Glossary of Financial Terms

401(k) plan.
A defined contribution plan offered by a business organization to its employees, which allows employees to set aside pre-tax income for retirement purposes. In some cases, employers match employee contributions in full or in part.
403(b) plan.
A defined contribution plan similar to a 401(k), but offered by non-profit organizations rather than businesses. Employee contributions can grow tax-deferred until withdrawal, at which time the money is taxed as ordinary income.
A contract by which an insurance company promises to make periodic payments to the annuitant, based on the assets in the annuity. An immediate annuity commences payments immediately upon establishment of the contract, while a deferred annuity delays the payments to the future. The annuity may be purchased either with a single payment or a series of payments called premiums. (See also fixed annuity, index annuity, and variable annuity.)
Asset allocation
is a strategy to manage short-term risk by combining investments from different asset classes (stocks, bonds, cash) that tend to move in opposite directions during market ups and downs. This combination of different asset classes is designed to reduce the risk of loss during brief downturns in any single class.
Capital gains taxes
on the sale of an investment are incurred on the amount by which the investment’s selling price exceeds its initial purchase price. A capital gain may be short-term (one year or less) or long-term (more than one year). Long-term capital gains are generally taxed at a lower rate in order to encourage investment in the economy.
Certificate of Deposit (CD).
An FDIC-insured bank product for which a specified amount of money is deposited for a specified period of time (anywhere from a few months to several years) at a set interest rate. CDs typically offer higher rates of return than other deposit accounts, in exchange for tying up the deposited money for the duration of the certificate's maturity. Money removed before the maturity date is subject to a penalty.
Compound interest.
Interest that is calculated on both the principal sum of money and interest previously accrued. Because compound interest can be applied to savings as well as debt, it can work in one’s favor or against it. For example, compound interest on the amount one saves may increase the value of the savings account over time. But compound interest on debt may increase the amount one owes to pay off that debt over time.
Debt consolidation loan.
A type of loan designed to consolidate multiple debts, typically at a lower interest rate, enabling the borrower to reduce monthly payments or accelerate payoff of debt.
Defined benefit plan.
A company retirement plan, such as a pension plan, in which a retired employee receives a specific amount based on salary history and years of service, and in which the employer bears the investment risk.
Defined contribution plan.
A retirement plan, such as a 401(k) plan or 403(b) plan, in which the employee elects to defer some amount of his or her salary into the plan and bears the investment risk. Contributions to the plan may be made by the employer, employee, or both.
Disability income insurance.
A type of insurance designed to replace a portion of one’s income if disabled due to illness or accident.
is a strategy to enhance opportunities for long-term returns by spreading investments within an asset class to take advantage of gains by particular individual investments while mitigating the risk of losses by others. For example, investments in stocks can be divided into combinations of large cap/small cap, growth/value, and domestic/foreign to diversify within that asset class.
Dollar-cost averaging.
Investing an equal amount of money at regular intervals, regardless of market performance, with the objective of reducing the average cost per share by purchasing more shares when prices are low, fewer when prices are high. While not assuring a profit nor protecting against a loss, dollar cost averaging can help remove emotion from investing. But as it involves continuous investment in securities regardless of fluctuating price levels, investors should consider their financial ability to continue purchases through periods of low price levels.
Equity index annuity.
An annuity in which returns on invested assets are linked to one or more equity indexes, such as the S&P 500 or the NASDAQ 100. Typically, holders of this type of annuity have the opportunity to limit the risk of loss by also agreeing to limit gains. This is done by selecting “participation” and “cap” rates that offer the combination of risk protection and potential reward that fits the annuity holder’s needs.
Estate planning.
The preparation of a plan of administration and disposition of one’s property before or after death, including wills, trusts and gifts.
Federal Deposit Insurance Corporation, an independent agency of the U.S. federal government that preserves and promotes public confidence in the U.S. financial system by insuring deposits in banks and thrift institutions for at least $100,000; by identifying, monitoring and addressing risks to the deposit insurance funds; and by limiting the effect on the economy and the financial system when a bank or thrift institution fails. Since the start of FDIC insurance on January 1, 1934 in response to the thousands of bank failures in the 1920s and early 1930s, no depositor has lost a single cent of insured funds as a result of a bank failure.
Fixed annuity.
An annuity that guarantees a specific rate of return and a fixed payment, either for the annuitant’s lifetime (the surviving spouse’s, in the case of a married couple’s joint annuity) or for a specified period. (Guarantee depends on the claims-paying ability of the issuing insurance company and does not apply to the investment return or principal value of the separate account.)
Home equity loan.
A loan that uses the borrower’s residence as collateral, or security for the loan, and provides a line of credit against which funds can be drawn, up to a designated amount.
Individual Retirement Account (IRA).
An account that permits individuals to set aside money for retirement, with earnings tax-deferred until withdrawals begin at age 59½ or later. (Required minimum distributions from an IRA begin at age 70½; withdrawals prior to age 59½ may incur a 10% penalty.) Contributions may be tax-deductible for individuals who do not participate in a pension plan at work or who do participate and meet certain income guidelines. Other individuals can make contributions to an IRA on a non-deductible basis and still enjoy tax-deferred earnings. (See also Roth IRA.)
Investment risk
is the potential for fluctuation in the value of an investment, which could result in loss of principal. Possible causes of investment risk include general market fluctuations, industry-specific market fluctuations, company-specific factors, interest rate trends and currency fluctuations. Generally speaking, higher risk is associated with the potential for higher rates of return and lower risk with the likelihood of lower rates of return.
Liability insurance.
A type of insurance designed to protect against claims alleging that the policyholder’s negligence or inappropriate action resulted in bodily injury or property damage. Often, property and casualty insurance includes some liability coverage. Separate “umbrella” liability policies can protect against claims above and beyond the amount covered by primary policies or for claims not currently covered.
Life insurance.
In exchange for periodic payments (premiums), life insurance provides financial compensation to a designated person or persons (beneficiaries) if the insured person dies. Typical uses of life insurance are to help cover final expenses and medical bills, pay off a mortgage and other debts, provide income for survivors and fund children’s educations.
Long-term care insurance.
A type of insurance designed to help pay for services that provide assistance with specific Activities of Daily Living a person cannot perform by himself or herself. These services may be provided in an assisted living facility, nursing home, adult day care center or private home.
Mutual fund.
A pool of money invested by a company on behalf of individuals and institutions who share common financial goals. The fund’s managers may invest in stocks, bonds, cash or some combination to meet the fund’s stated objectives. Generally recommended as long-term investments, mutual funds offer a convenient way to gain access to professional investment management, diversify one’s portfolio and enjoy the wealth-building potential of compound earnings on one’s investment.
National Association of Securities Dealers Automatic Quotation system, an electronic quotation system that provides securities brokers with price quotations for stocks traded over the counter.
Portfolio rebalancing
is designed to maintain the asset allocation and diversification that align with an investor’s tolerance for risk and expectations for returns. As market conditions change over time, assets may be sold from funds that exceed their recommended allocation, with the proceeds used to purchase funds that have dropped below their recommended allocation.
Property and casualty (P&C) insurance.
A type of insurance designed to compensate policyholders for loss of or damage to property such as a home, vehicle or personal possessions. P&C insurance often includes a deductible — the amount of a loss that an insurance policyholder has to pay out-of-pocket before reimbursement from the insurer begins.
Qualified tuition programs.
Also known as Section 529 Plans, these programs allow tax-deferred earnings and tax-free distributions for qualified post-secondary (college) education expenses only. Prepaid tuition plans and college savings plans are two types of qualified tuition programs.

Note: An investor should consider the investment objectives, risks, and charges and expenses associated with investing in 529 Plans or other securities before investing. Prior to investing in a 529 Plan, an investor should also consider whether the investor’s or designated beneficiary’s home state offers any state tax or other benefits that are only available for investments is such state’s qualified tuition program. More information about 529 Plans is available in the issuer’s official statement. The official statement should be read carefully before investing.
A Roth IRA
enables individuals, subject to certain restrictions, to save for retirement with both earnings and distributions free from taxes, although contributions are taxed. Unlike Traditional IRAs, there is no required minimum distribution at age 70½. (See also Individual Retirement Account.)
S&P 500.
An index of 500 widely held common stocks on the New York Stock Exchange (NYSE), compiled by Standard & Poor’s Corporation, a provider of independent investment research and data. The S&P 500 is used as a measure to indicate the overall health of the US stock market.
Securities and Exchange Commission, an independent U.S. federal agency that regulates and supervises the U.S. securities industry. The SEC administers federal laws, develops and enforces rules to protect investors against malpractice, and seeks to ensure that companies provide full disclosure to investors.
Section 529 Plan.
See Qualified tuition programs.
Secured loan.
A loan for which the borrower pledges a tangible asset (collateral), such as a home, vehicle or other personal property. If the borrower defaults (does not make payments according to terms of the loan), the lender may claim and sell the asset to recoup its money. Mortgage loans, which are secured by the real property, and auto loans, which are secured by the vehicle, are two common types of secured loan. (See also Unsecured loan.)
Thrift Savings Plan (TSP).
A tax-advantaged, defined-contribution retirement savings plan for federal government employees and military personnel, similar in many ways to corporate 401(k) plans
A legally binding arrangement by which the grantor transfers ownership of property to a trustee, who manages it for the benefit of the grantor and designated beneficiaries (people and/or organizations). An attorney prepares the trust document, which establishes the rules the trustee must follow when managing the trust. The grantor may name as trustee any capable adult or an entity, such as a bank or trust company.
Unsecured loan.
A loan granted upon the good credit and promise of the borrower to repay, with no requirement that the borrower pledge a tangible asset (collateral) as security. (See also Secured loan.)
Variable annuity.
A type of annuity that allows for the investment of assets in various portfolios of stocks, bonds and cash. The return on assets is not guaranteed as in a fixed annuity, but will fluctuate in value over time, reflecting the performance of the investment portfolios chosen. Variable annuities provide a death benefit, meaning that if the annuity holder dies before the insurer begins making payments, the beneficiary is guaranteed to receive a specified amount — typically at least the amount of the purchase payment or premiums. Variable annuities are also tax-deferred, meaning that the annuity holder pays no taxes on the income and investment gains from the annuity until withdrawals begin.


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