Financial Glossary
Glossary Index
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401(k) Plan
A tax-advantaged retirement savings plan offered by employers, where employees can contribute a portion of their salary, often with matching contributions from the employer.
403(b) Plan
A 403(b) plan is a retirement savings plan for employees of public schools, non-profits, and tax-exempt organizations. It allows for pre-tax contributions that grow tax-deferred, offering investment options like annuities and mutual funds.
457 Plan
A 457 plan is a retirement savings plan for state and local government employees and some non-profits. It features pre-tax contributions, tax-deferred growth, and flexibility with no early withdrawal penalty if you leave your job.
A
Adjusted Gross Income (AGI)
Your total gross income minus specific deductions, such as student loan interest, retirement contributions, or tuition fees. AGI is used to determine your taxable income.
Annuity
A financial product that provides a series of payments made at regular intervals, typically used as a retirement income strategy. Annuities can be immediate or deferred.
Appreciation
The increase in the value of an asset over time. Stocks, bonds, real estate, and other assets can appreciate in value, contributing to the growth of your wealth.
Asset
Any resource with economic value owned by an individual or business. Common examples include stocks, bonds, real estate, and cash.
B
Beneficiary
A person or entity designated to receive assets or benefits, such as those from a will, trust, or life insurance policy, upon the death of the asset owner.
Bond
A debt investment where an investor loans money to an entity (corporate or government) for a defined period, in exchange for periodic interest payments and the return of the bond’s face value upon maturity.
C
Call Option
A call option is a financial contract that gives the buyer the right, but not the obligation, to purchase an underlying asset, such as a stock, at a specified price (the strike price) within a set timeframe. It is often used for speculation or hedging.
Capital Gains Tax
A tax on the profit made from selling an asset that has appreciated in value. Different rates apply depending on how long the asset was held (short-term vs. long-term).
Certificate of Deposit (CD)
A savings certificate with a fixed maturity date and specified interest rate, issued by a bank. CDs restrict access to the funds until the maturity date.
Compound Interest
Interest calculated on both the initial principal and the accumulated interest from previous periods. Compounding allows your investments to grow faster over time.
Concentration Risk
Concentration risk refers to the potential financial loss that arises when a portfolio is overly invested in a single asset, sector, or market, making it vulnerable to significant declines if that specific area underperforms. Diversification is a common strategy to mitigate this risk.
D
Depreciation
The decrease in the value of an asset over time due to factors such as wear and tear, age, or obsolescence. It is often used for accounting and tax purposes.
Diversification
An investment portfolio that includes a mix of asset classes (stocks, bonds, cash, etc.) with the intention of alleviating the headline risk of a concentrated portfolio
Dividend Yield
A financial ratio that shows how much a company pays out in dividends each year relative to its stock price. It is expressed as a percentage.
Dollar-Cost Averaging
An investment strategy where you invest a fixed amount of money at regular intervals, regardless of the market price. This can help reduce the impact of market volatility over time.
E
Estate Tax
A federal tax on the transfer of the estate of a deceased person, typically applied to estates that exceed a certain value. Many states also have their own estate taxes.
Equity
Ownership in an asset, such as a share of stock, representing a claim on a portion of the company’s assets and earnings.
F
Financial Advisor
A professional who provides financial guidance to clients, helping them create strategies for managing their finances, investments, and long-term wealth.
Fixed Income
A type of investment that provides regular, fixed returns, such as bonds or certificates of deposit (CDs). Fixed income investments are generally less risky than stocks.
G
Grantor Trust
A type of trust where the grantor retains certain powers, such as the right to revoke or amend the trust. The grantor pays income tax on the trust’s income.
H
Headline Risk
The potential for negative news or media coverage to impact the value of an investment or the reputation of a company, often regardless of its underlying fundamentals.
Health Savings Account (HSA)
A tax-advantaged savings account used to pay for eligible medical expenses. Contributions, earnings, and withdrawals for medical expenses are all tax-free.
I
Inflation Risk
The risk that the purchasing power of money will decrease over time due to rising prices, reducing the value of savings and investments.
Index Fund
A type of mutual fund or exchange-traded fund (ETF) designed to match or track the components of a financial market index, such as the S&P 500. Index funds offer broad market exposure and low operating expenses.
Individual Retirement Account (IRA)
A tax-advantaged retirement savings account. Traditional IRAs offer tax-deferred growth, while Roth IRAs offer tax-free growth under certain conditions.
Irrevocable Trust
A trust that cannot be altered or canceled by the grantor once it is created. Irrevocable trusts are often used in estate planning to remove assets from the grantor’s taxable estate.
L
Liquidity Risk
The risk that you will not be able to quickly convert an asset into cash without a significant loss in value.
Long-Term Care Insurance
A type of insurance that helps cover the costs of long-term care services, such as nursing home care or in-home assistance, which are not typically covered by health insurance or Medicare.
M
Marginal Tax Rate
The rate at which the last dollar of income is taxed. As income increases, it is taxed at progressively higher rates.
Mutual Fund
An investment vehicle that pools money from multiple investors to purchase a diversified portfolio of stocks, bonds, or other securities.
P
Power of Attorney (POA)
A legal document that grants someone the authority to act on your behalf in financial or legal matters, either immediately or when you are unable to do so.
Put Option
The option to sell a given stock (or stock index or commodity future) at a given price before a given date.
R
Required Minimum Distribution (RMD)
The minimum amount that must be withdrawn from a retirement account, such as a 401(k) or traditional IRA, once the account holder reaches a certain age (currently 73).
Risk Management
The process of identifying, assessing, and prioritizing financial risks and implementing strategies to minimize or mitigate their impact.
Roth Conversion
The process of transferring assets from a traditional IRA or 401(k) into a Roth IRA. The converted funds are subject to taxes, but future earnings and withdrawals are tax-free.
S
SEP IRA
A Simplified Employee Pension plan that allows employers, including self-employed individuals, to make contributions toward their own and their employees’ retirement savings.
Sharpe Ratio
A measure of risk-adjusted return, calculated by dividing the excess return of an investment over the risk-free rate by its standard deviation, to assess performance relative to risk taken.
Stock Option
A contract that gives the holder the right, but not the obligation, to buy or sell a stock at a specific price before a certain date.
Strategic Asset Allocation
A long-term investment strategy that establishes and maintains a target asset mix aligned with an investor's risk tolerance, goals, and time horizon.
T
Tactical Asset Allocation
A dynamic investment strategy that adjusts portfolio allocations based on short-term market opportunities and economic conditions to capitalize on potential gains.
Tax-Deferred
A term referring to income or investment gains that are not taxed until they are withdrawn or realized, as with a traditional IRA or 401(k).
Term Life Insurance
A type of life insurance policy that provides coverage for a specified term, such as 10, 20, or 30 years. If the policyholder dies during the term, the beneficiaries receive a death benefit.
Trust
A legal arrangement where one party (the trustee) holds assets for the benefit of another (the beneficiary). Trusts are often used in estate planning to manage assets and reduce taxes.
V
Volatility Index (VIX)
Also known as the “fear gauge,” the VIX measures market expectations of volatility over the next 30 days. It is often used as an indicator of investor sentiment.
W
Wealth Management
A comprehensive approach to managing your financial life, including investment management, retirement planning, tax strategies, estate planning, and insurance solutions.
Y
Yield
The income return on an investment, such as the interest or dividends received from holding a security. Yield is expressed as a percentage of the investment’s cost.