Greetings, Boomer! This is an ongoing list of financial terms used throughout the blog that will be defined here. I will add to this list as time goes on. Good for you for wanting to make sure that you understand what exactly we’re talking about. Bolded words in text also have glossary definitions.
Annuity. In its simplest form, an annuity is bought from an insurance company. In return, the company promises to pay you money for as long as you live. Companies typically charge you annual management fees, insurance fees, and maintenance fees. These may not be transparent in your annuity contract—and may be called by different names. There are penalties for early withdrawal. Annuity sellers receive substantial financial benefit when you buy. The benefit they receive may or may not be called a “commission.”
Bear market. A bear market exists when the economy slows, investor sentiment is pessimistic, and security prices are falling. Although commonly referred to when discussing stocks, a bear market can occur for virtually any type of security, including bonds.
Beating the market. Beating the market occurs when your investment returns exceed the combined financial returns of all the companies in the market. Suppose the combined returns of all the companies in the market was 6%. If your investments achieved 7%, you would have beaten the market.
Bond. A bond is an IOU issued by a company or government in return for money you loan them. While you wait to get paid back, you are paid interest. If you want to sell your bond before the loan is due, you’ll receive less than the amount you loaned, if interest rates have risen. The principles of bonds are such that, when interest rates go up, the price of bonds goes down. Bonds generally don’t keep pace with inflation. That’s because prices tend to increase during the duration of long term loans. Sometimes companies and governments can’t repay the loan. They default and you don’t get paid back.
Bull market. A bull market exists during periods of economic recovery and expansion, investor optimism, and rising security prices. Although typically used in reference to stocks, bull markets can occur for virtually any type of security, including bonds.
Certificate of Deposit (CD). A financial instrument typically sold by banks and credit unions. You agree to deposit money for a specific period of time, like one, three, or five years. In return you are paid interest on your money. If you withdraw your money prior to the agreed upon duration of deposit, you incur interest penalties. These accounts are generally insured up to $250,000.
Chasing investment returns (or performance). When you pick an investment based on its past performance, such as a mutual fund, you are “chasing investment returns.” You are forgetting that market conditions change and investments that do well in a robust market tend to fade in a weak market–and vice versa.
Dow Jones Industrial Average (DOW). Thirty companies who are among the country’s largest. They are categorized as being on the DOW because they meet statistical criteria related to their size and the price of their stock. Exceeding the combined return for these companies is commonly used as a benchmark for “beating the market.
Index Fund. A stock index fund owns stock in all companies comprising the market, in the same percentages in which the companies are represented in the market. There are a variety of index funds, including stock and bond index funds.
Money Market Account. A savings account that allows you to write a limited number of checks from the account each year. Typically offered by banks and financial services firms, the interest on these accounts varies between institutions. Unlike a Money Market Fund, the money in a money market account is commonly insured for up to $250,000.
Mutual Fund. Mutual funds collect and invest money contributed by investors. A professional fund manager selects and manages the investments you and other investors contribute to the fund. The fund manager is hired by a financial services firm, like Vanguard, Fidelity, or T.Rowe Price. Mutual funds allow small investors to spread their money across different assets, like stocks and bonds, potentially reducing their investment risk.
NASDAQ – National Association of Securities Dealers Automated Quotation System. Stock issued by companies to the general public are bought and sold on stock exchanges. The NASDAQ is one such exchange. Technology and fast growing companies frequently sell their stocks on this exchange.
NYSE – New York Stock Exchange. Stocks issued by companies to the general public are bought and sold on stock exchanges. The NYSE is the world’s oldest and largest exchange for buying and selling stocks. TV commentators often refer to this particular exchange as the “Big Board.” Companies selling their stocks on this exchange are generally larger than those selling their stocks on the NASDAQ.
Publicly traded companies are those that sell shares of company stock on US stock exchanges—like the NYSE. They must file a series of reports with the Securities and Exchange Commission, including quarterly earnings reports showing their profitability.
Securities and Exchange Commission (SEC) is a government commission created to, among other things, protect investors from fraud. One function of the Commission is to require companies to routinely disclose financial information pertinent to investors.
Standard & Poor’s 500 (S&P 500) – a group of 500 companies chosen for their size, liquidity, and industry membership and whose stocks sells on the NYSE and the NASDAQ stock exchanges. Exceeding the combined return for these companies is commonly used as a benchmark for “beating the market.”
US Treasury Bills, commonly called T-Bills, are sold and backed by the federal government. Sold in denominations of $1,000, they are issued in 3-, 6-, and 12-month maturities. They pay interest upon maturity. T-bills can be purchased for up to $5 million.