Don’t let industry jargon prevent you from investing in your future. The glossary below can help acquaint yourself with some basic investing terminology.
The return from an investment after the effects of taxes have been taken into account.
Aggressive Growth Fund
A mutual fund in which the primary investment objective is substantial capital gains.
Balanced Mutual Fund
A mutual fund in which the objective is purchasing a balance of stocks and bonds. Such funds tend to be less volatile than stock-only funds.
A bond is evidence of a debt wherein the insurer promises to pay the bondholders a specified amount of interest and to repay the principal at maturity. Bonds are usually issued in multiples of $1,000.00.
Capital Gain or Loss
The difference between the sales price and the purchase price of a capital asset. When that difference is positive, the difference is referred to as a capital gain. When the difference is negative, it is a capital loss.
Short-term investments, such as U.S. Treasury securities, certificates of deposit, and money market fund shares, which can be readily converted into cash.
A savings instrument in which funds must remain on deposit for a specified period; premature withdrawals incur interest penalties.
An amount that can be subtracted from gross income, from a gross estate, or from a gift, thereby lowering the amount on which tax is assessed.
Defined Benefit Plan
A qualified retirement plan under which a retiring employee will receive a guaranteed retirement fund usually payable in installments. Annual contributions may be made to the plan by the employer at the level needed to fund the benefit. The annual contributions are limited to a specified amount, indexed to inflation.
Employer-Sponsored Retirement Plan
A tax-favored retirement plan that is sponsored by an employer. Among the more common employer-sponsored retirement plans are 401(k) plans, 403(b) plans, simplified employee pension plans, and profit sharing plans.
The value of a person’s ownership in real property or securities; the market value of a property or business, less all claims and liens upon it.
Income that is the same every month from investments such as certificate accounts, Social Security benefits, pension benefits, some annuities or most bonds.
A defined contribution plan that may be established by a company for employee retirement. Employees may allocate a portion of their salaries into this plan, and contributions are excluded from their taxable income (with limitations). Earnings will compound, tax-deferred.
A defined contribution plan that may be established by a school or nonprofit organization for retirement. Employees may allocate a portion of their salaries into this plan, and contributions are excluded from their income for tax purposes (with limitations). Earnings will compound tax-deferred.
A federal tax levied on the transfer of property as a gift. This tax is paid by the donor. The first $10,000.00 a year from a donor to each recipient is exempt from tax. Most states also impose a gift tax.
IRA (Individual Retirement Account)
Annual contributions up to $2,000.00 are deductible from earned income in the calculation of federal and state income taxes if the taxpayer meets certain requirements. The earnings accumulate tax-deferred until withdrawn, and then they are taxed as ordinary income. Individuals not eligible to make deductible contributions may make nondeductible contributions, the earnings on which would be tax-deferred.
Joint and Survivor Annuity
Most pension plans must offer this form of pension plan payout that pays over the life of the retiree and his or her spouse after the retiree dies. The retiree and his or her spouse must specifically choose to decline this method of payment.
This type of retirement plan is designed for self-employed individuals. Up to $30,000.00 or 25% of self-employed income (whichever is less) may be deducted from compensation and set aside into the plan.
The ease with which an asset or security can be converted into cash without loss of principal.
A provision of tax codes that allow all the assets of a deceased spouse to pass to the surviving spouse free from estate taxes. This provision is also referred to as the unlimited marital deduction.
The date on which the principal amount of a loan, bond or any other debt instrument becomes due and is to be paid in full.
Money Market Fund
A mutual fund that specializes in investing in short-term securities and that tries to maintain a constant net asset value of one dollar.
Net Asset Value (NAV)
The price at which a mutual fund sells or redeems its shares. The net asset value is calculated by dividing the net market value of the fund’s assets by the number of shares.
Open-End Mutual Fund
A mutual fund that can issue an unlimited number of shares, with new investment dollars invested by the fund manager according to the objective of the fund. Shares of open-end funds trade at their net asset value (NAV).
A class of stock with claim to a company’s earnings before payment can be made on the common stock and usually entitled to priority over common stock if the company liquidates. Generally, preferred stocks pay dividends at a fixed rate.
Qualified Retirement Plan
A pension, profit sharing or qualified savings plan that is established by an employer for the benefit of the employees. These plans must be established in conformity with IRS rules. Contributions accumulate tax-deferred until withdrawn and are deductible to the employer as a current business expense.
A measure of the probability of financial loss or gain.
Refers to the assumption that rational investors will choose the security with the least risk if they can maintain the same return. As the level of risk goes up, so must the expected return on the investment.
SEP (Simplified Employee Pension Plan)
A type of plan under which the employer contributes to an employee’s IRA. Contributions may be made up to a certain limit and are immediately vested.
A type of obligation with a maturity of less than one year.
The most appealing type of tax deduction, tax credits are subtracted directly, dollar-for-dollar, from your income tax bill.
Interest, dividends or capital gains that grow untaxed in certain accounts or plans until they are withdrawn.
Under certain conditions, the interest from bonds issued by states, cities, and certain other government agencies is exempt from federal income taxes. In many states, the interest from tax-exempt bonds will also be exempt from state and local income taxes.
Term life insurance provides a death benefit if the insured dies. Term insurance does not accumulate cash value and ends after a certain number of years or at a certain age.
An annuity contract that adjusts the monthly payment according to the investment experience (and sometimes the mortality experience) of the insurer.
Whole Life Insurance
A type of life insurance that offers a death benefit and also accumulates cash values tax-deferred at fixed interest rates. They generally have a fixed annual premium that does not rise over the duration of the policy.
In general, the yield is the amount of current income provided by an investment.
This type of bond makes no periodic interest payments but instead is sold at a steep discount from its face value. Bondholders receive the face value of their bonds when they mature.