Navigating the world of financial planning is quite confusing. Unless you have a degree in the field, all of the terms start to run together, adding to the confusion. Understanding these common terms will help.
Aggressive growth fund: Mutual funds that take on a lot of risk in an attempt to gain substantially.
Annuity: A life insurance policy that also earns future regular payments and serves as a form of investment.
Balanced mutual fund: A mutual fund that includes a balance of both bonds and stocks in order to try to provide stability.
Bear market: A declining market.
Bull market: An advancing market.
Blue chip stock: A stock purchased in a company with a stable history.
Bond: A long-term debt companies sell to an investor to cover their expenses; bonds are repaid with interest at the date of maturity, provided the company does not fail beforehand.
Capital gain or loss: The difference between the price paid for an asset and the price it is sold for.
Commodities: Grains, food items, livestock, oils, and metals that are traded in national exchange markets.
Common stock: A unit of ownership in a corporation purchased by a stockholder in an attempt to participate in the corporation's profits.
Consumer price index: An indicator of inflation published by the U.S. Department of Labor.
Diversification: An investment strategy that focuses on investing in a variety of funds, companies, industries, or assets in order to lower overall risk while maximizing profitability.
Dividend: An amount paid to stockholders by a corporation when profits are achieved.
Employer-sponsored retirement plan: A retirement plan arranged by an individual's employer, often a 401(k) plan, that carries a tax advantage.
401(k) plan: A common employer-sponsored retirement plan wherein employees and employers both contribute to the plan on a tax-deferred basis.
Individual retirement account (IRA): A tax-deferred investment option that is taxed as ordinary income at the time of withdrawal; the immediate tax benefit comes as an income tax deduction rather than as a pre-tax withdrawal from the paycheck.
Irrevocable trust: A trust that cannot be changed, even by its creator, after it has begun.
Liquidity: How easily an asset can be turned into cash without any loss.
Money market fund: A fund that works by investing in short-term securities in order to keep each asset at a constant net value of $1. Money market funds are not guaranteed by the Federal Deposit Insurance Corp. or by the government, which means money can be lost.
Portfolio: All the investments held in a fund or by an individual.
Risk: A measure of the chance that an investment will be lost.
Security: The evidence of an investment: direct ownership with stocks, creditorship with bonds, and indirect ownership with options.
Yield: The amount of current income an investment provides to an investor.
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Before you buy insurance or invest, make sure you know what you are doing. Understanding the terminology is just the first step in learning all you can about managing your finances wisely.