Here’s all the terms we covered, plus some bonus ones you’re likely to hear now that you’re ready to start investing.
An employer-sponsored plan with two potential biggies for retirement savings: company matches and tax advantages. Employers often (not always) pitch in as much as you do up to a certain percentage, i.e. 3-4%. Contributions to traditional 401(k)’s also help reduce your taxable income. Cha-ching.
An investment account that provides tax advantages when investing for higher education.That way, your student will have more money to spend on other stuff...like Franzia.
If it’s not a stock or a bond, and it can still be part of your portfolio, it’s likely an alternative. This covers a whole slew of investments, including venture capital, private equity, hedge funds, commodities like gold and wheat, domestic and foreign real estate and natural resources like coal and gas — even art collections!
The mix of stocks, bonds and alternatives in a portfolio. Starting with your goal and your timeline, the mix should reflect a balance between risk and reward commensurate with what you’re trying to achieve. Finding the right allocation is kinda like finding the perfect bad boy to date — someone who’s edgy, but doesn’t hurt you in the end.
Asset classes are to investments what vegetables are to spinach, or folk music is to the Indigo Girls. Asset classes are groups of securities that have similar risk and return characteristics. For investments, think our usual suspects — equity (stocks), fixed income (bonds), and alternatives.
Also known as “fixed income.” One of two common ways for a company to raise money (the other is equity). Basically, bond holders lend money to investors who in turn receive a fixed amount of interest, AND (unless the company fails) they get their initial investment paid back at the end of the loan. The interest and riskiness of a bond depends on the issuer, which can range from a large corporation to a small town municipal government.
Without one, you can’t buy or sell publicly traded stocks, bonds, or many other common types of investments. “B-D’s”, as they’re sometimes called, facilitate the buying and selling of securities. The firms and their employees are closely monitored by FINRA (Financial Industry Regulatory Authority). Recognizable examples include Morgan Stanley, UBS, Raymond James, and Merrill Lynch. Ellevest’s broker-dealer is Folio.
Think physical, tangible stuff that can help make...other stuff. Natural resources, oil and gas, precious metals, agricultural products, and livestock are a few examples. If you’ve ever played the card game “Pit”...it will totally make sense now.
See “asset allocation.”
For investment portfolios, this means including different types of securities (i.e., stocks, bonds, alternatives). Why not choose just one and stick with it? For the same reason you wouldn’t eat one flavor of gelato the rest of your life. One day it just won’t work the way you need it to. Diversifying should include securities that act differently, so when one’s not performing well, another one is — or is at least performing better, and vice versa.
Everyone Trust Fabio. Just kidding. Exchange Traded Funds. ETF’s track indexes such as the S&P 500 (U.S. stocks) or the MSCI (international stocks). Because they require minimal human interaction compared to other investment vehicles, they typically have much lower fees.
An investment advisor who is registered with a government entity (e.g. a state agency, the SEC) and is obligated to act in its clients’ best interests, putting a client’s interests ahead of their own. They also must disclose conflicts of interest, such as how and when they receive compensation for selling certain products.
When an asset, such as a stock or bond, increases in value. Yasss! Important asterisk here: when you sell the asset, you’ve realized the gain AKA you have more money than you started with. In taxable accounts, this may mean you owe a bit of the upside to Uncle Sam.
Think Michelle Kwan landing a triple axle...you don’t wanna wipe out at a critical moment. It’s a way of managing portfolio to become more conservative the closer it gets to its “cash out”/goal date, with the aim of minimizing fluctuations as you approach the time you need your $$$. Smooth.
Hedge funds are kind of like the country clubs of the investing universe. You have to have a lot of money to get in, they’re really expensive, and they try to add value you can’t get anywhere else. These funds use (a ton) of pooled money to invest in a variety of assets, many of which require a high initial dollar investment.
Very similar to an ETF in that it tracks an index, but with a different structure. Provides exposure to a broad market with lower operating expenses than mutual funds.
Your entry point into investing. Allows you to buy and sell, from stocks and bonds to mutual funds. There are different types, some of which come with tax advantages, which means most people have more than one.
Individual Retirement Account. Where a 401(k) is held with your employer, an IRA is yours no matter where you work. In fact, anyone over 18 with earned income in the U.S. can have one There are different kinds, such as traditional, SEP and Roth, with different maximum contributions,income limits, and tax treatments.
How soon can you get cash for what you own? Publicly traded securities like stocks and bonds are very liquid (you can sell them quickly and the buyer gives you money at a stable price); whereas things like your home or car are far less liquid. They’re worth something, but it’ll take you a long time to access the value.
Instead of trying to pick your own stocks, you can hire a human to pick a bunch for you. Mutual funds are publicly traded pools of money managed by investment firms who try to hold to certain risk/return parameters with the goal of benefitting anyone who invests. They’re available at a very modest investment level. The fees are typically higher than ETF’s, and the returns are typically similar, or worse.
Think Venus and Serena’s track records compared to their peers. Just like it sounds, outperforming means doing better relative to something or someone else. In the case of investments, this typically refers to a benchmark such as the S&P 500 Index or the MSCI EAFE.
A combo of different securities (hopefully!) designed to help you achieve your investing goals. Basically a bird’s-eye view of all of your investments, which is helpful when evaluating your entire financial picture.
Dollas on the DL. This is money (copious amounts) invested in private companies, i.e. they’re not traded on a public stock exchange.
The places where you set aside money for your golden years. You know, when you move to Miami with a closet full of caftans and have regular dancing dates. Present and accounted for: 401(k)’s, IRA’s, 403(b)’s, and SEP’s.
“Returns” are what they sound like — the money that comes back to you (or doesn’t) from market gains or losses. Important to note: returns can also be negative. Often found next to the word “risk”, because without one you can’t have the other.
An investment product that can be readily exchanged for value from one party to another and involves risk. Yep, you guessed it. Stocks and bonds are securities.
Also known as an equity, it’s a lil’ piece of ownership of a company. Owning stock gives you the right to participate in company earnings (and losses) through dividends and/or changes in market price.