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Financial Glossary

401(k) plan

A 401(k) plan allows employees to set aside tax-deferred income for retirement. In some cases, employers will match contributions made to the plan. Employers may also add a profit-sharing feature to the plan. If employees withdraw money from the plan before retirement age, they must pay a penalty tax.

403(b) plan

403(b) plans are retirement plans available to certain employees of public schools and universities, cooperative hospital organizations and not-for-profit organizations, as well as some self-employed ministers. Contributions to 403(b) plans are tax-deferred.

Adjustable rate mortgage (ARM)

A mortgage where the interest rate varies over time. The interest rate is usually fixed for an initial period and then is adjusted at regular intervals, often every month, against a specific benchmark. The borrower is protected by a maximum allowed interest rate, called a rate cap, and is usually compensated for the risk presented by interest rate adjustments with a lower initial rate than a fixed rate mortgage.


Paying off a debt, such as a mortgage, in regular installments over a period of time.

Annual percentage rate (APR)

Interest rate that reflects the total cost of a loan for a given year. The Truth in Lending Act mandates that the APR be disclosed to borrowers.

Balloon mortgage

A type of mortgage where a large payment is made at the end of the loan period in addition to the regular periodic payments. The regular payments alone are not enough to pay off the principal and interest owed. The final payment is called the balloon payment.


The actual cost of an investment, including commissions and other expenses. Basis is used to determine capital gains and losses for income tax purposes.


A piece of debt issued to an investor by a corporation, government, government agency or municipality. The issuer agrees to make regular, fixed payments of interest (called coupon payments) and repay the principal (the face value of the bond) on a specified date.

Cash equivalents

Assets that can easily and quickly be converted to cash. Cash equivalents include bank accounts, Treasury bills, short-term bonds, money market funds, notes and receivables.

Cash value

The investment portion of a permanent life insurance policy. The cash value will earn interest during the policyholder’s life. The cash value can be used as a tax-sheltered investment, to borrow against, to pay policy premiums or to pass on to heirs.

Closed-end fund

A fund that will only issue a set number of shares. A closed-end fund operates more like a stock than a typical fund. The fund will issue a fixed number of shares in an initial public offering (IPO). After that time, shares of the fund are listed and traded on a stock exchange.


A legal change to a will. A codicil can add to, subtract from, alter or explain elements of an existing will.

Common stock

A security that represents ownership in a corporation. Common stockholders are able to vote on company matters, such as membership of the board of directors and company policy. They also earn a share of the company’s profits in the form of dividends or capital appreciation. Should the corporation liquidate, common stockholders are entitled to the company’s assets only after all other parties, including creditors, bondholders and preferred shareholders, have been paid in full.


The process where the value of an investment increases exponentially over time. During each interest period, the investor earns interest on both the principal and all interest accumulated up to that point in time.

Credit bureau

An agency that researches and collects credit information about individuals and makes it available to creditors and potential creditors. The creditors and potential creditors then use that information to make an informed decision about whether or not to extend credit to a given individual. Banks, credit card companies and mortgage providers are common credit bureau customers.

Debt to income ratio

A figure that compares an individual’s debts to his or her income. The higher the ratio, the more of a person’s income is allocated to paying off debts. Lenders often use the debt to income ratio to determine how likely a person is to pay back a loan.

Defined benefit plan

An employer-sponsored retirement plan that promises a certain benefit amount to employees. The amount promised to be paid on retirement is calculated based on factors such as salary history and years of service.

Defined contribution plan

An employer-sponsored plan where the employer promises to contribute a specific amount or percentage of money each year on behalf of participating employees. 401(k) plans and 403(b) plans are types of defined contribution plans.


An investment strategy where an investor holds a variety of investments to reduce the volatility and risk of a portfolio. Investment funds are divided between different types of securities, companies and industries that are unlikely to gain or lose value at the same time. Diversification reduces unsystematic risk, i.e., risk that is not intrinsic to the market.


A portion of the company’s earnings paid to shareholders. Dividends are either distributed to stockholders as cash (cash dividends) or stock (stock dividends). A company’s board of directors determines the amount of dividend that will be paid. Companies that have matured beyond the growth phase are more likely to pay out dividends, as growth companies usually prefer to reinvest their profits.

Effective tax rate

The average, or actual, amount that a taxpayer pays on income. The effective tax rate takes all forms of taxes into account. It is calculated by dividing total tax paid by taxable income.


All the assets owned by a person at the time of his or her death. An estate includes such items as funds, real estate, investments, life insurance and other valuables.

Estate planning

The process of creating a plan for the orderly administration and distribution of a person’s property after death. Proper estate planning allows a person to minimize taxes, make necessary arrangements for dependents and beneficiaries and distribute wealth and assets according to his or her wishes.

Family trust

A trust that names family members as beneficiaries. Often, family trusts are used to pass assets to children directly to avoid those assets being passed automatically to a spouse.


A fiduciary is a person entrusted with the property of another who must act in that person’s best interests. A financial adviser who is a fiduciary is held to a higher ethical standard than an adviser who is not.

Financial planner

A person who helps you plan out your future and meet your short- and long-term financial goals. Financial planners use investments, tax planning, retirement planning, estate planning and risk management to help achieve those goals.

Fixed-rate mortgage

A mortgage where the interest rate is constant throughout the term of the loan. The rate of the loan will likely be higher than the initial rate of an adjustable rate mortgage (ARM), but a fixed-rate mortgage removes the risk that the interest rate will increase during the loan.

Future value

The value of an asset or cash at a given date in the future.

Futures market

A market where contracts for the future delivery of a commodity or financial instrument are bought and sold. The future delivery date and price are agreed upon at the time of purchase.

Growth stock

Stock of a company that is expected to grow at a faster rate than the overall market.

Home equity line of credit (HELOC)

An open-ended loan that allows homeowners to borrow against the equity in their home. A maximum loan balance is established, and the homeowner can then borrow or pay back funds at any time.

Home equity loan

Also known as a second mortgage, a home equity loan allows homeowners to borrow against the equity in their house. Equity is determined by measuring the value of the house minus the balance owed on the original mortgage.

Income stocks

Stock of a company that is expected to have stable earnings and dividends. Income stocks are less volatile than the overall market and pay out above-average dividends.

Individual retirement account (IRA)

A tax-deferred personal retirement plan. If the individual meets certain criteria, IRA contributions are tax deductible.

Interest rate

The amount paid for borrowing money. Interest rates are often given as an annual percentage of the principal of the loan, or APR. An interest rate is determined by several factors, including the size and type of the loan, the borrower’s credit history and interest rates set by the Federal Reserve Board.

Investment portfolio

A collection of financial investments.

Investment strategy

The approach used to guide investment decisions, including which assets to invest in and when to buy and sell those assets. A good investment strategy will be based on an individual’s goals and tolerance for risk.

IRA rollover

Withdrawing funds from a retirement account and reinvesting them in an individual retirement account (IRA). The rollover must take place within a specified time frame—usually 60 days—and each individual retirement account can only be rolled over one time during a one-year period.

Keogh plan

A tax-deferred retirement plan for self-employed individuals and employees of unincorporated businesses. Keogh plans are similar to IRAs but have higher contribution limits.

Life expectancy

The average amount of time an individual is expected to live. Insurance companies use life expectancy to make benefit projections. As life expectancies have been increasing, individuals need to save more money to provide for longer retirements.

Life insurance

An insurance policy that is paid to the beneficiaries of the deceased upon his or her death.


The ability to easily convert an asset into cash without penalty. Savings accounts, checking accounts and money market accounts are examples of liquid assets.

Living will

A legal document that specifies what a person wants or does not want should he or she become terminally ill or incapacitated. A living will ensures that your wishes are heard even if your medical condition prevents you from speaking for yourself.

Market risk

The risk posed by general fluctuations in the market, which may cause investments to lose value. For example, a recession may negatively affect the value of most stocks. Market risk cannot be reduced through diversification.

Medical power of attorney

A legal document that allows you to empower another person to make medical decisions on your behalf. Medical power of attorney is used if you are unable to make decisions or communicate your wishes about medical treatments.

Money purchase plan

A defined-contribution plan where the employer contributes an agreed-upon percentage of an employee’s wages to the plan. The employer must make contributions each year, regardless of the company’s financial position.


A loan used to finance a real estate purchase, where the real estate property is used as collateral. The borrower must pay back the loan through a predetermined series of payments.

Municipal bonds

Debt securities issued by a state, city, county, school district or other political entity. These bonds are used to fund both day-to-day activities and special projects, like highway construction. The interest investors receive from municipal bonds is usually exempt from federal taxes and is often exempt from state and local taxes as well.

Mutual funds

Pools of funds that are collected from individual investors and then used to invest into a portfolio of assets. Mutual funds are managed by an investment company and invested according to the stated goals of the fund. For example, one mutual fund may have the objective of investing in rapidly growing companies and another may have the goal of protecting its investors’ money. The risk associated with a mutual fund varies according to the fund’s goals.

Net asset value (NAV)

The value of a fund’s investments. Net asset value is calculated by determining the value of the fund’s assets minus any liabilities. For mutual funds, the net asset value also typically represents the market price of the fund.

Net worth

An individual’s total value, calculated by subtracting total liabilities from total assets.

Open-end fund

A type of mutual fund that continuously creates and redeems shares on demand. Most mutual funds are open-end funds.

Paper gain (loss)

The unrealized capital gain (or loss) of an asset held in a portfolio. The paper gain (loss) is determined by comparing the market price of the security to the original purchase price, allowing you to see how much money you would make (or lose) were you to sell the asset.


An insurance contract that sets out the term, coverage, premiums and deductibles.

Policy loan

A loan made by an insurance company to the policyholder where the cash value of the life insurance policy serves as collateral. A policyholder can use the loan for nearly any purpose.

Power of attorney

A legal document that gives one person the authority to act on the behalf of another. The authority can be broad or limited to certain activities, depending on the terms of the agreement.


A regular payment made by the policyholder of an insurance policy to the insurer in return for coverage.


The process of reviewing a will to ensure that it is valid, as well as the general administration of the terms of the will. An executor (or an administrator if an executor is not named in the will) will manage the process of collecting assets, paying any liabilities and transferring assets to the beneficiaries.

Profit-sharing plan

A savings plan where employees receive a portion of company’s profits. The company determines the amount that is contributed to the plan each year, depending on the company’s performance.


A formal written document issued by companies that are offering securities or mutual fund shares for sale. The document is filed with the SEC. The prospectus describes the details of the investment offering and the offering’s prospects so that investors can make informed decisions.


Retiring an existing mortgage in exchange for a new loan, with the same real estate property used as collateral. Refinancing is done to take advantage of better loan terms, such as a lower interest rate.

Registered representative

A person who is licensed to sell securities and act as an account representative for clients.

Required minimum distributions (RMD)

The minimum amount that IRA holders and participants must withdraw by April 1 of the year following the year they reach age 70 ½. RMDs must then be taken each following year. Roth IRAs are exempt from this rule.

Revolving debt

Debt without a fixed principal or payment. Credit cards and home equity lines of credit are examples of revolving debt.


An amendment to an insurance policy that alters the policy’s terms, benefits or coverage. Riders allow you to create an insurance policy that meets your specific needs.


The chance of loss or actual returns that differ from the expected return. The greater the variability of a given investment, the greater the risk. Investments that have greater risk must offer higher returns.

Roth IRA

A type of individual retirement account (IRA) where contributions to the account are not tax-deductible but withdrawals are tax-free. A Roth IRA also differs from a typical IRA in that contributors are not required to take distributions after they reach a certain age.

Rule of 72

A formula that allows you to estimate how long an investment with compound interest will take to double in value. To use the Rule of 72, divide 72 by the annual rate of return.

Safety of principal

A method of investment focused on the security of the invested principal.

Salary Reduction Simplified Employee Pension Plan (SARSEP)

A simper version of a 401(k) plan offered by small companies. Employees participating in the plan are able to make pre-tax contributions to their individual retirement accounts (IRAs). SARSEPs were replaced with SIMPLE plans in 1996—existing SARSEP plans can add new participants but new plans cannot be formed.

Savings Incentive Match Plan for Employees of Small Employers (SIMPLE)

A retirement plan for small businesses, similar to 401(k) or IRA but more flexible. Employees can make salary deferral contributions and employers can make either matching or non-elective contributions. Companies with 100 or fewer employees can offer these plans.

Securities and Exchange Commission (SEC)

The U.S. government agency that regulates the securities industry and financial markets.

Short sale

Selling a security you do not yet own but promise to take ownership of at a given point in the future. Investors borrow the security from a broker and sell it, hoping to take advantage of an expected decline in the price of the security.

Simplified Employee Pension (SEP)

A retirement plan for small businesses and the self-employed. Both employees and the employer can make contributions to the retirement account.

Small cap

Stock issued by a company with a small market capitalization (the value of the tradable shares of the company).

Spousal IRA

An individual retirement account set up in the name of a spouse who receives little or no income.


An ownership share in a corporation. Each share represents a piece of the corporation’s assets and earnings. Stockholders are usually entitled to vote at shareholder meetings and receive dividends.

Stock dividends

Dividends paid out in the form of shares of the company’s stock rather than cash. Stock dividends are not taxed until the shares are sold.

Stock exchange

A market for buying and selling stocks. The major U.S. exchanges are the New York Stock Exchange (NYSE) and the American Stock Exchange (AMEX).

Stop-loss order

An arrangement where you instruct the broker to automatically sell a stock if it drops to a certain price.

Tax credit

A dollar-for-dollar reduction in the amount of income tax owed. Compare to a tax deduction.

Tax deduction

An expense subtracted from overall taxable income. Unlike a tax credit, a tax deduction is taken before the total tax liability is calculated and reduces tax liability in proportion to the taxpayer’s tax bracket.


Delaying paying income taxes on investments until the investments are withdrawn. For example, earnings on investments in IRAs are taxed when they are withdrawn from the account, not when they are earned.

Tax-sheltered annuity (TSA)

A tax-deferred retirement plan offered to employees of certain educational, charitable or religious organizations. Both employees and employers can make contributions to the plan. Also known as 403(b) plans.

Term insurance

A type of life insurance where a death benefit is paid only when the insured dies during a specified time period. Term life insurance policies do not accrue cash value or provide borrowing power.

Testamentary trust

A trust written into the terms of a will that does not go into effect until the maker’s death.

Treasury bills

Short-term debt securities issued and backed by the U.S. government. Often called T-bills, these securities have maturities of one year or less.

Treasury bonds

Long-term securities issued and backed by the U.S. government. They have maturities of more than 10 years. They pay interest on a semiannual basis.

Treasury notes

Intermediate-term securities issued and backed by the U.S. government. They have maturities between one and 10 years.

Universal life insurance

A type of life insurance policy that combines term life insurance and a savings component. The savings component is invested and can, in certain cases, be used for a loan. The terms of the policy can be reviewed and changed as the policyholder’s life circumstances change.

Variable life insurance

A life insurance policy that provides a death benefit and a separate investment account, called the cash value. The value of the policy depends on the value of the securities held in the investment account.

Variable rate mortgage (VRM)

A real estate loan where the interest rate is not fixed. The initial interest rate is often lower to that offered by a fixed rate mortgage, but the interest rate adjusts periodically and may go up or down, depending on the economic climate.


A process where employees gain ownership over employer contributions to their retirement account. Vesting is determined by years of service with the company.

Whole life insurance

A life insurance policy that provides coverage for the policyholder’s entire life. The policy also provides an investment component, called the cash value, that accrues value over time. The policyholder can then borrow against the cash value.


A legal document that states how a person wants his or her assets to be distributed after death.

Wrap account

An investment account handled by a professional money manager in exchange for a flat fee that covers all administrative, commission and management expenses.


The return on an investment. Yield is usually expressed as a percentage of the amount invested.

Zero-coupon bond

A bond that does not make periodic interest payments. Investors make a profit by buying the bond at deep discount from face value and redeeming the bond at face value on its maturity date.