Financial Terms Defined For All Women – No MBA Required
Advocate: Someone you’ve chosen to coach you in enhancing your money building abilities and results. An advocate can provide a variety of financial services, including helping you to create the best possible strategies for consistently investing your cash and improving the growth of your Money Machine. See also Broker and Financial Adviser.
Annuity: An investment that shelters from taxation any proﬁt you make on your mutual funds but does not shelter you from paying taxes when you withdraw money. An annuity is an expensive way to convert capital gains into ordinary income when you’re ready to withdraw your money. Like an IRA, an annuity ties up your cash until age fifty-nine and a half.
Bear Market: Yahoo! Stock prices are falling. This means that stocks are “on sale.” It’s a buyer’s market and a good climate for the long-term investor.
Blue-Chip Stock: A stock representing a large, well-known company that has a long history of consistent corporate earnings. Blue chips include companies like IBM, General Electric, General Motors, and Kodak.
Bond: A security that pays you interest for a specified period and then repays you the face value of the security at the end of that time. Types of bonds include certificates of deposit (CDs), government savings bonds, Treasury notes and bonds, mortgage-backed bonds, municipal bonds, and corporate bonds. Bonds vary by issuer, time span, and rate of return. If you own a bond, you’re a creditor of the issuer. By contrast, if you’re a stockholder, you’re an owner.
Broker: An advocate who has direct access to the trading floor of securities exchanges and the over-the-counter market. Brokers buy and sell stocks, bonds, ETFs and mutual funds for you for a commission. A broker must be licensed by FINRA. See also Advocate.
Brokerage Account: An investment account in your name (or jointly with another person). A brokerage account is like a checking account, except that a brokerage account is held at a brokerage ﬁrm rather than a bank. Also unlike a checking account, a brokerage account may contain both cash and securities. Cash in a brokerage account may be kept in a money market fund to collect interest; when you choose, it may be used to purchase stocks, ETFs, mutual funds, or other investments within your same account. As with a checking account, you will receive a monthly statement showing what’s held in your account.
Bull Market: Yahoo! Stock prices are rising.
Capital Gain: When you buy a stock, an ETF, a mutual fund, or real estate for one price and sell it later for a higher price, the difference (your proﬁt) is called a “capital gain” for tax purposes. Historically, tax rates on capital gains have been lower than tax rates on regular income. You are required to declare a capital gain on your tax return only if your investment is in File Cabinet No. 1 (taxable investments).
Capital Loss: When you buy a stock, an ETF, a mutual fund, or real estate for one price and sell it at a lower price, the difference is called a “capital loss” for tax purposes. You record a capital loss on your tax return only if your investment is in File Cabinet No. 1 because File Cabinets No. 2 and No. 3 exempt you from taxes at this point. You can use a capital loss in File Cabinet No. 1 to offset other capital gains in this cabinet. Example: If you made some money in Microsoft stock but lost some in GM, you can offset one with the other. See also File Cabinet No. 1, File Cabinet No. 2, and File Cabinet No. 3.
Cash Value: The amount of money invested in an insurance policy. Under tax laws, you can borrow the cash value of a policy, usually anytime after the first year of the policy. Just like money borrowed from a bank, money borrowed against an insurance policy doesn’t have any tax liability.
Certificate of Deposit: Also known as a CD, a certificate issued to you by a bank for a deposit that cannot be withdrawn for months or even years. The low rate of interest doesn’t keep you ahead of inflation and taxes or build your Money Machine.
Common Stock: A share of ownership in a company. As an owner, you typically elect a board of directors, whose duties include issuing dividends. If the company dissolves for any reason, common stockholders will be the last in line to receive assets.
Death Beneﬁt: The number of dollars that will go tax-free to those you have named in an insurance policy to receive these funds upon your death. There may be estate taxes, depending upon your estate planning.
Debit Card: A piece of plastic that looks and functions much like a Visa or a MasterCard. You may use it to purchase groceries, rent a car, buy an airline ticket, order from a catalog, or do anything else that you can with a credit card. The difference is that instead of building up debt, your purchases are deducted from your bank account so that you’re always spending your own money.
Dignity Money: The amount of cash you’ll need each year from your Money Machine to pay for basics, like housing, transportation, food, and taxes.
Discount Broker: A broker who buys and sells whatever you request (stocks, bonds, mutual funds) but does not advise you about your purchase or your financial life. The transaction charges of a discount broker are lower than those of an advocate.
Dividend: A share of the profits of a company in which you hold stock. You may receive dividends either quarterly or annually.
Dow Jones Industrial Average: Also known as the Dow, it is a way to measure the growth of the price of stocks in the United States by examining the prices of the same thirty stocks each day. The Dow plots the rise and fall of these stocks as they are bought and sold, thereby using them as a mirror of the market. Consider the Dow a weather vane of sorts: It heralds the ups and downs of Wall Street.
Education IRA: A new form of IRA that allows you to contribute up to $2,000 a year for each child until the child’s eighteenth birthday. When the child reaches age thirty, the Education IRA reverts to a Plus IRA. (See also Roth IRA.)
ETFs (Exchange Traded Funds): A publicly traded security that is the best of both worlds, it trades like a stock and is composed of a ‘basket’ of stock like a mutual fund. It is known for its minimal cost; they often trade commission-free.
File Cabinet No. 1: Investments that are taxed across the board. This file cabinet represents stocks, bonds and real estate investments where after-tax dollars go into them, and earnings and profits are taxed.
File Cabinet No. 2: In this file cabinet, you’re spared some tax on your investments because it represents “qualified plans” such as IRAs, 401(k) plans, etc. Tax-free dollars go into File Cabinet No. 2, and earnings from stocks, bonds, and real estate grow tax-free. When you withdraw money from this file cabinet, you’ll be taxed at your ordinary income tax rate. If your combined state and the federal tax rate is 50 percent, half of everything you have in this file cabinet is Uncle Sam’s.
File Cabinet No. 3: You’re spared even more tax on your investments in this file cabinet. This represents the private pension plan. In this case, you’ve already paid tax on dollars that go into stocks, bonds, or real estate. Earnings and profits from stocks, bonds, and real estate investments are tax-free. And, most notably, you can withdraw your money from these investments tax-free.
Financial Adviser: An advocate who charges you a fee, usually quarterly or yearly, to help you build your financial wealth. A financial adviser must be licensed under state laws and associated with a ﬁrm that can buy and sell securities. See also Advocate.
FINRA: Financial Industry National Regulatory Authority. A self-regulatory body is overseen by the Securities and Exchange Commission (SEC). FINRA watches the operations and ethics of its licensed securities brokers and dealers. It can sanction and fine members who do not abide by its rules and regulations. In order to provide brokerage services, all individuals and firms must be registered with the FINRA.
Flexible Premium Variable Life Insurance Plan: Variable insurance combined with ETFs and good mutual funds to work as an investment plan for your money. To work as an investment, the plan has to have low term-insurance rates, guaranteed interest rates to withdraw your money, and ETFs and mutual funds that have a history of performing as well as the stock market. See also Private Pension Plan.
401(k) Plan: Named after a section in the U.S. tax code, a 401(k) plan is a company-sponsored qualified plan in which you allow your employer to regularly deduct money from your paycheck tax-free and invest the money in stocks, bonds, or real estate. Your investments grow tax-free, but you are taxed at your ordinary income tax rate when you withdraw the funds. Your employer may match your contribution to some extent. These sums of money are tied up until you’re fifty-nine and a half unless you want to pay a penalty for withdrawing your money early of 10 percent plus the ordinary income tax due. 401(k) plans are not federally insured. See also Qualified Plan.
Growth Mutual Fund: A mutual fund composed of stocks in companies that will grow faster than the economy. This kind of fund usually doesn’t pay much in dividends. Also, see Mutual Fund.
Individual Retirement Account (IRA): A qualified plan that allows you to make an annual tax-free contribution of up to $5,500 if you are younger than age 50; and $6500 if you are over age 50 before the end of the year. Investments in your IRA grow tax-free. Your money is tied up until you’re fifty-nine and a half unless you want to pay a 10 percent penalty plus the tax for withdrawing your money early. IRAs are federally insured. See also Qualified Plan. The new tax-law legislation created two circumstances in which you can withdraw money before age fifty-nine and a half without a penalty. These are for your child’s education and to purchase your first home. But you still must pay income tax on the withdrawal.
International Mutual Fund: A mutual fund composed of stocks in foreign companies, like telephone companies in Mexico, health-care companies in Europe, and manufacturing companies in China. See also, Mutual Fund.
Keogh Plan: A qualified plan that allows you to make an annual tax-free contribution of up to 25 percent of your earnings or $49,000, whichever is less, and invest the money. Like IRAs and 401(k) plans, the money grows tax-free, but it is taxed at your ordinary income-tax rate upon withdrawal. These monies are tied up until you’re fifty-nine and a half unless you want to pay a 10 percent penalty plus the tax for withdrawing the money early. See also Qualified Plan.
Marginal Tax Rate: The highest federal tax rate that you can be charged on some part of your income.
Money Machine: That well-oiled piece of machinery that houses all of your investments while they grow. It is the lifeblood of your future. It is the generator of all future cash and what you will need in order to create and lead a healthy, stress-free, and joyful life. Think of it as a pot of invested capital that is sufficient to create the income that will meet your future lifestyle expenses and your financial goals.
Money Market Fund: A fund for your short-term needs. A money market fund pays you interest from the short-term debt obligations of various companies. Brokerage firms usually have higher interest rates on their money market funds than banks and credit unions.
Municipal Bond: Debt incurred by cities, counties, and states to gather cash in order to build public projects, like roads, schools, football stadiums, airports, sewer and water systems, hospitals, public housing, theaters, redevelopment projects, public parking, environmental control and safety projects, and government buildings. Much as you can have a mortgage on a house, a city, county, or state has a mortgage on its property; the municipality pays interest on the borrowed money. When you are a municipal bondholder, you have lent your money for projects, and you receive interest that is tax-free. At the stated maturity of the bond, you are repaid. See also Bond.
Mutual Fund (Stocks): A bundle of stocks. A mutual fund allows you to own a piece of many companies instead of only one. Mutual funds vary in focus: Some are composed of high-tech stocks, others of health-care stocks, international stocks, or blue chips. A mutual fund has a professional manager, who buys for and sells from the fund’s portfolio.
Mutual Fund Family: Mutual funds can exist in a family, often as individual members with distinctive personalities sharing a common last name. Some mutual fund families contain as many as two hundred funds; some have as few as twenty. If you invest in a family and decide that you want to be in one of its funds rather than another, you can generally move within the family at no cost.
NASDAQ: A communications system developed by FINRA for exchanging over-the-counter quotes among the members of FINRA.
Net Asset Value: The total shares divided into the total market value, less any liabilities, of a mutual fund’s securities. The commission paid to buy the fund is generally the difference between the fund’s share price and the NAV.
No-Load: A stock or mutual fund that can be purchased without paying a commission or a sales charge. The administration of the fund includes other management costs and fees.
NYSE: The New York Stock Exchange, in lower Manhattan, is where buyers and sellers of stocks get together to establish a price for their trades. The NYSE is one of the three major exchanges (the other two are the American Stock Exchange and the Paciﬁc Stock Exchange). For every “buy” on these exchanges there is a matching “sell,” thereby creating a fluid market.
Ordinary Income: A year’s income that is taxed according to ordinary federal and state income-tax rates.
OTC: The over-the-counter market is a negotiation between dealers throughout the United States for the purchase and sale of stocks. Unlike the NYSE, a “buy” is not always matched to a “sell.” A dealer may buy some stock and hold it in inventory. Thus, the dealer, instead of a third-party buyer, establishes the price. In the OTC, prices of stock may vary widely from one dealer’s offer to another. Price differences often depend on how the dealer plans to proﬁt on the stock.
Price/Earnings (P/E) Ratio: A stock’s price divided by its earnings per share for the prior year. This shows how much people are willing to pay for ownership of $1 of the company’s earnings.
Private Pension Plan (PPP): Also known as a flexible premium variable life insurance plan, the PPP takes advantage of the best of what insurance has to offer (the ability to grow money tax free and withdraw it tax free) and the best of what the stock market (the historically best way to grow money) has to offer. Unlike with qualified plans, Uncle Sam is not your partner when you withdraw money from a PPP. See also Flexible Premium Variable Life Insurance Plan.
Qualified Plan: A plan that by special tax law allows you to invest and grow money tax-free. You’ll pay taxes at your ordinary income-tax rate when you withdraw your money. And there is a 10 percent penalty plus the tax for withdrawing cash before you are fifty-nine and a half. Qualified plans include IRAs, SEP-IRAs, Keogh plans, 401(k) plans, 403 (b) plans, company pension plans, and proﬁt-sharing plans. There is a limit on how much money you can put into a qualified plan each year, depending upon which plan you use.
Regular Account: A brokerage account that is fully taxed; interest, dividends, and gains on the sales of securities are taxable income for state and federal tax purposes.
Roth IRA: This new provision allows you to contribute up to $5,000 a year to your Roth IRA if you are under age 50, and up to $6,500 if you are age 50 by the end of the year. Under the new legislation, you won’t have a tax deduction for your contributions, but you will be able to withdraw tax-free. If you earn over $131,000 a year or if you and your spouse jointly earn over $193,000, you can’t use this IRA. Also known as the American Dream IRA and the Plus IRA.
Rule of 72: A simple mathematical formula that lets you project the growth of your Money Machine and the income you’ll be seeing in the future. To apply the rule, divide the number 72 by a rate of return. The result is the number of years your money will take to double at that particular rate. To get the rate of interest you’ll need to reach your financial goal, divide the number of years you plan to double your money into the number 72.
Securities Investor Protection Corporation (SIPC): A federally chartered nonprofit membership corporation that protects customer accounts of brokers who have financial difficulties. Under the SIPC, brokerage accounts are insured up to $500,000 per account.
Simple IRA: A qualified plan in which employees of small companies can both invest the money themselves and/or have their employer make contributions to the IRA. It works the same way as a traditional IRA by taxing you at your regular income-tax rate when you withdraw money. As an employee, you can make contributions to your simple IRA of up to $11,500 a year, and if you are over age 50 and additional $2500 per year. The employer must either elect to contribute a ﬂat 2 percent of the employee’s yearly salary or match the employee’s contributions dollar for dollar to a maximum of 3 percent of the employee’s salary or $11,500, whichever is less. You can have a simple IRA and at the same time contribute to a traditional IRA. However, the amount of your contribution that may be tax deductible will depend upon your income.
Simplified Employee Pension–Individual Retirement Account (SEP-IRA): A qualified plan that lets you (if you’re self-employed) invest up to $53,000 a year or 20 percent of your annual earned income, whichever is less, and your investments grow tax-free. When you withdraw money from a SEP-IRA, you’ll pay taxes at your ordinary income-tax rate. These monies are tied up until you’re fifty-nine and a half unless you want to pay a 10 percent penalty plus the tax for withdrawing your money early. See also Qualified Plan.
Small Cap Mutual Fund: A mutual fund composed of stocks in companies that have a lot of room to grow. Apple, Applied Materials, and the Gap were all small-cap stocks at one time. Now, though, they have grown beyond small cap distinction. Historically, small-cap stocks have been the best performers in the stock market because they have the potential to grow bigger. See also, Mutual Fund.
Stock: Ownership in a company that is traded either on a national exchange, like the NYSE, or simply between individuals. A stock represents a piece of ownership in a company.
Tax-Exempt Income: Income you receive that is not subject to federal or state taxes.
Term Insurance: Life insurance that pays a death beneﬁt for a specific period. Term insurance is renewable. Term insurance is the least expensive form of insurance.
Value Mutual Fund: A mutual fund composed of stocks in companies that are fully grown but for one reason or another undervalued by the market. At times, the stock of IBM, Hewlett-Packard, and Citibank have all been “cheap” compared to their value. Managers of value funds look for these bargains and expect the prices of these stocks to rise. See also, Mutual Fund.
White Knight Syndrome: The notion that women need and sometimes expect someone to take care of them. It is the false idea that you don’t have to worry about your financial life because your husband, boyfriend, father, domestic partner, or someone else will take care of you and see to your every need, and you’ll never, ever have to worry. It is a condition that has single-handedly made a vast number of women financial cripples, a belief system that prevents women from moving forward, taking control of their own destinies, and realizing their wellbeing and security.
Whole Life Insurance: Life insurance with level premiums, level death benefits, and cash value. Whole life is not a good investment for your Money Machine. It is a more expensive form of insurance than term insurance.
Joan Perry is the publisher of www.WomensWealth.money, the national authority site for women and money. She is a Best Selling Author of ‘A Girl Needs Cash’, Random House; and Living Proof, Celebrating the Gifts that Came Wrapped in Sandpaper (co-authored with Lisa Nichols). Joan is also the creator of The Women’s Wealth Model, A Heroine’s Journey to True Wealth,. As a pioneer in the field of women’s wealth, she founded the first female-owned investment banking firm that underwrote and traded municipal bonds for major governmental entities. Now as a women’s wealth advocate, she serves as a teacher, coach, writer and speaker.