The Nest

Thursday, June 07, 2007 8:37 AM

Money & Investing Glossary

Money Glossary

Whether you’ve hired a financial planner or are managing your money yourselves, this handy dictionary will ensure that you and your man are making dollars and sense.

 

401(k): A contribution plan offered by an employer that allows employees to set aside tax-deferred income for retirement. Employers typically offer a matching plan -- they either match all or part of the employee’s contribution.

 

APR: (Annual percentage rate). It’s the cost of credit on a yearly basis expressed as a percentage.

 

Abandonment option: The option of terminating an investment earlier than originally planned.

 

Acceleration clause: A contract stating that the unpaid balance becomes due and payable if specific actions transpire, such as failure to make interest payments on time.

 

Account executive: The brokerage firm employee who handles stock orders for clients.

 

Accrued interest: Interest that has accumulated between the most recent payment and the sale of a bond or other fixed-income security. At the time of sale, the buyer pays the seller the bond's price plus ‘accrued interest’. It is calculated by multiplying the coupon rate by the fraction of the coupon period that has elapsed since the last payment.

 

Amortization:  The process of fully paying off debt by installments of principal and earned interest over a definite time.

 

Annuity: A series of equal payments made at regular intervals, with interest compounded at a specified rate.

 

Appraisal fee: The charge for estimating the value of property (often real estate) offered as security.

 

Appreciation: An increase in the value or price.

 

Asset: Anything an individual or a business owns that has commercial or exchange value.

 

Asset class: An investment category such as stocks, bonds, cash, or real estate.
 

Balance of trade:  A nation's balance of payments dealing with imports and exports, which is trade in goods and services, over a given period. If exports of goods exceed imports, the trade balance is said to be favorable; if imports exceed exports, the trade balance if said to be unfavorable.

 

Balance sheet:  A financial statement showing a "snapshot" of the assets, liabilities and net worth of an individual or organization on a given date.

 

Balloon payment:  A large extra payment that may be charged at the end of a loan or lease.

 

Bank note:  A promise to pay the bearer on demand the amount stated on the face of the note. Today, only the Federal Reserve Banks are authorized to issue bank notes.

 

Bank run (bank panic):  A series of unexpected cash withdrawals caused by a sudden decline in depositor confidence or fear that the bank will be closed. Since the cash reserve a bank keeps on hand is only a small fraction of its deposits, a large number of withdrawals in a short period of time can deplete available cash and force the bank to close and possibly go out of business.

 

Bonds: A loan made by an investor to the government or a company in exchange for a predetermined interest rate. One of the easiest ways to purchase bonds is via a mutual fund. You can invest small amounts (sometimes just in $25 increments).

 

Broker-dealer:  Any person, other than a bank, engaged in the business of buying or selling

securities on its own behalf or for others.

 

Brokers' loans: Money borrowed by brokers from banks for uses such as financing specialists' inventories of stock, financing the underwriting of new issues of corporate and municipal securities, and financing customer margin accounts.

 

Bureau of Labor Statistics (BLS):  A research agency of the U.S. Department of Labor; it compiles statistics on hours of work, average hourly earnings, employment and unemployment, consumer prices and many other variables.

 

Buydown: A lump sum payment made to the creditor by the borrower or by a third party to reduce the amount of debt and periodic payments.

 

Certificate of Deposit (CD): A form of savings account, called a time deposit that earns more interest than most ordinary savings accounts, but cannot be withdrawn before a specified maturity date – or you’ll have to pay a penalty fee.

 

Closed-end credit:  An agreement, like in real estate or car loans, in which any credit and finance charges are expected to be repaid in full over a definite time.

 

Collateral (Also called security):  A property, like a home, that is offered to secure a loan or other credit and that can be taken over by the lender if loan isn’t paid.

 

Credit bureau: A business organization that puts together information for your credit file, keeps it up to date, and makes it available for a fee to lenders, insurance companies, and potential employers. This is how agencies check your credit report.

 

Credit rating:  An estimate of the amount of credit that can be extended to an individual or business without undue risk.

 

Credit report:  A loan and bill payment history, kept by a credit bureau and used by financial institutions and other potential creditors to determine the likelihood that a future debt will be repaid.

 

Credit scoring system: A statistical system used to determine whether to grant credit by assigning numerical scores to various characteristics related to creditworthiness.

 

Credit union:  A financial cooperative organization of individuals who have a common bond, such as place of employment or residence or membership in a labor union. Credit unions accept deposits from members, pay interest (in the form of dividends) on the deposits out of earnings and use their funds to provide consumer installment loans to members.

 

Day trade:  The purchase and sale or the short sale and cover of the same security in a margin account on the same day.

 

Default: Failure to meet the terms of a credit agreement (something you don’t want to be in!).

 

Deficit:  The amount each year by which government spending is greater than government income.

 

Diversification: The distribution of investments among several companies to lessen the risk of loss. You’ll often hear that it’s wise to “diversify your stock portfolio.” See below.

 

Diversified portfolio: A group of investments in a range of asset classes.
 

Dividend: A share of profits paid to a stockholder.
 

Dow Jones industrial average: An index of the top 30 highest-earning stocks that acts as a benchmark for the overall condition of the stock market.
 

E-banking: an umbrella term for the process by which a customer may perform banking transactions electronically without visiting an actual bank.

 

Economic growth:  An increase in the nation's capacity to produce goods and services.

 

Economic shocks:  Events that impact the economy, come from outside it, and are unexpected and unpredictable (like, 9/11 and Hurricane Katrina).

 

Employment rate:  The percentage of the labor force that is employed. The employment rate is one of the economic indicators that economists examine to help understand the state of the economy.

 

Equal Credit Opportunity Act:  Enacted in 1974, the Equal Credit Opportunity Act, or ECOA, seeks to ensure that non-credit-related factors, such as a person's race, national origin, or sex, do not enter into a decision to deny a person's request for credit.

 

Equity: Ownership interest in an asset after liabilities are deducted. Basically, what you own after subtracting the amount of debt you owe (home equity is how much you have based on all of your mortgage pages).

 

Escrow: a legal arrangement in which an asset (often money, but sometimes other property) is delivered to a third party (called an escrow agent) to be held in trust pending a contingency or the fulfillment of a condition or conditions in a contract. Upon that event occurring, the escrow agent will deliver the asset to the proper recipient. This is best known in the context of real estate, specifically in mortgages where the mortgage company establishes an escrow account to pay property tax and insurance during the term of the mortgage.

 

Exchange rate: The price of a country's currency in terms of another country's currency.

 

Federal Advisory Council (FAC):  Advisory group made up of one representative (in most cases a banker) from each of the 12 Federal Reserve districts. Established by the Federal Reserve Act, the council meets periodically with the Board of Governors to discuss business and financial conditions and make recommendations.
 

Financial planner: An agent licensed to manage your assets and/or provide investing advice, usually for a fee or for an annual percentage of your wealth.

 

Financing fee: The fee a lender charges to originate a loan. The fee is based on a percentage of the loan amount; one point is equivalent to one percent.

 

Fiscal policy:  The federal government's decisions about the amount of money it spends and collects in taxes to achieve a full employment and noninflationary economy.

 

Fixed rate mortgage (FRM) is a mortgage loan where the interest rate on the note remains the same through the term of the loan, and is initially based on an index. This is done to ensure a steady payment amount for the borrower.

 

Foreclosure:  The legal process used to force debt reimbursement through collateral where the property is sold to satisfy the debt (If you’ve ever read or seen House of Sand and Fog, this can get ugly).

 

Global economy:  International economic activity which includes the world-wide integration of markets for goods, services, labor, and capital.

 

Gold standard:  A monetary system in which currencies are defined in terms of a given weight of gold.
 

Graduated payment mortgage loan: A mortgage with low initial monthly payments which gradually increase over a specified time frame. These plans are mostly geared towards young men and women who cannot afford large payments now, but can realistically expect to do better financially in the future (like medical residents).

 

High-yield savings account: A deposit account opened at your bank where the money you deposit earns greater than average interest.

 

IRA (individual retirement account): Allows you each year to set aside and invest a fixed amount of money, on which the earnings are tax-deferred until it is withdrawn at retirement.

 

Index fund: A mutual fund that invests in stocks listed in a certain index in order to mirror its performance.

 

Interest: A fee for the use of money over time. It is an expense to the borrower and goes and goes in the lender’s pocket. It’s bad in terms of mortgages and credit cards, good in terms of CDs and bank accounts.

 

Interest-only loan: For a set term the borrower pays only the interest on the principal balance, with the principal balance unchanged. At the end of the interest-only term the borrower may enter an interest-only mortgage, pay the principal, or (with some lenders) convert the loan to a principal and interest payment (or amortized) loan at his/her option.

 

Interest rate:  The rate charged to borrow funds, usually from banks or other lending institutions. 

 

Leverage:  The ability to use a small amount of money to attract other funds, including loans, grants and equity investments.

 

Liquidity:  Quality that makes an asset easily convertible into cash with relatively little loss of value in the conversion process.

 

Macroeconomics: Examines economy-wide phenomena such as changes in unemployment, national income, rate of growth, gross domestic product, inflation and price levels.

 

Microeconomics:  Analyzes the market behavior of individual consumers and firms in an attempt to understand the decision-making process of firms and households. It is concerned with the interaction between individual buyers and sellers and the factors that influence their choices.

 

Mortgage:  A temporary and conditional pledge of property to a creditor as security for the repayment of a debt.

 

Municipal bond:  A bond issued by cities, counties, states and local governmental agencies to finance public projects, such as construction of bridges, schools and highways.
 

Mutual fund:  A fund that many shareholders invest in. It’s managed by an investment company that uses the money from selling shares to the public to invest in a range of stocks and bonds.

 

NASD (National Association of Securities Dealers):  A self-regulatory organization with jurisdiction over certain broker-dealers. The NASD requires member brokers to register and conducts examinations for compliance with net capital requirements and other regulations.

 

NASDAQ (National Association of Securities Dealers Automated Quotations):  A computerized system established by the NASD to facilitate trading by providing broker/dealers with current bid and ask price quotes on over-the-counter stocks and some listed stocks.

 

Net worth:  The difference between the total assets and total liabilities of an individual (the more assets and less liabilities, the higher “net worth” you have).

 

Open-end credit:  A line of credit, like a credit card, that may be used repeatedly up to a certain limit.

 

Overdraft checking account:  A checking account associated with a line of credit that allows a person to write checks for more than the actual balance in the account, with a finance charge on the overdraft.

 

Prime rate:  The lowest interest rate on bank loans, offered to preferred borrowers.

 

Principal:  The unpaid balance on a loan, not including interest; the amount of money invested.

 

Return: The profit made on an investment.

 

Roth IRA: An individual retirement account that allows you to contribute up to $4,000 year. Contributions are made only from earned income that has already been taxed (and is not tax deductible). The big advantage: you can withdraw the money without paying taxes on it.

 

S&P 500: An index of the 500 largest U.S. stocks that is used as a benchmark for mutual funds to compare investment returns.

 

Short-term interest rates: Often called money market rates, these are interest rates on loan contracts-or debt instruments such as Treasury bills, bank certificates of deposit or commercial paper-having maturities of less than one year.

 

Simple interest: Interest that is paid only on the original amount borrowed for the length of time the borrower has use of the credit. The amount borrowed is referred to as the principal. In the simple interest rate calculation, interest is computed only on that portion of the original principal still owed.

 

Stock: A share of ownership in a public company. For instance, if a company has issued 100 shares, and you buy up five of those shares, you now have a 5% ownership stake in that corporation.

Stockbroker: An agent licensed to buy and sell stock on your behalf while earning a commission on the trades.

Stock exchange: Marketplace where brokers buy and sell stocks of publicly traded companies on investors? behalf. Major US stock exchanges are the New York Stock Exchange (NYSE), where the biggest companies in the US are listed, the NASD [link to NASD above] and the American Stock Exchange.  

 

Stock mutual funds: This is a mutual fund that invests primarily in stocks.
 

Trade deficit:  The amount by which merchandise imports exceed merchandise exports.

 

U.S. savings bond: A nontransferable, registered bond issued by the U.S. government in denominations of $50 to $10,000.

 

Upfront Mortgage Brokers (UMB): People who shop the best mortgage rate for you, but disclose their fees to customers in advance and in writing, and disclose the wholesale prices (rates and points) passed through from lenders. Customers of UMBs pay the broker's fee plus wholesale loan prices. 

 

Yield: The return on a loan or investment, stated as a percentage of price.

 

[sources: CNNMoney.com; FederalReserveEducation.org; MotleyFool.com; MtgProfessor.com; BankersOnline.com; Moneycentral.MSN.com]