Glossary: Financial terms defined
401(k): Employer-sponsored plan that allows employees to contribute money before taxes are taken out. Employers often match contributions. Interest, dividends and capital gains accumulate tax-free until withdrawn.
403(b): Like a 401(k), but for employees of nonprofit and tax-exempt entities such as school systems.
Annuity: Contract sold by an insurance company that agrees to pay either a regular, fixed amount when you retire or an amount based on how much your investment earns. Earnings are taxed upon withdrawal.
Asset allocation: The strategy of lessening risk by investing assets in a range of different types of investments, including cash, bonds and stocks.
Asset class: A broad category of investment. The major classes are stocks, bonds and cash.
Bond: An IOU issued by a company or a unit of government promising to pay interest at a certain rate and to repay the principal at a specified time.
Certificate of deposit (CD): A deposit that earns a specified interest rate for a certain time period.
Disability insurance: Insurance policy that pays benefits to the insured should he or she not be able to work.
Diversification: The investment strategy of spreading dollars among different markets, sectors, industries and securities. The goal is to protect the overall value of your investments in case a single security or sector takes a downturn.
Growth stocks, value stocks: Growth stocks are stocks of companies that are expected to grow rapidly in coming years, hence increasing the value of their stock. Value stocks are generally shares of companies where analysts believe the company's stock is undervalued relative to the company's actual worth, so the stock will likely increase in value in future. Many mutual funds use either growth or value as a premise for selecting stocks.
Health Savings Account: An option for health insurance with two parts. The first is a health-insurance policy that covers large hospital bills. The second part is an investment account or retirement account from which you can withdraw money tax-free for medical care. Otherwise, the money accumulates with tax-free interest until retirement, when you can withdraw for any purpose and pay normal income taxes.
Income-producing stock: Stock in a company that pays dividends.
IRA: Individual Retirement Account. A personal retirement vehicle in which a person can make annual tax-deductible contributions.
Life insurance: In exchange for premium payments, provides coverage for an individual's life. Term-life insurance offers protection during a set period of time, often five to 20 years. Whole-life insures the individual for their entire lifetime, placing part of the funds in an investment account.
Long-term-care insurance: Insurance to cover long-term personal or custodial care.
Money market: Money-market funds invest in stable, short-term debt securities such as government bonds and certificates of deposit. Earnings are usually modest, but such funds are low-risk.
Mutual fund: A professionally managed investment that pools the capital of many investors to trade in stocks, bonds, options, futures, currencies or other securities. Load funds charge sales fees, while no-load funds do not.
Pension: Payments by a company to an employee who retires, usually based on how much the employee earned and how long he or she worked at the company.
Real Estate Investment Trust (REIT): A company, often with shares traded on a stock exchange, that manages a portfolio of real-estate holdings. REITs pool investors' capital to invest in real estate such as apartment or office buildings or shopping centers.
Roth IRA: This variant of the traditional IRA has a few unique features. Where funds can't be withdrawn from an IRA tax-free and without penalty until the holder is 59 ½, with the Roth IRA funds can be withdrawn tax- and penalty-free sooner, to pay for tuition or a first-time home purchase. The holder is not required to make withdrawals at any point. There is an income cutoff for eligibility.
Employer-sponsored retirement account. Money goes into the account after taxes are paid and grows tax free. Employees of all income levels can contribute. Employers may match contributions.
Securities: Proof of ownership, such as a stock certificate issued by a company or a bond issued by a government entity.
Small-, mid- and large-cap stocks: These refer to the size of a company's market capitalization. Small-cap companies have shares in the stock market valued at a total of less than $500 million; mid-caps between $500 million and $5 billion; and large-cap companies have more than $5 billion of their shares trading.
Stock options: Essentially, a stock option gives the holder the right to buy or sell stock at a specified price by a specific date. Companies often issue stock options redeemable at a higher share price than the current price, in hopes of inspiring employees to help the company improve performance. Investors often buy options on the open market because they believe a certain stock will rise or fall in the near future, hoping to pocket the difference between the stock's current price and the price they think the stock will sell for in future.
Tax-deferred: An investment such as a 401(k) plan or individual retirement account in which interest, dividends and capital gains are not taxed until the money is withdrawn.
Washington GET: Our state's 529 Guaranteed Education Tuition plan offers families the chance to purchase future college tuition and fees at current prices, offering protection from rising college costs.
Sources: www. morganstanleyindividual.com; www.401k.org, www.investorwords.com; www.savingforcollege.com, www.get.wa.gov; U.S. Department of Labor's "Savings Fitness" publication (free from www.dol.gov/ebsa or toll-free at 1-866-444-3272; "The Wall Street Journal's Guide to Planning Your Financial Future," and www.hsainsider.com
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