Finance Glossary

To help get your financial investment lingo legs under you, we’ve compiled a short glossary of words and terms you’ll likely hear during conversations or while reading. Feel free to bookmark or print them out for reference, and don’t be afraid to ask if you can’t remember all of them right away. You’ll have a deeper understanding of them over time, and they’ll be rolling off your tongue in no time.

Common Investment Account Definitions

A group of investments that have similar characteristics and are subject to the same laws and regulations. They tend to behave similarly within the marketplace.

A debt security, similar to an I.O.U. Borrowers issue bonds to raise money from investors who are willing to lend them money for a determined amount of time. Purchasing a bond is essentially lending money to a government, municipality or corporation. In return, the issuer of the bond promises to pay a specified rate of interest during the life of the bond along with repayment of the original principal (known as face value or par value) of the bond once it comes due (or “matures”) after a set period of time. Many are familiar with school bonds which are in a category called Municipal Bonds.

The profit from the sale of an asset or investment.

A savings account that contains a fixed amount of money for a fixed amount of time. This could be 6 months, 1 or even 5 years. Interest is paid on the CD and when cashed in, the investor receives the original investment plus any interest. Considered a safe savings option and if purchased through a federally insured bank or credit union, is insured up to $250,000.
Simply explained, it’s the interest you earn on interest. Let’s say you start with $100 and earn 5% interest each year. At the end of year 1, you’ll have $105. At the end of year 2, you’ll have $110.25. How? Because you earned the $5 on the initial investment of $100 AND you earned $0.25 on the $5 in interest. Compounding interest adds up over time. If you didn’t add anything else to that $100 initial investment, you’d have nearly $340 over the course of 25 years.

Compound returns make a sum of money grow at a faster rate than simple interest, because in addition to earning returns on the money you invest, you also earn returns on those returns at the end of every compounding period—which could be daily, monthly, quarterly or annually.

Reduces risk by investing in different asset classes, which means various industries, that would react differently to the same event. Basically, don’t put all your eggs in one basket.

A benchmark that tracks 30 American stocks considered to be the leaders of the economy. Examples of stocks included: American Express, Chevron, Intel…

ESG stands for environmental, social, and (corporate) governance. ESG helps identify investments that may follow sustainable, responsible, or ethical guidelines.

Exchange-Traded Funds are baskets of securities much like a mutual fund. The difference is that it trades on an exchange like a stock. A mutual fund only trades once a day after the market closes. They are a low-cost investment vehicle.

A measure of investment’s operating expenses. This expense is passed on to the investor, so it needs to be considered when making investment decisions. EFTs have low expense ratios.

It’s what’s known as a low-volatility type of mutual fund investment and can be easily turned into cash. They are considered a safe investment and are often used to protect rather than grow retirement savings while earning interest (typically 1-3%).
An investment vehicle that contains money collected from a pool of investors. It’s invested in securities such as money market, stocks, bonds and other assets. They are managed by money managers to help them grow and provide returns for the investors. Provides small or individual investors access to professional managed and diversified portfolios at a low price.

An index that holds 3,700 stocks, over 50% of which represent technology stocks. It is the most used index in financial market reports.

A measurement of the degree of loss an investor is willing to endure within their investments. Age, investment goals, and income contribute to an investor’s risk tolerance.

An account allowing funds to move from an old employer sponsored retirement plan into an IRA. A Rollover IRA maintains the tax-deferred status of the account’s retirement assets and avoids paying current taxes or early withdrawal penalties at the time of transfer.
Different than a traditional IRA in that in this retirement account, contributions are made with after-tax dollars. Contributions and earnings can grow tax free and withdrawals can be made, tax free and penalty free, after the age of 59 ½ and once the account has been open for five years.

A financial instruments that hold value and can be traded between parties. In other words, it’s a catch-all term for stocks, bonds, mutual funds, exchange-traded funds or other types of investments you can buy or sell.

A Simplified Employee Pension IRA (or SEP-IRA) is a traditional IRA designed for small business owners and those that are self-employed with few or no employees. The contributions are tax deductible and investments are tax-deferred until retirement when distributions (aka withdrawals) are made and then taxed as income.

Also known as equity, stocks are a security that represents the ownership of a fraction of a corporation. The owner of the stock is entitled to a portion of that corporation’s assets and profits equal to how much stock you own. These units are called shares.

Tracks the stock performance of 500 large companies listed on exchanges. It’s the most commonly-followed equity index. The companies included are Apple, Microsoft, JP Morgan Chase, etc.

An investment account that can invest in stocks, bonds, and mutual funds. Any gains the investments accumulate at the end of the year will be taxed as investment income.

The period of time the investment will be held until they are needed. Generally the longer the time horizon, the more aggressive an investor can be with their portfolio and vice versa.

A long-term retirement account that allows for tax-deductible contributions on the front side and defers taxes while the investment grows. Taxes are paid on withdrawals in retirement.
A thrift savings plan is similar to a 401(k) plan but is open only to federal employees and uniformed services personnel.
A 401(k) plan is a company-sponsored retirement account to which employees can contribute a percentage of their pre-tax salary. Employers may also make matching contributions to the employees account. These funds are invested in many types of vehicles like mutual funds, stocks, bonds and cash.
A college savings plan providing tax advantages. It can be used to pay for qualified education costs including K-12, college and apprenticeship programs.

Common Terms Used in the Financial Industry

The profit or loss on an investment over the course of a one-year period. There are numerous ways to calculate the annual rate of return. For example, if the rate of return is calculated on a monthly basis, it’s multiplied by 12. This is often called the annual percentage rate (A.P.R.)
Annuities are financial products that offer a guaranteed income stream, used primarily by retirees.
An asset is a resource with economic value that an individual, corporation, or country owns or controls with the expectation that it will provide a future benefit. Examples include a bank account, a house, or stock shares.
A time when stock prices are moving downward and the market outlook is pessimistic. This generally happens when a broad market index (a group of stocks of all sizes) falls by 20% or more over a minimum of a 2 month period.
A person who acts as an intermediary between the buyer and seller. Brokers typically charge a commission to execute trades. They are required to seek the best execution of trades for their clients and must only recommend investments suitable for the clients.
This occurs when stock prices are on the rise and the market outlook is optimistic. This generally happens when a broad market index (a group of stocks of all sizes) rises by 20% or more over a minimum of a 2 month period.
The profit that is realized when the investment is sold for more than what the investor paid for it.
Collateral is an item of value used to secure a loan. An example could be a house or commercial property.
Fiduciary is a person or organization that acts on behalf of another person or persons, putting their clients’ interest ahead of their own, with a duty to preserve good faith and trust.
The total, combined stocks, bonds, commodity, real estate and other investments held by an individual.
This represents the initial amount of money invested, borrowed or lent.
Refers to the degree of uncertainty about the rate of return on an asset and the possible harm caused when financial returns are not what the investor expected. Typically the higher the risk, the higher the return.


We’re here to answer them.