Glossary of Important Terms to Know
401(k) - A qualified plan established by employers to which eligible employees may make salary deferral (salary reduction) contributions on a post-tax and/or pre-tax basis.403(b) - Also known as a tax-sheltered annuity (TSA), this is a retirement plan for certain employees of public schools, employees of certain tax-except organizations and certain ministers.
457(b) - A non-qualified, deferred compensation plan established by state and local governments and tax-exempt employers. Eligible employees are allowed to make salary deferral contributions .
Asset - Any item of economic value owned by an individual or corporation, especially that which could be converted to cash. Examples are cash, securities, accounts receivable, inventory, office equipment, real estate, a car, and other property.
Asset Class - Type of investment, such as stocks, bonds, real estate or cash.
Asset Allocation - An investment strategy that aims to balance risk and reward by apportioning a portfolio’s assets according to an individual’s goals, risk tolerance and investment horizon.
Capital appreciation - An increase in the market price of an asset.
Compounding - The ability of an asset to generate earnings, which are then reinvested in order to generate their own earnings. In other words, compounding refers to generating earnings from previous earnings.
Diversification - A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique contends that a portfolio of different kinds of investments will, on average, yield higher returns and pose a lower risk than any individual investment found within the portfolio.
IRA - Traditional IRA that s not a Roth IRA. Individual taxpayers are allowed to contribute 100% of compensation (Self-employment income for sole proprietors and partners) up to a specified maximum dollar amount to their Traditional IRA. Contributions to the Traditional IRA may be tax-deductible depending on the taxpayer’s income, tax-filling status, and coverage by an employer-sponsored retirement plan. Eventual withdrawals are treated as ordinary income and may be subjected to income tax. However, since your income is likely less once you retire, you may be taxed at a lower rate. B. Roth An individual retirement plan that bears many similarities to the traditional IRA, but contributions are not tax deductible and qualified distributions are tax free. Similar to other retirement plans accounts, non-qualified distributions from a Roth IRA may be subject to a penalty upon withdrawal.
Liquidity - The ability of an asset to be converted into cash quickly and without any price discount.
Open – End Fund - A type of mutual fund that does not have restrictions on the amount of shares the fund will issue. If demand is high enough, the fund will continue to issue shares no matter how many investors there are. Open-end funds also buy back shares when investors wish to sell
Rebalancing - The process of realigning of your portfolio’s asset class. At times out performance of some asset classes and underperformance of others may result in the need to rebalance your portfolio to maintain your financial goals and objectives, along with a comfortable level of risk.
Securities - A security is essentially a contract that can be assigned a value and traded. Examples of a security include a note, stock, preferred share, bond, debenture, option, future, swap, right, warrant, or virtually any other financial asset
Risk - A fundamental idea in finance is the relationship between risk and return. The greater the amount of risk an investor is willing to take on, the greater potential return. The reason for this is that investors need to be compensated for taking on additional risk.
Rollovers - A tax-free reinvestment of a distribution from a qualified retirement plan into an IRA or other qualified plan within a specific time frame, usually 60 days. These transfers can happen when leaving a job at an employer who offered a retirement plan such as a 401(k) plan.
Target Date or Life Style Funds - Asset- allocation mutual funds also, known as life-cycle, or target –date funds are an attempt to provide investors with portfolio structures that address an investor’s age, risk appetite and investment objectives with an appropriate apportionment of asset classes. However, critics of the approach point out the arriving at a standardized solution for allocating portfolio assets are problematic because individual investors require individual solutions.
Tax-deferred - Income whose taxes can be postponed until a later date. Examples include IRA, 401(k),or Savings Bond
Tax-sheltered Annuity- A legal method of minimizing or decreasing an investor's taxable income and, therefore, his or her tax liability. Tax shelters can range from investments or investment accounts that provide favorable tax treatment, to activities or transactions that lower taxable income. The most common type of tax shelter is an employer-sponsored 401(k) and 403(b) plans.
Volatility - The relative rate at which the price of a security moves up and down. Volatility is found by calculating the annualized standard deviation of daily change in price. If the price of a stock moves up and down rapidly over short time periods, it has high volatility. If the price almost never changes, it has low volatility.
