Investment Terminology

401(k) Plan

An employer-sponsored retirement savings plan that gives employees a choice of investment options, typically mutual funds. Employees who participate in a traditional 401(k) plan have a portion of their pre-tax salary invested directly in the option or options they choose. These contributions and any earnings from the 401(k) investments are not taxed until they are withdrawn.

403(b) Plan

A type of tax-deferred retirement savings program available to employees of public schools, certain non-profits, and some members of the clergy.

529 Plan

A 529 plan is a tax-advantaged savings plan designed to encourage saving for educational 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.

Accrued Interest

Interest earned on a security but not yet paid to the investor.

Alternative Investments

Alternative investments are supplemental strategies to traditional long-only positions in stocks, bonds, and cash. Alternative investments include investments in long–short public market strategies and such less common assets as private equity, real estate, infrastructure, and commodities. Alternative investment strategies are typically active, return-seeking strategies that often have different risks from those in indexed public markets allowing the option for investors to diversify and manage market volatility.

Annual Return

An annual rate of return is the profit or loss on an investment over a one-year period.

Annuity

An annuity is a contract between you and an insurance company that is designed to meet retirement and other long-range goals, under which you make a lump-sum payment or series of payments. In return, the insurer agrees to make periodic payments to you beginning immediately or at some future date. Annuities typically offer tax-deferred growth of earnings and may include a death benefit that will pay your beneficiary a specified minimum amount.

Ask Price

The term “ask” or “offer” price refers to the lowest price at which a seller will sell the stock.

Asset

Any tangible or intangible item that has value in an exchange. A bank account, a home, or shares of stock are all examples of assets.

Asset Allocation

Asset allocation involves dividing your investments among different categories, such as stocks, bonds, and cash.

Asset Classes

Investments that have similar characteristics. The three main asset classes are stocks, bonds, and cash.

Bear Market

A time when stock prices are declining, and market sentiment is pessimistic.

Bid Price

The term "bid" refers to the highest price a buyer will pay to buy a specified number of shares of a stock. The bid price will almost always be lower than the “ask” or “offer” price.  The difference between the bid price and the ask price is called the "spread."

Bond/Income Funds

"Bond funds”—also referred to as "income funds"— describe a type of fund from an investment company that invests primarily in bonds or other types of debt securities. Depending on its investment objectives and policies, a bond fund may concentrate its investments in a particular type of bond or debt security. The securities that bond funds hold will vary in terms of risk, return, duration, volatility and other features. Historically, bonds are known for their potential to generate consistent, moderate returns.

Bonds/Fixed Income

A bond is a debt security similar to an IOU.  Borrowers issue bonds to raise money from investors willing to lend them money for a certain amount of time. The issuer may be a government, municipality, or corporation. In return, the issuer promises to pay you a specified rate of interest during the life of the bond and to repay the principal, also known as face value or par value of the bond, when it “matures,” or comes due after a set period of time. 

Bull Market

A time when stock prices are rising, and market sentiment is optimistic.

Capital Gain

The profit that comes when an investment is sold for more than the price the investor paid for it.

Certificate of Deposit

A certificate of deposit (CD) is a savings account that holds a fixed amount of money for a fixed period of time. In exchange, the issuing bank pays you interest. When you cash in or redeem your CD, you receive the money you originally invested plus any interest. Certificates of deposit are considered to be one of the safest savings options. A CD bought through a federally insured bank is insured up to $250,000.

Compound Interest

Interest paid on both principal as well as on accumulated interest.

Corporate Governance

A framework which may include rules and regulations, a corporate charter and bylaws, formal policies, customs, and other processes that determines the leadership, organization, and direction of a company.

Coupon

A feature of a bond that indicates the amount of interest due and the date that the payment will be made.

Coupon Payment

The dollar amount of interest paid to an investor. The amount is calculated by multiplying the interest of the bond by its principal (also known as “face value” or “par value” of the bond).

Coupon Rate

The interest rate on a bond. It is expressed as an annual rate, but the interest is most often paid semi-annually.

Current Yield

The ratio of the interest rate payable on a bond to the actual market price of the bond, stated as a percentage. For example, a bond with a current market price of $1,000 that pays $80 per year would have a current yield of 8%.

Default

A failure by an issuer to pay principal or interest when due, or to fulfill other obligations, such as reporting requirements.

Diversification

Diversification is a strategy that can be neatly summed up as "Don't put all your eggs in one basket." The strategy involves spreading your money among various investments in the hope that if one loses money, the others will make up for those losses.

Dividend

A portion of a company's profit paid to shareholders. Public companies that pay dividends usually do so on a fixed schedule, although they can issue them at any time.

The Dow Jones Industrial Average

The Dow Jones Industrial Average (DJIA) is the oldest American stock market index and consists of 30 blue chip stocks representing all the major business sectors. You would recognize most of the companies represented, including Johnson & Johnson, Coca Cola and McDonalds. The criteria for a company to get on the Dow is that the companies are leaders in their industry and very large. It takes a significant change in a company for it to be removed from the index, so it is a consistent benchmark in evaluating how the stock market in general is performing.

Exchange-Traded Fund

Exchange-traded funds (ETFs) are SEC-registered investment companies that offer investors a way to pool their money in a fund that invests in stocks, bonds, or other assets. Most ETFs are professionally managed by SEC-registered investment advisers. Some ETFs are passively managed funds that seek to achieve the same return as a particular market index (often called index funds), while others are actively managed funds that buy or sell investments consistent with a stated investment objective.

Fee-Based Asset Management

Fee-based asset management ties the compensation of your wealth management professional directly to the performance of your account. Instead of commissions, your professional earns an annual fee based on the market value of your account. This allows a wealth management professional to share a common goal with you: growing the value of your assets.

Form CRS

Form CRS—which stands for “Client Relationship Summary”—is a required client or customer relationship summary containing important information about the adviser or broker. A relationship summary tells you about: the types of services the firm offers; the fees, costs, conflicts of interest; required standard of conduct associated with the services offered; whether the firm and its financial professionals have reportable legal or disciplinary history; and how to get more information about the firm. A relationship summary also includes questions to help you begin a discussion with an adviser or broker about the relationship, including questions about their services, fees, costs, conflicts, and disciplinary information.

High-Yield Bond/Junk Bond

These types of bonds are ones believed to have a higher risk of default and which receive lower ratings by credit rating agencies, namely bonds rated Ba or below (by Moody's) or BB or below (by S&P and Fitch). These bonds typically are issued at a higher yield (meaning a higher interest rate) than more creditworthy bonds, reflecting the perceived higher risk to investors.

Index Fund

An index fund is a type of mutual fund, unit investment trust (UIT), or ETF whose investment objective typically is to achieve approximately the same return as a particular market index, such as the S&P 500 Composite Stock Price Index, by investing in securities of companies that are included in that index. The management of index funds is considered to be more passive because an index fund manager only needs to track a relatively fixed index of securities. This may translate into less trading of the fund’s portfolio, more favorable income tax consequences (lower realized capital gains), and lower fees and expenses than more actively managed funds.

Individual Retirement Account (IRA)

Individual Retirement Accounts (IRAs) provide tax advantages for retirement savings. You can contribute each year up to the maximum amount allowed by the Internal Revenue Service.  There are several types of IRAs available: traditional IRAs, Roth IRAs, SEP IRAs, and SIMPLE IRAs.

Interest

The price paid for borrowing money. It is expressed as a percentage rate over a period of time. Interest rates may be fixed, meaning the rate is set and will not change, or may be variable or "floating," meaning the rate may move higher or lower over time.

Investment-Grade Bond/High-Grade Bond

These types of bonds are ones believed to have a lower risk of default and which receive higher ratings by the credit rating agencies, namely bonds rated Baa (by Moody's) or BBB (by S&P and Fitch) or above. These bonds tend to be issued at lower yields than less creditworthy bonds.

Large Cap, Mid Cap, Small Cap

Terms used to describe a company’s size and market value (market capitalization).

Liability/Debt

An amount owed to a person or organization for borrowed funds. Loans, notes, bonds, and mortgages are forms of debt. These different forms all call for borrowers to pay back the amount they owe, typically with interest, by a specific date, which is set forth in the repayment terms.

Liquidity

Liquidity generally refers to how easily or quickly a security can be bought or sold in a secondary market. Liquid investments can be sold readily and without paying a hefty fee to get money when it is needed.

Money Market Fund

A money market fund is a type of mutual fund that has relatively low risks compared to other mutual funds and most other investments, and it historically has had lower returns. Money market funds invest in high quality, short-term debt securities and pay dividends that generally reflect short-term interest rates. Many investors use money market funds to store cash or as an alternative to investing in the stock market.

Mutual Funds

A mutual fund pools money from many investors and invests the money in stocks, bonds, money market instruments, other securities, or even cash. Some mutual funds are index funds and others are actively managed. Each may have a different investment objective and strategy and a different investment portfolio. Different mutual funds may also be subject to different risks, volatility, and fees and expenses. Fees reduce returns on fund investments and are an important factor that investors should consider when buying mutual fund shares.

NASDAQ

The “National Association of Securities Dealers Automated Quotations System” (NASDAQ) was the first exchange to offer online trading. Stocks that are traded on the NASDAQ Exchange tend to be tech companies, like Apple, Facebook, Microsoft and Google. However, companies outside of technology, like Amazon and Starbucks, are also traded, as well as banking and airline companies. 

Portfolio

The combined holdings of stocks, bonds, commodities, real estate, and other investments by an individual or institutional investor.

Principal

The total amount of money being borrowed or lent; the initial amount of money invested.

Real Estate Investment Trust

Real estate investment trusts (REITs) allow individuals to invest in large-scale, income-producing real estate. A REIT is a company that owns and typically operates income-producing real estate or related assets as part of its own investment portfolio. Unlike other real estate companies, a REIT does not develop real estate properties to resell them.

Real Return

Real return is what is earned on an investment after accounting for taxes and inflation. Real returns are lower than nominal returns, which do not subtract taxes and inflation.

Rebalancing

Rebalancing brings a portfolio back to its original asset allocation. This is necessary because, over time, some investments will grow faster than others, and holdings may become out of alignment with investment goals.

Risk

In finance, risk refers to the degree of uncertainty about the rate of return on an asset and the potential harm that could arise when financial returns are not what the investor expected. In general, as investment risks rise, investors seek higher returns to compensate them for taking on such risks.

Risk Tolerance

An investor's ability and willingness to lose some or all of an investment in exchange for greater potential returns.

Security

An investment instrument such as a stock or bond.

Stock/Equities

An instrument that signifies an ownership position (called equity) in a corporation, and a claim on its proportional share in the corporation's assets and profits. Most stocks also provide voting rights, which give shareholders a proportional vote in certain corporate decisions. Stocks have a high return potential, but the potential risk with stocks is also high. For the average investor, they are typically considered as part of a long-term investment strategy where you have much more time on your side and can afford to be more aggressive and take on more risk. They may not make sense for a short-term investment goal where safety and stability are more of a priority.

Structured Product

In very general terms, structured products are securities whose value is based on a reference asset, market measure, or investment strategy. Reference assets and market measures may include single equity or debt securities, indexes, commodities, interest rates, and/or foreign currencies, as well as baskets of these assets or measures.

Target Date Fund

A diversified mutual fund that automatically shifts towards a more conservative mix of investments as it approaches a particular year in the future, known as its "target date."

Time Horizon

Your time horizon is the number of months, years, or decades you need to invest to achieve your financial goal.

Yield

The annual percentage rate of return earned on a bond calculated by dividing the coupon interest rate by its purchase price.

Select Sources:

U.S. Securities and Exchange Commission Glossary: https://www.investor.gov/introduction-investing/investing-basics/glossary

U.S Securities and Exchange Commission Archives: https://www.sec.gov/Archives/edgar/data/36995/000121465907002234/c101872fwp.htm

CFA Institute: Introduction to Alternative Investments: https://www.cfainstitute.org/en/membership/professional-development/refresher-readings/2020/introduction-alternative-investments