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Glossary of Terms

This Glossary of terms used in wealth management and financial circles can help you feel more confident when you talk with your advisor.


401(k) are plans offered by companies and help you save for retirement. The money you set aside is tax deferred, and it's frequently matched in part, meaning your company will dedicate their money to your account as well. (Free cash—woohoo!)

403(b) Tax Sheltered Annuities

A qualified retirement plan for eligible employees of public schools, tax-exempt organizations and eligible ministers. Similar to a 401(k) plan but mainly for non-profit organizations.

Adjusted gross income

A taxpayer’s accrued income minus adjustments, such as IRAs and alimony.


A financial product designed to grow an individual’s funds and then upon annuitization, pay a fixed payment for the designated number of periods.  Annuities are used primarily as a way to secure cash flow during retirement years.


This term stands for annual percentage rate, and it refers to how much interest you're paying on the money you borrow. It's especially important to pay attention to when signing up for a credit card-- the higher your APR, the more money you'll ultimately pay if you don't pay off your balance in full each month.


Annual Percent Yield. The annual return of an investment for a one-year period.  This rate includes compounding, which makes it greater than the periodic interest rate multiplied by the number of periods.


Any resource that has economic value that an individual or corporation owns.  Assets are generally viewed as resources that produce cash flow or bring added benefit to the individual or company.

Asset allocation

This is just a fancy phrase for your investment strategy. There are three general categories where you're going to put your money: cash, bonds and stock. Cash is the least risky and would provide the least amount of return … Bonds are generally riskier than cash but less risky than stocks.


A legal proceeding in which a debtor’s assets are liquidated and the debtor is released from further liability. In short, it happens when you borrow too much. Declaring bankruptcy can solve hopeless financial situations, but it should be used as a last resort. When you file for it, it stays on your record for 10 years-- and all of your assets are seized.

Bear Market

A market condition where securities are falling and investors have a pessimistic outlook on the market as a whole. A downturn of 20% or more for more than two months within multiple indexes like the Dow Jones Industrial Average or the S&P 500 is considered the start of a bear market.


When you invest in a bond, you are essentially loaning money to a company or government. How that money is paid back is determined by the conditions you bought the bond under. The investor does not become part owner like a shareholder, but does have a greater claim on the issuer’s income than a shareholder. Provided that nothing bad happens, like a bankruptcy, you cash in the bond on the maturity date and collect some interest.

Bull Market

Opposite of bear market. A market condition where securities rise faster than historic averages; usually from an economic recovery, boom or spike in investor confidence (psychological).

Capital Gain

A capital gain is realized when an investment’s selling price exceeds its purchase price.


It's money- but if a financial advisor suggests you move some of your portfolio into cash, he or she is probably referring to certificates of deposit, also known as CDs, Treasury bills or money market accounts.

Cash Flow

One of the main indications of a company’s overall financial health. Calculated by subtracting cash payments from cash receipts over a period of time (month, quarter, year).


Certificate of Deposit – Interest bearing note offered by banks, savings and loans, and credit unions.  CDs are FDIC insured and provide interest on the investor’s money that is locked in for a certain term (usually three months to six years).

Compound Interest

Interest that is calculated not just on the initial principal but also on the accumulated interest from previous periods.  As interest is added back to the principal, the rate of return applies to the entire balance, making the balance grow even faster than simple interest (simple interest is when the interest is applied only the initial principal, not the accumulated interest as well).


An amount owed to a person or corporation for funds borrowed.

Debt Consolidation

Debt consolidation is a useful strategy when you've accumulated debt from multiple, high-interest sources (such as credit cards). It allows you to make one (usually lower interest) payment each month, reducing the amount of money you spend repaying your debts overall.


When a borrower fails to repay a debt obligation by the agreed term.


Spreading risk by investing in a range of investment tools such as securities, commodities, real estate, CDs, etc.

Dollar-cost averaging

An individual who makes regular payments or investments in the same amount periodically.

Expense ratio

It costs money to run mutual funds, so investors can expect to pay an annual fee, expressed as the expense ratio. That's the percentage of your money that goes to the managers of the mutual fund you're investing in. The expense ratio also covers other fund expenses, such as administrative fees, record-keeping fees and even print or TV ads promoting the mutual fund.

Index funds and Indexes

This is a popular type of mutual fund because its costs are generally low. But if you really want to understand index funds, you first need to understand indexes, which are essentially collections of stocks that represent a slice of the economy. By tracking the performance of a group of stocks, indexes give investors a sense of how the stock or bond market, or a portion of it, is doing. And by investing in an index fund, you are essentially betting on the success of the basket of companies it contains.

For instance, if you're interested in investing in technology, you might sink your money into one of the many technology index funds. Or you might want to put your money into some really big, solid companies.

While there are many indexes, the Dow Jones industrial average and Standard & Poor 500 are both well-known indexes The Dow tracks 30 large, blue-chip stocks, which are stocks of well-established and financially sound companies. Whereas the S&P 500 tracks 500 of the most widely held stocks.


The gradual increase or rise in the price of goods of a period of time.


The fee paid for using other people’s money. For the borrower, it is the cost of using other people’s money. For the lender, it is the income from renting the good (the money).

Investment portfolio

A collection of investments, including CDs, stocks, mutual funds, cash, and more.


This financial term is technically a debt. It's usually one that must be paid every month, like student loans or a car payment. Why are these payments called liabilities? Because you are liable to pay them-- or not great things happen.


The ability of an asset to be converted to cash quickly without sacrificing value or giving a discount on the price.


The ratio of the fair market value of the asset to the value of the loan used to purchase the asset.  This shows the lender that potential losses may be recouped by selling the asset.

Mutual fund

An investment that is made up of a pool of funds from multiple investors who want to invest in securities like stocks, bonds, money market accounts, and other assets. A mutual fund may hold hundreds of stocks, with the purpose of spreading the risk. In most cases, money managers make buy and sell decisions for mutual funds.

Net Income

This term seems confusing at first, but it's actually incredibly useful in determining whether your earnings match up with your monthly expenses. It's simply your income minus your income tax and other deductions-- the money left over, more or less, when you receive your paycheck.

Net worth

Basic calculation of assets minus liabilities.  Used both for corporations and individuals to measure financial health.


A contract that gives the buyer the right, but not the obligation, to buy (call) or sell (put) a security at a price that has been set (strike price) during a set period of time or certain date (exercise date).

Price-to-earnings ratio

A company’s stock price in relation to its earnings. The price-earnings ratio gives you a general measure of whether your investments are overvalued or not.

As a general rule, a low P/E, between 0 and 10, means the company isn't doing too well, or it's doing just fine but is undervalued (this is why, when you research stocks, you don't want to rely only on the P/E). If the ratio is high, over 25, that may be a sign that the company has a lot of growth in its future, but it might also be a sign that the industry is at the top of a bubble that's about to burst. A P/E between 10 and 17 is generally considered average.

Prime Rate

Determined by the federal funds rate (the overnight rate at which banks lend to one another) the prime rate is the best rate available to a bank’s most credit-worthy customer.


The original investment on which interest is generally paid. 


 Looking for a go-to source that contains every bit of information about an investment? Ask your financial advisor for a prospectus, or search online to find one. It's a legal document that contains in-depth details about stocks, bonds, a mutual fund or whatever you're planning to invest in. If you're wondering, for instance, what the expense ratio is on your mutual fund, or you would like a list of all the fund's holdings, you'd find it in the prospectus.


An economic condition defined by a decline in GDP for two or more consecutive quarters.  During a recession, the stock market usually drops, unemployment increases, and the housing market declines.

Risk Averse

An investors desire to avoid risk; a more conservative approach to investing is generally upheld by risk averse investors.

RMD – Required Minimum Distribution

The minimum annual amount required for retirement account holders to withdraw, starting a age 70 ½.  This amount is calculated based on the account value on December 31 of the prior year divided by the factor on the IRS RMD table.  (RMD does not apply for Roth IRAs.  )

Roth IRA

Retirement vehicles that allow certain individuals who meet income restrictions to contribute funds that have already been taxed in order to save for retirement.  The withdrawals from Roth IRAs will never be taxed (including interest – after five years of the initial investment).


A wide array of investment options, including mutual funds, stocks, bonds, CDs, cash, and other assets.

Service charge

Lending institutions charge a nominal fee for carrying or servicing a loan or account.


One unit of ownership in a corporation, security, or limited partnership.


When you purchase a stock, you are buying a small part of the company. A company may offer 100 shares of stock and if you own 10, you have 10% ownership of the company. The price of each share is determined in part by how much people are willing to pay for them, how much they're selling them for and how well the company is anticipated to perform.

Target-date fund

Often found in 401(k) plans, target-date funds are designed to serve as all-in-one portfolios that are tailored to your expected retirement date. Farther away from the “target date” - your investments will be riskier and more heavily weighted toward stocks. As you get closer to your “target date”, the investments will become increasingly more conservative and will shift to include more bonds.


Postponing taxes until a later date – common tax-deferred vehicles include IRAs, 401(k), Keogh Plans, 403(b), and pension plans.

Traditional IRA 

A retirement vehicle that allows you to save pretax funds for retirement.  These funds are taxed upon withdrawal and may be subject to penalty if withdrawn before age 59 ½.

Usury laws

These laws set the maximum interest rates that lending institutions may charge for their consumers.

Variable interest rate

An interest rate that fluctuates up or down on a schedule based on an economic index, such as the prime rate.


The annual rate of return for an investment expressed as a percentage.

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