By: Rachel Vertrees & Charles Wanner IV
Navigating the world of finance can feel overwhelming, especially when you’re bombarded with terms and abbreviations that seem more complex than they need to be. Whether you’re managing your personal budget, exploring investment opportunities, or simply trying to make sense of financial news, understanding the language of finance and investments is key.
In this article, we’ll break down common financial terms and explain their meanings in simple terms. We chose terms that are commonly used by our advisors and clients; however, you can reference Investopedia’s full Dictionary HERE to learn more. By the end, you’ll have a clearer picture of financial terms, be able to apply them when navigating the world of finance, and see how they empower you to make smarter financial decisions.
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401(k) Plan: “A defined-contribution, tax-advantaged retirement savings plan that is sponsored by one’s employer.”
403(b) Plan: “A tax-advantaged retirement account for certain employees of tax-exempt organizations.”
52-Week High/Low: “The highest and lowest price at which a security, such as a stock, has traded during the time period that equates to one year. Typically, the 52-week high represents a resistance level, while the 52-week low is a support level that traders can use to trigger trading decisions.”
529 Plan: “Tax-deferred savings plans designed to help pay for college expenses. In some states, qualified withdrawals for these costs are not subject to federal or state taxes.”
A:
Active Management: “An investor, a professional money manager, or a team of professionals is tracking the performance of an investment portfolio and making buy, hold, and sell decisions about the assets in it. The goal of any investment manager is to outperform a designated benchmark while simultaneously accomplishing one or more additional goals such as managing risk, limiting tax consequences, or adhering to environmental, social, and governance (ESG) standards for investing. Active managers may differ from other is how they accomplish some of these goals.”
Annuity: “A contract that’s issued and distributed by an insurance company and bought by individuals. The insurance company pays a fixed or variable income stream to the purchaser.”
Asset Management: “The practice of increasing wealth over time by acquiring, maintaining, and trading investments that have the potential to grow in value.”
Assets Under Management (AUM): “The total market value of investments that a person or entity manages on behalf of clients.”
B:
Bear Market: “A prolonged decline in stock prices with the major indices falling by 20% or more from their highs.”
Bond: “A fixed-income instrument that represents a loan made by an investor to a borrower (typically corporate or governmental.”
Bull Market: “Asset prices have risen or are expected to rise, the commonly accepted threshold for the start of a bull market is a rise in stock prices of 20%.”
C:
Capital: “Anything that confers value or benefit to its owner, such as a factory and its machinery, intellectual property like patents, or the financial assets of a business or an individual.”
Capital Gains: “The increase in the value of an asset relative to the price that was originally paid for it…Long-term capital gains taxes are lower than ordinary income taxes, providing a tax advantage to many taxpayers, including homeowners and investors.”
Compound Interest: “The interest on a loan or deposit calculated based on both the initial principal and the accumulated interest from previous periods.”
Consumer Price Index (CPI): “The CPI is used as a measure of inflation for policymakers, financial markets, businesses, and consumers.”
D:
Diversification: “Owning a wide variety of investments with different characteristics to reduce volatility.”
Dividend: “The distribution of corporate profits to qualified shareholders, as determined by the company’s board of directors.”
Dollar-Cost Averaging (DCA): “An approach to purchasing an investment in which the buyer spreads out their purchases so that the total price paid is less affected by market timing.”
Dow Jones Industrial Average (DJIA): “Tracks thirty of America's biggest and most established companies, acting like a quick temperature check of the U.S. economy.”
Due Diligence: “An investigation, audit, or review performed to confirm facts or details of matter under consideration.”
E:
Economic Growth: “An increase in the production of economic goods and services, compared from one period of time to another.”
Economics: “A social science concerned chiefly with description and analysis of the production, distribution, and consumption of goods and services.”
Employment Situation Summary (Jobs Report): “The monthly jobs report estimates the U.S. unemployment rate and the monthly change in nonfarm payrolls as well as average earnings and hours worked.”
Equity: “The amount of money that would be returned to a company’s shareholders if all of the assets were liquidated and all of the company’s debt was paid off in the case of liquidation.”
Exchange-Traded Fund (ETF): “An investment vehicle that pools a group of securities into a fund. It can be traded like an individual stock on an exchange.”
Exponential Growth: “A pattern of data that shows greater increases with passing time, creating the curve of an exponential function.”
F:
Federal Funds Rate: “The target interest rate range at which commercial banks borrow and lend their excess reserves to each other overnight, which is set by the Federal Open Market Committee (FOMC).”
Federal Reserve System: “The Federal Reserve System is the central bank and monetary authority of the United States. The Federal Reserve System is composed of a board of seven members, 12 regional Federal Reserve Banks, and the Federal Open Market Committee.”
Fiduciary: “A person or organization that makes financial decisions on behalf of another party who is legally obligated to act in their client’s best interests.”
Fixed Annuity: “A type of insurance contract that promises to pay the buyer a guaranteed interest rate on their contributions to the account.”
Fixed Income: “A type of investment security that pays the investor a fixed amount on a fixed schedule.”
Fundamental Analysis: “Measures a security's intrinsic value by examining a company's financial statements along with broader economic indicators.”
G:
Gain: “A general increase in the value of an asset or property. A gain arises if the current price of something is higher than the original purchase price. For accounting and tax purposes, gains may be classified in several ways, such as gross vs. net gains or realized vs. unrealized (paper) gains. Capital gains may additionally be classified as short-term vs. long-term in nature.”
Global Financial Stability Report (GFSR): “The Global Financial Stability Report (GFSR) is a semiannual report by the International Monetary Fund (IMF) that assesses the stability of global financial markets and emerging-market financing. It is released twice per year, in April and October.”
Gross Domestic Product (GDP): “The total monetary or market value of all the finished goods and services produced within a country’s borders in a specific time period.”
Gross Income: “An individual’s total earnings before taxes or other deductions.”
H:
Hardship Withdrawal: “An emergency removal of funds from a retirement plan, sought in response to what the Internal Revenue Service (IRS) calls "an immediate and heavy financial need." This type of special distribution may be allowed without penalty...provided the withdrawal meets certain criteria regarding the need for the funds and their amount.”
Holding Period: “The amount of time the investment is held by an investor, or the period between the purchase and sale of a security.”
Holdings: “The contents of an investment portfolio held by an individual or an entity, such as a mutual fund. Holdings can be any type of investment product, including stocks, bonds, mutual funds, options, futures, and exchange-traded funds (ETFs). Having multiple holdings or asset classes can help diversify an investor's investment portfolio.”
I:
Individual Retirement Account (IRA): “A tax-advantaged retirement savings account to which you contribute either pre- or after- tax money and which grows either a tax-deferred or tax-free basis.”
Inflation: “A gradual loss of purchasing power that is reflected in a broad rise in prices for goods and services over time. The inflation rate is calculated as the average price increase of a basket of selected goods and services over one year.”
Inherited IRA: “An account that is opened when an you inherit an IRA or employer-sponsored retirement plan after the original owner dies. The SECURE Act mandated that non-spousal beneficiaries must withdraw all the funds from an inherited IRAs within 10 years.”
Interest Rate: “The amount a lender charges a borrower and is a percentage of the principal – the amount loaned.”
IRA Rollover: “A transfer of funds from a retirement account, such as an employer-sponsored plan, into an individual retirement account (IRA). The purpose of a rollover is to maintain the tax-deferred status of those assets.”
Irrevocable Trust: “A type of trust that cannot be modified, amended, or terminated without the permission of the grantor’s beneficiary or beneficiaries.”
J:
Joint Account: “A bank or brokerage account shared by two or more individuals.”
Joint Tenants with Right of Survivorship (JTWROS): “A legal structure where two or more parties share ownership of a financial account or another asset. When one of the joint owners dies, their share automatically passes to the surviving co-owner(s).”
K:
Knowledge Economy: “A system of consumption and production based on intellectual capital. It refers to the ability to capitalize on scientific discoveries and applied research.”
L:
Large Cap (Big Cap): “A company with a market capitalization value of more than $10 billion. Large cap is a shortened version of the term "large market capitalization."
Limited Power of Attorney (LPOA): “An authorization that permits a portfolio manager to perform specific functions on behalf of the account owner. In general, the LPOA allows the manager to execute an agreed-upon investment strategy and take care of routine related business without contacting the account holder.”
Liquid Assets: “An asset that can easily be converted into cash, such as heavily-traded shares, money market instruments, and funds held in checking accounts.”
Living Trust: “A legal arrangement established by an individual (the grantor) during their lifetime to protect their assets and direct their distribution after the grantor's death. It is an estate planning tool that can help family members and beneficiaries avoid a lengthy, public, complex, and sometimes costly, probate process.”
Living Will: “A legal document that specifies the type of medical care that an individual does or does not want in the event they are unable to communicate their wishes.”
Long-Term Capital Gains and Losses: “The gain or loss that comes from the sale of an investment owned for longer than 12 months.”
Long-Term Investments: “An account on the asset side of a company's balance sheet that represents the company's investments—including stocks, bonds, real estate, and cash—that it intends to hold for more than a year.”
Loss Carryforward: “An accounting technique that applies the current year's net operating loss (NOL) to future years' net income to reduce tax liability. This results in lower taxable income in positive NOI years, reducing the amount the company owes the government in taxes.”
M:
Managed Account: “An investment account that is owned by an investor but managed by somebody else. Armed with discretionary authority over the account, the dedicated manager actively makes investment decisions pertinent to the individual, considering the client's needs and goals, risk tolerance, and asset size.”
Management Fee: “A charge levied by an investment manager for overseeing an investment fund. The fee is intended to compensate managers for their time and expertise in selecting stocks and managing the portfolio.”
Market: “A market is any place or venue where buyers and sellers can exchange goods and services. A market may be physical, like a retail outlet, or virtual, like an online brokerage with no physical contact between buyers and sellers.”
Market Capitalization: “Market capitalization, or "market cap," represents the total dollar market value of a company's outstanding shares of stock. Investors use this figure to determine a company's size instead of sales or total asset value.”
Market Cycles: “Also known as stock market cycles, is a wide term referring to trends or patterns that emerge during different markets or business environments. During a cycle, some securities or asset classes outperform others because their business models are aligned with conditions for growth. Market cycles are the period between the two latest highs or lows of a common benchmark, such as the S&P 500, highlighting a fund’s performance through both an up and a down market.”
Market Exposure: “Refers to the dollar amount of funds or percentage of a broader portfolio that is invested in a particular type of security, market sector, or industry. Market exposure represents the amount an investor can lose from the risks unique to a particular investment or asset class. It is a tool used to measure and balance risk in an investment portfolio.”
Market Indicators: “Quantitative in nature and seek to interpret stock or financial index data in an attempt to forecast market moves. Market indicators are a subset of technical indicators and are typically comprised of formulas and ratios. They aid investors' investment/trading decisions.”
Market Leader: “A company with the largest market share in an industry that can often use its dominance to affect the competitive landscape and direction the market takes.”
Micro-Cap: “A publicly-traded company in the U.S. that has a market capitalization between approximately $50 million and $300 million.”
Mid-Cap: “Designate companies with a market cap (capitalization)—or market value—between $2 and $10 billion.”
Money Market: “Trading in very short-term debt investments. It involves continuous large-volume trades between institutions and traders at the wholesale level. It includes money market mutual funds bought by individual investors and money market accounts opened at banks at the retail level.”
Mutual Fund: “Pooled investments managed by professional money managers. They trade on exchanges and provide an accessible way for investors to get access to a wide mix of assets that are selected for the fund.”
N:
NASDAQ: “A global electronic marketplace for buying and selling securities.”
Nest Egg: “A substantial sum of money or other assets that have been saved or invested for a specific purpose.”
Net Loss: “When total expenses (including taxes, fees, interest, and depreciation) exceed the income or revenue produced for a given period of time.”
New York Stock Exchange (NYSE): “A stock exchange located in New York City that is the largest equities-based exchange in the world, based on the total market capitalization of its listed securities.”
Non-Qualified Plan: “A type of tax-deferred, employer-sponsored retirement plan that falls outside of Employee Retirement Income Security Act (ERISA) guidelines.”
P:
Payable on Death: “An arrangement between a bank or credit union and a client that designates beneficiaries to receive all of the client’s assets.”
Pension Plan: “An employee benefit that commits the employer to making regular contributions to a pool of money set aside to fund payments to eligible employees after they retire.”
Personal Finance: “A term that covers managing your money as well as saving and investing.”
Principal: “The original sum of money that’s borrowed in a loan or placed into an investment.”
Producer Price Index (PPI): “Measures the average change over time in the prices domestic producers receive for their output.”
Profit: “The financial benefit realized when revenue generated from a business activity exceeds the expenses, costs, and taxes involved in sustaining the activity in question.”
Profit and Loss (P&L) Statement: “A financial statement that summarizes the revenues, costs, expenses, and profits/losses of a company during a specified period.”
Purchasing Power: “The value of a currency expressed in terms of the number of goods or services that one unit of money can buy.”
Q:
Qualified Annuity: “A retirement savings plan that is funded with pre-tax dollars.”
R:
Rally: “A period of sustained increases in the prices of stocks, bonds, or related indexes.”
Realized Gain: “Results from selling an asset at a price higher than the original purchase price.”
Realized Loss: “The loss that is recognized when assets are sold for a price lower than the original purchase price.”
Rebalancing: “The process of returning the values of a portfolio's asset allocations to the levels defined by an investment plan.”
Recession: “A significant, widespread, and prolonged downturn in economic activity.”
Required Minimum Distribution (RMD): “The amount of money that must be withdrawn annually from certain employer-sponsored retirement plans like 401(k)s and certain individual retirement accounts (IRAs), such as the traditional IRA. RMDs must be taken by April 1 after you turn 73 years old.”
Registered Investment Advisors (RIA): “A financial professional firm that advises clients on securities investments and may manage their financial portfolios.”
Retirement Planning: “Determining your long-term financial goals and tolerance for risk, and then starting to take action to reach those goals.”
Return: “The money made or lost on an investment over some period of time.”
Return on Investment (ROI): “Performance measure used to evaluate the efficiency or profitability of an investment or compare the efficiency of a number of different investments.”
Rider: “An insurance policy provision that adds benefits to or amends the terms of a basic insurance policy.”
Risk: “The chance that an outcome or investment's actual gains will differ from an expected outcome or return.”
Rollover: “The transfer of holdings from one retirement plan to another without creating a taxable event.”
Roth 401(k): “An employer-sponsored retirement savings account that is funded using after-tax dollars.”
Roth IRA: “A type of tax-advantaged individual retirement account to which you can contribute after-tax dollars toward your retirement.”
S:
S&P 500 Index: “A market-capitalization-weighted index of 500 leading publicly traded companies in the U.S.”
Sector: “An area of the economy in which businesses share the same or related business activity, product, or service.”
Shareholder: “A person, company, or institution that owns at least one share of a company’s stock or a share of a mutual fund.”
Shares: “Units of ownership in a company.”
Stock Market: “An exchange mechanism that helps investors buy and sell shares in publicly traded companies.”
T:
Tax-Advantage: “Any type of investment, financial account, or savings plan that is either exempt from taxation, tax-deferred, or that offers other types of tax benefits.”
Time Horizon: “The period of time one expects to hold an investment until they need the money back.”
Total Return: “The actual rate of return of an investment or a pool of investments over a given evaluation period.”
Traditional IRA: “Allows individuals to deposit pre-tax income into investments that can grow tax-deferred.”
Transfer on Death (TOD): “Allows an account holder to pass assets from brokerage accounts, stocks, and bonds at their death, bypassing probate.”
Treasury Yield: “The effective annual interest rate that the U.S. government pays on one of its debt obligations, expressed as a percentage.”
Trend: “The overall direction of a market or an asset's price.”
U:
Uptrend: “The price movement of a financial asset when the overall direction is upward.”
V:
Valuation: “The analytical process of determining the current or projected worth of an asset or company.”
Variable Annuity: “A type of investment income stream that rises or falls in value periodically based on the market performance of the investments that fund the income.”
Volatility: “A statistical measure of the dispersion of returns for a given security or market index.”
Y:
Year-to-Date (YTD): “The period beginning on the first day of the current calendar year or fiscal year up to the current date.”
Understanding financial terms is an essential step toward taking control of your financial future. By demystifying these concepts, you can approach decisions – whether budgeting, investing, or planning for the long term – with confidence and clarity.
Remember, financial literacy is a journey, not a destination. Keep building your knowledge, asking questions, and exploring resources to stay informed. As always, Maverick Wealth Advisors is here to help along the way. Visit our Advance & Defend Strategy page here or Portfolio Management page here, to see how you can apply the terms you’ve learned above!
Advisory Services offered through Concurrent Investment Advisors, LLC an SEC Registered Investment Advisor. Concurrent Investment Advisors, LLC d/b/a Maverick Wealth Advisors are not affiliated companies.
Source:
Investopedia. (2024). Financial Terms Dictionary. https://www.investopedia.com/financial-term-dictionary-4769738