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Education & Outreach Financial Literacy — Glossary of Financial Terms
401 (k) plan – An employer-sponsored retirement plan that permits employees to divert part of their pay into the plan and avoid current taxes on that income. Money invested in the plan may be partially matched by the employer, and earnings accumulated tax-deferred until they’re withdawn.
Bond – An interest-bearing security that obligates the issuer to pay a specified amount of interest for a specified time, usually several years, and then repay the bondholder the face amount of the bond.
Capital gain (or loss) – The difference between the price at which you buy an investment and the price at which you sell it.
Certificate of deposit – Usually called a CD, a certificate of deposit is a short – to medium – term instrument (one month to five years) issued by a bank or savings and loan to pay interest at a rate higher than that paid by a regular savings account.
Churning – Excessive buying and selling in a customer’s account undertaken to generate commissions for the broker.
Diversification – The method of balancing risk by investing in a variety of securities.
Dividend – A share of the company earnings paid out quarterly to stockholders, usually in cash, but sometimes in the form of additional shares of stock.
Home equity – The difference between what you paid for your home and what you get when you sell.
Individual retirement account (IRA) – A tax-favored retirement plan. Contributions to a regular IRA may be tax deductible, depending on your income and if you are covered by a retirement plan at work. Earnings grow tax-deferred. Earnings in a variation, the Roth IRA, grow tax-free, and contributions are made with after-tax dollars.
Load – A sales commission charged by many mutual funds. Some are front-end loads (fee paid when the shares are purchased) or back-end loads (fees paid when the shares are sold).
Money-market account – Offered by full-service brokers, these are similar to checking accounts but usually pay higher rates. Minimum deposit levels are higher than checking, and access to the account may be limited.
Money-market fund – A mutual that invests in short-term corporate and government debt and passes the interest payments on to shareholders.
Mortgage-backed securities – Securities issued by government-related agencies that buy up mortgage loans from lenders such as banks and savings and loan associations.
Mutual fund – A professionally managed portfolio of stocks and bonds or other investments divided up into shares.
Risk tolerance – The degree to which you are willing to risk losing some (or all) of your original investment in exchange for a chance to earn a higher rate of return. In general, the greater the potential gain from an investment, the greater the risk that you might lose money.
Opportunity cost – The cost of passing up on investment in favor of another.
Portfolio – The Collection of all your investments.
Stock – A share of stock that represents ownership in the company that issues it. The price of the stock goes up and down, depending on how the company performs and how investors think the company will perform in the future.
Street name – The term used to describe securities that are held in the name of your brokerage firm but that still belong to you.
Time value of money – The concept that money today is worth more than the same amount in the future, when inflation has reduced its value.
Unit trusts – A collection of securities, usually bonds, packaged by brokers and sold to investors.