Glossary – Definition of Financial Terms

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.


Actively managed mutual fund.  A mutual fund is actively managed when a portfolio manager who actively buys and sells stocks for the fund in an effort to beat the market.

Annuitant.  The owner of an annuity.

Annuity.  An annuity is an insurance policy you buy to protect yourself against outliving your money.  At a specified point after you buy, the annuity company pays you back your purchase price—with interest—for a designated period of time. Some annuities come with a provision to pay for three to five years of any long-term care you might require.  Annuities are replete with fees, like annual management fees, insurance fees, and maintenance fees. For most annuities, sales agents receive substantial financial benefit when you buy.  

Asset Allocation.  The percentage of assets, like stocks, bonds, and cash, that comprise your investment portfolio is called asset allocation.  These percentages largely determine the size of your investment returns.  Disciplined adherence to asset allocation provides a framework for buying low and selling high.

Asset Classes.  Asset classes are investment vehicles like stocks, bonds, real estate, and cash.  

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 the the securities you’ve purchased, like a stocks, bonds, or mutual funds exceed the investment performance of the index associated with those securities.  For example, if the combined return of an index was 6%, and your investments achieved 7%, you’d have “beaten the market.”  

Bond.  A bond is an I.O.U.  It’s issued by a company or government to you, in return for money you loan them for an agreed length of time.  While you wait to get paid back, you are paid interest.  If you want to sell your bond before the agreed upon time, 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.

Cap.  Commonly used abbreviation for capitalization.

Capitalization (commonly called “cap”).  A company’s market “capitalization” is essentially the market value of the company. When companies restructure to become publicly traded, they issue shares of stock to the general public at a specific price.  The number of shares owned by the general public is called shares outstanding.  Shares outstanding x price per share = market capitalization.  Capitalization is commonly abbreviated to “cap” in the popular press.

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.

Churning.  The excessive buying and selling of securities, like stocks and bonds, in your portfolio.  Churning typically generates a commission for your broker.  Don’t churn your account.  If you’re still using a broker, don’t let the broker churn your account.

Continuing Care Retirement Communities.  These are housing developments that let you age in place, while also making long-term care available if you eventually need it.  They offer independent living, assisted living, and nursing home care.  As your needs change, you can move from one level of care to another, without ever leaving the community. Generally, you must be independent and sufficiently healthy when you first move into one of these communities.  The minimum move-in age is typically between 55 and 62.  Move-in fees range from $75,000 to $1,000,000.

Diversification.  Diversification is the technique of investing in different asset classes, like stocks vs. bonds, in order to minimize losses and maximize gains.  Different asset classes, like stocks vs. bonds, each respond differently to the same economic event. For example, during the Great Recession, S&P 500 stocks fell 37%, but Treasury bonds rose 20%.  As such, each responded differently to the same event.  Diversification can also be practiced within asset classes, like investing in large-cap, mid-cap, and small-cap stocks.

Dividend.  Money paid to shareholders out of company profits.

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.”

Due diligence.   For our purposes, due diligence means doing your own research to make sure that the information you have been provided is accurate. 

Elimination period.  For a long-term care insurance policy, it’s the length of time you must wait for the policy to start paying, once it’s clear you need care.  Most long-term care policies require a 30- to 180-day elimination period before they start paying.

Equities.  The term equities is another name for stocks. Stocks are frequently called equities because they give the buyer a form of ownership—or equity—in  a company.  See stocks for more.

Expense ratio.  Mutual fund expenses are expressed as a ratio of total fund costs to total fund assets.  The formula is:  total fund costs ÷ total fund assets = fund expense ratio.

Fiduciary.  As it relates to your money, a fiduciary is a person or company required by law to offer you investment management or advice that is in your best interest. This means, they must put what benefits you above what benefits them. Generally, financial advisers who charge an hourly fee and don’t sell any financial products—like mutual funds or annuities—are fiduciaries.  All others may or may not be.  You must ask them.  Always understand how they are compensated.  

Index.  An index is a listing of securities, like stocks or bonds, organized by certain traits. One of the most popular indexes is the S&P 500, which is an index of the U.S.A.’s 500 largest publicly traded companies.  The combined investment performance of these securities serves as a performance benchmark against which individual securities (like stocks and bonds)—or actively managed mutual funds—are compared.  Most securities and mutual funds have an index associated with them.  Make sure that the security you’ve invested in produces a higher investment return than its associated index.  This is called “beating the index” or “beating the market.”  Over time, it is hard to beat the index because the fees associated with buying and selling actively managed funds and individual securities eat away at your return. 

Index Fund.  An index fund is a type of mutual fund containing stocks or bonds.  These stocks or bonds are associated with an index (defined above).  The index fund owns stocks or bonds in the same percentages in which the companies are represented in the index.  If company A represents 35% of an index and company B represents 15% of the index, the index fund will be composed of those same companies in those same percentages.

Individual Retirement Account (IRA).  An IRA is a savings account for your retirement.  IRAs generally have:

  • income thresholds, above which you can’t open an account;
  • requirements governing how much you can deposit; and
  • age requirements for when you can make withdrawals without tax penalties.

There are two main types of IRA’s:  a Traditional IRA and a Roth IRA. 

  • A Traditional IRA allows you to open an account with money you deduct from your taxes. The account grows tax free.  Taxes are paid when you withdraw the money. 
  • A Roth IRA also grows tax free. However, unlike the Traditional IRA, you pay no taxes on the money when you begin withdrawals, typically between the age 59 ½ and 70 ½.

Failure to abide by withdrawal requirements for both the Traditional and Roth IRA’s will result in substantial tax penalties.

Large Cap stocks. Stocks whose market value, i.e., capitalization (or cap), is $10 billion and above. (“Cap” is short for capitalization.”)  Large-cap stocks typically pose less investor risk than mid-cap or small-cap stocks.  Large-caps are mature industry leaders like Amazon, Apple, and Alphabet (Google). 

Market.  When people refer to the market in investment discussions, they are typically referring to one of two things:  1) the combined investment performance of all publicly traded stocks and/or bonds or 2) the index with which the stock or bond is associated. 

Market capitalization.  See Capitalization.

Market value.  See Capitalization.

Market timing.  Market timing is the mistaken belief that you can buy into the market just before it goes up and exit the market just before it goes down.

Median.  In a list of numbers going from smallest to largest, the median is the middle number.  It’s the midpoint at which half the numbers are smaller and half the numbers are larger.  Another way to think of it is as the 50th percentile in a list of ascending numbers.  If you’re projecting what your lifetime costs might be for, say, long-term care, the median is the point at which you have a 50% chance of paying more and a 50% chance of paying less.  The median is often a superior tool of measurement to the use of an average because the median is not subject to the extreme values on the high and low side of a number range.  As such, the median can provide a more accurate data assessment.

Mid-Cap stocks.  Stocks whose market value, i.e., capitalization, is between $2 billion and $10 billion.  Mid-cap stocks typically pose less investor risk than small-cap stocks, but more investor risk than large-cap stocks.  Higher risk can potentially yield higher return, but such higher return is by no means guaranteed.  Whirlpool, Garmin, and iRobot are examples of mid-cap companies.

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.

Money Market Fund.  A mutual fund that invests in assets that can be quickly liquidated, like US Treasury Bills.  It is not insured.

Mutual Fund.  A mutual fund collects and invests 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 investment risk.

NASDAQ.   NASDAQ stands for 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.  NYSE stands for 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.

Opportunity costs.  The costs you pay and the benefits you give up when you select one alternative over another.  (Everything has a price.)

Ordinary Income.  When an investment is taxed as “ordinary income” it is taxed at the same rate as the salary you earn. Ordinary income tax is between 10% and 37%.

Passive Income.  Money earned from a source other than your employer.  Examples include rental income, book royalties, and dividend paying stocks.

Passively managed mutual fund.  (See index fund.)  A passively managed fund is also called an index fund.

Publicly traded companies.  These are companies that sell shares of their stock on US stock exchanges.  These exchanges provide a platform for people to buy and sell company stocks.  Publicly traded companies are bound by rules designed to protect investors that are promulgated by the Securities and Exchange Commission.

Ticker symbol.  Two to five letters used to uniquely identify each stock publicly traded on a stock exchange.

Rebalancing your portfolio.  Rebalancing is the act of periodically adjusting the various assets in your portfolio so that they meet your desired asset allocation.  For example, say you desire an asset allocation of 50% stocks and 50% bonds–a 50-50 split.  If during the course of a year, your stocks grow to 70%, your asset allocation will be out of whack.  To restore your desired 50-50 stock-bond split, you’d rebalance by selling off the excess in your stock portfolio and reinvesting that same amount in your bond portfolio.  Now both funds each have the same amount of money in them.  Rebalancing your portfolio allows you to buy low and sell high.  In this example you sold your stocks when they were high and invested in bonds when they were low.  

Risk.  Risk is the degree of uncertainty about an investment return as well as the potential harm that could arise if that investment return falls short of what the investor expected.  Typically, the higher the investment risk, the potentially higher–but by no means guaranteed— investment return

Risk tolerance.   Risk tolerance is the degree of uncertainty an investor can handle when it comes to knowing how much money an investment will make or lose. It’s an investor’s ability to tolerate sharp gains and losses during the course of holding an investment, without undue angst.

Rollover.  The transfer of money contained in a 401(k), 457, 403(b), or similar type of account, into an Individual Retirement Account. 

Rule of 72.  A calculation used to determine how long it takes an investment or price to double.  For an investment, it’s calculated by dividing the interest an investment earns into 72.  For example, an investment earning 10% a year doubles in 7.2 years.  (72 / 10 = 7.2 years.)  It’s used the same way for determining how fast prices double.  With average inflation at 3%, prices double every 24 years (72 / 3 = 24 years).  

Security.  Examples of securities discussed in this blog are stocks, bonds, and mutual funds.

Securities and Exchange Commission (SEC).  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.

Shareholders.   Shareholders are owners of a company’s stock. Shareholders may be individuals, companies, or institutions like a pension funds, college endowment funds, etc.  

Shares.  When a company sells stock, it divides the stock into individual units of ownership, called shares.   

Small-Cap stocks.  Stocks whose market value, i.e, capitalization,  is between $300 million and $2 billion.  Small-cap stocks typically pose more investor risk than do large-cap or mid-cap stocks.  Higher risk can potentially yield higher return, but such return is by no means guaranteed.   Small-caps include companies that most people haven’t heard of.

Standard & Poor’s 500 (S&P 500).  The S&P 500 is an index of 500 companies chosen for their size, liquidity, and industry membership.  Their stocks sell on the NYSE or the NASDAQ stock exchange.  Exceeding the combined return for these companies is commonly used as a benchmark for “beating the market.”

Stocks.  Stocks are financial instruments that companies sell investors to raise money.  Stocks are also called equities because they give the buyer a form of ownership—or equity—in the company.  Stocks are sold in units called “shares.”  Owners of shares, called shareholders, are entitled to a portion of the company’s assets and earnings.  

U.S. Treasury Bills (T-Bills).  Commonly called T-Bills, U.S. Treasury Bills are short-term bonds sold and backed by the federal government.  They are sold in denominations of $1,000, and have maturities of less than one year.  They pay interest upon maturity.  

U.S. Treasury Bonds.  These are bonds issued by the U.S. government with a maturity of more than 10 years.  Because they are backed by the full faith and credit of the U.S. government, they are considered “risk free.”  They pay interest upon maturity.