- Basic Principles of Investing
- Stocks and Bonds
- Mutual Funds
- Fixed Annuities
- Variable Annuities
- Other Investments
- Tax Planning
- Tax-Deferred and Tax-Free Investments
- Worksheet: Mutual Fund Shares
12b-1 fees: Fees mutual fund companies charge investors for marketing and related expenses.
401(k): A company retirement plan established under Internal Revenue Code Section 401(k), that allows employees to save for retirement on a tax-deferred basis.
Agency bonds: Offered by U.S. government agencies. Not quite as risk-free as Treasuries.
American Opportunity Tax Credit: The American Opportunity Tax Credit (AOTC) allows taxpayers to save money on their taxes if they paid higher education expenses for themselves, a spouse, or a dependent. The credit is worth up to $2,500 per student but only for their first four years of higher education. If you paid education expenses for multiple people, such as for two dependents, you can deduct up to $2,500 for each person. Your exact credit amount is calculated as the 100% of your first $2,000 of qualified expenses, and then 25% of your next $2,000 of eligible expenses. You need to have at least $4,000 of expenses per person in order to qualify for the maximum credit.
2020 AOTC incolme limits
|FILING STATUS||MAXIMUM INCOME FOR FULL CREDIT||MAXIMUM INCOME FOR PARTIAL CREDIT|
|Head of household||$80,000||$90,000|
|Married, filing jointly||$160,000||$180,000|
|Married, filing separately||$80,000||$90,000|
Annuity: A stream of payments from an insurance policy or a retirement account. Annuities basically come in two forms: 1) an immediate annuity, in which the insurance company pays fixed income starting today; and 2) a deferred annuity, which lets the money grow tax-deferred and pays an income in the future.
Asset allocation: The composition of a person's investment portfolio designed to minimize risk. It should be based on a person's investment objectives.
Back-End Load: A fee you may be charged when you sell certain types of mutual funds.
Basis: The amount you use when determining gain or loss for tax purposes.
Blue chip: Stocks which have a long history of stable growth and dividends.
Bond: Bonds are IOUs with three elements: face value (the value of the bond when it matures); maturity (the date when the holder gets the face value of the bond); and a coupon rate (the interest payment made to the bondholder by the issuer for use of their money).
Broker: Someone who will buy and sell securities for you for a fee.
Brokerage account: Money that's held by a broker. It may be in the form of stocks, bonds, mutual funds, or cash.
Capitalization: How much a company is worth.
Capital gain: The difference between the price at which you buy an investment and the price at which you sell it. Short-term capital gains are generated on property held 12 months or less. Long-term capital gains are generated on property held for more than 12 months.
CMO: Collateralized Mortgage Obligation. A type of derivative.
Collectibles: Baseball cards, stamps, antique cars, salt and pepper shakers, etc.
Commission: The fee paid to a broker or salesperson for buying or selling an investment.
Common stock: The most standard type of stock issued by a corporation.
Commodity: Natural resources, e.g., gold, pork bellies, wheat.
Correlate: How investments relate to each other.
Currency risk: The risk that an investment in a foreign country will rise or fall based on the value of its currency.
Derivative: An investment that is removed from its original source. It is difficult to value, and is therefore more volatile.
Diversification: The concept of reducing risk by investing your money in different types of investments.
Dividend: Income paid by corporations to their shareholders.
Dividend reinvestment plan: Buying additional shares directly from a company with your dividends.
Dollar-cost average: To enter or exit an investment slowly, in fixed amounts.
Downturn: A decrease in value.
Effective rate: What you pay for something when taxes are taken into account.
Emergency funds: Amount of money set aside for unexpected events.
Exercise: With stock options: using them to buy stock.
Face value: The value printed on the front (face) of a security.
GIC: Guaranteed Investment Contract issued by an insurance company. A typical choice in a 401(k) plan, it offers some security of a dependable return.
Grant: Typically a stock option that's been given to you.
Hedge: A way of covering a risky investment by buying its opposite.
Index: In investing: a collection of stocks of a certain size or in a certain segment of the economy.
Index fund: A fund that holds stocks in exactly the proportions of an index.
IRA: A tax-advantaged retirement account, allowing individuals with earned income to contribute up to $6,000 in 2020 (Same as 2019), no matter what your age (provided you have earned income), and presents an opportunity to receive tax-free income when the funds are withdrawn. If you are age 50 or older, you can contribute a total of $7,000 to a Roth IRA
Interest: The price you pay for borrowing money and the value you receive for lending it.
Interest-rate risk: The chance that interest rates will rise dramatically while you are holding a low interest-rate investment.
Investment risk: The chance that an investment will fall in value while you hold it.
Lifetime Learning Credit: The lifetime learning credit is worth a maximum of $2,000 per tax return but you need to have at least $10,000 of expenses to be eligible for the full deduction ($20,000 if you file a joint tax return). You also need to fall within the income limits to claim this credit. For 2020, your income must be $69,000 or less ($138,000 for joint filers) to claim even a partial credit, up from $68,000 ($136,000 for joint filers) in 2019
Limited partnership: A partnership which offers some protection to its partners against liability.
Liquidity: The ease with which something can be converted to cash typically without significant loss of principal.
Load/No-load: Applied to mutual funds and annuities. Paying or not paying a sales charge to buy the investment.
Marginal tax rate: The rate you pay on each additional dollar of income.
Market fluctuation: Sudden changes in the financial markets.
Market risk: The risk of the market fluctuating, especially in a downward direction.
Market timing: Trying to guess when the markets will change their course.
Maturity: When an investment comes due.
Money management/managed account: Paying a professional money manager to make certain investment decisions for you.
Municipal bond: A bond issued by a state or local government. These bonds are generally exempt from federal taxes, and if you live in the state or locality where they are issued, may be free from state and local taxes as well.
Mutual fund: A professionally managed pool of stocks, bonds, and other investments. The public invests by purchasing shares in the fund.
Net Asset Value: The total market value of a fund's assets divided by the number of shares of the fund outstanding.
Option: The opportunity to buy an investment at a stated price.
Ordinary Income: Income that is not eligible for special tax rates.
Par value: For a bond, typically $1,000. The same as face value.
Portfolio: Refers to all of your investments, both inside and outside of your retirement plans.
Preferred stock: A special class of stock. When dividends are paid out, preferred stockholders are paid first.
Premium: The extra amount you are willing to pay for an investment.
Prospectus: A document giving detailed information about an investment to prospective buyers.
Purchasing power risk: The risk that inflation may eat away at your ability to buy goods. Also called inflation risk.
Realized and unrealized gains: Gains you have to pay taxes on (realized) and those you don't (unrealized).
Return of Capital: Getting back the money you put into an investment. This is not taxed.
Risk/Reward Ratio: How much reward you get for so much risk.
Risk tolerance: The number and intensity of fluctuations in the value of your investments that you can tolerate.
Roth 401(k), Roth 403(b), or Roth IRA: A 401(k), 403(b), or Individual Retirement Account (IRA) which will allow you to save money on an after tax basis, and withdrawals are tax-free provided you meet the eligibility requirements and holding period rules.
Secondary market: The resale market for securities.
Security: A piece of paper representing an interest in something of value, like a company or a bushel of wheat.
Series EE savings bond: An interest-paying savings bond issued by the U.S. government.
Speculation: Trying to make quick profits by taking high risks.
Spread: Difference between the bid and ask price.
Surrender charges: The price you have to pay to redeem an investment. Typical with annuities and insurance policies.
Tax-Deferred: Refers to an investment where interest earned (and sometimes the principal invested) is not taxed until the amounts are withdrawn.
Time horizon: The amount of time between now and one of your financial goals.
Treasuries: U.S. government obligations. May be called a bill, bond, or note, depending on years to maturity and amount invested.
Use asset: An asset you use, like a car or a house, as opposed to an invested asset.
Volatility: How much a particular investment can change in value over time.
Zero coupon bond: A Treasury bond which pays no interest until maturity.