In order to make money complement your life and not dictate it, you need to be able to understand what you read/hear. Being able to interpret the language of money is key to understanding. Therefore, we put together this list of investment terms for beginners to help you build a solid foundation as you begin building your financial knowledge.
Investment Accounts & Related Investment Terms For Beginners
401k: A 401k is one of the most important investment terms a beginner needs to know. Its a type of retirement plan offered by employers to employees. A 401k is not an investment. Instead it is a vehicle used to house investments and has distinct tax treatments that differentiates it from other retirement accounts. These retirement accounts are typically used by for-profit businesses. Click here for more info on 401k and 401k rollovers.
403B: Mostly the same as 401k but used by non-profit employers.
529 Plan: Type of account used to save for children’s future education costs (K-12 and college)
Brokerage Account: An investment account that allows you to buy and sell stocks, bonds, mutual funds, ETFs, and a wide variety of investments.
Employer Matching: An amount usually stated as a percent of your income that an employer matches as a contribution in a 401k or a 403b. If you make $60,000 and your employer matches 3%, if you put in $1,800 per year into your 401k, your employer also puts in $1,800. By the way, we call this “free money” so you should really do everything you can to make your contribution whenever your employer offers a match.
Money market account: An interest-bearing account that is combines saving account and checking account features but pays a higher interest rate.
Pension: An employee benefit plan established or maintained by an employer or employee organization (such as a union). They provide retirement income for a pre-defined period.
Profit-Sharing: Incentive plans used by businesses that provide employees compensation based on their employer’s profitability. It is paid in addition to regular salaries and bonuses.
Traditional IRA, Roth IRA, Rollover IRA: These are the second most important terms a beginner needs to know. These are so important that we’ll be publishing an article with more information on them soon.
SEP-IRA: Form of retirement account used by self-employed people and small business owners that has much higher contribution limits than Traditional or Roth IRAs.
Taxable Account: These brokerage accounts do not have favorable tax treatment such as a 401k or an IRA.
Vesting: Time you must work for your employer before the employer match in your retirement is yours to keep. 100% vested means you get all the money as soon as its contributed by your employer. 50% a year means you’d receive 50% of the employer match after completing 1 year of employment and the other 50% after 2 years of employment for instance.
Asset Allocation: How you decide to mix different types of investments. Based on your risk and return preferences, you’ll put more money into certain types of assets: stocks vs. bond v.s cash etc. One big key to money management is how you have your assets allocated.
Bonds: When you hold bonds, you are the lender of money and you collect interest payments. Think of it like a mortgage but instead of you borrowing the money and paying it back, you are lending the money and receiving interest and principal back.
Capital Gains: The difference between what you bought an investment for and what you sell it for. If you sold for less that you paid for, you end up with a loss of course.
Dividends: Cash flows you receive from investment such as stocks. Cash flows are usually usually quarterly.
Dollar Cost Averaging: A money management technique whereby you invest money at various time periods regardless of the investments value. For example, investing every two weeks through your 401k.
ETF: Investments vehicles similar to mutual funds but which can trade during the trading day and they are much cheaper. These are the most common form of investment among beginners. Most use ETF Index Funds.
Index Funds: Similar to mutual funds but they typically have a lower management fees
Interest: Cash flow you receive from investments such as money market accounts, bonds, bank accounts, etc… Cash flows are usually monthly.
Mutual Funds: Pooled money which is invested in a variety of investments.
Principal: When you lend money, the payments you receive back are part interest earned and part return of your lended money. The part that is return of your money is principal.
Stocks: An investment whereby you own part of a company.
Risk: How much you can expect to earn on an investment each year on average and how much you can expect it to increase or decrease each year. The more the investment value fluctuates, the more risk it has. Statistics are often used to describe investment risk with the most popular being stand deviation around the average return. This is so important that our investment technology specifically analyzes your ability to take risk. As a beginner, it is extremely important you take the appropriate amount of risk so you don’t put yourself in a bad situation.
REITs: Are pooled investments that invest in real estate.
By Joseph Reinke, CFA