Financial jargon is often perceived as being too confusing, overwhelming, or complicated to learn. Read on to learn about some of the more commonly used terms that you need to know. Pro Tip: Test out one of the new vocab words below in your next conversation – you just might teach someone else a thing or two!
Stock: A type of investment that allows one to purchase a portion of a corporation. There are two types of stock: common and preferred. Common stock allows the investor to receive dividends if the company declares them, and also may allow investors the ability to vote at shareholders’ meetings. Preferred stockholders don’t typically have the ability to vote at shareholders’ meetings, but they do take priority when it comes to receiving company assets should the company fail. (Stocks are also referred to as ‘equities’ and ‘shares’).
Bond: A type of investment where the investor loans money to a company for a period of time in exchange for the return of that money at the end of the agreed-upon time period. Think of this as an I.O.U. whereby the company receiving the loaned money promises to pay it back at the end of a designated time period AND, just to show that they’re good for the money, pays small interest payments to the investor in the meantime. The most common entities that issue bonds are corporations and governments that may need to raise funds for a specific project or other cause.
IRA: Stands for Individual Retirement Account. See? Not so complicated!Anyone with earned income from a job can open an IRA as a way to save for retirement. As of the most recent tax law for 2019, individuals are allowed to invest up to $6,000/year in an IRA, and can withdraw the funds at age 59.5. Depending on your situation, you may even be able to deduct your contribution to your IRA, reducing your tax liability for the year. One other benefit of most IRA plans: you don’t pay taxes on the money in your IRA until you take it out.
401(k)/403(b): Two types of retirement accounts that are offered by employers for their employees. The most common type of plan companies offer their employees is the 401(k). A 403(b) is a very similar plan offered to employees of public schools and non-profit organizations. You can and should elect to participate in these plans and contribute a percentage of your income each paycheck. Several employers will even volunteer to match a portion of your contribution so at the very least, be sure to contribute enough to the account to take advantage of this perk!
Roth IRA: A specific type of retirement account available to anyone with earned income from a job who also is below a particular income threshold (read more on this here). The best part of a Roth IRA? You can withdraw money TAX FREE from the account beginning at age 59.5!
Dividend: A dividend is a portion of its earnings that a company can choose to share with its shareholders each quarter. Not all companies choose to issue a dividend to their shareholders. Most new companies choose to reinvest their profits in order to continue growing and improving operations.
Interest Rate: The amount of interest due each period that the borrower must pay the buyer of the bond. The interest rate is a calculated as a percentage of the principal (or the amount of money that was loaned). For example, if the investor loaned $100 to the borrower, and the interest rate is 5%, then the borrower must pay the investor $5 each designated pay period in interest.
Stock Market: The Stock Market is where buyers and sellers exchange or purchase stocks of companies. The most well-known stock markets in the United States are the New York Stock Exchange (NYSE), the NASDAQ, and the Chicago Board Options Exchange (CBOE).
Bull Market/Bear Market: Two different terms that describe the condition of the Stock Market. A market that is thought to be on the rise, with prices moving upward is a Bull market (read: yay! Things are good!). A market that is thought to be on the downslope, with prices falling is considered a Bear market (read: Things will get better…in time!).
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