Vocabulary Cheat Sheet

Don’t gobblefunk around with words.

-Roald Dahl, The BFG

In case you haven’t noticed, even simple investing is packed full of Tier III vocabulary words! And just like our kids, we have to know what the heck these words mean if we’re going to make progress. I’d hate to let a few unknown words get in the way of you creating an even better future for yourself, so here’s a quick but thorough cheat sheet intended to give you all the definitions you need to take charge of your investment decisions. I hope it’ll be an easy resource that you can come back to again and again. If you come across another word I should add, drop it in the comments!

  • Actively Managed: When a real person decides the stocks and bonds that go into a mutual fund. Actively managed funds are most often more expensive than passively managed funds and in most cases don’t outperform their passively managed counterparts.
  • Annuity: An insurance policy where a person pays a life insurance company a lump-sum premium at the start of the contract. That money is to be paid back to the person in fixed, incremental amounts, over some future period (predetermined by the insured). These are most often a very expensive, bad deal. Proceed with caution. Confusingly, some 457 and 403b retirement accounts are also called “annuities,” but have nothing to do with expensive life insurance policies.
  • Asset Allocation: How your money is distributed in your retirement account. Typical asset classes are stocks, bonds, cash and commodities. The allocation refers to the percentage you have in each class. For example: 80% stocks, 20% bonds.
  • Asset Class: A thing you can invest in within a retirement account. Examples include stocks, bonds, REITs, or ETFs. There are sub-classes within each larger class. For example, stocks could be large-cap blend, small-cap value, international, etc. Bonds could be corporate or municipal (government).
  • Bonds: A kind of investment where you lend money to a company or government (municipal) entity and they pay you back after a certain period of time with a fixed interest rate. Usually considered a very low-risk investment. Bonds are classified by their term, which is the length of time until they are repaid to you. Bonds can also come with built-in inflation protection. These are called TIPS (Treasury Inflation Protected Securities).
  • Brokerage: A company that you can use to invest in the stock market. Vanguard, Fidelity, TDAmeritrade, Edward Jones, etc. All brokerages are not created equal. Choose wisely! Vanguard is my go-to.
  • Cap: Short for “market capitalization” or how big a company is. Large-cap means great big companies, small-cap means smaller.
  • Commodities: a raw material or primary agricultural product that can be bought and sold, such as copper, coffee, oil or gold.
  • Compounding Interest: This one honestly needs to be it’s own post because this term is so misused. A textbook definition of compounding interest is when you have a sum of money that earns interest, and then the next month you earn interest on your original amount plus the interest you already earned. It’s pretty incredible because you earn interest on the interest you’ve been paid. However, true compounding interest is only found in a few places, such as savings accounts. People often use the term “compounding interest” to describe the growth of money in the stock market. While stocks can gain value over time, this is not true compounding interest because it’s not guaranteed, no one is paying you interest, and it’s not at a fixed rate. Better terms to describe stock market appreciation would be: capital gains, increased valuation, compounding gains, or growth.
  • Cost Basis: the original price of an asset plus any expenses that you pay to purchase it. A high cost basis is bad because it means you’re paying high fees to buy, sell, or maintain ownership.
  • Dividends: Some companies pay out a share of their earnings to stockholders. These are called dividends. They are usually paid quarterly but not always. These companies are usually big and stable. If you choose to reinvest your dividends you can automatically buy more shares of that company. Some index funds also pay dividends from the companies in the fund. By reinvesting those dividends, you can buy more shares of the fund.
  • Equities: Stocks
  • Exchange Traded Funds (ETFs): Like a mutual fund, these funds are a group of stocks or bonds. The difference between ETFs and a mutual fund is that they trade like a stock instead of like a mutual fund. To most of us, that difference is very, very small. ETFs can be index funds and can be found in pretty much any asset class you can imagine.
  • Expense Ratio: A way of quantifying how much you’re paying for an investment. A very good expense ratio is anything lower than .05. You can basically subtract the expense ratio from what your investment earns. So if you have a gain of 6% and an expense ratio of .05%, your net earnings are 5.95%. This seems like small potatoes, but it’s NOT. A high expense ratio of 2 or 3% can do monumental damage to your earnings over a lifetime! Keeping expense ratios low is one of the biggest reasons to invest on your own through a low-cost brokerage like Vanguard or Fidelity.
  • Fixed-income Investments: Bonds
  • Growth: A growth stock is a company that is expected to generate substantial and sustainable cash flow and whose revenues and earnings are expected to increase at a faster rate than the average company within the same industry. *Expected* is the key word here.
  • IRA: Individual Retirement Account. See my first post on investing for more details!
  • Limit Order: When buying stocks, you set a price at which you want to buy a stock. This is usually not a concern for long-term investors.
  • Market Order: An order to buy a stock at the current market price. Easiest, fastest, and the way I always do it.
  • Mutual Funds: A group of investments. They can include all stocks, all bonds, or a mix of both. They can be actively managed or passively managed.
  • No Load: This describes a mutual fund that does not charge a commission or sales fee.
  • Pension: A regular payment made during a person’s retirement from an investment fund to which that person and/or their employer has contributed during their working life.
  • Pre-tax and Post-tax: These terms refer to the status of your money before it is invested. Pre-tax investments make your taxable income lower, but you usually pay taxes on your earnings later. Post-tax investments make your taxable income higher, but you don’t normally pay taxes on your earnings.
  • Principal: The amount of money that you invest without any compounding or interest added.
  • Rebalancing: When you adjust the percentages that you hold in each asset class to match your target allocation. For example you may want to hold 90% stocks and 10% bonds. If the market has been down and the total value of the stocks in your portfolio is more like 85%, then when you make new contributions to your account you may put it all into stocks to bring it back up to 90%.
  • REIT: Real Estate Investment Trust. This is a company or group of companies that own income-producing real estate. REITs own many types of commercial real estate, ranging from office and apartment buildings to warehouses, hospitals, shopping centers, hotels and even timberlands. You can buy an REIT ETF and it’s a great way to invest in real estate without actually owning investment property.
  • RMD: Required Minimum Distribution. Some retirement accounts require you to take a certain amount or percentage of money out (and pay taxes on it) after a certain age. Read more about it in the account descriptions in this post.
  • Roth: A Roth account is a type of account that you contribute post-tax money to. Most often it’s a Roth IRA or a Roth 401k. Income limits determine whether or not you can deduct the contributions from your taxes.
  • Securities: Bonds
  • Stocks: Tiny pieces of ownership in a company. When you buy a stock you are buying a piece of that company.
  • Target Date Fund: A mutual fund designed to shift the percentages of stocks and bonds as a target retirement year draws closer. The farther you are from retirement, typically the more stocks you’ll own. Then as retirement grows closer, the fund will shift to include a higher percentage of bonds because bonds are considered less risky.
  • Tax-deferred: Pre-tax investments. Taxes owed on your investments and your earnings are deferred until a later date.
  • Ticker: The letters used to identify an investment within the stock market. For example VTSAX is the ticker for the Vanguard Total Stock Market Index Fund.
  • Value: A value stock is a security that is trading at a lower price than expected given the performance of the company and key performance indicators of the stock itself. Literally a stock that’s been determined to be a great “value.” Value stocks can be very interesting addition to a portfolio. I’ll write about them soon!
  • Volatility: The ups and downs of the stock market or of a particular stock or group of stocks.

Whew! That was fun! Imagine how much more you already know about the powerful wealth-building tool of the stock market. Thanks so much for reading! Please subscribe so you never miss a post and share this on social media or with a teacher friend who you think might be interested!