GLOSSERY OF TERMS
When money experts toss around unfamiliar financial terms, don’t dive for cover. Reach for a quick definition. This glossary of common terms should clear up the murk:
– Annuity: A contract between an insurance company and individual in which the company accepts a certain amount of the individual’s money now and agrees to provide an income for a special period (lump sum at a designated time, payments for 10 years or payments for as long as you and/or your spouse live).
– Individual retirement account (IRA): A personal savings plan that lets you set aside money for your retirement. If you qualify, you can use all or part of your contributions to the plan as a tax deduction in the tax year for which you make the contribution. Earnings that accumulate are not taxed until you begin withdrawing the money.
– Bear market: A sharply declining stock market (a good time for long-term investors to buy, if they’re planning on holding the stock or mutual fund that they buy).
– Bull market: A market that is sharply advancing (a stock market in which the value of stocks is rising rapidly).
– Dividend: The percentage of a corporation’s profits paid to the stockholders. In preferred stock, dividends are usually fixed; with common shares, dividends vary with the fortunes of the company.
– Security: An investment of money in a common enterprise with the expectation of profit from the effort of others.
– Common stock: Securities which represent an ownership interest in a corporation.
– Preferred stock: A class of stock with a claim on the company’s earnings before payment may be made on the common stock if the company liquidates or declares a dividend.
– Blue chip: A common stock that is highly esteemed as an investment based on the following criteria: Earnings in good times and bad over a long period of time; 25 years or more of paying quarterly cash dividends; leadership in solid, established industries coupled with solid expectations for continued success.
– Government obligations: Instruments of the U.S. government public debt. Examples are Treasury bills, notes, bonds, savings bonds and Retirement Plan bonds. These are fully backed by the U.S. government.
– Municipal bonds: The obligations of states, cities, towns, school districts and public authorities are known as municipal bonds. In general, interest paid on municipal bonds is exempt from federal taxes.
– Treasury bond: A U.S. government long-term security, sold to the public and having a maturity greater than five years.
– Treasury stock: A stock issued by a company but later reacquired. It may be held in the company’s treasury indefinitely, reissued to the public, or retired.
– Mutual fund: A mutual fund pools the dollars of many people, and undertakes to invest those dollars more productively than individuals could for themselves.
– Money market fund: A mutual fund that specializes in investing in short-term securities.
– Unit investment trust: A limited portfolio of bonds or other securities in which investors may purchase shares. It differs from a mutual fund in that no new securities will be added to the portfolio.
– Portfolio: All assets held by a mutual fund at any specific time and, thus, held by the shareholders. A portfolio also means the total investments held by an individual.
– Retirement plans: A tax-favored employer benefit plan which defers taxation of contributions until retirement and can be established by any business, whether incorporated or not incorporated. Employees as well as business owners participate on a non-discriminatory basis. Contributions are deductible as a business expense. Contribution and benefit limits may fluctuate from year to year. (Because of the tax advantages, it’s probably the best way to save for retirement, if it’s available.)
– Tax-exempt interest: The interest earned on tax-exempt securities is not includable in a shareholder’s gross income for federal income tax purposes. In many states, the income from municipal bonds issued within a state is tax-exempt to residents of the state.
Sources: American Express Financial Advisors in Tupelo and the Mississippi Cooperative Extension Service.