Frequently Used Terms
Written By: Ryan Rink, CFP®, EA, ChFC®, CLTC®
Financial literacy is a cornerstone of sound investing. Revisiting basic concepts can help deepen your understanding of market trends and financial reports and bring confidence to your decisions. Below is a list of frequently used financial terms that will help you stay informed and engaged with your investment strategy.
Asset Allocation: How you divide your money amongst different types of investments, like stocks, bonds and cash, to balance risk and reward.
Annuity: A financial product sold by an insurance company that pays you regular income in exchange for an upfront investment, often used for retirement.
Bond: Represents a loan you make to companies or governments. In return, the company/government promises to pay you a specified rate of interest to be received on a predetermined schedule (generally annually, semiannually, or quarterly). Your original loan amount (principal) is returned when the bond matures.
Cost Basis: The original price you paid for an investment, which is used for tax purposes when you sell it.
Dividend: A portion of a company’s profits that is paid to shareholders, usually in cash.
Dollar Cost Averaging: A strategy where you invest a fixed amount of money at regular intervals, regardless of the share price.
Domestic: Refers to investments in companies or assets held within the United States.
Exchange Traded Fund (ETF): An investment fund or portfolio of securities that holds assets like stocks, bonds, or commodities. Similar to stocks, ETFs trade on an exchange and experience price fluctuations throughout the day.
Expense Ratio: The annual fee that a fund (like a mutual fund or ETF) charges its investors, expressed as a percentage of your investment.
Fiduciary: A person or institution legally required to act in your best financial interest.
Income: Money you earn from investments, such as dividends or interest.
Index: A group of securities designed to represent a particular market, sector or commodity. Some well-known market indices include the S&P 500, the Dow Jones Industrial Average and the NASDAQ.
International: Refers to investments in companies or assets held outside the United States.
Mutual Fund: A pool of money collected from many investors to invest in a diversified portfolio of stocks, bonds, or other assets.
Non-Qualified Investment: An investment held outside of tax-advantaged accounts, meaning earnings such as dividends, interest, or capital gains are subject to taxes in the year they are received or when the securities are sold.
Qualified Investment: An investment in a tax-advantaged account, like an IRA or 401(k), where taxes can be deferred or reduced.
Required Minimum Distribution (RMD): The minimum amount you must withdraw each year from retirement accounts (like an IRA or 401(k)) after a certain age (typically 73 or 75).
Security: A financial asset that has value and can be bought, sold or traded in a financial market. Some examples include stocks, bonds, exchange-traded funds (ETFs) and mutual funds.
Stock: A share of ownership in a company, giving you a claim on part of its assets and earnings.
Yield: The income return on an investment, often expressed as a percentage of its current market value, such as interest or dividends.
As you encounter these concepts in your investment reports or financial news, take the time to review and apply them to your own financial situation. If you ever have questions or need further clarity, don’t hesitate to reach out to your Shakespeare advisor for guidance tailored to your individual needs.