Glossary of Financial Terms
Updated on Mar 15 2019
In order to properly plan your finances for your future, you need to understand the different types of financial products, instruments and terms that help you save, invest, get insurance or get a mortgage. Financial products differ in terms of their underlying asset class, volatility, risk and return. A senior financial advisor or planner can help you determine which products make the most sense for your unique situation.
Here’s a list, in alphabetical order, to help you get started.
401(k) Plan: A 401k is a retirement savings plan sponsored by an employer. It lets workers save and invest a piece of their paycheck before taxes are taken out. Taxes aren’t paid until the money is withdrawn from the account.
403(b) Plan: A 403(b) plan is a U.S. tax-advantaged retirement savings plan available for public education organizations, some non-profit employers, cooperative hospital service organizations, and self-employed ministers in the United States.
457 Plan: A 457 plan refers to a non-qualified, tax-advantaged deferred compensation retirement plan. Eligible employees are allowed to make salary deferral contributions to the 457 plan. Earnings grow on a tax-deferred basis and contributions are not taxed until the assets are distributed from the plan.
529 Plan: A is a tax-advantaged savings plan designed to encourage saving for future education costs. 529 plans, legally known as “qualified tuition plans,” are sponsored by states, state agencies, or educational institutions and are authorized by Section 529 of the Internal Revenue Code.
Acquisition: When one company purchases a smaller company.
Adjustable Rate Preferred Stock: A preferred stock with dividends that change (usually quarterly) based on changes taking place with Treasury Bill Rates.
Aggressive Growth Fund: Aggressive growth funds are mutual funds having a goal of making the most capital gains, acquired by taking high risk endeavors.
Analyst: A financial analyst, securities analyst, research analyst, equity analyst, investment analyst, or rating analyst is a person who performs financial analysis, both macroeconomics and microeconomics conditions, for external or internal financial clients. This person also researches company fundamentals to make business, sector and industry recommendations.
Annuity: An annuity is a contract between you and an insurance company that requires the insurer to make payments to you, either immediately or in the future. Your payout may come either as one lump-sum payment or as a series of payments over time.
Asset Class: An asset class is a grouping of similar types of investments that behave similarly in the marketplace and are subject to the same laws and regulations. The three main asset classes are:
- equities, or stocks
- fixed income, or bonds
- cash equivalents, or money market instruments
Assisted Living Facility: An assisted living residence, community or facility is a housing facility for people with disabilities or for adults who cannot or chose not to live independently.
BBB Rating: A credit rating by the Better Business Bureau that designates a particular standard. Generally investments with these ratings are bonds that are judged by the rating agency as likely enough to meet payment obligations — allowing banks to invest in them.
Bear Market: A condition of the market during which time the price of securities are decreasing. Investors are pessimistic and their negativity causes them to sell which contributes to further pessimism. If the Dow Jones Industrial Average or Standard & Poor’s 500 Index drop 20% or more over a two-month period, most consider this entry into a bear market.
Bitcoin: Bitcoin is a cryptocurrency, a form of electronic cash. It was designed to work as a decentralized digital currency without a central bank or single administrator, though in practice many aspects of its use are centralized.
Blockchain: A blockchain, originally block chain, is a growing list of records, called blocks, which are linked using cryptography. Blockchains which are readable by the public are widely used by cryptocurrencies.
Blue-Chip Stock: Stocks from nationally recognized companies that have a strong record of being financial stable and reliable. They are often able to withstand economic downturns.
Bonds: Bonds are issued by companies to finance their business operations and by governments to fund budget expenses like infrastructure and social programs.
Bull Market: A condition of the market during which time the price of securities are increasing or expected to increase. The term can be used to describe anything traded, including bonds, commodities and currencies, but is most often used to describe the stock market.
Buy-and-Hold Equity Funds: Buy and hold is a passive investment strategy in which an investor buys stocks and holds them for a long period of time, regardless of fluctuations in the market. An investor who employs a buy-and-hold strategy actively selects stocks, but once in a position, is not concerned with short-term price movements and technical indicators.
Caregiving: The act of providing unpaid assistance and support to family members or acquaintances who have physical, psychological or developmental needs. Caring for others generally takes on three forms: instrumental, emotional and informational caring.
Catch-up Contributions: Catch-up contributions help individuals who are age 50 and older save more for retirement by contributing more each year through their retirement investment plans, such as 401(k)s and IRAs.
Certificate of Deposit (CD): A certificate of deposit is a time deposit, a financial product commonly sold in the United States and elsewhere by banks, thrift institutions, and credit unions.
Certified financial planner (CFP): A certified financial planner (CFP) refers to the certification owned and awarded by the Certified Financial Planner Board of Standards, Inc. The CFP designation is awarded to individuals who successfully complete the CFP Board’s initial and ongoing certification requirements.
Chartered financial analyst (CFA): A CFA is someone who earns a professional credential offered internationally by the American-based CFA Institute (formerly the Association for Investment Management and Research, or AIMR) to investment and financial professionals.
Chartered financial consultant (ChFC): A professional designation representing completion of a comprehensive course consisting of financial education, examinations and practical experience.
Certified fund specialist (CFS): A certification indicating an individual’s expertise in mutual funds and the mutual fund industry. These individuals advise clients on which mutual funds best suit their particular needs.
Closed funds: A closed fund or closed-end fund is organized as a publicly traded investment company by the Securities and Exchange Commission (SEC). Like a mutual fund, a closed-end fund is a pooled investment fund with a manager overseeing the portfolio; it raises a fixed amount of capital through an initial public offering (IPO).
Chartered life underwriter (CLU): A CLU is a professional designation for individuals who go through specific training and get credentials to specialize in life insurance and estate planning.
Collateralized Debt Obligations (CDO): A collateralized debt obligation is a type of structured asset-backed security. Originally developed for the corporate debt markets, over time CDOs evolved to encompass the mortgage and mortgage-backed security markets.
Commodities: Goods used in commerce that are often used to produce other goods and services. When traded on an exchange, commodities must meet minimum standard requirements, called “basis grade.”
Currency: The accepted form of money issued by the government. Currency is circulated within an economy, and includes paper and coins.
Credit Default Swaps (CDS): A CDS is a financial swap agreement that the seller of the CDS will compensate the buyer in the event of a loan default or other credit event. This means that the seller of the CDS insures the buyer against some reference loan defaulting.
Credit Score: A credit score is a numerical expression based on a level analysis of a person’s credit files, to represent the creditworthiness of an individual. A credit score is primarily based on a credit report information typically sourced from credit bureaus.
Debt Financing / Debt Investment: Debt financing occurs when a firm raises money for working capital or capital expenditures by selling bonds, bills or notes to individuals and/or institutional investors. In return for lending the money, the individuals or institutions become creditors and receive a promise the principal and interest on the debt will be repaid.
Debtholder: A debtholder is the owner of a bond. In addition to receiving regular interest payments and the return of principal, debtholders are given precedence over stockholders in case of asset liquidation. also called bondholder.
Distribution Distribution occurs when the trading volume of a security is greater than that of the previous day without any price increase. Distribution is the disbursement of assets from a retirement account. The assets from the account are paid directly to the retirement account holder or beneficiary either electronically or by check.
Dividends: The amount a company distributes to their shareholders. It’s often calculated in a dollar amount as a portion of the company’s earnings, based on either pre-determined dividends per share amount or as a percentage of the current market price.
Dow Jones Industrial Average (DJIA): A price-weighted average of 30 stocks traded on Nasdaq and the New York Stock Exchange (NYSE).
Durable Medical Equipment (DME): Durable medical equipment and providers includes, but is not limited to, wheelchairs (manual and electric), hospital beds, traction equipment, canes, crutches, walkers, kidney machines, ventilators, oxygen, monitors, pressure mattresses, lifts, nebulizers, bili blankets and bili lights. A DME can help people get the medical devices and supplies they need conveniently and discreetly to their homes.
EBITDA: Earnings before interest, tax, depreciation and amortization (EBITDA) is a measure of a company’s operating performance. Essentially, it’s a way to evaluate a company’s performance without having to factor in financing decisions, accounting decisions or tax environments.
Elder Law: Elder law is a specialized area of legal practice, covering estate planning, wills, trusts, arrangements for care, social security and retirement benefits, protection against elder abuse (physical, emotional and financial), and other involving involving older people.
Elder Law Attorney: Elder law attorneys handle a wide range of legal matters affecting an older or disabled person, including issues related to health care, long term care planning, guardianship, retirement, Social Security, Medicare/Medicaid, and other important matters.
Equity: Assets available immediately that could be sold for cash. Equity may be in terms of stocks, cars, real estate, or more.
Exchange Traded Funds (ETF): ETFs offer low-cost access to virtually every corner of the market, allowing investors to build institutional-caliber portfolios with lower costs and better transparency. They combine the flexibility of a stock with the low costs of a mutual fund, but unlike a managed mutual fund, most ETFs trade on stock indices. As such, their price is constantly changing, and you can buy and sell them at any time, based on the current price.
Expense Ratio: The expense ratio is the annual fee that all funds or ETFs charge their shareholders. It expresses the percentage of assets deducted each fiscal year for fund expenses, management fees, administrative fees, operating costs, and all other asset-based costs incurred by the fund.
Fast and Secure Transfers: Fast and secure transfers are the most affordable service for urgent transfer or receiving of funds at participating banks. There are fees involved for the expedited service.
Fiduciary: A fiduciary manages another party’s assets and has a legal and ethical obligation to put the other party’s interests first. For a financial advisor, that means helping a client make decisions in his best interest, even if it means reduced compensation – or no compensation – for the advisor.
Fiduciary Duty: A legal obligation of one party to act in the best interest of another. The obligated party is typically a fiduciary, that is, someone entrusted with the care of money or property. Also called “fiduciary obligation.”
Financial Advisor: A financial advisor is a professional who helps individuals manage their finances by providing advice on different financial areas such as investments, insurance, mortgages, college savings, estate planning, taxes and retirement.
Financial Services: Financial services are the economic services provided by the finance industry, which encompasses a broad range of businesses that manage money, including credit unions, banks, credit-card companies, insurance companies, accountancy companies, consumer-finance companies, stock brokerages, investment funds, individual managers and some government-sponsored enterprises.
Fintech: Fintech is a portmanteau of financial technology that describes an emerging financial services sector in the 21st century. Originally, the term applied to technology applied to the back-end of established consumer and trade financial institutions.
Flexible Spending Account: A Flexible Spending Account (also known as a flexible spending arrangement) is a special account you put money into that you use to pay for certain out-of-pocket health care costs. You don’t pay taxes on this money.
Full Retirement Age: Full retirement age, also referred to as “designated retirement age” and “normal retirement age,” is the age at which a person may first become entitled to full or unreduced retirement benefits. Age 65 was ‘full retirement age’ for many years, but improvements in the health of older people and the increases in average life expectancy has gradually increased retirement age. Today normal retirement age is 67 for people born after 1959.
Fund accountant: Fund accounting is an accounting system for recording resources whose use has been limited by the donor, grant authority, governing agency, or other individuals or organizations or by law.
Forex Market: A market in which investors can buy, sell, exchange and speculate on currencies. It’s made up of commercial companies, banks, hedge funds, investors, forex brokers, and investment management firms. The currency market is considered to be the largest financial market in the world, and processes trillions of dollars’ worth of transactions on a daily basis.
Fraud: Fraud occurs when someone gains something of value, usually money or property, from a victim by knowingly making a misrepresentation or falsehood of truth. Basically, fraud is a person’s wrongful or criminal deception intended to result in financial or personal gain.
Gender Savings Gap or Gender Pay Gap: The gender savings or gender pay gap is the difference between the average male full-time earnings and the average female full-time earnings. Historically, women have made substantially lower earnings than men, including bonuses and superannuation, or future retirement pension-type, funds.
Healthcare Directive: An advance healthcare directive, also known as living will, personal directive, advance directive, medical directive or advance decision, is a legal document in which a person specifies what actions should be taken for their health if they are no longer able to make decisions for themselves because of illness or other reason.
Healthcare Power of Attorney: The healthcare power of attorney is a document in which you designate someone to be your representative, or agent, in the event you are unable to make or communicate decisions about all aspects of your health care.
Health Savings Account (HSA): A type of savings account that lets you set aside money on a pre-tax basis to pay for qualified medical expenses. By using untaxed dollars in a Health Savings Account (HSA) to pay for deductibles, copayments, coinsurance, and some other expenses, you can lower your overall health care costs.
Hedge Fund: A hedge fund is an alternative investment option available only to sophisticated investors, like institutions and investors with significant assets. A hedge fund has a pooled investment structure set up by a money manager or registered investment advisor, and is organized as either a limited partnership (LP) or a limited liability company (LLC). LLCs are more popular today.
Index: A term to describe the statistical measure of change in a securities market or economy. An index is also an imaginary portfolio of securities that represent a particular market.
Individual Retirement Accounts (IRA): An IRA is a type of investment or savings account that comes with tax benefits to help you save for your retirement. There are different types of IRAs, such as traditional and Roth.
Initial Public Offering (IP): Often issued by small, young companies, an IPO is the first sale of stock used to generate capital for expansion. Large privately-owned companies sometimes issue IPO’s to become publicly traded.
Investment Policy Statement (IPS): An IPS is a document drafted between a portfolio manager and a client that outlines general rules for the manager. This statement provides the general investment goals and objectives of a client and describes the strategies that the manager should employ to meet these objectives.
Juris doctor (JD): A JD is the highest education available in the legal profession in the United States and is considered a professional degree. The J.D. will prepare the student to take the state bar exam allowing them to practice law in their state. The Juris Doctorate degree is obtained by going to a law school that has been approved by the American Bar Association.
Keogh Plan: A retirement plan set up by self-employed people and for their employers as an opportunity to save for retirement with a tax-deferred plan.
Laddering: An investment technique where bonds and other products that mature at intervals are bought, resulting in the investor receiving regular income.
Large Capital Funds: Known as the high risk/high return opportunities, these funds manage money from investors looking for private equity stakes in those companies showing strong growth potential.
Life Insurance: Life insurance provides a payout after your death to the people you designate as beneficiaries. It’s an important safety net if anyone depends on you financially. The life insurance payout can pay debts such as a mortgage, replace your income and provide college tuition funds.
Liquid Assets: Assets from established markets that can be sold quickly. Liquid assets can be quickly converted to cash to reduce the impact on the price received. Examples include stocks, government bonds, and foreign exchange markets.
Living Will: A written statement detailing a person’s desires regarding their medical treatment in circumstances in which they are no longer able to express informed consent, especially an advance directive.
Long Position: The purchasing of a security such as a stock, currency, or commodity with the anticipation that the value of the asset will appreciate in value if the market price increases.
Long-Term Care Insurance: Long-term care insurance is an insurance product that helps pay for the cost of long-term care and medical needs not covered by other insurance.
Market Index: A stock index or stock market index is a measurement of the value of a section of the stock market. It is computed from the prices of selected stocks. The market index is a tool used by investors and financial managers to describe the market, and to compare the return on specific investments.
Medicare: Medicare is the federal health insurance program for people who are 65 or older, certain younger people with disabilities, and people with End-Stage Renal Disease (permanent kidney failure requiring dialysis or a transplant, sometimes called ESRD). The different parts of Medicare, including Medicare Part A-D, help cover specific services.
Merger: A merger is when two companies of about the same size combine forces as a single company.
Mergers & Acquisitions (M&A) Lawyer: M&A lawyers assist their clients with the appropriate financing for mergers and acquisitions and provide advice concerning the drafting, negotiation and performance of contracts for the sale of portions of the business.
Modified Adjusted Gross Income (MAGI): MAGI is the total of your household’s adjusted gross income plus any tax-exempt interest income you may have (these are the amounts on lines 37 and 8b of IRS from 1040).
Mutual Fund: A mutual fund is a professionally managed investment fund that pools money from many investors to purchase securities. Mutual funds have advantages and disadvantages compared to direct investing in individual securities.
Nursing Home: Nursing homes are a type of residential care that provide around-the-clock nursing care for elderly people.
Option: Represents a contract sold by one party to another. This contract offer allows the buyer the right to buy or sell a security or other asset at an agreed upon price on a specific date or a period of time; but does not give obligation. Options can be used in a variety of ways with traders using them to speculate and hedgers using them to reduce the risk of holding an asset.
Penny Stock: A stock trading at a relatively low price, generally outside of the major market exchanges. They are often considered to be high risk because they lack liquidity, small capitalization and limited following and disclosure.
Portfolio: The collection of financial assets including stocks, bonds, and cash equivalents. Portfolios are held by individuals, banks, or other financial institutions. Portfolios are often managed by financial professionals.
Power of Attorney: A power of attorney is a legal document that gives someone you choose the power to act in your place. In case you ever become mentally incapacitated, you’ll need what are known as “durable” powers of attorney for medical care and finances.
Premium: The premium is the price of the option being purchased. A premium may also refer to the monetary credit one gets when selling an option.
Qualified Charitable Distribution: A qualified charitable distribution (QCD) is the withdrawal of funds from an IRA with the intention of donating them directly to a qualified charity. There are tax benefits that go along with this strategy. And you can use QCDs when you’re taking required minimum distributions (RMDs) in retirement.
Rate of Return: A rate of return is the gain or loss on an investment over a specified time period, expressed as a percentage of the investment’s cost. Gains on investments are defined as income received plus any capital gains realized on the sale of the investment.
Real Estate and Investment Real Estate: Real estate is property comprised of land and the buildings on it, as well as the natural resources of the land. Real estate investing is when you own real estate, sometimes multiple properties, to serve as a not only a primary residence, but also to generate rental income and profits through price appreciation. The tax implications for investment real estate and commercial are often different than those for residential real estate.
Required Minimum Distribution (RMD): Your required minimum distribution is the minimum amount you must withdraw from your account each year. You generally have to start taking withdrawals from your IRA, SEP IRA, SIMPLE IRA, or retirement plan account when you reach age 70½. Roth IRAs do not require withdrawals until after the death of the owner.
Retirement Income: The amount of money an individual earns after retiring based on retirement savings assets, Social Security allowances, pensions, stocks, mutual funds, savings accounts, CDs, home equity funds, annuities, insurance, rental income, and any other form of monetary investment used to pay for retirement.
Retirement Income Certified Professional (RICP): A professional designation for experienced financial professionals who wish to become experts in retirement income planning. A Retirement Income Certified Professional helps retirees and near-retirees develop a plan for managing and using the assets they have accumulated for retirement in order to live within a realistic budget and not run out of money prematurely.
Retirement Management Advisor (RMA) The Retirement Management Advisor ℠ (RMA℠) program is an advanced certificate program and pathway to certification that focuses on building custom retirement income plans to mitigate clients’ risks. The certification also helps advisors master the retirement planning advisory process in an industry that has an increasingly regulatory environment.
Retirement Penalties If you take money of your 401(k) or individual retirement account (IRA) too soon or too late, you’ll be penalized. There are also penalties if you claim Social Security and Medicare benefits early or late. Generally, the penalty is generally a fee or tax you need to pay if you don’t take money out of the retirement account at the designated or optimal time outlined by the investment.
Risk: Refers to the chance that an investor’s actual return will be different than anticipated. A risk may include the possibility of losing all, or some, of the original investment amount. The risk is measured by calculating the historical returns or the average returns of a specific investment. A risk may also be described as a person, company or other institution that owns at least a share in a company.
Robo-advisor: Robo-advisors are digital platforms that provide automated, algorithm-driven financial planning services with little to no human supervision. A typical robo-advisor collects information from clients about their financial situation and future goals through an online survey, and then uses the data to offer advice and/or automatically invest client assets.
Sandwich Generation Caregiver: The sandwich generation is a generation of people who care for their aging parents while supporting their own children. With the obligation to care for their aging parents – who may be ill, unable to perform activities of daily living or in need of financial support – and children, who require financial, physical and emotional support. The trends of increasing life spans and having children at an older age have contributed to the sandwich generation phenomenon.
SEP IRA: A Simplified Employee Pension Individual Retirement Arrangement is a variation of the Individual Retirement Account used in the United States. SEP IRAs are adopted by business owners to provide retirement benefits for themselves and their employees.
Sequence of Returns Risk: Sequence risk is also called sequence-of-returns risk. It becomes a danger as an individual takes withdrawals from a fund’s underlying investments. The order or the sequence of annual investment returns is a primary concern for retirees who are living off the income and capital of their investments.
Simple IRA: A Savings Incentive Match Plan for Employees Individual Retirement Account, commonly known by the abbreviation “SIMPLE IRA”, is a type of tax-deferred employer-provided retirement plan in the United States that allows employees to set aside money and invest it to grow for retirement.
Short Position: The sale of a security, currency or commodity with an expectation that the value of the asset will decrease.
Small Cap: The value of the stock’s market capitalization. Most brokerages define small-cap stocks as companies with a market cap between $300 million and $2 billion.
Social Security: Social Security provides a safety net for eligible Americans, as they receive a guaranteed source of income during retirement. The Social Security program is funded through payroll taxes collected from employees and companies.
Standard & Poor’s 500 (S&P 500) Index: The Standard & Poor’s 500, often abbreviated as the S&P 500, or just the S&P, is an American stock market index based on the market capitalizations of 500 large companies having common stock listed on the NYSE or NASDAQ.
Stockbroker: A stockbroker is a regulated professional individual, usually associated with a brokerage firm or broker-dealer, who buys and sells stocks and other securities for both retail and institutional clients through a stock exchange or over the counter in return for a fee or commission.
Stocks: Also referred to as “shares” or “equity,” stock is a type of security that signifies ownership in a corporation and represents a claim on part of the corporation’s assets and earnings. There are two main types of stock:
- Common stock usually entitles the owner to vote at shareholders’ meetings and to receive dividends.
- Preferred stock generally does not have voting rights, but has a higher claim on assets and earnings than the common shares.
Shares: A share is a unit of account for various investments. It often means the stock of a corporation, but is also used for collective investments such as mutual funds, limited partnerships, and real estate investment trusts.
Shareholder: A shareholder or stockholder is an individual or institution that legally owns one or more shares of stock in a public or private corporation. Shareholders may be referred to as members of a corporation.
Social and Corporate Governance (ESG): Sustainable, responsible and impact investing is an investment discipline that considers environmental, social and corporate governance criteria to generate long-term competitive financial returns and positive societal impact.
Succession planning: Succession planning is a process for identifying and developing new leaders who can replace old leaders when they leave, retire or die. Succession planning increases the availability of experienced and capable employees that are prepared to assume these roles as they become available.
Sustainable Investments / Sustainable, Responsible and Impact Investing (SRI): Sustainable investing is a discipline that considers environmental, social and corporate governance criteria to generate long-term competitive financial returns and positive societal impact.
Tax-Deferred Savings Plan: A tax-deferred savings plan is a savings plan or account that is registered with the government and provides deferral of tax obligations. Tax-deferred savings plans may defer taxable income earned within the account either until withdrawal or until a particular date.
Top-Loss Order: An order designed to limit an investor’s loss. A stop-loss order is placed with a broker to sell a security if it reaches a specified price.
Technical Indicators: Used by active traders to analyze short-term price movements, technical indicators predict future price levels based on previous performance patterns.
Trust Fund: A fund consisting of assets belonging to a trust, held by the trustees for the beneficiaries. Trust funds typically accrue over the lifetime of an individual and gain value with compound interest to be withdrawn at an optimal time.
Volatility: A statistical measure of the dispersion of return on a given security or market index. It can be measured with the standard deviation or variance. The higher the volatility of a security or market index, the riskier it is.
- Investopedia.com: 2017
- RothIRA.com: 1997-2017
- EconomyWatch.com: 2017
- MoneySense.gov: 2003 - 2017
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