Glossary of Financial Terms
401(k): A retirement savings plan offered by employers that allows employees to contribute a portion of their pre-tax income to invest for retirement.
Adjustable-Rate Mortgage (ARM): A mortgage with an interest rate that can change periodically, typically based on an index.
Amortization: The gradual repayment of a mortgage loan through regular installments, consisting of both principal and interest.
APR (Annual Percentage Rate): The cost of borrowing, expressed as a percentage, including interest and fees.
Asset Allocation: The strategic distribution of investments across different asset classes (e.g., stocks, bonds, real estate) to manage risk and achieve specific financial goals.
Asset: Anything of value owned by an individual or organization, including cash, real estate, stocks, and more.
Bear Market: A period of declining stock market prices, typically marked by pessimism and sustained selling of securities.
Bearish: A negative sentiment in the stock market, indicating expectations of falling prices.
Blue Chip Stocks: Shares of large, well-established companies with a history of stable performance and dividends.
Bonds: Fixed-income securities representing loans to governments or corporations, paying periodic interest.
Budget: A financial plan that outlines expected income and expenses to manage money effectively.
Bull Market: A period of rising stock market prices, characterized by investor optimism and confidence.
Bullish: A positive sentiment in the stock market, indicating expectations of rising prices.
Certificate of Deposit (CD): A time-based deposit with a fixed interest rate, typically offering higher yields than savings accounts.
Checking Account: A bank account used for everyday transactions, with features like checks and debit cards.
Closing Costs: Fees and expenses associated with finalizing a mortgage, including appraisal, title insurance, and attorney fees.
Compound Interest: Interest calculated on both the initial principal and accumulated interest, leading to exponential growth.
Credit Card: A payment card that allows users to make purchases on credit, with the understanding that they will repay the borrowed amount with interest.
Credit Counseling: Professional advice to manage debt and improve financial health.
Credit Report: A detailed record of an individual’s credit history, including credit accounts, payments, and debts. A numerical representation of an individual’s creditworthiness, used by lenders to assess the risk of lending money.
Day Trading: The practice of buying and selling stocks within the same trading day to profit from short-term price fluctuations.
Debit Card: A card linked to a bank account, allowing users to make electronic transactions by deducting funds directly from their account.
Debt Consolidation: Combining multiple debts into a single loan to simplify payments and reduce interest.
Diversification: The practice of spreading investments across a variety of assets to reduce risk by avoiding over-concentration in a single investment.
Dividend Yield: The annual dividend income earned from a stock, expressed as a percentage of the stock’s current price.
Dividend: A payment made by a corporation to its shareholders, usually in the form of cash or additional shares, as a portion of its profits.
Down Payment: A portion of the home’s purchase price paid upfront by the buyer, reducing the amount to be financed through a mortgage.
Emergency Fund: Savings set aside to cover unexpected expenses or emergencies, providing financial security.
Escrow Account: A dedicated account where funds for property taxes and insurance are held and paid by the lender on behalf of the borrower.
Estate Planning: Preparing for the transfer of assets upon death, including wills, trusts, and inheritance planning.
Federal Reserve (The Fed): The central bank of the United States, responsible for regulating monetary policy, interest rates, and currency supply.
Fixed-Rate Mortgage: A mortgage with a constant interest rate throughout its term, providing predictability for monthly payments.
Foreclosure: The legal process in which a lender takes possession of a property due to mortgage default.
Hedge Fund: An investment fund managed by professionals, typically open to accredited investors, that employs various strategies to generate returns.
Home Equity: The difference between the home’s market value and the outstanding mortgage balance, representing ownership.
Index: A benchmark or indicator used to measure the performance of a specific market or sector, such as the S&P 500 or Dow Jones Industrial Average.
Inflation Rate: The percentage increase in the general price level of goods and services over a specific period, indicating rising costs.
Inflation: The increase in the general price level of goods and services over time, reducing the purchasing power of money.
Initial Public Offering (IPO): The first sale of a company’s shares to the public, allowing it to raise capital by going public.
Insurance Premium: The periodic payment to maintain an insurance policy.
Interest Rate: The percentage charged by a lender for borrowing money or earned on savings and investments.
IRA (Individual Retirement Account): A tax-advantaged retirement savings account individuals can open independently.
Liability: A financial obligation or debt that an individual or organization owes to another party.
Liquidity: The ease with which an asset can be converted into cash without a significant impact on its price.
Loan-to-Value (LTV) Ratio: A measure of risk used by lenders, calculated by dividing the mortgage amount by the appraised value of the home.
Market Capitalization (Market Cap): The total value of a company’s outstanding shares, often used to classify companies as large-cap, mid-cap, or small-cap.
Market Order: An order to buy or sell a stock at the current market price, executed immediately.
Mortgage Rate: The interest rate charged by a lender for a home loan, determining the cost of borrowing.
Mutual Fund: An investment vehicle that pools money from multiple investors to purchase a diversified portfolio of stocks, bonds, or other securities.
Net Worth: The difference between an individual’s assets (what they own) and liabilities (what they owe), representing their financial health.
Options: Financial contracts that give the holder the right (but not the obligation) to buy or sell an underlying asset at a specified price within a certain time frame.
Portfolio: A collection of financial assets (e.g., stocks, bonds, cash, real estate) held by an individual or organization.
Principal: The initial amount of money invested or borrowed, before interest or returns are calculated.
Private Mortgage Insurance (PMI): Insurance required by lenders when the down payment is less than 20% of the home’s purchase price, protecting the lender in case of default.
Required Minimum Distribution (RMD): The minimum amount individuals must withdraw annually from retirement accounts after a certain age.
Risk Management: The process of identifying, assessing, and mitigating potential risks associated with investments or financial activities.
Risk Tolerance: An individual’s willingness and ability to accept investment or financial risk.
Roth IRA: An individual retirement account with tax-free withdrawals if certain conditions are met.
Savings Account: An interest-bearing bank account used for saving money while keeping funds accessible.
Short Selling: The practice of borrowing and selling a security with the expectation that its price will decline, allowing the borrower to buy it back at a lower price.
Stock Portfolio: A collection of individual stocks owned by an investor.
Stock Split: A corporate action in which a company divides its existing shares into multiple shares, typically to lower the stock’s price and increase liquidity.
Stock: A share of ownership in a corporation, representing a claim on its assets and earnings.
Tax Deduction: An expense that reduces taxable income, lowering the amount of income subject to taxation.
Treasury Bond: A long-term government debt security with a fixed interest rate, typically considered one of the safest investments.
Volatility: The degree of variation in a stock’s price over time, indicating its risk level.
Yield: The income generated by an investment, typically expressed as a percentage of its value, such as dividend yield or bond yield.