Investment Terms

A term that refers to a place to put money that is liquid and acts much like actual cash would -- it doesn't suddenly raise or lower in value. Examples of cash are money market, checking, and savings accounts.

This is a numeric rating given to you by credit agencies. It is used to determine how risky it is to loan to you. The riskier they deem you to be, the higher the interest rate you will have to pay.

Having a good credit rating is important to your long-term financial success. If you have a lower interest rate by even 1% on, say, a home loan that can save you thousands of dollars.

When a company pays money directly to their stock holders on a per share basis, that is called a dividend.

Many companies pay a regular, quarterly dividend. Typically, it is the bigger and older companies that pay dividends.

I like companies that pay a dividend.

If an account is "FDIC insured" and the custodian of that account goes out of business, your money is guaranteed by the government for up to $100,000 per account. For example, if you have $20,000 in an FDIC insured money market account -- not a money market fund -- and the bank running the money market account goes under, the federal government would reimburse your money.

In practice, what will most likely happen, as we saw in 2008 when banks were failing left and right, another bank will take over the failing bank and it will affect you very little to not at all. When Washington Mutual declared bankruptcy, I had a money market account with them, but Chase bought them immediately. The transition was seamless and affected me not at all (until later when they lowered the money market account rate significantly). The website stayed up. I could still make transactions just as before. Easy as pie.

Currently that amount has been temporarily increased to $250,000 until at least December 31st, 2013. It has already been pushed back once. I expect it to be made permanent eventually.

Inflation is the gradual increase in the cost of living. The long-term inflation rates are about 3%.

Inflation slowly eats away at any money you have. If you store money under your mattress for 30 years, then it will be worth significantly less. That is why investing your money is so important.

IPO stands for initial public offering. It is when a company makes its first stock offering to the public. This is rarely a good price for the public, so it is usually unwise to buy a stock this way.

A term referring to a financial asset that can quickly be turned into actual cash in your pocket. The most liquid financial asset is cash.

Long-term is any time period at least 5 years - sometimes much longer.

A load fee is basically a sales fee for mutual funds. They take a significant chunk out of your earning potential by putting you in the hole on your money right from the start.

You don't ever need to pay a load fee. There are plenty of good mutual funds out there that don't charge a load fee.

Real Return:

Real return refers to the actual amount of increase in buying power you get with your investments. It is your investment return minus inflation.

For example: Inflation runs averages about 3% per year and the stock market averages about 10% over the long run. Therefore, the long run real return of the stock market is 7%.

A period of time shorter than 3 years - sometimes much shorter.

Tax-exempt means that the tax man doesn't take a bite out of your earnings. There are tax-exempt investment classes (like tax free bonds) and tax-exempt investment accounts (like Roth IRA's).

Tax-deferred refers to accounts like the 401k where you can take earnings and set them aside without having to pay taxes. You can then let that money grow without having the initial big bite from the government holding your investment back. This will save you a lot of money. However, eventually, when you pull those earnings out after many years of investment returns, you will have to pay taxes on the money as if it were regular earnings.

Yield is usually used in relation to dividends. It refers to how much an investment pays you on an annual basis. For example, if a stock was purchased for $1 and it gave quarterly dividends of 1 cent, then for the entire year you would've received 4% of your purchase back to you. Therefore, the yield would be 4%.

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