Glossary
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401(k) Plan
An employer-sponsored retirement plan that is used primarily by for-profit companies. Employees can choose to contribute a portion of their wages into an account; employers sometimes also contribute to each employee’s account, and/or match each employee’s contributions. All contributions are usually tax-deductible, and money in the account is not taxed until withdrawn, allowing for decades of tax-free growth.
See 403(b) Plan, 457 Plan, Defined Contribution Plan, IRA, Rollover IRA
403(b) and 403(b)(7) Plans
An employer-sponsored retirement plan that is primarily used by non-profit organizations, including schools and hospitals. Employees can choose to contribute a portion of their wages into an account; employers sometimes also contribute to each employee’s account, and/or match each employee’s contributions. All contributions are usually tax-deductible, and money in the account is not taxed until withdrawn, allowing for decades of tax-free growth. Participants in 403(b) plans may only invest in annuities approved by the plan’s sponsor; those participating in 403(b)(7) plans may also invest in mutual funds approved by the plan’s sponsor.
See 401(k) Plan, 457 Plan, Defined Contribution Plan, IRA, Rollover IRA<
457 Plan
529 Plan
see College Savings Plan
A
ACA
Accident Insurance
A contract with an insurance company whereby you pay a fee, called a premium, and in exchange, the insurer pays the costs of injury-related hospital stays, subject to the conditions and limitations of the contract. Accident insurance is generally disliked by financial advisors, who prefer policies that pay benefits regardless of why treatment is needed.
See Health Insurance, Insurance Policy
Accredited Investor
Individuals or entities meeting criteria established by the Securities and Exchange Commission allowing them to invest in securities not available to the general public, which the SEC regards as not financially sophisticated enough to understand the risks associated with said investments.
Action Bias
The tendency to act when no action is the better choice. Example: You own shares of stock. When the price falls, you decide to buy more or sell what you own – when doing nothing is the right decision.
See Behavioral Bias
Active Management
An investment strategy in which a professional money manager chooses the investments to buy or sell, with the goal of producing above-average returns. Active managers devote significant effort to research and analyze securities, and they typically trade them more often than they would if they used a buy-and-hold approach. As a result, actively managed funds typically charge higher fees than index funds. Studies consistently show that most active funds fail to meet their goal, generating below-average returns – and incurring higher risks and fees in the process.
See Beating the Market, Index Investing, Passive Management, SPIVA Scorecard
Activities of Daily Living
Defined as dressing, bathing, eating, transferring from bed to chair and toileting. Inability to perform two or more ADLS without assistance generally qualify long-term care insurance policyholders to receive benefits.
See Long-Term Care
Actuary
A business professional who uses mathematics, statistics and financial theory to assess the likelihood and cost of potential events such as death, illness or disability. Insurance companies rely on actuaries to design their insurance contracts and set premiums so that the company can afford to pay claims and remain profitable.
See Insurance Company, Pension, Pension Fund
Adjustable Expense
An expense that can be increased, decreased or eliminated at will. Examples include dining out, entertainment and subscriptions. Because these costs are not mandatory, they are the first place to look when you need to reduce your spending.
See Budget, Discretionary Expense, Fixed Expense, Non-Discretionary Expense, Variable Expense
Adjustable-Rate Mortgage
A loan used to purchase real estate that charges an interest rate that can change over time. ARMs typically offer lower initial monthly payments than Fixed-Rate Mortgages but because rates can rise over time, future payments could be substantially higher.
See Mortgage-Backed Securities, Private Mortgage Insurance, Refinance
Adjusted Gross Income
Your annual income minus deductions, exemptions, exclusions and credits. Your income tax liability is determined by your AGI.
See Taxable Income
Advance Directive
A legal document that tells healthcare providers and loved ones what medical treatments you do or do not want if you become unable to communicate your own wishes.
See Estate Planning, Health Care Power of Attorney, Living Will
Affordable Care Act
A 2010 federal law that expanded access to health insurance, established online insurance marketplaces, required insurers to cover people with pre-existing conditions, and created rules about the minimum coverage health plans must provide. Also known as ACA or Obamacare.
Agent
A person or business authorized to act on behalf of another person or organization. In insurance, an agent sells the products of a single insurance company; they legally represent that company, not the consumers purchasing its products. In legal matters, an agent is someone you designate through a power of attorney to act on your behalf.
See Attorney in Fact, Insurance Agent
Alpha
A measure of an investment’s performance relative to a benchmark, such as the S&P 500. A positive alpha means the investment outperformed the benchmark; a negative alpha means it underperformed. Alpha is often used to evaluate a fund manager’s skill.
See Active Management, Beta
Alternative Investments
Asset classes that are outside the traditional categories of lpha stocks, bonds and cash. Examples include real estate, commodities, hedge funds, private equity, crypto and collectibles. Alternative investments often have higher risks and fees, lower liquidity and regulation and potentially higher returns than traditional investments.
Amortization
The process of repaying a loan over time, where each payment consists of a larger portion of principal and a smaller portion of interest than the previous payment. The initial payments of an amortized loan are almost entirely interest, and the final payments are almost entirely principal.
See Depreciation
Anchoring Bias
The tendency to ascribe greater value to an asset than it has, merely because you own it. Example: Choosing to rent a house you inherit instead of selling it; had you inherited an equivalent amount of cash, you would not have chosen to buy that house and make it a rental.
Annual Percentage Rate
The yearly cost of borrowing money, as a percentage of the amount borrowed. The formula for calculating APR is set by the government, making it easy for consumers to compare rates in the marketplace.
Annuitant
The person who receives payments from an annuity. The payment amount is based in part on the annuitant’s age at the time the annuity is purchased and their life expectancy. Additional factors include the annuity company’s projections regarding the annual returns it will earn on the money that’s paid into the annuity in the years prior to annuitization and the fees charged. The annuitant and the owner of the annuity can be the same person.
See Annuitize, Bonus Annuity, Fixed Annuity, Immediate Income Annuity, Variable Annuity
Annuitization
The act of converting money into a series of periodic payments. Each payment is part interest and part principal; ordinary income taxes are owed only on the interest portion.
See Annuitant, Annuitize, Annuity, Bonus Annuity, Fixed Annuity, Immediate Income Annuity, Variable Annuity
Annuitize
The act of converting the accumulated value of an annuity into payments paid to the annuitant. When you annuitize, you waive the opportunity to receive the annuity’s value in a lump sum in exchange for periodic payments (typically monthly) that last for a set number of years, called “term certain” or for the rest of the annuitant’s life. Payments can also be set as “joint and survivor” to provide income for the combined lifetimes of the annuitant and the annuitant’s spouse.
See Annuitization, Bonus Annuity, Fixed Annuity, Immediate Income Annuity, Variable Annuity
Annuitization
The act of converting money into a series of periodic payments. Each payment is part interest and part principal; ordinary income taxes are owed only on the interest portion.
See Annuitant, Annuitize, Annuity, Bonus Annuity, Fixed Annuity, Immediate Income Annuity, Variable Annuity
Annuity
An insurance contract that features an owner, who purchases the contract and is the person who typically funds it; an annuitant, named by the owner and whose life expectancy is used to determine the amount of money that will be paid when owner chooses to annuitize the contract, which converts the account value to a series of monthly payments ranging from a few years to the annuitant’s lifetime. Once annuitized, changes cannot be made, and payments cease upon the death of the annuitant, unless the owner had selected a guaranteed minimum period of payments or a “joint and survivor” payment schedule that is based on the combined lifetimes of the annuitant and the annuitant’s spouse. The owner also names a beneficiary, who receives the value of the annuity upon the owner’s death if the contract had not been annuitized. The growth in value of an annuity is tax-deferred until withdrawal. Withdrawals are subject to tax at ordinary income tax rates; withdrawals prior to age 59½ are also subject to a 10% IRS penalty.
See Fixed Annuity, Bonus Annuity, Immediate Income Annuity, Variable Annuity
Asset
Anything you own that has value, such as cash, property and investments.
See Asset Allocation, Asset Classes, Net Worth
Asset Allocation
Asset Classes
Broad categories of investments. The three primary asset classes are stocks, bonds and cash (including cash equivalents). Real estate, commodities, emerging markets, gold (and other precious metals) and alternative investments are also recognized asset classes. Each asset has unique risks, return potential, taxation, liquidity, fees and other features. Diversifying across asset classes is widely regarded as a fundamental element of investment management.
See Asset Allocation, Diversification
Asset Management
The act and process of investing money into investments. Professional asset managers perform these duties on behalf of others, with the goal of increasing the value of the assets over time while limiting risk.
See Financial Advisor, Portfolio Manager
Asset Management Fee
The money you pay to an asset manager, financial firm or financial advisor for their services. The AUM fee is a percentage of the value of the assets held with the firm or advisor, typically 0.5% to 2% per year. Often, the higher the assets under management, the lower the percentage.
See Commissions
Asset Management Industry
The sector of the financial services field, composed of individuals and firms, that invests and manages money on behalf of individuals, companies, pension funds, endowments and institutions. The industry includes mutual fund companies, hedge funds, private equity firms and registered investment advisors.
See Asset Management, Asset Manager, Financial Firm, Wealth Management Industry
Asset Manager
A person or firm that manages investments on behalf of clients in exchange for compensation. Asset managers decide which securities to buy and sell consistent with the client’s financial goals and risk tolerance. See Asset Management, Asset Management Industry, Financial Advisor, Portfolio Manager
Assets Under Management
The total value of investments held in all client accounts at a financial firm or being served by a financial advisor within the firm. The asset management industry and the wealth management industry both frequently derive their revenue by charging clients an asset management fee that is a percentage of the AUM. Investment advisers often charge annual fees calculated as a percentage of your AUM. For example, 1% of $100,000 in assets would be a $1,000 annual fee.
See Commissions
Attorney in Fact
The person you authorize through a power of attorney to act on your behalf in legal and financial matters. Your attorney in fact does not need to be a lawyer; they can be any trusted adult you choose. The role carries a fiduciary obligation, meaning your attorney in fact is legally required to act in your best interest. The authorization becomes void upon your incapacity.
See Durable Power of Attorney
Availability Bias
The tendency to make a decision based on the frequency of media mentions. For example, people who track news stories daily tend to believe there’s a higher rate of crime than those who don’t track the news.
See Behavioral Bias
B
Balance Sheet
A document that shows what you own and what you owe.
See Asset, Debt, Net Worth
Bank
A financial institution licensed by state or federal authorities to accept deposits, make loans and provide other financial services. Deposits at FDIC-member banks are insured by the federal government, subject to limits. Banks earn money from fees for services and by charging higher rates of interest on loans than they pay on deposits.
See Investment Bank
Bankruptcy
A legal process for cancelling debts you cannot repay. Although a judge in bankruptcy court may relieve you of your obligation to repay debts, the judge may also order that some or all of your assets be given to creditors. You will probably be unable to borrow money for years, and your ability to keep you job or get hired could also be impacted.
Bear Market
A period when stock prices have fallen 20% or more from their high. Bear markets are typically accompanied by investor pessimism, slowing economic activity and rising unemployment. Bear markets generally occur every 4–7 years and last less than two years. Historically, all bear markets have been followed by new all-time highs.
See Bull Market, Market Correction
Beating the Market
Achieving investment returns that exceed the performance of a market benchmark, such as the S&P 500 Stock Index, after accounting for fees. As shown by the SPIVA Scorecard, published by S&P Dow Jones Indices, most professional fund managers fail to beat the market in either short- or long-term periods.
See Active Management, Index Investing, Index Funds, Passive Management
Behavioral Bias
The tendency to make decisions based on emotions or cognitive errors rather than objective data. These biases can cause you to buy high or sell low – resulting in losses or below-average returns.
See Action Bias, Anchoring Bias, Availability Bias, Catastrophizing Bias, Compartmentalizing Bias, Confirmation Bias, Endowment Bias, Framing Bias, Herd Mentality Bias, Hindsight Bias, Illusion of Attention Bias, Illusion of Control Bias, Intuition Bias, Mental Accounting Bias, Optimism Bias, Overconfidence Bias, Pattern Recognition Bias, Pessimism Bias, Proud Papa Bias, Recency Bias, Regret Avoidance Bias, Small Sample Size Bias, Status Quo Bias
Benchmark
A standard or reference point against which the performance of an investment or portfolio is measured. Common benchmarks include the S&P 500 Stock Index and the Bloomberg U.S. Aggregate Bond Index. More than 100,000 benchmarks exist, enabling investors to compare their investments to almost any investment category or strategy.
See Alpha, Beta, Index Funds
Beneficiary
A person or entity designated to receive the proceeds of a life insurance policy, annuity or retirement account, as well as assets left to them in a will or trust.
Beneficiary IRA
An Individual Retirement Account originally owned by someone who has died. Also called a Decedent IRA.
See Beneficiary IRA, Inherited IRA, Rollover IRA, Roth IRA, Spousal IRA
Beta
A measure of an investment’s price volatility relative to the overall market. A beta of 1 means the investment moves in line with the market. A beta above 1 means it is more volatile than the market; below 1 means it is less volatile.
See Alpha, Benchmark
Bitcoin
A digital asset created in 2009 by Satoshi Nakamoto. It operates on a decentralized network, called the Bitcoin blockchain, using distributed ledger technology. Bitcoin can be bought, sold, transmitted and used to purchase goods and services worldwide.
See Crypto, Tokens
Blockchain
A digital record-keeping technology that stores transactions across a network of computers in a way that makes the records difficult to hack. Each “block” of data contains a group of transactions, and each block is linked, forming a chain of data. Blockchain is the technology underlying Bitcoin and other digital assets. Also called Distributed Ledger Technology.
See Crypto
Bond
A security that when purchased serves as a loan to the issuer, which pays interest to the bondholder until the bond’s maturity date is reached, upon which the principal is returned to the investor.
See Duration
Bonus Annuity
An investment contract that credits the account with an amount of money, typically 1% to 10% of the initial premium. Bonus annuities often feature longer surrender periods than other annuity products, lower long-term credited interest rates and/or higher fees, resulting in erosion or elimination of the bonus benefit over time.
See Fixed Annuity, Immediate Income Annuity, Variable Annuity
Broker
A person or firm that acts as an intermediary between a buyer and seller of securities or other financial products, earning compensation on each transaction. In insurance, a broker represents many insurance companies and legally serves them, not the consumer purchasing a policy.
See Brokerage Firm, Broker-Dealer, Insurance Broker, Stockbroker
Brokerage Firm
A company that is licensed to buy and sell securities on behalf of investors. Brokerage firms are regulated by FINRA and client accounts are protected to some extent by the Securities Investor Protection Corporation.
See Broker, Broker-Dealer
Broker-Dealer
Also known as a Brokerage Firm, this is a company is licensed to buy and sell securities on behalf of investors. Broker-dealers are regulated by FINRA and client accounts are protected to some extent by the Securities Investor Protection Corporation. When acting as a dealer, the firm sells securities to investors that it owns or buys them from investors to hold in its own account. Its compensation may include fees and/or commissions. When acting as a broker, the firm acts as an intermediary, helping buyers and sellers execute trades. As a broker, the firm’s compensation can include fees and/or commissions, as well as a spread.
Budget
A plan for how you will spend your money during a period.
See Expenses, Fixed Expense, Variable Expense
Budgeting
The process of creating a plan for earning and spending your money in a given period, typically monthly or annually. A budget helps you track income and expenses, identify opportunities to reduce spending and make progress toward financial goals such as buying a home or paying off debt.
Bull Market
A period when stock prices increase 20% or more from their recent low. Bull markets are typically accompanied by investor confidence, strong economic growth and declining unemployment. Bull markets generally last for years before being replaced by a bear market.
See Market Correction
Business Continuity Insurance
A contract with an insurance company whereby you pay a fee, called a premium, and in exchange, the insurer replaces lost income when normal business operations are interrupted.
Buy-Now Pay-Later Programs
Financing arrangements offered at the point of sale. These contracts let you purchase a product immediately and pay for it in installments, typically four equal payments over six weeks, often with no interest. Missed payments can result in fees and damage to your credit score.
See Credit
Buy-and-Hold
An investment strategy in which you purchase investments and keep them for a long period of time regardless of short-term market fluctuations. The buy-and-hold strategy has been far more successful than market-timing strategies. See Index Investing, Passive Management
C
Call Option
A financial contract that gives the buyer the right, but not the obligation, to purchase a specific security at a set price, called the strike price, on or before a specified date. Investors buy call options when they expect the price of the underlying security to rise.
See Options Contract, Put Option
Capital Asset
Any property you own and use for personal or investment purposes, such as stocks, bonds, vehicles or real estate. Under U.S. tax law, it excludes inventory held for sale to customers, depreciable business property, real property used in a business and certain creative works held by their creator. When you sell a capital asset for more than you paid, you generally owe capital gains tax on the profit.
See Capital Gains Tax Rate, Cost Basis
Capital Gain
Profit earned when selling an asset for more than what you paid to acquire it. Short-term capital gains (profits obtained in one year or less) are taxed at ordinary income tax rates; long-term capital gains (profits on assets held more than one year) are taxed at lower rates.
See Capital Gains Tax Rate, Cost Basis
Capital Gains Tax Rate
The tax rate that applies to when selling an asset for a price that’s higher than its cost basis. Under current tax law, assets sold in one year or less generate a short-term capital gain which is taxed at ordinary income tax rates. Assets held longer than one year generate a long-term capital gain, taxed at capital gains tax rates.
See Capital Gain, Ordinary Income, Taxes
Capitalism
Captive Agent
An insurance agent who sells products for only one insurance company, typically as an employee or exclusive contractor of that company. Contrast with an independent insurance agent, who can sell products from multiple insurers.
Cash Equivalents
Short-term, highly liquid investments that can be quickly converted to cash and carry very low risk of losing value. Examples include money market funds, Treasury bills and certificates of deposit maturing in 90 days or less. Cash equivalents are considered among the safest places to hold money.
See Cash Reserves
Cash Reserves
Money set aside for emergencies or unexpected expenses. Safety of principal and liquidity are paramount; financial advisors generally regard safes, bank accounts, Certificates of Deposit, Treasury Bills and money market funds as the only suitable place to hold cash reserves.
Cash Value
The savings or investment component of a permanent life insurance policy, such as whole life insurance, universal life insurance and variable life insurance. A portion of each premium is credited to the cash value of the account, which grows on a tax-deferred basis. You can borrow from or withdraw the cash value, but doing reduces the death benefit. If you surrender the policy, you receive some or all of its cash value.
See Cash Value Life Insurance
Cash Value Life Insurance
A type of permanent life insurance that stays in force for your entire life (provided you pay required premiums) and includes a savings or investment component, called cash value, that rises over time. You can borrow from or withdraw the cash value. Whole life insurance, universal life insurance and variable life insurance are all types of cash value policies.
Catastrophizing Bias
The tendency to believe that bad news will become the worst possible news. For example, if stock prices have been falling recently, you might fear that the stock market will crash and never recover.
See Behavioral Bias
Central Bank
A financial institution authorized by the government to manage the country’s money supply, set interest rates and regulate its banking system. Central banks act as lenders of last resort during financial crises and use monetary policy tools to promote stable prices and employment. The central bank of the United States is called the Federal Reserve Bank.
See Banks, Investment Banks
Certificate of Deposit
A low-risk, low-interest asset sold by banks and credit unions. CDs pay a specified interest rate at a specified rate of compounding for a specified period, upon which the CD reaches maturity and principle is returned to the investor. Interest is reduced or forfeited if the money is withdrawn prior to maturity.
Certified Financial Planner®
A professional designation awarded by the CFP® Board of Standards. Candidates must complete an accredited financial planning program, pass a comprehensive exam and accumulate at least 4,000 hours of relevant work experience. CFP® practitioners must complete 30 hours of continuing education every two years to maintain their certification.
CFP® Board of Standards
The nonprofit organization that administers the Certified Financial Planner® credential. The Board sets and enforces the education, examination, experience and ethics requirements that financial planners must meet to earn and maintain the CFP® designation.
Charitable Contributions
Donations of money, property or assets made to a qualifying nonprofit organization. Charitable contributions may be tax-deductible if you itemize deductions on your federal tax return, subject to IRS rules and limits.
See Adjusted Gross Income, Deduction, Tax Deduction
Checking Account
A bank or credit union account designed for daily money management. You can make deposits anytime, in any amount. These accounts give you checks that you give to others to pay for goods and services, reducing the need for you to carry cash – although checking accounts are being increasingly supplanted by digital payment options, such as debit cards, PayPal, Venmo, Zelle and crypto. Checking accounts often require that you maintain a minimum balance, and they generally pay little to no interest.
See Credit Unions
Claim
A request you submit to your insurance company asking it to pay for expenses you incurred which are covered by your policy. The insurer will investigate decide whether to pay some or all of the claim, subject to policy limits.
See Coverage Percentage, Deductible, Insurance Policy
Closing
The final step in a transaction in which ownership is legally transferred from the seller to the buyer. At closing, you sign related legal documents, including any financing agreements, pay closing costs and any required down payment.
See Mortgage
Coincident Indicator
An economic measurement that reflects current economic activity. Example: Housing Starts, which show the number of new homes that are under construction, indicating current employment rates in the housing industry.
See Lagging Indicator, Leading Indicator
Co-Insurance Cap
The amount of expenses you must pay before your insurance contract will pay. For example, you might be required to pay 20% of medical bills, up to a total of $5,000 per year; once you reach that $5,000 “cap” the insurer will pay all remaining bills for the year.
See Deductible, Insurance Cap, Insurance policy
Collateral
An asset you pledge to a lender to secure a loan. If you fail to repay the debt, the lender has the right to seize the collateral. Example: When you borrow money to buy a house, called a mortgage, the property serves as collateral; if you don’t make required payments, the lender can foreclose, taking the property.
See Home Equity Loan
Collectibles
Physical items valued for their rarity, condition or historical significance. Examples include art, antiques, coins, stamps, wine, comic books and sports memorabilia. Collectibles are considered alternative investments and are subject to a higher tax rate than capital gains.
See Capital Gains Tax Rate
College Planning
The process of preparing financially for higher education expenses. It includes estimating future college costs, exploring savings vehicles such as 529 Plans, researching financial aid and scholarships and considering the long-term return on a college investment.
See College Savings Plan
College Savings Plan
A federal program established by Section 529 of the Internal Revenue Code that lets people save for college on a tax-advantaged basis. Anyone can establish 529 account; contributions are generally not tax-deductible, but profits grow tax-deferred and withdrawals are tax-free if used to pay for qualified education expenses of the beneficiary, such as tuition, room and board, fees and books.
See Tuition Pre-Payment Plan
Commercial Paper
A short-term, unsecured debt instrument issued by large, creditworthy corporations. Commercial paper typically matures in 1 to 270 days and is sold at a discount to face value rather than making interest payments. It is considered a cash equivalent and is often purchased by money market funds.
See Debt Securities
Commissions
Compensation you pay to stockbrokers, financial advisors and insurance agents when buying investments and insurance. Commissions are typically a percentage of the amount you are investing. Commissions can range from zero to “2 and 20” (a 2% one-time commission plus 20% of the profits). With some products, you pay commissions annually; with others, you pay a commission when you sell rather than when you buy.
See Fees
Commodities
Basic goods or raw materials. Examples include food (such as crops and livestock), energy (oil and gas), precious metals (gold, silver, platinum) and metals (zinc and copper). Investors trade options contracts and futures contracts based on their expectations of price movements for these items.
Communism
An economic system where private ownership of property, businesses and resources are not allowed, and the government distributes goods and services to citizens – supposedly on an equal basis.
See Capitalism, Socialism, Fascism
Compartmentalizing Bias
The tendency to convert a single complex decision into several simpler, separate decisions. The result can be several wrong decisions instead of one correct one.
See Behavioral Bias
Compound Interest
Compounding
The process by which investment earnings grow over time. When interest, dividends or capital gains are reinvested, they themselves earn returns, causing your money to grow at an accelerating rate. Often described as “earning interest on interest.” The longer your money compounds, the greater the effect.
See Compound Interest
Confirmation Bias
The tendency to agree with news and information that support your views and dismiss news and information that conflict with your views. Example: You believe that an investment will rise in value, so you agree with stock analysts who say so, while dismissing analysts who say the price will fall.
See Behavioral Bias
Conflict of Interest
A situation in which one’s financial interests could influence their advice or recommendations. Some conflicts can be avoided; those that cannot must be disclosed.
See Financial Advisor
Consumer Price Index
The CPI reveals the current rate of inflation. The index is published each month by the Bureau of Labor Statistics and shows the extent of changes in the prices of everyday goods and services.
See Inflation Rate
Co-Pay
An amount of money you must pay for healthcare services that are otherwise paid by your health insurer. Example: paying $30 for each doctor’s visit. Co-pays are separate from the deductible and are a form of cost-sharing between you and your insurer.
See Health Insurance, Insurance Policy
Correlation
A statistical measure of how two investments move in relation to each other. A correlation of +1 means they move the same; ‑1 means they move in opposite directions; 0 means there is no relationship. Holding assets with low or negative correlations to each other is the foundation of diversification.
See Asset Classes, Modern Portfolio Theory
Cost Basis
The amount you paid to acquire an asset. It includes the cost of the asset plus related expenses, such as commissions. Reinvested interest and dividends increase your cost basis. The higher your cost basis, the less your profit – and therefore the less you owe in taxes.
See Capital Gain
Coupon
The interest rate paid on a bond, expressed as a percentage of the bond’s face value. The coupon is set when the bond is issued; it does not change. The term originated centuries ago, when bonds were printed documents to which coupons were affixed. Bond holders cut one coupon at pre-set intervals and redeemed them at banks. Over time, the term became synonymous with “interest rate.”
See Interest, Zero-Coupon Bonds
Coverage Percentage
The portion of expenses that an insurance policy will pay for a claim. Policies that have low coverage percentages cost less than other policies but require you to pay more if you incur a claim.
See Deductible, Insurance Cap
Credit
Credit Bureau
A company that collects and maintains financial information about consumers, including borrowing and repayment history, and provides that information to lenders in the form of credit reports and credit scores. The three major credit bureaus in the United States are Equifax, Experian and TransUnion.
Credit Card
A payment card issued by a financial institution that lets you make purchases up to a pre-set limit. Purchases made constitute loans, which must be repaid by a monthly due date. If you do not pay the full balance, you are charged interest on the unpaid amount, which compounds over time.
See Credit, Debt, Credit Score
Credit Rating Agency
A company that evaluates the creditworthiness of debt issuers, such as corporations and governments, and assigns letter ratings to their bonds. Investment-grade securities are rated BBB and higher; speculative-grade securities are rated BBB- and lower. The higher the rating, the lower the presumed risk of default. The three largest credit rating agencies in the United States are Moody’s, Standard & Poor’s and Fitch.
See Default Risk
Credit Record
A report of your borrowing and repayment history. These reports are produced by Experian, Equifax and TransUnion, and include your employment history as well as information about any bankruptcies, lawsuits or arrests. You are entitled by law to obtain a free copy of your credit report; visit [AnnualCreditReport.com].
See Credit Score
Credit Repair
The notion of improving your credit record, so you can borrow more money. Many who claim to be able to repair your credit record are crooks; they collect up-front fees but do not improve your credit record. Financial advisors caution consumers who have accumulated large amounts of debt to work exclusively with non-profit organizations that are devoted to this issue and which don’t charge fees for their services.
Credit Report
A detailed record of your borrowing history, compiled by a credit bureau. It includes information about your current and previous credit accounts, payment history, balances owed and bankruptcies. Lenders use your credit report to evaluate your creditworthiness. You are entitled to receive a free copy of your credit report annually from each of the three major bureaus, Equifax, Experian and TransUnion, by visiting AnnualCreditReport.com.
See Credit Record, Credit Repair, Credit Score
Credit Risk
The possibility that a borrower will fail to repay a debt as agreed. Higher credit risk generally results in higher interest rates, since lenders demand greater compensation for taking more risk. Also called default risk.
See Credit Rating Agency, Default
Credit Score
A numerical rating that lenders use to determine whether to lend money to you, and what interest rate to charge. Your credit score is based on your credit report. Scores from FICO and VantageScore range from 300 to 850 points. The higher your score, the more money you can borrow, the lower your interest rate and the less you’ll pay in fees.
See Credit Record
Credit Union
A member-owned, not-for-profit financial cooperative that provides such banking services as savings accounts, checking accounts and loans. Because credit unions return profits to its members in the form of lower loan rates and higher savings rates, they can offer better terms than banks. Deposits are insured by the National Credit Union Administration.
See Certificate of Deposit, Money Market Fund
Creditor
A person or institution that lends money or extends credit to another party. Creditors include banks, credit card companies and mortgage lenders. If a borrower fails to repay, the creditor may pursue legal action or other remedies to recover the amount owed.
See Debt, Default
Cross-Sell Policy
A contract with an insurance company that is purchased by a small business owned by two or more people. If one owner dies, the surviving owner(s) receive(s) money from the policy, which they can use to buy from the decedent’s surviving spouse their share of the business. These insurance policies provide liquidity, alleviating the concern that the surviving business owners might find themselves in business with a deceased partner’s heirs who know nothing about the business and who have no interest in working in the company – while simultaneously giving cash to the decedent’s heirs for an asset that is otherwise not liquid.
See Life Insurance
Crypto
A reference to distributed ledger technology, also known as a blockchain. The term broadly encompasses assets and companies in the space, including digital assets, tokens, stablecoins, decentralized finance, metaverse and companies engaged in the field.
See Picks and Shovels
Currency Futures
Also called FX Futures. Legally binding contracts to buy or sell a specific currency at a predetermined price on a future date. Currency futures are used by investors and businesses to hedge against foreign exchange risk or to speculate on changes in currency values.
See Currency Risk, Futures Contracts
Currency Risk
Also called foreign exchange risk. The possibility that the value of an asset will change along with changes in the exchange rates between currencies issued by different governments. Currency risk can affect companies involved in international trade, anyone holding foreign assets, American consumers purchasing goods manufactured overseas, and U.S. tourists traveling to foreign countries. Companies, investors and tourists can hedge this risk by trading FX futures.
Custodian
A person or entity holding and safeguarding a client’s assets, such as securities or cash. A custodian does not make investment decisions; rather, it holds assets, executes trades as directed and provides recording-keeping services.
See Brokerage Firm, Crypto, SIPC, Qualified Custodian
Custody
The holding and safekeeping of a client’s assets by a financial institution on behalf of a client. When am RIA, brokerage firm or bank holds your investments, it is acting as your custodian.
D
Dealer
A person or firm that buys securities from and sells securities to clients from and for its own account. Dealers profit from the spread, the difference between the price they pay and the price they charge. Dealers often act as market makers, providing liquidity to financial markets.
See Broker, Broker-Dealer
Death Benefit
When you buy a life insurance contract, you (as the owner) name the person whose life is being insured; if the insured dies while the policy is in force, the insurance company pays money (called the death benefit) to the policy’s beneficiary.
See Life Insurance
Death Tax
The levy assessed by a government against a person’s estate after they die. Some states also impose separate estate or inheritance taxes. Estate planning can help to avoid or minimize this tax.
See Estate Tax
Debit Cards
A payment card linked to your checking account or savings account that deducts money when you make a purchase. Unlike a credit card, no interest is charged when using the card.
Debt
Money you owe to others, which can include credit cards, auto loans, student loans and personal loans. A key financial goal is to move from owing money to owning money.
See Credit, Debt-to-Income Ratio
Debt Securities
Financial instruments that represent loans made by investors to borrowers, such as corporations or governments. With each debt security, the borrower promises to repay the principal at the maturity date and to make interest payments as required until then.
See Bond
Debt-to-Income Ratio
This statistic shows the extent to which your income is used to pay accumulated debts rather than current expenses. Financial advisors generally advise that your DTI be 36% or less.
Decedent IRA
Also called a Beneficiary IRA. An Individual Retirement Account originally held by someone who died. The beneficiary is now the owner of the account. See Rollover IRA
Decentralized Finance
Also called DeFi. A financial system built on blockchain technology that operates without intermediaries such as banks or brokerages. DeFi applications use computer programs called smart contracts to allow users to borrow, lend, trade and earn interest on digital assets without relying on a central authority.
See Crypto, Distributed Ledger Technology
Deductible
The portion of a bill covered by an insurance policy that you must pay; the insurance company pays the rest. Policies that have large deductibles cost less than other policies but require you to pay more if you file a claim.
See Coverage Percentage
Deductible IRA
Deduction
When calculating taxable income, it is an amount subtracted from gross income. The effect is a reduction in the amount of income subject to tax. Examples include mortgage interest, charitable contributions and medical expenses.
See Adjusted Gross Income, Tax Deduction, Taxable Income
Default
The failure to make interest or principal payments are required by the terms associated with a loan or bond. Persistent failure leads to default, which can result in loss of the asset through foreclosure, repossession or collection and damage to your credit score.
See Default Risk
Default Risk
The possibility that a bond might become worthless if its issuer files for bankruptcy.
See Default
DeFi
Defined Benefit Plan
An employer-based retirement plan that promises to pay a pre-set monthly income to qualifying employees during their retirement.
See Defined Contribution Plan, Pension Plan
Defined Contribution Plan
An employer-based retirement plan where the amount of money placed into the plan is known but the future value of each employee’s account is not known. Future values depend on the amount contributed and the performance of the investments selected.
See 401(k) Plan, 403(b) Plan, 457 Plan, Defined Benefit Plan, IRA, Rollover IRA
Deflation
A decline in the prices of goods and services across the economy. Deflation is harmful because it discourages spending, resulting in a loss of jobs and an increase in government debt. It can lead to recession and depression. The Federal Reserve targets a 2% inflation rate to maintain a healthy economy.
See Inflation
Delta
The difference between two prices. For example, if an asset purchased for $10 is now worth $15, the delta is $5.
See Alpha, Beta
Depreciation
An accounting method used by businesses. Instead of deducting the cost of an asset in the year it is purchased, the business deducts a portion of the cost each year over the asset’s useful life. This lets the business match each year’s expense to each year’s revenue that the asset helps the business generate.
See Amortization
Depression
A severe and prolonged economic downturn characterized by sharp declines in economic activity, widespread unemployment, falling stock prices and interest rates and sharply reduced consumer spending and investment. A depression is more severe and longer-lasting than a recession. The most well-known example is the Great Depression of the 1930s.
See Deflation, Bull Market, Bear Market, Market Correction
Direct Rollover
The transfer of funds from one qualified retirement plan to another or to an IRA, without the account holder receiving the money in the interim. Because the funds move between plan administrators, no taxes or IRS penalties are triggered.
See Rollover, Trustee-to-Trustee Transfer
Directors and Officers Liability insurance
A contract with an insurance company whereby an organization pays a fee, called a premium, and in exchange, the insurer shields the corporation’s leadership from personal financial risk should they be sued for conduct associated with the execution of their duties.
Disability
A physical or mental condition that limits a person’s movements, senses or activities. Disabilities can prevent a person from being or remaining employed.
See Disability Income Insurance
Disability Income Insurance
A contract with an insurance company whereby you pay a fee, called a premium, and in exchange, the insurer replaces some or all of your income if you’re unable to work due to injury or illness.
See Disability, Insurance Policy
Discount
The amount by which a bond’s market price trades below its face value. A bond trades at a discount when its coupon rate is lower than prevailing interest rates. Example: A bond with a $1,000 face value selling for $950 trades at a $50 discount.
See Premium
Discretionary Authority
The right of a financial advisor to buy or sell securities in a client’s account without obtaining the client’s prior approval.
Discretionary Expense
An expense that can be increased, decreased or eliminated at will. Examples include dining out, entertainment and subscriptions. Because these costs are not mandatory, they are the first place to look when you need to reduce your spending.
See Budget, Discretionary Expense, Fixed Expense, Non-Discretionary Expense, Variable Expense
Distributed Ledger Technology
Also called blockchain technology. A system for recording and sharing data across multiple computers simultaneously, so that no single party controls the record. Unlike traditional ledgers that are created and maintained by a single authority, such as a bank or government, a distributed ledger is maintained by a network of participants; there is no central authority. Bitcoin is the first, largest and best known blockchain.
See Crypto
Distributions
Money sent from an account or fund to the account owner. Distributions might consist of principal, interest, dividends or capital gains and might be taxable.
Diversification
Dividend
The portion of a corporation’s profit that is distributed to shareholders. Dividends are typically subject to ordinary income taxes.
See Shares
Dollar Cost Averaging
The practice of investing a fixed amount of money into a specific investment at a specific interval, regardless of market conditions. The strategy automatically results in the purchase of more shares when prices are lower and fewer shares when prices are higher, helping to improve returns. Dollar Cost Averaging does not guarantee that investment losses will not occur.
Down Payment
Dread Disease Insurance
A contract with an insurance company whereby you pay a fee, called a premium, and in exchange, the insurer pays for medical expenses incurred due to diagnosis of a serious illness. These policies are generally disliked by financial advisors, who prefer policies that pay benefits regardless of diagnosis.
See Health Insurance, Insurance Policy
Durable Power of Attorney
A legal document that authorizes a person you choose, known as your agent or attorney in fact, to manage your financial and/or legal affairs on your behalf. The word “durable” means the document remains in effect even if you become incapacitated; by comparison, a standard power of attorney is void upon incapacity.
See Health Care Power of Attorney
Duration
The actual life of a bond. Duration can be shorter than a bond’s maturity date. Example: Mortgage bonds typically have 30-year maturity dates. But few 30-year mortgages actually last that one, because some homeowners sell their homes during that period, while others pay off their mortgages and still others die (resulting in heirs to sell the house, paying off the mortgage). Therefore, the average duration of a mortgage-backed security is less than the 30-year maturity of the bond.
See Interest, Interest Rate, Interest Rate Risk
E
Earned Income
Your compensation from working. This includes wages, salaries, tips, bonuses and net earnings from self-employment or gig activities. Earned income is subject to ordinary income tax.
See Earned Income Tax Credit
Earned Income Tax Credit
A provision of the tax code that lets low- and moderate-income workers and families reduce what they owe in federal income tax. If there is no tax due, the EITC is paid to the worker or family. The amount of the credit depends on your earned income, filing status and the number of qualifying children.
See Tax Credit
Earnings
The profit generated by a company during a specific period. Earnings are a key measure of a company’s financial health and are closely watched by investors. If earnings exceed investor expectations, the stock price will rise; if earnings are weaker than expected, the stock price will fall.
See Revenue
Economic Indicator
A statistical measure used to evaluate the economy. Leading indicators predict future activity; lagging indicators confirm past trends; and coincident indicators reflect current conditions.
See Coincident Indicator, Gross Domestic Product
Effective Tax Rate
The percentage of your income that you actually pay in taxes, after accounting for all deductions, credits, exclusions and exemptions. Unlike the marginal tax rate, which applies to the highest portion of your income, the effective tax rate reflects your total tax burden as a share of your entire income.
See Tax Rate, Taxable Income
Efficient Frontier
A concept from Modern Portfolio Theory that identifies the portfolios offering the highest expected return for a given level of risk, or the lowest risk for a given expected return. Portfolios that lie on the efficient frontier are considered optimally diversified. Developed by economist Harry Markowitz.
See Diversification, Risk Tolerance
Elder Financial Abuse
Emerging Markets
Economies that are in a stage of rapid growth and industrialization but have not yet reached the status of a fully developed market. Investments in emerging markets offer higher potential returns but carry higher risk, including political instability and currency fluctuation.
See Currency Risk, Diversification
Employee Benefit
A form of non-cash compensation provided by an employer. Common benefits include health insurance, dental and vision coverage, life insurance, disability income insurance, retirement plan contributions, paid time off and flexible spending accounts. Benefits are a key part of compensation and can significantly improve your financial well-being.
See 401(k) Plan, Health Savings Account
Employer Match
The amount of money an employer contributes to an employee’s retirement account based on the amount contributed by the employee.
Endowment Bias
The tendency to assign more value to something simply because you already own it.
See Behavioral Bias
Endowment Fund
Investments owned and managed by nonprofit organizations, such as universities, hospitals and foundations, to support their mission. Principle is preserved; only a portion of annual returns is spent each year. Endowments provide nonprofits with a stable source of funding that does not depend on annual fundraising.
See Institutional Investor
Entrepreneurship
Starting and operating a business in the hopes of generating operating income and the ability to sell the enterprise in the future.
See Self-Employment Earnings, Self-Employment Income
Equifax
One of the three major consumer credit bureaus in the United States, along with Experian and TransUnion. Equifax collects financial data on individuals and makes that information available to employers, landlords and others. The data includes payment history, credit account information and public records. Equifax was founded in 1899 and is headquartered in Atlanta. Consumers can access their Equifax credit report for free annually at AnnualCreditReport.com.
See Credit Record, Credit Report, Credit Score
Equities
Shares of stock in a publicly traded company.
See Equity, NASDAQ, New York Stock Exchange
Equity
Estate
Estate Planning
The process of deciding how your assets will be managed and distributed both during your lifetime and after your death.
See Estate Tax, Power of Attorney, Trust, Will
Estate Tax
Exchange
An organized marketplace where buyers and sellers come together to trade financial instruments such as stocks, bonds and derivatives. Exchanges provide transparency, price discovery and efficiency to financial markets. Examples include the New York Stock Exchange and Nasdaq.
See Stock Exchange
Exchange-Traded Fund
An investment that trades on a stock exchange. ETFs hold dozens or even thousands of securities, offering diversification. They generally have lower fees and are more tax efficient than mutual funds.
See Index Funds
Excise Tax
An indirect tax imposed by governments on specific goods, services or activities, often to discourage their use (examples include alcohol and tobacco). Unlike a sales tax, which is added to a product’s price when you buy it, an excise tax is included in the product’s price.
Exclusion
Income that is omitted from the calculation that determined the amount you owe in income tax.
See Adjusted Gross Income, Taxable Income, Deduction, Exemption
Executor
The person, named in a will, responsible for executing the deceased’s wishes as explained in the will. Duties include paying debts and taxes, and distributing property to beneficiaries. The executor, who is appointed by the probate court, has a fiduciary duty to act in the best interests of the estate and its beneficiaries.
See Trustee, Power of Attorney
Exemption
An amount that reduces your taxable income.
See Adjusted Gross Income, Deduction, Exclusion
Expenses
The costs you incur in daily life, such as housing, food, clothing, transportation, insurance and entertainment. Tracking your expenses is a fundamental aspect of budgeting and financial planning.
Experian
One of the three major consumer credit bureaus in the United States, along with Equifax and TransUnion. Experian collects financial data on individuals and makes that information available to employers, landlords and others. The data includes payment history, credit account information and public records. Experian has roots tracing back to the 1800s and is headquartered in Dublin, Ireland. Consumers can access their Experian credit report for free annually at AnnualCreditReport.com.
See Credit Record, Credit Report, Credit Score
Exposome
The totality of environmental exposures a person experiences over their lifetime and how those exposures interact with genetics to affect health. Exposures include diet, exercise, pollution, stress and other lifestyle factors. The exposome is studied in longevity research to understand what drives healthy aging. See Healthspan, Lifespan, Life Expectancy
F
Face Value
The amount of money that a bond holder will receive from the bond’s issuer when the bond reaches maturity.
See Bond Discount, Bond Premium
Fascism
An authoritarian political and economic system that concentrates power in a centralized national government led by a dictator. Under fascism, the government exercises control over economic activity; private property may be permitted but is directed by the state; and individual rights are subordinated to the goals of the nation.
See Capitalism, Communism, Socialism
FDIC
see Federal Deposit Insurance Corporation
Fear
Federal Deposit Insurance Corporation
FDIC is a U.S. government agency that insures bank accounts. If an FDIC-insured bank fails, FDIC reimburses depositors to the covered limit per account. Only bank accounts are covered; securities, insurance policies, and annuities are not.
See National Credit Union Administration
Federal Income Tax
A tax levied by the federal government on the annual income of individuals, corporations, trusts and other entities. The U.S. federal income tax is progressive, meaning higher income levels are taxed at higher rates. It is administered by the Internal Revenue Service.
See Marginal Tax Rate, Taxable Income, Tax Rate
Federal Reserve
The central bank of the United States. The Fed regulates monetary policy, manages the nation’s money supply, influences interest rates to promote employment and control inflation, supervises financial institutions and strives to maintain stability of the nation’s financial system and growth of the economy. Its decisions do not require approval from the President or Congress.
Federal Revenue
The income collected by the federal government. The main sources are, payroll taxes (funding Social Security and Medicare) and income taxes levied on individuals and corporations. Federal revenue funds government programs, services and operations.
See Federal Income Tax, FICA
Fees
Fixed charges assessed by asset managers and financial advisors. Fees can be hourly, flat-rate or billed a la carte based on the services provided.
See Commissions
FICA
The Federal Insurance Contributions Act is a payroll tax that funds Social Security and Medicare. FICA taxes are split equally between employees and employers, each paying 6.2% for Social Security and 1.45% for Medicare. Self-employed individuals pay the full 15.3%.
See Self-Employment Tax
FICO
A credit scoring model created by the Fair Isaac Corporation and used to evaluate a borrower’s credit risk. FICO scores range from 300 to 850. The score is based on your payment history (35% of the score), amounts owed (30%), length of your credit history (15%), amount of new credit (10%) and credit mix (10%). The higher your score, the more likely your loan request will be approved and the less you’ll pay in interest.
See Credit Score
Fiduciary
An individual or firm legally required to act in their client’s best interest. Registered Investment Advisors are required to act as fiduciaries, as are lawyers, doctors and accountants. Stockbrokers and insurance agents, and the brokerage firms and insurance companies that hire them, are not.
See Suitability, Utmost Good Faith
Fiduciary Obligation
The legal and ethical duty of a financial professional to act in a client’s best interest, placing the client’s interest above their own. Fiduciaries must disclose conflicts of interest, avoid self-dealing and provide advice that best serves the client, not the advisor.
See Conflict of Interest, Fiduciary, Registered Investment Advisor
Financial Abuse
The unauthorized or unethical use of someone else’s money, property or assets. Victims are often financially unsophisticated or of declining mental competence, enabling abusers to engage in theft, coercion, fraud or misuse of a power of attorney. Perpetrators are commonly family members and caregivers, knowing that their victims are unlikely to prosecute.
See Elder Financial Abuse
Financial Advisor
A professional holding a federal securities license and/or state insurance license who helps individuals, families and organizations manage money, investments, taxes, insurance, debt, real estate and more, often in the context of comprehensive financial planning. An advisor may or may not be a fiduciary and earns salaries, bonuses, fees and/or commissions.
Financial Firm
A company that provides financial services, such as investment management, banking, insurance or financial advice. Examples include brokerage firms, investment banks, mutual fund companies and registered investment advisory firms.
See Asset Management Industry
Financial Industry Regulatory Authority
FINRA is a self-regulatory organization authorized by the U.S. Securities and Exchange Commission to govern the activities of mutual funds as well as brokerage firms and their stockbrokers.
See Securities
Financial Literacy
A reference to one’s knowledge about the many topics associated with personal finance. When you’re financially literate, you have greater ability to effectively manage your income and expenses and your assets and debts – helping you achieve and maintain financial independence.
Financial Planning
The process of analyzing your financial situation and risk tolerance in order to develop strategies to achieve your financial goals. A comprehensive financial plan typically addresses debt management, spending, cash reserves, investments, insurance, taxes, retirement planning, college planning and estate planning.
See Financial Advisor, Certified Financial Planner®
Fitch
One of the three major credit rating agencies in the United States, alongside Moody’s and Standard & Poor’s. Fitch assigns letter ratings to corporations, governments, and financial instruments to help investors assess the risk of default. Ratings range from AAA (highest quality) to D (in default).
See Credit Rating Agency, Default Risk
Fixed Annuity
An insurance contract that features an owner, who purchases the contract and typically funds it; an annuitant, named by the owner and whose life expectancy is used to determine the amount of money that will be paid when owner chooses to annuitize the contract; and the beneficiary, who is named by the owner to receive the value of the annuity upon the owner’s death if the contract had not yet been annuitized. A fixed annuity pays a pre-set rate of annual interest for a specified period, after which the interest rate may change. Any interest earned is tax-deferred until withdrawal. Withdrawals are subject to contract penalties and taxes at ordinary income tax rates; withdrawals prior to age 59½ are also subject to a 10% IRS penalty. The owner can also annuitize the contract, converting the account value to a series of monthly payments ranging from a few years to the annuitant’s lifetime (or a combination of the lifetimes of the annuitant and the annuitant’s spouse, called “joint and survivor” payments). Payments cease upon the death of the annuitant(s), unless the owner had selected a guaranteed minimum period of payments, called “term certain.” Once annuitized, changes generally cannot be made.
Fixed Expense
A cost that stays the same for a period, usually one year.
See Adjustable Expense, Discretionary Expense, Non-Discretionary Expense, Variable Expense
Fixed-Rate Mortgage
A loan used to purchase real estate that charges a pre-set, unchanging interest rate. Borrowers thus pay the same amount each month for the life of the loan.
See Adjustable-Rate Mortgage, Mortgage-Backed Securities, Private Mortgage Insurance, Refinance
Flexible Spending Account
An employer-sponsored employee benefit program that lets workers make tax-deductible contributions to an account; they can then spend the money in the account throughout the calendar year on a tax-free basis to pay for on eligible healthcare expenses, but they forfeit any money they do not spend by December 31.
See Health Savings Account
FOMO
Short for “fear of missing out,” a behavioral bias that causes investors to make impulsive decisions driven by anxiety that others are profiting from a market trend they are not participating in. FOMO often leads to buying overpriced assets near the peak of a rally. It can cause significant financial harm.
See Herd Mentality Bias
Foreclosure
The legal process by which a lender takes ownership of real estate and sells it to recover the money its owed when the borrower has failed to make required mortgage payments. Foreclosure laws vary by state, and the process generally does not begin until several consecutive payments have been missed.
See Foreclose, Home Equity Loan, Home Equity Line of Credit
Foreign Exchange
Also called forex or FX, it is a global marketplace operating at all times through a network of banks and brokerage firms, where one country’s currency is traded for another’s. Trillions of dollars trade daily, with prices fluctuating based on supply and demand, economic data and geopolitical events. Travelers, importers, exporters and investors all participate in the foreign exchange market. See Currency Risk, FX Futures
Forex
Short for foreign exchange. A global, decentralized marketplace where currencies are bought and sold around the clock, five days a week. The forex market is the largest and most liquid financial market in the world and determines the relative values of world currencies. See Currency Risk, FX
Form 1040
The standard form used by U.S. taxpayers to pay their federal income tax. Most people must file a 1040 by Tax Day (typically April 15), though extensions can be requested. Variations include the 1040-SR for seniors and the 1040-NR for nonresident aliens.
See Internal Revenue Service
Framing Bias
The tendency to base decisions based on how information is presented. People are less likely to invest when told there’s a “50% chance of loss” than when told there’s a “50% chance of gain.”
See Behavioral Bias
Futures Contracts
Legally binding agreements to buy or sell a specific quantity of a commodity or financial instrument at a predetermined price on a specific future date. Futures are traded on regulated exchanges and are used both to hedge against price risk and to speculate on price movements. The Commodity Futures Trading Commission is the primary federal regulator of futures markets.
FX
An abbreviation for foreign exchange. It refers to the global market for buying and selling currencies, as well as to currency-related financial instruments and transactions, such as FX futures or FX trading.
See Forex
FX Futures
Also called currency futures and futures contracts, these are agreements under which one currency is to be exchanged for another at a fixed rate on a predetermined future date. FX futures allow businesses to lock in exchange rates and protect themselves against currency risk, while allowing speculators to profit from movements in the prices of currencies. These contracts trade on exchanges, such as the CME Group.
See Foreign Exchange
G
GDP
see Gross Domestic Product
Grantor
The person who creates and transfers assets into a trust. The grantor (also called the settlor or trustor) establishes the terms of the trust and may retain certain powers over it, including the ability to change or revoke it. If the grantor retains enough control, the IRS treats it as a “grantor trust,” meaning the grantor owes income tax on the trust’s earnings.
See Beneficiary
Grantor Trust
A type of trust in which the person who created the trust (the grantor) retains certain powers or benefits, causing the trust’s income and assets to be taxed to the grantor rather than to the trust. Grantor trusts are often used in estate planning to transfer assets while retaining some level of control.
See Trustee
Greed
Gross Domestic Product
The total monetary value of all goods and services produced in a country during a period. GDP is the broadest measure of a nation’s economic output and is used to gauge whether the economy is growing or contracting.
See Leading Indicator, Coincident Indicator, Economic Indicator, Lagging Indicator
Gross Income
Your total income from all sources. This includes wages, salaries, tips, business income, rental income, interest, dividends and capital gains. Gross income is the starting point for calculating your adjusted gross income (AGI), which is your gross income minus tax deductions, tax exemptions, tax exclusions and tax credits. You owe federal and state income taxes based on your AGI.
Guaranteed Lifetime Income
An income stream, typically from an annuity or pension, that is paid to a person for as long as they live. This type of income protects against the risk of outliving your savings.
See Joint and Survivor, Single-Life Option
Guardian
The person appointed by a court to care for a ward, typically a minor or incapacitated adult. The guardian provides or arranges for the ward’s day-to-day care and manages the ward’s finances, education and health care. The guardian submits periodic reports to the court. If you name a guardian for your minor children in your will, the court typically honors your choice.
See Beneficiary, Trust, Trustee
H
Harry Markowitz
Health Care Power of Attorney
Health Insurance
A contract with an insurance company whereby you pay a fee, called a premium, and in exchange, the insurer pays for certain medical expenses under specific conditions, subject to deductibles, co-pays and policy limits.
See Accident Insurance, Cash Value Life Insurance, Disability Income Insurance, Dread Disease Insurance, Hospital Insurance, Insurance Policy, Key Person Insurance, Life Insurance, Long-Term Care Insurance, Major Medical Insurance, Medical Expense Insurance, Permanent Life Insurance, Term Life Insurance, Travel Cancellation and Medical Evacuation Insurance, Trip Insurance, Umbrella Liability Insurance, Universal Life Insurance, Variable Life Insurance, Whole Life Insurance
Health Savings Account
An account that can be established by individuals who own a High Deductible Health Plan. Contributions to HSAs are tax-deductible; profits grow tax-free, and withdrawals are tax-free when used to pay for qualified medical expenses. Employers often make HSAs available to their workers as an employee benefit.
Healthspan
The number of years a person lives in good health, free from serious chronic illness or disability. Unlike lifespan, which measures how long a person lives, healthspan focuses on the quality and vitality of those years. Maximizing healthspan is an important goal in personal health planning and retirement planning.
See Life Expectancy, Longevity
Hedge
An investment strategy designed to reduce the risk of significant losses due to adverse price movements in an asset. As part of protecting against large losses, hedging may limit upside potential.
See Hedge Fund, Active Management
Hedge Fund
An investment partnership that pools money from accredited investors and uses advanced strategies – including leverage, short selling and derivatives – to seek returns regardless of market direction. Hedge funds are lightly regulated compared to mutual funds and are generally available only to wealthy individuals and institutions.
See Alternative Investments, Institutional Investors
Heirs
People who are to inherit a person’s assets after their death, either through a will or the state’s laws of intestate succession. Heirs may include family, friends and/or charities.
See Beneficiary, Estate, Estate Planning
Herd Mentality Bias
The tendency to do something merely because others are doing it.
See FOMO
High-Deductible Health Plan
A type of health insurance policy that features a higher annual deductible and lower monthly premiums than other types of health insurance policies. Enrolling in an HDHP makes you eligible to contribute to a Health Savings Account.
High-Yield Bond
A type of corporate debt instrument that pays a higher rate of interest than investment-grade bonds because it is issued by a company with a greater risk of defaulting on its debt payments. High-yield bonds are rated below “BBB” by S&P or below “Baa” by Moody’s, and are sometimes called “junk bonds.” While the higher interest payments can be appealing, investors face a greater risk of not receiving all promised payments – or of losing their principal – if the issuer defaults.
See Credit Rating Agency, Default Risk
Hindsight Bias
The tendency to believe that recent events were predictable, and that you predicted them – even though they weren’t and you didn’t. This “saw it coming” misperception distorts memories and causes people to mistakenly believe they’ll be able to predict future events.
See Overconfidence Bias
Home Equity
Home Equity Line of Credit
A revolving line of credit that lets you borrow against the equity in your home. Like a credit card, a HELOC lets you borrow, repay and borrow again up to the credit limit. But unlike a credit card, which is not backed by an collateral, HELOCs are backed by your home – meaning that defaulting on a HELOC can result in foreclosure. Interest rates vary, but HELOCs typically charge lower interest rates than credit cards.
See Home Equity, Home Equity Loan
Home Equity Loan
A lump-sum loan that uses your home equity as collateral. You receive the money at once to use as you wish, and you repay the money borrowed in monthly installments at a fixed interest rate. A home equity loan is considered a second mortgage. Because your home secures the loan, failing to repay it can result in foreclosure.
See Home Equity Line of Credit
Hospital Insurance
Howey Test
The legal standard established by the Supreme Court in 1946 to determine whether a financial arrangement qualifies as a “security” subject to federal securities laws. Under the Howey Test, an arrangement is considered a security if it involves (1) an investment of money, (2) in a common enterprise, (3) with an expectation of profit, and (4) derived from the efforts of others. Named for case SEC v. W.J. Howey Co., the test is applied by regulators when evaluating unconventional financial products.
See Securities and Exchange Commission
I
Illusion of Attention Bias
The tendency to overestimate the degree to which you are monitoring events or developments that could affect the value of your investments.
See Behavioral Bias
Illusion of Control Bias
The tendency to believe that your actions will influence an outcome. Example: the belief that an investment will rise in value because you buy it.
See Behavioral Bias
Immediate Income Annuity
Also called Single Premium Immediate Annuity, this annuity contract has you make a single lump-sum payment to an insurance company. In exchange, you receive monthly income starting either immediately or within 12 months. The monthly income typically lasts for a pre-set period, your lifetime or the combined lifetimes of you and your spouse (called Joint and Survivor). Immediate income annuities are commonly used by retirees who want to convert a portion of their savings into guaranteed lifetime income.
See Bonus Annuity, Fixed Annuity, Variable Annuity
In Force
An insurance policy where premiums have been paid, meaning the insurer is obligated to pay covered claims. A policy goes lapses when you fail to pay premiums as required.
Income
Money received from work or investments.
See Earned Income, Dividend, Interest, Rent, Royalties, Passive Income, Wages
Income Tax
A levy by a federal, state or local government on your earnings in a given year. Some income taxes are progressive, meaning higher taxable incomes pay higher tax rates. Income subject to tax includes wages, salaries, tips, self-employment earnings and investment income.
See Adjusted Gross Income, Income, Ordinary Income Tax
Independent Insurance Agent
An insurance agent who represents multiple insurance companies and can offer clients policy options from a variety of insurers. Unlike a captive agent, who works exclusively for one company, an independent agent can shop the market on the client’s behalf to find the best coverage and price. Like all who sell insurance products, independent agents legally represent the insurance company, not the consumer who is purchasing the product.
See Insurance Broker
Index Funds
Mutual funds or exchange-traded funds designed to mimic the performance of a specific market index, such as the S&P 500, by holding the same securities in the same proportions. Because index funds are passively managed, they generally have lower fees than actively managed funds and are more tax efficient.
See Active Management, Beating the Market, Index Investing, Passive Management
Index Investing
An investment strategy that seeks to replicate the returns of a market index by holding the index’s securities. Index investing is a form of passive investing; rather than trying to pick investments that will outperform an index, indexing simply tries to match the index’s performance. Index investing tends to outperform most actively managed strategies.
See Active Management, Beating the Market, Index Funds, Passive Management
Indirect Tax
A levy collected by an intermediary rather than the government. Examples include sales taxes, value-added taxes and excise taxes.
Individual Retirement Account
Inflation
An increase in the cost of goods and services. The Federal Reserve’s goal is for the inflation rate to be in the low single digits each year. When inflation is too high, prices rise faster than wages, meaning money loses its purchasing power – making it harder for consumers to afford the cost of goods and services. The Fed responds by raising interest rates; by increasing the cost of borrowing, consumers and businesses reduce their spending, which reduces inflation. But when prices are rising too slowly or even declining (called deflation), consumers and businesses stop buying entirely, in the expectation that prices will get even lower. That causes businesses to lose money, resulting in layoffs. The Fed responds to low inflation by lowering interest rates; by making loans cheaper, consumers and businesses are more willing to borrow – spurring spending and increasing
Inflation Rate
The increase in the prices of goods and services, expressed as a percentage. Inflation erodes the purchasing power of money. The most widely tracked measure of inflation is the Consumer Price Index), published monthly by the U.S. Bureau of Labor Statistics. The Federal Reserve targets an inflation rate of 2% per year.
Inheritance Tax
A state tax paid by the person who receives money or property from a deceased individual. Unlike estate taxes, which are paid by the estate before assets are distributed, inheritance taxes are the responsibility of the beneficiary. Not all states impose an inheritance tax.
See Death Tax
Inherited IRA
Also called a Decedent IRA. An IRA containing assets originally held by someone who died. The heir of the deceased is now the owner of the account.
See Beneficiary IRA, Rollover IRA, Roth IRA, Spousal IRA
Institutional Investors
Large organizations that invest on behalf of others, such as pension funds, insurance companies, mutual funds, hedge funds and university endowments. Because they manage vast pools of money, institutional investors often receive more favorable trading terms and have significant influence in financial markets.
See Endowment Funds
Insurance Agent
A licensed professional who sells insurance policies and annuities on behalf of one or more insurance companies. A captive agent represents a single insurer, while an independent insurance agent or insurance broker represents multiple insurers. Insurance agents must hold a state-issued insurance license for each type of insurance they sell. All insurance agents and brokers legally represent the insurance company, not the customers buying their policies.
See Commissions, Fiduciary
Insurance Cap
The maximum dollar amount an insurance policy will pay for a covered loss or for covered services during a specified period. Once you reach the cap, you are responsible for any additional costs. Under the Affordable Care Act, most health plans are prohibited from imposing annual or lifetime dollar limits on essential health benefits.
See Co-Insurance Cap
Insurance Claim
A formal request submitted by a policyholder, or their healthcare provider, to an insurance company asking for payment for a covered loss or service. The insurer reviews the claim and, if it falls within the policy’s terms and limits, pays the benefit. Fraudulent claims are illegal and can result in policy cancellation and criminal prosecution.
See Insurance Policy
Insurance Company
A business that sells insurance and annuity products. Buyers of these products pay premiums; the insurer uses this money to pay customers who file claims for losses they’ve incurred, and to pay monthly income on the annuity products as required by each contract. Insurance companies are regulated by state governments.
See Insurance Claim, Insurance Agents
Insurance Contract
Also called an insurance policy. A contract with an insurance company whereby you pay a fee, called a premium, and in exchange, the insurer will pay some or all of the costs of covered risks (such as accidents, illness, death or property damage) so you don’t have to.
Insurance License
A state-issued credential that authorizes a person or company to sell a specific type of insurance in that state. Separate licenses are required for life and health insurance and property and casualty insurance. To obtain and maintain a license, candidates must complete required education, pass a state exam and satisfy continuing education requirements.
See Insurance Agent
Insurance Policy
Also called an insurance contract. A contract with an insurance company whereby you pay a fee, called a premium, and in exchange, the insurer will pay some or all of the costs of covered risks (such as accidents, illness, death or property damage) so you don’t have to.
Insured
The person or property covered by an insurance policy.
See Beneficiary
Intangibles Tax
A fee assessed by a municipal, state or federal government applied to non-physical assets, typically investments or investment income.
See Taxes
Interest
The payment paid by a borrower to a lender in exchange for receiving a loan. Interest is typically a percentage of amount being lent. Most interest rates are fixed, meaning they do not change, while others float, meaning they periodically change with inflation rates.
See Bond, Coupon, Duration, Interest Rate Risk, Maturity, Yield, Zero-Coupon Bond
Interest Rate
The percentage charged or earned when lending or borrowing money.
See Bond, Coupon, Duration, Interest, Interest Rate Risk, Maturity, Yield, Zero-Coupon Bond
Interest Rate Risk
The potential for interest rates to rise, which would cause bond values to fall. Bond prices and interest rates are inversely linked, as if on opposite ends of a seesaw: if one rises, the other falls. The longer the maturity date, the greater the swing in prices. (a 30-day T‑bill would sit at the center of a seesaw and thus experience little change in price due to changes in interest rates, while a 30-year T‑bond would sit at the far end of the seesaw and thus experience far greater swings in price.) Thus, if you sell a bond prior to maturity, the price you receive may be more or less than the price you paid to buy it, depending on what the interest rates were when you bought the bond compared to current rates.
See Coupon, Duration, Interest, Yield, Zero-Coupon Bond
Internal Revenue Code
The tax law of the federal government of the United States. The code is established by Congress and signed into law by the President. The IRC’s 70,000+ pages contain 3.4 million words and is changed every year by Congress.
See Internal Revenue Services, Taxes
Internal Revenue Service
The federal agency within the U.S. Department of the Treasury responsible for administering and enforcing federal tax law. The IRS collects the income tax, payroll taxes, estate tax and other federal revenue; processes tax returns; issues tax refunds; and investigates tax fraud.
See Internal Revenue Code, Form 1040
Investment Advisers Act of 1940
A federal law that imposes disclosure requirements, recordkeeping rules and ethical standards on those who provide investment advice for compensation.
See Fiduciary, Registered Investment Advisor, U.S. Securities and Exchange Commission
Investment Advisor Representative
A person who works for a Registered Investment Advisor and provides investment advice to clients. IARs must pass qualifying examinations and be registered with the SEC or state securities regulators. IARs are held to the fiduciary standard, meaning they must put their clients’ interests first.
See Investment Advisers Act of 1940, Fiduciary
Investment Bank
A financial firm that helps corporations and governments raise capital by underwriting and issuing securities, and provides advisory services for mergers, acquisitions and other large financial transactions. Investment banks do not typically accept consumer deposits or make personal loans.
Investment Contract
An agreement in which one party invests money in a common enterprise with the expectation of earning a profit based primarily on the efforts of others. Under U.S. law, investment contracts are considered securities subject to SEC regulation. The legal test was established in SEC v. W.J. Howey Co. (1946).
See U.S. Securities and Exchange Commission, Howey Test
Intuition Bias
The tendency to “trust your gut” instead of considering objective data or rational analysis – especially when your instincts conflict with them.
See Behavioral Bias
Investment Manager
A professional or firm that makes investment decisions for clients in exchange for a fee, typically based on a percentage of assets under management. Investment managers serve individuals, retirement plans, endowment funds, pension funds and other institutional investors. Investment managers must be licensed and registered with the SEC. They are subject to the Investment Advisers Act of 1940 and must act as a fiduciary to their clients.
Investment-Grade
A rating assigned to bonds or other debt securities by credit rating agencies, including Moody’s, S&P, and Fitch . The rating indicates the risk that an investment might default. A rating of AAA through BBB- by S&P and Fitch, or AAA through Baa3 by Moody’s, is considered investment-grade while ratings below those levels are considered speculative-grade, also known as junk bonds. The higher the rating, the lower the risk – and the lower the interest rate that is paid to investors.
See Default Risk, Money Market Fund, Commercial Paper
IRA
see Individual Retirement Account
IRS
see Internal Revenue Service
Issuer
A corporation, government or municipality that borrows money by selling bonds or other debt securities to investors. The issuer promises to pay interest to investors periodically and to return principal upon maturity. The issuer’s creditworthiness is a key factor in determining the interest rate it must pay to investors.
See Investment-Grade, Speculative-Grade, Junk Bond, Credit Rating Agency
J
Joint and Survivor
An annuity or pension payout option that provides guaranteed lifetime income to an annuitant and continues the payments to the annuitant’s surviving spouse for their lifetime. Spousal payments are typically 50% to 100% of what the annuitant’s payments were. Although the Joint and Survivor payout option provides financial protection for spouses, this option reduces the amount of money that the annuitant receives during their lifetime.
See Fixed Annuity, Single-Life Option
Junk Bond
Also called a high-yield bond or speculative-grade bond. A bond issued by a company with a lower credit rating, indicating a higher risk of default. Because of the added risk, junk bonds pay higher interest rates to attract investors.
See Credit Rating Agency, Default Risk, Investment-Grade
K
Key Person Insurance
A contract with an insurance company whereby an organization pays a fee, called a premium, and in exchange, the insurer pays money to the organization when a vital member of the organization who is named as the insured becomes unable to work due to death or disability.
See Insurance Policy
Kidnap and Ransom Insurance
A contract with an insurance company whereby you pay a fee, called a premium, and in exchange, the insurer provides negotiators to secure the safe release of an insured’s capture, including the payment of ransom (up to policy limits). Some policies also pay for the costs associated with the attempt to rescue the insured hostage.
L
Lagging Indicator
An economic measurement that reflects what has already occurred. Lagging indicators confirm trends rather than predict them. Example: new home sales, which tell us how many houses have recently been built. Lagging indicators help analysts confirm that an economic expansion or contraction is underway.
See Coincident Indicator, Leading Indicator
Landlord
A person or entity that owns rental property and leases it to tenants in exchange for periodic rent payments. Landlords are responsible for maintaining the property and complying with applicable housing laws. Rental income received by landlords is generally subject to income tax.
See Passive Income
Lapse
The termination of an insurance policy due to nonpayment of premiums. When a policy lapses, coverage ends and the insurer is no longer obligated to pay claims. Some policies offer a grace period before lapsing.
See Lapsing, In Force, Out of Force
Large-cap
Refers to companies with a market capitalization of $10 billion or more. Large-cap companies are typically well-established, financially stable businesses with a long track record. They tend to be less volatile than smaller companies, though they may offer less growth potential.
See Mid-cap, Small-Cap
Leading Indicator
An economic measurement that projects future economic trends. Example: new home building permits, which tell us how many houses are going to be built. Investors monitor leading indicators to predict investment returns.
See Coincident Indicator, Lagging Indicator
Liabilities
Money you owe to others. Common liabilities include mortgages, auto loans, student loans, credit card balances and personal loans. On a balance sheet, your liabilities are subtracted from your assets to determine your net worth.
See Debt
Lien
A legal claim against your property that gives a creditor the right to the proceeds when the property is sold. Liens are placed on homes by mortgage lenders when borrowers are in default. See Collateral
Life Expectancy
The number of years a person of a given age is statistically likely to live, based on mortality data. Life expectancy is used by insurance companies to price life insurance and annuity products, and by retirees to estimate how long their savings must last. The Social Security Administration publishes actuarial life tables showing life expectancy by age and sex.
See Lifespan, Healthspan
Life Insurance
A contract with an insurance company whereby you pay a fee, called a premium, and in exchange, the insurer pays a death benefit to the beneficiary when the insured dies. The money provided is meant to replace the income that the insured was earning, and on which the beneficiary was dependent. See Permanent Life, Term Life
Lifespan
The number of years an individual person lives. Your lifespan is influenced by genetics, lifestyle, healthcare and environment.
See Longevity, Life Expectancy, Exposome
Liquid
Describes an asset that can be quickly, easily and cheaply converted into cash without affecting its market value. Cash is the most liquid asset. Publicly traded stocks and government bonds are also liquid but can take a few days, incur fees and be subject to changes in value. Real estate and collectibles are examples of illiquid assets because they can take far longer – from weeks to years – to sell and incur substantial fees to do so. It’s important to maintain sufficient amounts of money in liquid assets to avoid the risk that an emergency might otherwise force you to sell illiquid assets at a loss.
See Liquidity
Liquidity
The degree to which an asset can be converted into cash.
See Liquid
Living Will
An estate planning document that stipulates your preferences regarding the medical treatment you want to receive, should you be unable to tell doctors yourself. Most commonly, living wills are used to state whether you want artificial life-sustaining measures to be deployed vs. allowing you to pass away naturally with treatment limited to provide comfort and eliminate pain.
See Power of Attorney
Loan
A sum of money borrowed from a lender. Loans must be repaid, typically with interest, over an agreed-upon period. Common loans include mortgages, auto loans, student loans and personal loans. The terms of a loan include the interest rate, repayment schedule and fees and are set out in a loan agreement.
See Bond, Home Equity Loan, Home Equity Line of Credit
Loan Agreement
A legally binding contract between a borrower and a lender that specifies the terms of a loan, including the amount borrowed, the interest rate, the repayment schedule and penalties for missed payments. Both parties sign the agreement before funds are disbursed.
See Collateral, Debt
Longevity
A reference to lifespan, or how long you can be expected to live.
See Life Expectancy
Long-Term Capital Gains
Profit from the sale of a capital asset that you held for more than one year. Long-term capital gains are taxed at lower rates than ordinary income and short-term capital gains.
See Capital Gain
Long-Term Care
Long-Term Care Insurance
A contract with an insurance company whereby you pay a fee, called a premium, and in exchange, the insurer pays the costs of injury-related hospital stays, subject to the conditions and limitations of the contract. Accident insurance is generally disliked by financial advisors, who prefer policies that pay benefits regardless of why treatment is needed. See Health Insurance, Insurance Policy
Loss Aversion
The tendency to avoid investments that might fall in value, even when “safe” investments won’t generate enough profit to meet your financial goals. This behavioral bias is common because many people dislike the feeling associated with losing money more than they like the feeling associated with making money.
Lump Sum
A single, one-time payment of a complete amount, rather than a series of smaller installments paid overtime. Some retirees choose to receive a pension as a lump sum rather than monthly payments. Life insurance death benefits may also be paid as a lump sum to the beneficiary. Investors often invest a lump sum instead of investing small amounts over time.
M
Major Medical Insurance
Marginal Tax Rate
The percentage of tax applied to the last, or highest, dollar of your taxable income. The U.S. federal income tax system is progressive, meaning income is taxed at increasing rates as it rises. Your marginal rate applies only to the portion of income that falls in your highest bracket.
See Effective Tax Rate, Tax Rate
Market Capitalization
The value of a publicly traded company’s shares of stock, calculated by multiplying the stock price by the number of shares outstanding. Large-cap companies are generally considered to be worth $10 billion or more; mid-cap companies are worth $2 billion to $10 billion and small-cap companies are worth under $2 billion. Larger companies are less likely to go out of business but rise less than small companies.
See Risk, Investment Strategy
Market Correction
A decline of 10% or more in stock prices from their high. Market corrections are typically short-lived and have always been followed by new all-time highs. Corrections are less severe than bear markets and are considered a normal part of investment cycles, serving as a reset when prices have risen too quickly. Market corrections occur about once every 12 months.
See Bull Market, Market Capitalization
Market Sector
A group of companies in an industry, classified together for investment analysis and portfolio management purposes. The main sectors of the U.S. stock market include technology, healthcare, financials, consumer staples, energy and real estate. Investors use sector analysis to diversify and manage risk.
See Diversification
Maturity
The date on which the issuer of a bond or other debt security must return principal to the investor. The longer the maturity, the greater the asset’s sensitivity to changes in interest rates.
See Treasury Bills, Duration
Maturity Date
The date that principal of a bond or other debt instrument is to be paid to the investor.
See Maturity
Medicaid
A joint federal and state government program that provides health coverage to eligible low-income individuals and families, including children, pregnant women, elderly adults and people with disabilities. Eligibility is based primarily on income and benefits vary by state.
See Health Insurance, Medicare
Medical Expense Insurance
A contract with an insurance company whereby you pay a fee, called a premium, and in exchange, the insurer pays for healthcare costs not paid by other insurance policies. It often supplements major medical insurance.
Medical Expenses
Costs you pay for the diagnosis, prevention, treatment or cure of a medical condition. Out-of-pocket medical expenses that exceed 7.5% of your adjusted gross income may be deductible if you itemize expenses on your federal tax return. See Health Insurance, Tax Deduction
Medicare
The federal health insurance program for people age 65 and older, and certain younger individuals with qualifying disabilities or conditions. Medicare has four parts: Medicare Part A (hospital insurance), Medicare Part B (medical insurance), Medicare Part C (Medicare Advantage) and Medicare Part D (prescription drug coverage). Medicare is funded by payroll taxes, premiums and federal revenue.
See Medicaid
Medicare Part A
The portion of Medicare that covers inpatient hospital care, skilled nursing facility care, hospice care and some home health services. Most people who have paid Medicare taxes for at least 10 years receive Part A coverage at no monthly cost.
See Medicare Part B, Medicare Part C, Medicare Part D
Medicare Part B
The portion of Medicare that covers outpatient medical services, including doctor visits, preventive care, lab tests and durable medical equipment. Part B requires payment of a monthly premium.
See Medicare Part A, Medicare Part C, Medicare Part D
Medicare Part C
Also called Medicare Advantage. A Medicare health plan offered by private insurance companies. Part C combines the coverage of Parts A and B and often includes prescription drug coverage and added benefits such as dental and vision care.
See Medicare Part A, Medicare Part B, Medicare Part D
Medicare Part D
The portion of Medicare that provides prescription drug coverage. Part D plans are sold by insurance companies approved by Medicare. Enrollees pay a monthly premium and typically share the cost of medications through copays or coinsurance.
See Medicare Part A, Medicare Part B, Medicare Part C
Mental Accounting Bias
The tendency to justify financial decisions without regard to logic or rationality. Example: you buy clothing on sale, rationalizing that you “saved” $50 when in fact you spent $100.
See Behavioral Bias
Metaverse
A term describing a network of immersive, three-dimensional virtual worlds where people can work, socialize, shop and engage in other activities through digital avatars. The metaverse combines technologies such as virtual reality, augmented reality and blockchain. It is an emerging area for digital commerce and investment.
See Tokens
Mid-cap
Refers to companies with a market capitalization generally between $2 billion and $10 billion. Mid-cap companies are typically in a growth phase and may offer more growth potential than large-cap companies but carry more risk. S
ee Small-Cap
Modern Portfolio Theory
The most common investment management strategy used by professional financial advisors today. Harry Markowitz created MPT in 1952 and won the Nobel Prize for it in 1990. MPT helps investors design portfolios that balance risk and return through diversification. See Asset Allocation
Modified Adjusted Gross Income
Your Adjusted Gross Income with certain tax deductions added back in. The IRS uses MAGI to determine your eligibility for various tax benefits, including deductions for IRA contributions, education credits and eligibility for programs such as tax credits under the Affordable Care Act.
Money Manager
A professional or firm managing investment portfolios on behalf of clients, making decisions about what securities to buy and sell. Also called a portfolio manager or investment manager, a money manager is typically compensated either by a fee that is a flat rate or based on a percentage of the assets under management. Money manager must be registered with the SEC or their state securities regulator.
See Active Management, Passive Management
Money Market Account
Deposit accounts offered by banks and credit unions that combine the features of savings and checking accounts. These accounts typically offer a higher interest rate than savings accounts but may have restrictions on the number of checks that can be written per month. Money market accounts are insured by FDIC at banks and NCUA at credit unions.
See Money Market Fund
Money Market Fund
An investment that pools money from many investors to purchase investment-grade, short-term assets designed never to fluctuate in value, paying interest to investors. MMFs offer a high degree of safety, low interest rates, low fees and high liquidity. They are offered by mutual fund and ETF providers, and differ from Money Market Accounts, which are offered by banks and credit unions.
Moody’s
One of the three major credit rating agencies in the United States, alongside Standard & Poor’s and Fitch. Moody’s assigns ratings to bonds, corporations and governments to help investors assess the risk of default. Its ratings range from AAA (highest quality) to C (in default).
See Investment-Grade, Junk Bond
Mortgage
A loan used to purchase real estate.
See Adjustable-Rate Mortgage, Fixed-Rate Mortgage, Mortgage-Backed Securities, Private Mortgage Insurance, Refinance
Mortgage Interest
The portion of your monthly mortgage payment that goes to the lender as the cost of borrowing, rather than reducing your loan balance. Mortgage interest is typically tax-deductible for homeowners who itemize deductions on their federal income tax return, subject to certain limits.
See Adjustable-Rate Mortgage, Fixed-Rate Mortgage, Tax Deduction
Mortgage-Backed Securities
An investment that consists of mortgages that are bought from banks, pooled and the pools sold to investors. As homeowners make their monthly payments, those payments are send to the MBS holders.
See Duration
Municipal Bond
Debt securities issued by state and local governments to fund public projects such as schools, roads and infrastructure. Also called “muni bonds”. Interest earned on most munis is exempt from federal income tax and, in many cases, from state and local taxes as well, making them especially attractive to investors in higher tax brackets.
See Bond, Issuer, Tax-Free
Mutual Funds
N
Nasdaq
Short for the National Association of Securities Dealers Automated Quotations, a U.S. stock exchange founded in 1971 that was the world’s first electronic stock market. Nasdaq is the second-largest stock exchange in the world by market capitalization. It’s known for the large number of technology companies whose stocks trade on it, including Apple, Microsoft and Amazon.
See Equities, New York Stock Exchange
National Credit Union Administration
An independent federal agency that charters, regulates and insures deposits at federally insured credit unions. NCUA administers the National Credit Union Share Insurance Fund, which insures deposits up to $250,000 per member per account ownership category.
See FDIC
Net Investment Income Tax
A 3.8% levy imposed by the federal government on individuals, estates and trusts who have interest, dividends, capital gains, rental income, and annuity income that exceeds certain amounts.
See Passive Income, Income Tax, IRS
Net Profit
The amount of money a company has left after deducting all expenses from its revenue – including operating costs, interest, taxes and other charges. Net profit is sometimes called the “bottom line” and is the most complete measure of a company’s profitability. Also called net income.
See Earnings, Profit
Net Worth
What you own minus what you owe.
See Assets, Debts, Expenses, Income
New York Stock Exchange
The world’s largest stock exchange by market capitalization, founded in 1792. NYSE operates as a marketplace where buyers and sellers trade stocks, bonds and other securities. companies must meet strict financial standards to have their shares traded on the NYSE. The exchange is owned by Intercontinental Exchange (ICE).
See Equities, Nasdaq
NGO
Non-Governmental Organization. A nonprofit entity that operates independently but which engages in activities that governments don’t oppose, such as disaster relief and humanitarian causes. Examples include the Red Cross and Doctors Without Borders.
Non-Deductible IRA
Also called traditional IRA, it is funded with contributions that are not deducted on your tax return. Non-Deductible IRAs are typically used by taxpayers whose income exceeds IRS limits for making contributions to Deductible IRAs. While contributions are not tax-deductible, investment earnings grow tax-deferred until withdrawal. When you take distributions, only the earnings portion is taxable. Non-Deductible IRA contributions must be tracked and reported to the IRS on Form 8606 to avoid being taxed twice.
Non-Discretionary Expense
A cost you must pay regardless of your financial circumstances. Many non-discretionary expenses are recurring ones. Examples include housing payments, utilities, groceries, insurance premiums and loan payments. Once these expenses are established, they become unavoidable and therefore should be paid before discretionary expenses are incurred.
See Fixed Expense, Variable Expense
O
Obamacare
The popular nickname for the Affordable Care Act, or ACA, a 2010 federal law that expanded access to health insurance, required insurers to cover people with pre-existing conditions and established minimum standards for health coverage.
Offshore Account
Bank or investment account held in a foreign country, often in a jurisdiction with lower taxes or lighter regulation. Offshore accounts are legal, but U.S. citizens and residents must report them to the IRS. Using offshore accounts to conceal income or assets from tax authorities is illegal tax evasion.
See Tax Avoidance
Opportunity Cost
The missed profit caused by choosing a different investment. The basic formula is the return earned by the investment that was not selected minus the return earned by the investment that was selected. Example: You are choosing between two investments, A and B. You select A. A later earns 8% while B earns 10%. Your opportunity cost is therefore ‑2%. Opportunity Cost can be applied to every aspect of life: choosing to go to a movie means you lose the opportunity to go bowling. Considering opportunity costs helps you make better, more informed decisions.
Optimism Bias
The tendency to overestimate the likelihood of good outcomes and underestimate the chance of bad ones, which can lead to saving too little, failing to obtain proper types and amounts of insurance, and amassing more debt than is appropriate for your circumstances.
See Pessimism Bias
Options Contract
An agreement that gives the buyer the right, but not the obligation, to buy (called a call option) or sell (put option) a specific security at a specific price (strike price) within a set period. The buyer pays a premium for this right. Options can hedge existing positions or speculate on price movements. They are complex instruments that carry significant risk and are not suitable for all investors.
See Forex, FX, Foreign Exchange
Ordinary Income
Money earned from wages, salaries, tips, commissions, interest and dividends. Such earned income is taxed at Ordinary Income Tax Rates.
See Capital Gains, Capital Gains Tax Rates
Ordinary Income Tax Rate
The tax rate applied to most income, such as wages, salaries, tips, business income and short-term capital gains.
See Ordinary Income
Out of Force
Also called lapsing. An insurance policy that is no longer provides coverage. A policy lapses when the policyholder fails to make required premiums.
See In Force
Out-of-pocket
Medical expenses that you pay, as they are not reimbursed by your health insurance plan. Out-of-pocket costs include deductibles, copayments and coinsurance for covered services, as well as the full cost of any services not covered by your plan. Most health plans set an annual out-of-pocket maximum – the highest amount you will pay in a given year before the insurer covers 100% of remaining costs for covered services.
See Affordable Care Act, Deductible
Overconfidence Bias
The tendency to overestimate your knowledge or skill, which causes you to make investments based on your perceived ability to make accurate predictions. Examples: Most lawyers believe they will win their case (only half can), most people think they are funnier than the average person (some must be wrong) and most believe they are above-average drivers (can’t be true).
Over-the-Counter
A method of trading securities directly between two parties, usually through a network of dealers, rather than on a centralized exchange. Stocks, bonds, and derivatives that are not listed on major exchanges trade over-the-counter. Abbreviated as OTC.
See Broker-Dealer, NYSE, Nasdaq
Overtime Pay
Compensation paid to eligible employees who work more than 40 hours in a workweek. Under the Fair Labor Standards Act, covered employees must receive at least 1.5 times their regular pay rate for overtime hours. Overtime pay is subject to income and payroll taxes.
See Earned Income
P
Passive Income
Money earned without effort or engagement. Examples include rental income, stock dividends and royalties. Passive income is defined by the IRS as money obtained from activities where you do not “materially participate” and is generally taxed at Ordinary Income Tax Rates, reported on Schedule E of Form 1040, and is not subject to self-employment tax, though it may be subject to the Net Investment Income Tax.
See Earned Income
Passive Management
An investment strategy that calls for purchasing all the securities in a given asset class and holding them for long periods. The goal is to produce a return that is equal to the performance of the asset class (minus expenses), not to outperform. Some passive investors purchase equal amounts of each security, while others buy them on a market-cap basis.
See Active Management, Beating the Market, Index Funds, Index Investing, SPIVA Scorecard
Pattern Recognition Bias
The tendency to see trends that aren’t there. Leads to overconfidence. Example: Deciding that a coin-flip will be heads because the last three flips have all been heads.
Payroll Tax
Tax withheld from employees’ wages by employers and given to the federal or state government. The primary U.S. payroll tax is FICA, which funds Social Security and Medicare. Employers and employees pay a matching share; self-employed individuals pay both shares through the self-employment tax.
Pension
A monthly payment to an employee or union member that starts upon their retirement and continues until their death. Retirees often have the option of making the irrevocable decision to have payments made until the death of both them and their spouse. Such joint and survivor pension benefits result in lower monthly payments. Pensions are available only to retirees whose employers or unions offer a pension plan, who participate in the plan and who qualify for benefits upon separation of service. Pension benefits are typically taxable at ordinary income tax rates.
See Actuary, Defined Benefit Plan, Defined Contribution Plan, Pension Fund
Pension Fund
An investment pool sponsored by an employer or union. Paycheck contributions (and sometimes, employer contributions) are invested by the fund’s investment manager; the money is used to provide monthly income to workers or members upon retirement.
See Actuary, Defined Benefit Plan, Defined Contribution Plan, Pension, Pension Plan
Pension Plan
An retirement plan sponsored by employers and unions, formally known as a defined benefit plan, that promises employees a specific monthly income in retirement based on such factors as years of service and salary. The plan sponsor is responsible for funding the plan, managing the assets and providing the benefit to retired and disabled workers as promised. Pension plans are now uncommon in the private sector, having been replaced by defined contribution plans such as 401(k) plans.
See Pension
Permanent Life Insurance
Also known as Whole Life Insurance or Cash Value Life Insurance. This is a contract with an insurance company whereby you pay a fee, called a premium, and in exchange, the insurer pays a death benefit to the contract owner’s beneficiary when the insured dies, regardless of when or why death occurs. In addition to providing a death benefit, this type of life insurance also accumulates a cash value, which is distributed to the policy owner if the contract is cancelled before the insured’s death. The cash value received is taxable at ordinary income tax rates to the extent that it exceeds the amount of premiums paid.
See Term Life Insurance, Universal Life Insurance, Variable Life Insurance
Personal Finance
The management of an individual’s or household’s money, including decisions about earning, saving, investing, spending, budgeting, insurance and planning for retirement and other financial goals. Good personal finance practices involve living within your means, building an emergency fund, saving consistently, managing debt and protecting against financial risks through insurance and estate planning.
See Financial Literacy, Financial Planning, Financial Advisor
Pessimism Bias
The tendency to overestimate the potential for negative events to occur or underestimate the potential for positive outcomes. It causes people to make investment decisions that underperform.
See Optimism Bias
Picks and Shovels
An investment strategy that focuses on companies supplying the tools, materials or infrastructure that an industry needs to operate, rather than investing in the industry’s product. The term comes from the California Gold Rush, when merchants earned more money selling tools to gold miners than the miners earned by prospecting for gold.
See Stock
Policy Limit
The maximum dollar amount an insurance company will pay for a covered claim under your policy. You are responsible for costs that exceed the policy limit. For example, if your policy has a $100,000 liability limit and your loss is $150,000, you must pay $50,000. Choosing adequate policy limits is a crucial decision when buying insurance.
See Insurance Policy
Policy Owner
The person who, under the terms of an insurance contract, names the insured, annuitant and beneficiaries. The owner is also responsible for seeing to it that the premiums are paid on time to keep the contract in force.
Portfolio Manager
A professional who makes investment buy and sell decisions on behalf of investors, in exchange for compensation. Portfolio managers decide what to buy, hold and sell in order to meet client objectives, and are responsible for managing risk and monitoring performance.
See Asset Manager, Financial Advisor, Investment Manager
Power of Attorney
A legal document whereby you give someone you trust (called an attorney in fact) the authority to make financial or legal decisions on your behalf. Comon usages include when you are traveling and thus unavailable, or incapacitated. POAs are typically obtained as part of estate planning.
See Durable Power of Attorney, Health Care Power of Attorney
Premium
The fee charged by an insurance company to put and keep an insurance contract in force. Depending on the contract, premiums might be due one-time or periodically.
See Insurance Policy
Premium
The amount by which a bond’s market price exceeds its face value. A bond trades at a premium when its coupon rate is higher than prevailing interest rates. Example: A bond with a $1,000 face value selling for $1,050 trades at a $50 premium.
See Discount
Prenuptial Agreement
A legal contract between two people that is signed before they marry. Prenups dictate how the couple’s assets, income and debts will be divided upon divorce or death of one of them.
Primary Beneficiary
The person or entity to receive the proceeds of a retirement plan, trust, annuity or insurance policy upon the death of the owner, insured or annuitant. Owners may name more than one primary beneficiary.
See Secondary Beneficiary
Principal
An investor’s initial and ongoing contributions to an investment or fund. Dividends and interest also comprise principal when reinvested into the fund or account that paid them. Principal contributes to the calculation of cost basis, which is used to determine the profitability of an investment and its tax obligations. The return of principal is not subject to tax.
Private Equity
An investment in companies whose shares are not traded on a stock exchange. Private equity firms raise money from accredited and institutional investors.
See Alternative Investments, Publicly Traded Company
Private Mortgage Insurance
A contract with an insurance company whereby you pay a fee, called a premium, and in exchange, the insurer reimburses the mortgage lender if you default on the loan. Lenders typically require that you buy and pay for PMI when your down payment is less than 20% of the property’s price.
Probate
The court-supervised process of settling a deceased’s estate, including validating the will, appointing the executor, paying debts and distributing assets to beneficiaries. When a person dies without a will, the probate court distributes the estate according to state law. Assets held in a trust, retirement accounts and annuities generally pass to heirs outside of probate.
Profit
For investors, profit refers to the gain earned from an investment. Net profit refers to the gain after paying expenses. Taxes may reduce the net profit. For businesses, profit has a similar concept but involves more complex issues, including amortization and depreciation.
See Revenue
Profit-Sharing Contribution
A portion of profits that are placed annually into a company’s retirement plan. These payments are typically voluntary by the company and thus vary from year to year.
See 401(k) Plan, Defined Benefit Plan, Defined Contribution Plan, Profit-Sharing Plan
Proof of Work
A consensus mechanism used in some blockchain networks, including Bitcoin, that requires participants, known as “miners”, to use computing power to solve complex mathematical puzzles. The process validates transactions and adds new blocks to the chain. The first miner to solve each puzzle earns newly issued cryptocurrency, called a “block reward.”
See Proof of Stake
Proof of Stake
A consensus mechanism used in some blockchain networks as an energy-efficient alternative to Proof of Work. PoS validators lock up (or “stake”) a quantity of their digital asset as collateral, assuring that new data being added to the chain is legitimate.
See Proof of Work
Profit-Sharing Plan
A retirement plan established by a company for the benefit of its employees. Funding for this plan is provided by the employer, based on the company’s annual profits. Contributions are typically voluntary and vary annually.
See 401(k) Plan, Defined Benefit Plan, Defined Contribution Plan, Profit-Sharing Contribution
Property and Casualty Insurance
A contract with an insurance company whereby you pay a fee, called a premium, and in exchange, the insurer reimburses you for losses due to theft, loss or damage to your valuable physical possessions, such as real estate, vehicles, jewelry, collectibles and artwork. These contracts also pay for financial losses you incur if you are held responsible for accidentally injuring someone or damaging their property.
Property Tax
An annual assessment, typically by a municipal government, based on the value of real estate you own.
See Taxes
Proud Papa Bias
The tendency to overvalue an asset or its growth potential merely because already own it or are closely associated with it.
See Behavioral Bias
Publicly Traded Company
A company whose shares of stock are listed and available for purchase on a public stock exchange, such as the NYSE or Nasdaq. Publicly traded companies must register with the SEC and regularly disclose financial information, including annual and quarterly reports, and material events. Transparency allows investors to make timely and informed decisions.
See Private Equity
Purchasing Power
The quantity of goods and services that a unit of currency can buy. Inflation reduces purchasing power over time. Protecting and increasing purchasing power is the main reason people invest.
See Deflation
Put Option
A financial contract that gives the buyer the right, but not the obligation, to sell a specific security at a set price, called the strike price, on or before a specified date. Investors buy put options when they expect the price of the underlying security to fall.
See Call Option, Options Contract
Q
Qualified Custodian
A bank, broker-dealer, futures commission merchant or foreign entity designated by the SEC or a state agency to serve as a custodian.
R
Real Estate
Land and any structures or improvements permanently attached to it, including residential homes, apartment buildings and commercial properties. Real estate may be owned for personal use, such as a primary residence, or held as an investment to earn rental income or benefit from appreciation in value over time. Because it cannot be quickly or cheaply converted into cash, real estate is generally considered one of the least liquid asset classes.
See Mortgage, Property Tax, Real Estate Investment Trust
Real Estate Investment Trust
Money gathered from investors and collectively used to purchase real estate. REITs might invest in property, mortgages or companies engaged in the real estate field, such as builders and developers. REITs generally trade like stocks on the New York Stock Exchange and thus enjoy liquidity; Non-Traded REITs do not and typically return principle after 7–10 years.
Realized Capital Gain
The profit earned when selling an asset for more than you paid for it. Realized capital gains are subject to tax. An asset that has not been sold but which has risen in value has an unrealized capital gain, which is not subject to tax.
See Taxable Income
Rebalancing
The act of selling some assets within a portfolio while buying others, to restore a portfolio’s composition to its prior asset allocation. The need for rebalancing occurs due to price fluctuations in each asset. The benefit is that shares are purchased while prices are lower and sold while they are higher, helping to reduce risk and increase returns.
Recency Bias
The tendency to assign greater weight to recent events than to longer-term results. People tend to buy stocks if prices have recently risen and sell them if prices have recently fallen, without regard to the long-term performance of the stock market. Recency bias causes people to take greater risks and suffer lower returns.
Recession
A period in which the nation’s economic output has declined for three consecutive months. Recessions are typically marked by rising unemployment and reduced consumer spending.
See GDP, Lagging Indicator, Economic Indicator
Refinance
The process of replacing an existing loan, most commonly a mortgage, with a new loan, usually to obtain a lower interest rate, reduce monthly payments, change the maturity date or increase or decrease the loan amount. Refinancing involves closing costs.
Registered Investment Advisor
Firms registered with the SEC (or state securities regulator) that provide investment advice for compensation. Unlike stockbrokers and insurance agents, RIAs are required to act as fiduciaries, meaning they must always put their clients’ interests ahead of their own.
See Investment Advisor Representative
Regret Avoidance Bias
The tendency to make financial decisions based on fear of feeling sad, repentant or disappointed in the future. Example: holding a losing investment and hoping it will rise, because selling it would force you to admit that buying it was a bad decision.
Rent
A periodic payment made by a tenant to a property owner, also called a “landlord” in exchange for use of a property, such as an apartment, home or commercial space. Rental income received by a property owner is generally taxable and reported on Schedule E of Form 1040. It is typically a non-discretionary expense but not tax-deductible for individuals.
Retirement Account
A savings or investment account designed to help individuals accumulate money to be spent in retirement. Common retirement accounts include Deductible IRAs, Non-Deductible IRAs, Roth IRAs, Spousal IRAs, 401(k) plans,403(b) plans and the Thrift Saving Account. Contributions may or may not be tax-deductible, and earnings grow tax-deferred and withdrawals may be tax-free.
See Individual Retirement Account
Retirement Plan
A program sponsored by employers and unions that is designed to help you accumulate savings to be spent in retirement. Plans include 401(k) plans, 403(b) plans and pensions.
See Defined Benefit Plan, Defined Contribution Plan
Retirement Planning
The process of setting financial goals for retirement and developing a strategy to meet them. It includes estimating how much money you will need in retirement, deciding how much to save, choosing the right accounts and investments and planning for how you will draw income once you stop working.
See Financial Planning, Retirement Account, Retirement Plan
Revenue
Also called “gross sales.” It is the money a company generates by selling products or services. It is distinct from profit, which is what remains after expenses are deducted.
RIA
Short for Registered Investment Advisor. A firm that provides investment advice for compensation and is legally required to act as a fiduciary. RIAs are registered with the SEC or a state securities regulator.
See Investment Advisers Act of 1940
Risk
The degree to which you or your assets are exposed to harm or loss.
See Diversification, Risk Tolerance
Risk Tolerance
The degree to which you are willing to accept risk.
Rollover
The transfer of funds from one retirement account to another, without incurring taxes or penalties. A direct rollover moves money between institutions. If the funds are paid to you, you deposit them into another qualifying account within 60 days to avoid taxes and a 10% IRS penalty.
See Retirement Plan, IRA
Rollover IRA
An IRA that contains assets originally held in another retirement account.
See Roth IRA, Spousal IRA, Decedent IRA, Beneficiary IRA
Roth IRA
An IRA or employer-sponsored account that is funded with after-tax contributions. Profits grow tax-deferred and withdrawals are tax-free in retirement.
See Beneficiary IRA, Decedent IRA, Rollover IRA, Spousal IRA
Royalty
Payment received for granting others the right to use your intellectual property, such as a patent, copyright, trademark or the right to extract natural resources from your land. Royalty income is generally reported on Schedule E of Form 1040 and is taxable as ordinary income. Example: an author who licenses their book to a publisher receives royalties based on sales.
See Passive Income
Rule of 55
A provision in the IRS tax code that allows employees who leave their job in the year they turn 55 or older, for any reason, to withdraw money from that employer’s retirement plan without paying a 10% early withdrawal penalty, subject to conditions. This rule does not apply to IRAs.
See Defined Contribution Plan, Retirement Account, Separation of Service
Rule of 72
A shortcut for estimating how long it will take for an investment to double in value at a given annual rate of return. Simply divide 72 by the annual return. For example, an investment earning 6% per year would double in approximately 12 years (72 ÷ 6 = 12). The rule can also be reversed to estimate the rate of return needed to double money within a certain number of years, making it a quick tool for comparing the long-term impact of different rates of return.
See Compound Interest
S
S&P
Short for Standard & Poor’s, one of the three major credit rating agencies in the United States, along with Moody’s and Fitch. S&P also publishes widely followed market indexes, including the S&P 500 Stock Index, through its division S&P Dow Jones Indices.
S&P 500 Stock Index
A list of the 500 largest publicly traded companies in the United States, sorted by each company’s market cap. Shares of each company trade on the New York Stock Exchange or NASDAQ.
S&P Dow Jones Indices
The world’s largest index provider, and a division of S&P Global. It creates and maintains thousands of market indices across every major asset class and market sector, including its flagship products: S&P 500 and Dow Jones Industrial Average. More assets are benchmarked to S&P Dow Jones Indices than to any other index provider in the world.
See S&P 500 Stock Index, Stock Market
Salary
Fixed compensation paid to employees on a daily, weekly, bi-weekly, semi-monthly or monthly basis. Exempt workers are paid the same salary regardless of the number of hours worked; nonexempt workers are entitled to overtime pay. Salaries are subject to federal and state income tax, and FICA.
See Earned Income, Ordinary Income, Taxable Income
Sales Tax
A fee added to the price of goods and services at the point of purchase, collected by the seller and sent to the government. The fee is typically a percentage of the purchase price. The rate varies by jurisdiction and product/service.
See Excise Tax, Indirect Tax, Value-Added Tax
Savings Account
A place to store money that earns interest. It is offered by banks and credit unions. Savings accounts are protected by the Federal Deposit Insurance Corporation up to FDIC limits.
Schedule C
A form filed with Form 1040 that sole proprietors and single-member LLCs use to report business income and deductible business expenses. The net profit shown on Schedule C is subject to both income tax and self-employment tax.
See Internal Revenue Service, Self-Employment Earnings
Second Mortgage
A loan secured by the equity in your home that is subordinate to your primary mortgage. When the property is sold, the primary lender is paid first, then the secondary lender. You receive any remaining proceeds.
See Home Equity Loans, Home Equity Lines of Credit
Secondary Beneficiary
The person or entity to receive the proceeds of a retirement plan, trust, annuity or insurance policy upon the owner’s death, provided that the Primary Beneficiary has predeceased the owner. Owners may name more than one secondary beneficiary.
Securities
Financial assets, including stocks, bonds, mutual funds, exchange-traded funds, REITs, options and other investments. Securities are regulated by the SEC.
See Collectibles
Securities Investor Protection Corporation
A nonprofit membership corporation created by Congress in 1970 that protects customers of failed brokerage firms. If your brokerage firm fails, SIPC returns your cash and securities up to $500,000 per account, including up to $250,000 in cash. SIPC does not protect against investment losses from market declines or bad advice.
See FDIC, NCUA
Securities License
A credential issued by FINRA that authorizes a financial professional to sell securities. Common licenses include the Series 7 (general securities representative), Series 6 (mutual funds and variable annuities) and Series 65 (Investment Adviser Representative).
See Brokerage Firm, RIA
Self-Employment Earnings
Income you generate from working as a freelancer, independent contractor, sole proprietor or gig worker. Self-employment earnings are reported on Schedule C of IRS Form 1040 and are subject to self-employment tax.
See Taxable Income
Self-Employment Tax
A federal tax equal to 15.3% of net self-employment earnings, consisting of 12.4% for Social Security and 2.9% for Medicare. This tax covers the portions of Social Security and Medicare taxes that employers pay on behalf of employees. Self-employed individuals can deduct half of the self-employment tax when calculating their Adjusted Gross Income.
Separation of Service
A term used by retirement plans to describe a worker’s cessation of employment, whether through resignation, termination, layoff, disability, death or retirement. Separation from service can trigger the right to receive benefits in accordance with the rules established by the retirement plan. Under the Rule of 55, workers who leave their job in or after the year they turn 55 may take distributions from their employer’s retirement plan without incurring an IRS 10% penalty.
See Pension Plan, Defined Benefit Plan
Settlor
Also called a grantor or trustor. The person who creates a trust by transferring assets into it and establishing the rules governing how those assets are managed and distributed. The settlor names the trustee and the beneficiaries.
Shareholder
Individuals or entities that own shares of stock in a corporation. Shareholders are the company’s owners and therefore are entitled to receive dividends and vote on corporate decisions, such as electing the board of directors. If the company is liquidated, shareholders receive their share of assets after the company’s liabilities are paid.
See Creditor
Shares
Units of ownership in a company or fund. When you buy shares, you own a pro-rata share.
See Assets, Equities, Capital Gains
Short-Term Capital Gains
Profit from the sale of an asset that you held for one year or less. Short-term capital gains are taxed as ordinary income.
See Long-Term Capital Gain
Single-Life Option
An annuity or pension payout that pays income to the annuitant for the remainder of their life. Payments stop at the annuitant’s death; they do not continue to the surviving spouse or other beneficiary. Single-life payments are higher than joint-and-survivor payments.
See Joint and Survivor
SIPC
Short for the Securities Investor Protection Corporation, a nonprofit membership corporation created by Congress in 1970 that protects customers of failed brokerage firms. SIPC replaces missing stocks and other securities up to $500,000 per customer account, including up to $250,000 in cash. SIPC does not protect against investment losses.
Small Sample Size Bias
The tendency to make decisions based on insufficient data. It often causes faulty conclusions. Example: your neighbor is laid off, causing you to conclude that the economy is terrible and leading you to sell your investments.
Small-Cap
Refers to companies with a market capitalization generally between $300 million and $2 billion. Small-cap companies often offer higher long-term growth potential than larger companies, but they also tend to carry more risk and experience greater price volatility.
See Large-cap, Mid-cap
Social Security
A federal insurance program administered that provides monthly benefits to eligible retired and disabled workers, and their survivors. Workers pay Social Security taxes. See Social Security Administration
Social Security Administration
The federal agency that administers the Social Security program, including retirement, disability and survivor benefits. SSA collects payroll taxes, maintains earnings records and determines eligibility and benefit amounts for qualifying individuals.
See FICA, Medicare
Socialism
An economic system in which the major means of production – such as factories, energy and transportation – are owned or regulated by the government, rather than by individuals. Socialism allows individuals to own property and businesses, but the state plays a larger role in distributing resources and providing such social services as healthcare and education.
See Capitalism, Communism
Soft Dollar Compensation
The provision of free services in exchange for business. Example: a brokerage firm gives an investment manager research reports; in exchange, the manager directs trades to that firm. This activity creates potential conflicts of interest.
See Commissions
Speculative-Grade
A bond or debt security with a credit rating below investment grade – rated BB+ or lower by S&P and Fitch, or Ba1 or lower by Moodys. These bonds carry a higher risk of default and pay higher interest rates to attract investors willing to take on that extra risk. Also called high-yield or junk bonds.
See Credit Rating Agency, Default Risk, Investment-Grade
SPIVA Scorecard
A semiannual report called “S&P Indices Versus Active” that is published by S&P Dow Jones Indices. It compares the performance of actively managed mutual funds to their benchmark over various time periods. The scorecard shows that the majority of active fund managers consistently underperform their benchmarks over every time period. See Index Investing, MPT, Investment Strategy
Spousal IRA
Spread
The difference between two prices, rates or yields. In trading, the spread is the gap between the bid price (what buyers pay) and the ask price (what sellers receive), which represents the dealer’s profit. In bond markets, the spread refers to the difference between a bond’s yield and a benchmark, such as Treasury bonds.
See Interest Rate
Stablecoins
A type of digital asset designed to maintain a stable value by being pegged to a traditional asset, such as the U.S. dollar. They are widely used as a medium of exchange.
See Bitcoin, Blockchain, Crypto, Tokens
State Income Tax
A levy collected by state governments based on your earned income. Rates and rules vary by state.
See Income Tax
State Securities Regulator
A state agency responsible for licensing investment advisors, broker-dealers and securities offerings within its jurisdiction. State regulators work alongside federal agencies such as the SEC and FINRA to protect investors from fraud and ensure fair markets.
See Registered Investment Advisor
Status Quo Bias
The tendency to leave things as they are, even though current events or changes in your circumstances warrant action.
Stock
A security representing ownership of a company. A fraction of a stock is called a share.
See Equities, Stock Exchange
Stock Exchange
A marketplace where buyers and sellers trade shares of publicly listed companies and other securities. Stock exchanges such as the NYSE and NASDAQ provide price transparency, liquidity and regulatory oversight. must meet the exchange’s listing requirements and comply with SEC disclosure rules.
See Stock, Stock Market
Stock Market
The broad network of exchanges, platforms and over-the-counter markets where stocks and other securities are bought and sold. When people refer to “the market,” they are typically referring to the performance indexes that track many stocks, such as the S&P 500 Stock Index.
See Stock Exchange
Stockbroker
A licensed financial professional registered with FINRA who buys and sells securities on behalf of clients. Stockbrokers are officially known as Registered Representatives because they are registered with FINRA and represent the brokerage firm that employs them. Brokers are not fiduciaries and do not give advice; they are only required to offer investments that are “suitable” for the investor at the time the recommendation is made.
See Suitability, Utmost Good Faith
Strike Price
Also called the exercise price. The fixed price at which a buyer of an options contract can buy (call option) or sell (put option) the underlying security. The strike price is set when the contract is written and remains fixed throughout its life.
Student Loan
Money borrowed to pay for education.
See Debt, Loan
Suitability
A regulatory standard that requires a stockbroker to have a reasonable basis for believing that a recommended investment or strategy is appropriate for a specific client, based on that client’s profile.
See Fiduciary Obligation, Utmost Good Faith
Surrender
The act of canceling an annuity or life insurance policy before its scheduled end date. When you surrender a policy, the insurance company pays you the accumulated cash value minus any applicable surrender charges.
See Surrender Periods
Surrender Periods
A set period, typically several years after a contract is purchased, during which withdrawing money or surrendering an annuity or life insurance policy will result in a surrender charge. Surrender charges are designed to discourage early withdrawals and typically decrease each year until they reach zero at the end of the surrender period. See Cash Value
Surtax
A levy imposed in addition to a base tax, typically applied to income above a certain threshold. A surtax is an extra charge. See Income Tax
T
Tax Avoidance
The practice of legally arranging your financial affairs to minimize the amount of taxes you owe, using strategies permitted by the Internal Revenue Code. Examples include tax-deductible contributions to a 401(k), claiming eligible deductions, and strategically timing the receipt of income and the payment of expenses.
See Tax Efficient, Tax Evasion
Tax Code
The body of federal tax law enacted by Congress that governs how income, estates, gifts and other financial transactions are taxed in the United States. The tax code is administered and enforced by the IRS. See Internal Revenue Code, Income Tax
Tax Credit
A reduction in the amount of tax you owe. Example: You have taxable income of $100 and your tax rate is $30, meaning you owe $30 in taxes. If you have $10 in tax credits, you thus owe $20 in taxes. An example is the Child and Dependent Care Tax Credit, which lets working parents reduce their federal income tax by thousands of dollars.
See Tax Deduction
Tax Deduction
Tax Deferred
Also called Tax-Sheltered. Investment income or profits that are not taxed until withdrawn from an account.
Tax-Efficient
An investment strategy, account type or financial decision that minimizes the amount of current or future taxes you are required to pay. Tax-efficient strategies include the use of index funds, municipal bonds and retirement accounts.
See Tax Avoidance, Tax Evasion
Tax Evasion
The illegal act of deliberately misrepresenting to or concealing from the IRS income, capital gains other information to reduce your tax liability. Examples include failing to report income, inflating deductions, hiding assets in unreported offshore accounts or submitting false documents to the IRS. Tax evasion is a federal crime that can result in substantial fines and imprisonment.
See Taxes, Tax Avoidance, Tax Efficient
Tax Exclusions
Portions of income that are left out of your gross income and therefore are not subject to federal income tax.
See Adjusted Gross Income, Exclusion, Tax Exemptions
Tax Exemptions
Amounts that reduce your taxable income, as allowed by the tax code. Historically, taxpayers could claim personal exemptions for themselves and each dependent. Certain organizations, such as nonprofits, are exempt from paying income taxes.
See Adjusted Gross Income, Tax Deduction
Tax Rate
The percentage used to calculate your tax liability on income or a financial transaction. Your marginal tax rate is applied to the last dollar you earn; your effective tax rate is the average percentage you pay on all your income. These numbers differ because the U.S. tax system is progressive, meaning portions of your income are taxed at increasingly higher rates.
See Capital Gains Tax Rates, Ordinary Income Tax Rates, Taxes
Tax Refunds
The amount returned to a taxpayer by the U.S. Treasury or state tax authority when the taxes withheld or paid during the year exceed the amount owed. Getting a refund means you overpaid your taxes during the year and are receiving your own money back – without interest.
See Federal Income Tax, Income Tax, Internal Revenue Service
Taxable Income
Also called Adjusted Gross Income. It is the portion of your gross income that is subject to federal, state and/or local income tax. It includes wages, salaries, bonuses, tips, realized capital gains and self-employment earnings and is reduced by deductions, exemptions, exclusions and credits.
Tax-Deductible
Describes an expense or contribution that can be subtracted from your gross income to reduce the amount of income subject to tax. For example, contributions to a traditional IRA, mortgage interest and certain charitable donations may be tax-deductible. A deduction reduces your taxable income, not your tax bill directly, so the actual savings depends on your tax bracket.
See Tax-Deferred
Tax-Deferred
Describes income or investment growth that is not subject to tax until a later date, typically when funds are withdrawn. Traditional 401(k) contributions and traditional IRA contributions allow your money to grow tax-deferred. You pay income tax when you take distributions in retirement, at which point you may be in a lower tax bracket. Tax-deferral allows your investments to compound more quickly because they are not reduced by annual taxes.
See Tax-Deductible
Taxes
Tax-Free
Describes income, investments or transactions that are exempt from taxation. Examples include qualified interest from municipal bonds, qualified distributions from a Roth IRA and death benefits paid to a life insurance beneficiary. Contrast with tax-deferred, where taxes are postponed but eventually owed.
Tax-Loss Harvesting
A tactic that calls for selling investments in taxable accounts that have declined in value, using the loss to reduce the tax due from gains on other investments, and using the proceeds of the sale to simultaneously purchase other, similar investments – thus preserving the overall investment strategy.
T‑Bills
see Treasury Bills
T‑Bonds
see Treasury Bonds
Term Certain
An option to receive payments for a fixed period, such as 10, 15 or 20 years. If the annuitant dies during the term, payments continue to their beneficiary until the term ends. See Joint and Survivor
Thrift Saving Plan
A retirement savings and investment program available to federal government employees and members of the uniformed services. TSP functions similarly to a 401(k) plan, offering tax-advantaged savings through payroll contributions and a range of investment fund options.
See Defined Contribution Plan, Retirement Account
Tips
Voluntary payments made by customers to service workers – such as restaurant servers, hair stylists or rideshare drivers – to recognize good service. Tips are taxable income and must be reported to your employer if they total $20 or more in a calendar month. Employers are required to withhold income tax, Social Security and Medicare taxes on reported tips.
See Earned Income, Ordinary Income
T‑Notes
see Treasury Notes
Tokens
Digital units of value created and managed on a blockchain. Tokens can represent a wide range of assets or rights, including ownership in a project, access to a service or voting power in a decentralized organization. Unlike coins such as bitcoin, which are the native currency of their own blockchain, tokens are typically built on an existing blockchain platform.
See Crypto, Stablecoins
Trades
The buying or selling of securities – such as stocks, bonds, options or ETFs – in the financial markets. When you place an order through a brokerage, the broker executes the trade on your behalf on an exchange or in over-the-counter markets. Each trade may involve transaction costs such as commissions or bid-ask spreads, and the sale of appreciated securities in a taxable account generally triggers capital gains taxes.
See Stock Exchange
TransUnion
One of the three major consumer credit bureaus in the United States, along with Equifax and Experian. TransUnion collects financial data on individuals and makes that information available to employers, landlords and others. The data includes payment history, credit account information and public records. It was founded in 1968 and is headquartered in Chicago. Consumers can access their TransUnion credit report for free annually at AnnualCreditReport.com.
See Credit Record, Credit Score
Travel Cancellation and Medical Evacuation Insurance
Accident Insurance
Also called Trip Insurance. A contract with an insurance company whereby you pay a fee, called a premium, and in exchange, the insurer reimburses you for the cost of travel if you are unable to go or the trip is interrupted. Covered claims include illness, bad weather, war, work demands, lost luggage and missed or cancelled flights. If you become ill while traveling, these policies will pay for your medical expenses and cost of evacuation to the U.S.
Treasury Bills
Treasury Bonds
Treasury Notes
Intermediate-term securities issued by the federal government to finance its operations. T‑Notes have maturity dates of 2, 3, 5, 7 or 10 years. They pay a fixed rate of interest semi-annually until maturity. T‑Notes are considered among the safest investment in the world because they are guaranteed by the “full faith and credit” of U.S. government, which has never defaulted on an interest payment or failed to return principal upon maturity.
See Treasury Bills, Treasury Bonds
Trip Insurance
see Travel Cancellation and Medical Evacuation Insurance
Trust
A legal structure established by a grantor, who names a trustee to manage assets in accordance with instructions stipulated in the trust for the benefit of named beneficiaries. Trusts are part of estate planning.
Trustee
A person or institution appointed to hold, manage and distribute the assets held in or owned by a trust in accordance with the trust’s terms. The trustee has a fiduciary obligation to serve the best interests of the trust’s grantor and beneficiaries. The trustee is selected by the grantor and can be any individual (such as a family member) or corporation (such as a bank or trust company).
Trustee-to-Trustee Transfer
The process of transferring assets, tax-free, from one retirement plan custodian to another. Unlike a Rollover, transferred funds are not sent to the account owner as a intermediary step.
Trustor
Also called a grantor or settlor. The person who creates a trust by contributing assets into it and establishing the rules by which those assets will be managed and distributed. The trustor names the trustee to manage the trust and designates beneficiaries to receive the assets.
Tuition Prepayment Plan
A federal program operated by the states, established by Section 529 of the Internal Revenue Code. TPPs let you lock in current tuition rates of public colleges now (via a lump sum investment or a series of periodic investments), protecting against inflation. The accounts only cover tuition at in-state schools; if the student chooses to attend a private or out-of-state school, the plan will only pay a portion of the cost. Financial advisors generally consider TPPs to be vastly inferior to College Savings Plans.
U
U.S. Securities and Exchange Commission
An independent federal agency established by Congress in 1934 to protect investors, maintain fair and efficient capital markets and facilitate capital formation. The SEC requires public companies to disclose financial information, oversees stock exchanges and enforces federal securities laws. It is also the chief regulator for investment advisers, broker-dealers and mutual funds.
See FINRA, RIA
Umbrella Liability Insurance
A contract with an insurance company whereby you pay a fee, called a premium, and in exchange, the insurer pays your legal bills and related expenses, subject to policy limits. Coverage is far more broad than other types of insurance policies.
Underwriting
The process by which an insurance company evaluates the risk of insuring a person, property or business and decides whether to offer coverage and at what premium. Underwriters review factors such as age, health, driving history or property condition to determine the likelihood that it will have to pay a claim. In securities, underwriting refers to the process by which an investment bank agrees to buy and resell a company’s newly issued securities to the public.
Unemployment Rate
The percentage of the labor force that is currently without a job but is actively looking for work and available to take one. The rate is calculated by dividing the number of unemployed people by the total labor force and multiplying by 100. The U.S. Bureau of Labor Statistics publishes the rate monthly. See Lagging Indicator
Universal Life Insurance
A type of permanent life insurance that offers flexible premium payments by combining the death benefit with a cash value component. Unlike whole life insurance, you can adjust the amount and timing of your premium payments (within limits) and increase or decrease your death benefit. The cash value earns interest at a rate set by the insurer and grows tax-deferred. While the death benefit, cash value and premiums of Whole Life are guaranteed, that is not the case for Universal Life – meaning the policy might not perform as expected.
Utmost Good Faith
A requirement that insurance companies and their agents disclose all material facts about an insurance policy that could influence a consumer’s decision to purchase it. Utmost is considered the lowest standard of care in the financial services industry.
See Suitability, Fiduciary Duty
V
Value-Added Tax
A levy on goods and services at each stage of production and distribution, ultimately paid by the end consumer. Unlike a sales tax collected at the point of sale, the VAT is collected incrementally; each business pays an amount based on how much value it has added to a product’s value. VATs are used in 170 countries.
See Indirect Tax
Variable Annuity
An insurance contract in which you invest a lump sum or make ongoing optional payments. VAs offer a variety of investment options that are similar to mutual funds; as such, account value fluctuate based on the performance of the option(s) you choose. Variable annuities offer the potential for higher returns than fixed annuities but carry investment risk. Profits grow tax-deferred but are subject to ordinary income tax rates, which are higher than the tax rates assessed on the capital gains of mutual funds and exchange-traded funds. Liquidity is also restricted until age 59½. Because VAs are securities, they are regulated by the SEC as well as state securities regulators.
See Annuity, Bonus Annuity, Fixed Annuity, Immediate Income Annuity
Variable Expense
A cost that changes month to month.
See Adjustable Expense, Discretionary Expense, Fixed Expense, Non-Discretionary Expense
Variable Life Insurance
A type of permanent life insurance that includes a death benefit and a cash value component that is invested in sub-accounts, similar to mutual funds, selected by the policyholder. Therefore, the cash value fluctuates based on the performance of the option(s) you choose. Variable life insurance is regulated as a security by the SEC in addition to being regulated as insurance by states.
See Term Life Insurance, Universal Life Insurance
Volatility
The extent to which an investment’s value changes within a given period. Investors who say they dislike volatility fail to realize that they are focusing only on downside volatility; no one objects to upside volatility – and many fail to recognize that one comes with the other. See Diversification, Risk
W
Waiting Period
The time between the filing of an insurance claim and the start of benefits. The longer the waiting period, the less expensive the policy.
See Insurance Policy
Ward
A minor or incapacitated adult who has been placed under the legal protection and care of a court-appointed guardian. The guardian is responsible for making personal, financial and medical decisions on behalf of the ward. See Estate Planning
Wealth Management Industry
The sector of financial services that provides comprehensive, integrated financial services – including investment management, financial planning, tax strategy, estate planning and insurance – primarily to high-net-worth individuals and families. Wealth management firms offer personalized advice across all aspects of a client’s financial life.
See Asset Management Industry, Financial Advisor
Whole Life Insurance
see Permanent Life Insurance
Will
A legal document that is used following your death. It provides instructions for your funeral, names a guardian who will have custody of your minor children and explains how your assets are to be distributed. You name an executor, who is responsible for executing the will. Your will must be approved by the Probate Court.
See Estate Planning, Living Will
Y
Yield
ncome earned from an investment. It can be expressed either as a dollar amount or as a percentage; if the latter, then a percentage of either the amount invested or the investment’s current value.
See Bond, Dividend, Interest