A 529 plan is a tax-advantaged savings plan designed to help pay for education. Originally limited to postsecondary education costs, it was expanded to cover K-12 education in 2017 and apprenticeship programs in 2019.
Alpha - is a term used in investing to describe an investment strategy's ability to beat the market, or its "edge."
American Depository Receipt (ADR) - refers to a negotiable certificate issued by a U.S. depositary bank representing a specified number of shares—usually one share—of a foreign company's stock. The ADR trades on U.S. stock markets as any domestic shares would.
Annuity - an insurance contract issued and distributed by financial institutions with the intention of paying out invested funds in a fixed income stream in the future.
Applicable Federal Rate (AFR) - the minimum interest rate that the Internal Revenue Service (IRS) allows for private loans.
Bear Market – A condition in which securities fall 20% or more from the recent highs amid widespread pessimism and negative investor sentiment.
Beta – A measure of the volatility of a security compared the market as a whole (usually the S&P 500).
Bond – A fixed-income instrument that represents a loan made by an investor to a borrower (typically corporate or governmental).
Bull Market – A colloquial term used in the financial markets when asset prices have risen or are expected to rise.
Compound Interest - The interest on a loan or deposit calculated based on both the initial principal and the accumulated interest from previous periods.
Consumer Price Index (CPI) – An index that measures the monthly change in prices paid by U.S. consumers.
Correlation – A statistic that measures the degree to which two securities move in relation to each other.
Debt Ratio – A financial ratio that measures the extent of a company’s leverage.
Debt-to-Equity (D/E) Ratio – A ratio that is used to evaluate a company’s financial leverage and is calculated by dividing a company’s total liabilities by its shareholder equity.
Deferred Compensation - an addition to an employee's regular compensation that is set aside to be paid at a later date. In most cases, taxes on this income are deferred until it is paid out.
Discount Rate – Either the interest rate that the Federal Reserve charges banks for short-term loans or the rate used to discount future cash flows.
Diversification – A risk management strategy that mixes a wide variety of investments within a portfolio. A diversified portfolio contains a mix of distinct asset types and investment vehicles in an attempt at limiting exposure to any single asset or risk.
Dividend - the distribution of a company's earnings to its shareholders and is determined by the company's board of directors. Dividends are often distributed quarterly and may be paid out as cash or in the form of reinvestment in additional stock.
Dividend Yield - a financial ratio (dividend/price) that shows how much a company pays out in dividends each year relative to its stock price.
Dow Jones Industrial Average (DJIA) - a stock market index that tracks 30 large, publicly-owned blue-chip companies trading on the New York Stock Exchange (NYSE) and Nasdaq.
Earnings Per Share (EPS) - a company's profit divided by the outstanding shares of its common stock. The resulting number serves as an indicator of a company's profitability.
Employee Stock Ownership Plan (ESOP) - an employee benefit plan that gives workers ownership interest in the company in the form of shares of stock.
Environmental, Social, and Governance (ESG) Investing - a set of standards for a company’s behavior used by socially conscious investors to screen potential investments.
Ex-Dividend - a stock that is trading without the value of the next dividend payment.
Exchange-Traded Fund (EFT) - a type of pooled investment security that operates much like a mutual fund. Typically, ETFs will track a particular index, sector, commodity, or other assets, but unlike mutual funds, ETFs can be purchased or sold on a stock exchange the same way that a regular stock can. An ETF can be structured to track anything from the price of an individual commodity to a large and diverse collection of securities. ETFs can even be structured to track specific investment strategies.
FAANG Stocks – An acronym that refers to the stocks of five prominent American technology companies: Meta (formerly Facebook), Apple, Amazon, Netflix, and Alphabet (formerly Google).
Federal Deposit Insurance Corporation (FDIC) - an independent federal agency insuring deposits in U.S. banks and thrifts in the event of bank failures.
Federal Funds Rate - the target interest rate set by the Federal Open Market Committee (FOMC). This target is the rate at which commercial banks borrow and lend their excess reserves to each other overnight.
Fiduciary - a person or organization that acts on behalf of another person or persons, putting their clients’ interests ahead of their own, with a duty to preserve good faith and trust. Being a fiduciary thus requires being bound both legally and ethically to act in the other’s best interests.
Fixed Income - Fixed income broadly refers to those types of investment security that pay investors fixed interest or dividend payments until their maturity date. At maturity, investors are repaid the principal amount they had invested. Government and corporate bonds are the most common types of fixed-income products.
Government Bond - A debt security issued by a government to support government spending and obligations. Government bonds can pay periodic interest payments called coupon payments. Government bonds issued by national governments are often considered low-risk investments since the issuing government backs them.
Gross Domestic Product (GDP) - the total monetary or market value of all the finished goods and services produced within a country’s borders in a specific time period. As a broad measure of overall domestic production, it functions as a comprehensive scorecard of a given country’s economic health.
Gross National Product (GNP) - an estimate of the total value of all the final products and services turned out in a given period by the means of production owned by a country's residents. GNP is commonly calculated by taking the sum of personal consumption expenditures, private domestic investment, government expenditure, net exports, and any income earned by residents from overseas investments, then subtracting income earned by foreign residents. Net exports represent the difference between what a country exports minus any imports of goods and services.
Health Savings Account (HAS) - a tax-advantaged account created for or by individuals covered under high-deductible health plans (HDHPs) to save for qualified medical expenses. Contributions are made into the account by the individual or their employer and are limited to a maximum amount each year. The contributions are invested over time and can be used to pay for qualified medical expenses, such as medical, dental, and vision care and prescription drugs.
Hedge Fund – Actively managed investment poos whose managers use a wide range of strategies, often including buying with borrowed money and trading esoteric assets, in an effort to beat average investment returns for their clients.
Index Fund - a type of mutual fund or exchange-traded fund (ETF) with a portfolio constructed to match or track the components of a financial market index, such as the Standard & Poor’s 500 Index (S&P 500). An index mutual fund is said to provide broad market exposure, low operating expenses, and low portfolio turnover. These funds follow their benchmark index regardless of the state of the markets.
Inverted Yield Curve - An inverted yield curve shows that long-term interest rates are less than short-term interest rates. With an inverted yield curve, the yield decreases the farther away the maturity date is.
Irrevocable Trust – A type of trust that cannot be modified, amended, or terminated without the permission of the grantor’s beneficiary or beneficiaries.
Joint Tenant With Right of Survivorship (JTWROS) - a legal ownership structure involving two or more parties for any type of financial account or another asset. When one of the co-owners dies in a joint tenancy with the right of survivorship, then the surviving co-owner automatically owns the asset.
Junk Bond - A bond that carries a higher risk of default than most bonds issued by corporations and governments.
Kiddie Tax - a special tax law created in 1986 to address investment and unearned income tax for individuals 18 years of age or under—or dependent full-time students under age 24. All unearned income over the threshold is taxed at the parent’s marginal income tax rate rather than the lower child’s tax rate.
Limit Order - a direction to purchase or sell a stock or other security at a specified price or better. This stipulation allows traders to better control the prices at which they trade.
Limited Liability Corporation (LLC) - a business structure in the U.S. that protects its owners from personal responsibility for its debts or liabilities. Limited liability companies are hybrid entities that combine the characteristics of a corporation with those of a partnership or sole proprietorship.
Liquidity – The efficiency or ease with which an asset or security can be converted into cash without affecting its market price.
Margin - the collateral that an investor has to deposit with their broker or exchange to cover the credit risk the holder poses for the broker or the exchange.
Market Share – The percent of total sales in an industry generated by a particular company.
Monetary Policy - a set of tools used by a nation's central bank to control the overall money supply and promote economic growth and employ strategies such as revising interest rates and changing bank reserve requirements.
Monte Carlo Simulation - models the probability of different outcomes in a process that cannot easily be predicted due to the intervention of random variables. It is a technique used to understand the impact of risk and uncertainty.
Mutual Fund - a financial vehicle that pools assets from shareholders to invest in securities like stocks, bonds, money market instruments, and other assets. Mutual funds are operated by professional money managers, who allocate the fund's assets and attempt to produce capital gains or income for the fund's investors. A mutual fund's portfolio is structured and maintained to match the investment objectives stated in its prospectus.
Nasdaq - a global electronic marketplace for buying and selling securities.
Negative Correlation - a relationship between two variables in which one variable increases as the other decreases, and vice versa.
Net Asset Value (NAV) - net value of an investment fund's assets less its liabilities, divided by the number of shares outstanding.
New York Stock Exchange (NYSE) - a stock exchange located in New York City that is the largest equities-based exchange in the world, based on the total market capitalization of its listed securities.
Opportunity Cost - the potential benefits that an individual, investor, or business misses out on when choosing one alternative over another.
Over-the-Counter - the process of trading securities via a broker-dealer network as opposed to on a centralized exchange like the New York Stock Exchange.
Penny Stock – The stock of a small company that trades for less than $5 per share.
Ponzi Scheme - a fraudulent investing scam promising high rates of return with little risk to investors. A Ponzi scheme is a fraudulent investing scam which generates returns for earlier investors with money taken from later investors.
Preferred Stock – A class of stock that is granted superior rights to common stock, like higher dividend payments and a higher claim to assets in the event of liquidation.
P/E Ratio - Price-to-Earnings Ratio - the ratio for valuing a company that measures its current share price relative to its earnings per share (EPS). The price-to-earnings ratio is also sometimes known as the price multiple or the earnings multiple.
Pro Rata – A process where whatever is being allocated will be distributed in equal portions.
Prospectus - a formal document required by and filed with the Securities and Exchange Commission (SEC) that provides details about an investment offering to the public. A prospectus is filed for offerings of stocks, bonds, and mutual funds.
Qualified Terminable Interest Property (QTIP) Trust - enables the grantor to provide for a surviving spouse and maintain control of how the trust's assets are distributed once the surviving spouse dies. Income generated from the trust, and sometimes the principal, is given to the surviving spouse to ensure that the spouse is taken care of for the rest of their life.
R-Squared - a statistical measure that represents the proportion of the variance for a dependent variable that's explained by an independent variable or variables in a regression model. Whereas correlation explains the strength of the relationship between an independent and dependent variable, R-squared explains to what extent the variance of one variable explains the variance of the second variable. So, if the R2 of a model is 0.50, then approximately half of the observed variation can be explained by the model's inputs.
Rate of Return – Net gain or loss of an investment over a specified time period, expressed as a percentage of the investment’s initial cost.
Real Estate Investment Trust (REIT) - a company that owns, operates, or finances income-generating real estate.
Modeled after mutual funds, REITs pool the capital of numerous investors. This makes it possible for individual investors to earn dividends from real estate investments—without having to buy, manage, or finance any properties themselves.
Required Minimum Distribution (RMD) - the amount of money that must be withdrawn from an employer-sponsored retirement plan, traditional IRA, SEP, or SIMPLE individual retirement account (IRA) by owners and qualified retirement plan participants of retirement age.
Roth IRA - an account used to save for retirement. A Roth IRA is a special type of tax-advantaged individual retirement account to which you can contribute after-tax dollars. The primary benefit of a Roth IRA is that your contributions and the earnings on those contributions can grow tax-free and be withdrawn tax-free after the age 59½ assuming the account has been open for at least five years. In other words, you pay taxes on money going into your Roth IRA, and then all future withdrawals are tax-free.
Rule of 72 – A formula that is popularly used to estimate the number of years required to double the invested money at a given annual rate of return.
Russell 2000 Index - A stock market index that measures the performance of the 2,000 smaller companies included in the Russell 3000 Index.
S&P 500 Index - a market-capitalization-weighted index of 500 leading publicly traded companies in the U.S. It is not an exact list of the top 500 U.S. companies by market cap because there are other criteria that the index includes. Still, the S&P 500 index is regarded as one of the best gauges of prominent American equities' performance, and by extension, that of the stock market overall.
Securities and Exchange Commission (SEC) - an independent federal government regulatory agency responsible for protecting investors, maintaining fair and orderly functioning of the securities markets, and facilitating capital formation.
Series 7 - The Series 7 exam licenses the holder to sell all types of securities products except commodities and futures. Known formally as the General Securities Representative Qualification Examination, the Series 7 exam and its licensing is administered by the Financial Industry Regulatory Authority (FINRA).
Sharpe Ratio - compares the return of an investment with its risk. It's a mathematical expression of the insight that excess returns over a period of time may signify more volatility and risk, rather than investing skill.
Standard Deviation - a statistic that measures the dispersion of a dataset relative to its mean and is calculated as the square root of the variance. The standard deviation is calculated as the square root of variance by determining each data point's deviation relative to the mean.
