Financial terms can be complex and in order to comprehend the investing process, you first must understand the terminology. Online financial resources should be used regularly to build upon your knowledge.
With the proper tools at your fingertips, you can be empowered to be confident in your financial decisions. From 401(k) plans to IRA Roth conversions, managing your portfolio can be easier when you have an understanding of the language that is being used. A finance glossary can be a quick reference that you can bookmark for easy access.
This personal finance glossary is for those new to investing or for savvy investors that are looking for a quick reference. You will find an alphabetical index of terms derived from M1 Finance informative articles. It is for informational and educational purposes only and It is not meant to be comprehensive.
401(k): A 401(k) retirement plan is an employer-sponsored savings plan for employees’ retirement. Some plans include employer matches up to a certain percentage whereby the employer contributions vest after the employees have remained at their jobs for a specific number of years.
401(k) rollover: A 401(k) rollover occurs when people transfer the funds from their old 401(k) plans into a new or existing plan. A rollover can include transferring the funds into the new 401(k) plan offered by the new employer, rolling over funds into an IRA, or rolling over the money into a Roth IRA.
529 plan: A 529 plan is an education or college savings savings plan that offers tax benefits and financial aid benefits.
alpha: Alpha is a measurement of the performance of an investment as compared to an index such as the S&P 500.
asset allocation: Asset allocation refers to the apportionment of the capital assets in your investment portfolio in a way that balances the risks and rewards.
asset class: Asset classes refer to instruments that have similar enough characteristics and market behaviors to be grouped together for purposes including investment, trading and economic analysis.
automatic investing: Automatic investing is a method of investing in which money is contributed at specific intervals automatically.
backdoor IRA: A Roth IRA conversion is a way for you to open a Roth IRA even if your income exceeds the maximum income limits. You can contribute $6,000 to the traditional IRA and then roll it over to your Roth account to create a backdoor Roth IRA contribution without running afoul of the laws or regulations.
bear market: A bear market is a downward trend that extends over a longer time period than a stock market correction.
beta: The investment beta or β refers to a measurement of the volatility of a portfolio, stock, or security as compared to a benchmark or an entire market.
bond: Bonds are securities that are considered to be relatively low-risk types of investments. They allow others to borrow money from you. Bonds pay you a fixed interest rate, and the debt that is owed to you by the government or corporate entity is repaid when your security matures.
broker: A broker is a stockbroker or firm that executes buy and sell orders at commission.
brokerage account: A brokerage account is a type of taxable investment account that you can open at a licensed brokerage firm. It is an arrangement through which you deposit funds and then can place buy and sell orders for different types of securities.
brokerage firm: The full-service brokerage firm is a firm that offers a variety of services in addition to executing buy and sell orders for their clients.
bull market: In a bull market, the market performance continues to climb.
capital gain: An increase in the worth of an investment, capital asset, or real estate is a capital gain.
capital loss: Capital losses occur when there has been a capital asset that you own has declined as compared to the price that you paid for it.
Certificates of Deposit (CD): These certificates of deposit are savings accounts where your money is held for a time period of a few months up to a number of years.
common stock: Common stocks are shares of companies that provide you with voting rights at shareholders’ meetings.
debt: Debt is when something that is owed by one party, usually in the form of money, to a second party.
demand pull inflation: Demand pull inflation occurs when the demand for a stock or asset is much higher than the supply. As consumer demand increases, companies try to increase the supply to meet demand. When additional supply is not available, the stock price increases. This causes inflation.
diversification: Diversification is the act of including different kinds of asset classes in a portfolio. Diversification can serve as a hedge against risk.
dividend: A dividend is a percentage of a company’s profits that the company pays to shareholders on a regular basis, typically quarterly.
dividend yield: The dividend yield formula is a company’s annual dividend divided by its share price.
dollar cost averaging: Dollar cost averaging is a technique that involves buying into a given portfolio investment on a predetermined schedule. The dollar value of each purchase is the same, so the purchase volume can fluctuate based on the share price.
earnings per share: The earnings per share formula of a dividend stock is the difference between the company’s net income and dividends that are paid for preferred stock divided by the average number of shares that are outstanding.
equity: Equity typically refers to the value of the assets minus the liabilities.
Exchange Traded Funds (ETFs): Exchange-traded funds are specific kinds of index funds that try to match the performance of a predetermined indicator.
Federal Deposit Insurance Corporation (FDIC): FDIC is a government created agency that provides insurance which protects the money that you hold in your deposit accounts at FDIC insured banks.
financial bubble: A financial bubble refers to when the price of a commodity, security, or other financial instrument increases to a point where it cannot be reasonably supported by its underlying fundamentals.
financial goals: Your financial goals are where you would like to be financially in the short-term, mid-term and long-term.
financial plan: personal financial plan is a written examination of your finances, including your income, asset evaluation, your liabilities and your investments to determine both your current financial state and your future financial state.
financial success: Financial success can be measured by monetary success.
Financial Industry Regulatory Authority (FINRA): FINRA is an organization that writes and administers rules related to the activities of registered broker-dealer firms and registered brokers in the U.S.
fund: A fund consists of money from a large number of investors pooled for a specific purpose.
Generally Accepted Accounting Principles (GAAP): GAAP sets standards for accounting principles and procedures that companies and accountant must follow when doing their financial statements.
getting rich: Getting rich are the acts of acquiring wealth in order have the option to do as you please.
inherited IRA: When an IRA’s original owner dies, the inherited IRA account often becomes, like any other possession, a part of their estate. Bequeathed retirement accounts can hold a variety of assets and be subject to different dictates that reflect their beneficiaries’ circumstances.
investment books: Investment books are books that are meant to educate people about the stock market, the importance of saving and how to make smart investment choices.
investment portfolio: An investment portfolio is a term that refers to a collection of your assets. A portfolio may include securities including stocks, bonds, mutual funds, money market funds and exchange-traded funds.
investment strategies: The methods that people use to try to get strong returns and greater capital appreciation from their investments are called investment strategies.
IRA: An individual retirement account (IRA) is a tax-advantaged way for individuals to save for retirement.
IRA conversion: A Roth IRA conversion is when you move the assets in your traditional, SIMPLE, or SEP IRA into a Roth IRA.
IRA distributions: IRA distributions are monetary amounts withdrawn from an IRA. They can be early, regular, or required withdrawals.
IRA rollover: A rollover IRA happens when you take funds from an employer-sponsored retirement account and roll them into a new IRA.
IRA withdrawal penalties: An IRA withdrawal penalties occur when the IRS assesses a fee on individuals for violating certain regulations when withdrawing from an IRA.
long term capital gains: Long term capital gains are an increase in the worth of an asset that you have held for more than one year.
long-term debt: Long-term debt consists of financial obligations that last 12 months or longer.
margin call: If the assets in your margin account fall below its initial margin requirement for a stock that you purchased, you can get a margin call. This is a demand from your broker that you deposit additional money or securities into your margin account so that potential losses and your margin debt can be covered.
market downturn: The stock market downturn definition refers to a period of time during which the stock market continues to decline.
mobile investing: Mobile investing refers to investing that is performed using wireless technology from smartphones or tablets.
National Association of Securities Dealers Automated Quotations (NASDAQ): NASDAQ is a global stock exchange for the buying and selling of securities.
net income: Net income is the dollar amount after subtracting taxes and deductions.
New York Stock Exchange (NYSE): The New York Stock Exchange is the largest stock exchange in the world.
options: Options are contracts that allow you to exercise the option to purchase or sell stocks at a set price on a specific date.
passive investing: Passive investing involves less buying and selling. When you engage in passive investing, you might buy and hold investments, which is called set it and forget it investing or a lazy portfolio.
portfolio: A portfolio is a term that refers to a collection of your assets. A portfolio may include securities including stocks, bonds, mutual funds, money market funds and exchange-traded funds.
preferred stock: Preferred stock are shares of a company that pay dividends in predetermined amounts. If you are a preferred stockholder, you may not have voting rights.
price-earning ratio: The price-earning ratio is a measure of a stock’s current price to its earnings per share. P/E ratio is determined by taking the product of the share price and the number of fully diluted shares outstanding and then dividing that by the sum of the company’s earnings over the past four quarters.
Real Estate Investment Trusts (REIT): An REIT is a public or private company that owns real property that creates income.
Regulation E (Reg E): Regulation E, which is also called Reg E, is a federal regulation that was issued by the Federal Reserve System. Regulation E includes the rules governing electronic fund transfers or EFTs. It also provides guidance to banks and other institutions that issue electronic debit cards. Reg E is in place for banks, financial institutions, and consumer protection.
retirement: Retirement can mean completely leaving the workforce while others think of it as changing their current job to something else.
retirement checklist: A retirement checklist is a list of the financial steps that you must take to have the amount of money that you will need to have saved in order to retire.
retirement strategies: Retirement strategies are the plans that you make and implement so that you will not run out of money when you are retired.
risk: Risk is defined as an investor’s ability and willingness to withstand volatility in the stock market.
roboadvisor: Robo-advisors are computer programs that are programmed to advise investors according to their financial needs and goals.
Roth IRA: A Roth IRA is a type of retirement account that you fund with your post-tax income. When you open a Roth and make your contributions, the withdrawals that you make in the future that comply with the regulations and laws will be tax-free.
Securities and Exchange Commission (SEC): The Securities and Exchange Commission regulates, registers and oversees brokerage firms and others that are involved in the securities industry. It has the power to discipline firms and securities brokers that violate its regulations.
Simplified Employee Pension (SEP): A simplified employee pension individual retirement arrangement, or SEP IRA, is a type of employer-sponsored retirement plan.
short-term capital gains: Short term capital gains are an increase in the price of an asset that you have held for 12 months or less.
SIMPLE IRA: A SIMPLE IRA is an acronym that stands for a Savings Incentive Match Plan for Employees. These are plans that are employer-sponsored and that are meant for smaller businesses that have fewer than 100 workers.
SIPC: The Securities Investor Protection Corporation is an organization that was started in 1970 by Congress. It is a non-profit corporation that works to recover funds for investors when their brokerages fail.
stock: A stock is a security that represents ownership in a company sold by the firm to an investor or shareholder. The business then uses the money to fund operations, and the investor receives dividends, or fiscal rewards, based on the company’s performance and earnings.
tax exempt: Tax exemption is a monetary reduction in taxable income.
traditional IRA: Traditional IRAs and Roth IRAs are both individual accounts that offer different tax benefits to people for retirement. Contributions that are made to traditional IRAs are made on a pre-tax basis.
Treasury bills: Treasury bills are short-term, no interest, government securities that are sold at a discount.
Treasury bonds: Treasury bonds are debt securities with long-term maturities of more than 10 years.
trend investing: A strategy employed by some investors in which they place their money in industries, stocks, or markets that are expected to boom in the future is known as trend investing.
value investing theory: Value investing theory is the finding of stocks that are undervalued and buying them.
volatility: Volatility is a measurement of the distribution of returns for a particular index or security.
wash sale: A wash sale occurs when you trade or sell securities at a loss. Then, within 30 days either before the sale or after it, you purchase securities that are substantially identical, purchase securities that are substantially identical in a taxable trade, or purchase an option to buy or a contract to buy securities that are substantially identical to the ones that were sold at a loss.
yield curve: A yield curve is a graph that plots in a line the yields of equal credit bonds and their maturity dates.