Glossary

Boosting Your Financial Literacy

Navigating the world of finance can be intimidating, especially when you don't understand all of the lingo.

401(k)

An employer-sponsored retirement plan. Employee contributions are deducted from their salary pre-taxation. In some cases, the employer will match some or all of the employee’s contributions. The money will be taxed when the employee withdraws it from the account.

529 Plan

An education savings plan that can be set up on behalf of a beneficiary. It is sponsored by states, state agencies or educational institutions. All states sponsor at least one type of 529 plan. Money invested in a 529 plan is exempt from federal taxes and is often subject to other tax benefits. There are two types of 529 plans: prepaid tuition plans and education savings plans.

Accountant

An accountant monitors and keeps records of the flow of money in a company. They perform a variety of duties such as audits, issuing financial statements, financial statement analysis, and budget preparation and review. They can be employed with an accounting firm, in the accounting department at a company, or at a personal practice.

Aggressive Growth Fund

Aggressive growth funds are mutual funds that invest in aggressive growth stocks, namely stocks that have a high level of volatility and therefore have the potential for high returns.

Bonds

A bond is a type of fixed income investment that involves loans being made to large organizations. The borrowing organization makes interest payments to the bondholder until the set end date is reached and the borrower must pay the lender back the initial loan amount.

Certified Financial Planner (CFP)

A certified financial planner is an individual who has met the education and work requirements as set out by the Certified Financial Planner Board of Standards, Inc. and who has passed the CFP exam. They must also adhere to the CFP Board’s standards of professional conduct in order to gain certification and must take continuing professional education courses to maintain their certification. CFPs have expertise in financial planning, taxes, insurance, estate planning and retirement. They can assist individuals and businesses with forming financial plans and reaching financial goals.

Certified Public Accountant (CPA)

A certified public accountant is an individual who has met education and work requirements set out by the American Institute of Certified Accountants and who has passed the Uniform CPA Examination. CPAs are subject to a code of ethics and must take continuing professional education courses to maintain their certification. CPAs can work in a variety of capacities, many providing tax preparation, consulting and auditing services to individuals and businesses.

Chartered Financial Analyst (CFA)

A chartered financial analyst is an individual who has met the education and work requirements as set out by the Certified Financial Analyst Institute and who has passed three levels of exams. Once certification is earned, they must become a member of the CFA Institute and pay annual dues and regularly sign statements confirming they have been adhering to the CFA Institute’s code of ethics and standards of professional conduct. Many CFAs work in portfolio management, as financial analysts, risk managers, investment bankers and more.

Compound Interest

Compound interest can be applied to both loans and deposits. It is a process by which the initial amount of money invested or loaned earns interest, and then interest is earned on that interest, ad infinitum. After the first interval, money that has been invested or loaned will earn interest that is calculated based on the initial investment or loan amount. The next interval, however, the interest will be calculated based on the initial amount plus the interest earned in the first interval. In each subsequent interval, interest will be calculated based on the initial amount and all accumulated interest earned thereafter.

Credit Score

A credit score is a three-digit number that represents an individual’s likelihood to repay debt. It is calculated based on payment history and the number of accounts an individual has in good standing. It is a way for lenders to tell how much risk an individual poses of defaulting on loan payments. When applying for a loan, an individual’s credit score may impact the interest rate offered and whether the loan is approved or declined. Scores typically range from 300 to 850.

Dividends

When you buy a company’s stock, you become a shareholder of that company. Company’s thank shareholders by paying them a portion of the company’s profits. The money shareholders receive from the company is called a dividend.

Education Savings Plans

A type of 529 plan that allows an individual to save for post-secondary institution expenses such as tuition, mandatory fees, and room and board. The account can be used at any post-secondary institution as well as for tuition at public, private and religious elementary or secondary schools.

Equity

Business equity is the measurement of assets (what the business owns) minus liabilities (what the business owes). Equity is used as an indication of how financially healthy a company is.

Exchange-traded Funds (ETF)

Exchange-traded funds are baskets containing many different types of investments — such as stocks, commodities or bonds — that can be bought for one price. Unlike mutual funds, ETFs can be bought and traded throughout the trading day. They are also usually passively managed.

Individual Retirement Account (IRA)

An IRA is an investment account set up at a financial institution that allows individuals to set aside funds for their retirement. There are four different types of IRAs, but a Traditional IRA allow you to deduct contributions from your tax return. Contributions and subsequent investment earnings will not be taxed until they are withdrawn.

Insurance Premium

An insurance premium is the amount of money the insurance company charges for a given insurance policy.

Liquid Assets

Liquid assets are things you own that can be easily converted to cash without its market value being impacted. Examples of liquid assets are investments such as stocks, mutual funds and bonds.

Medicare

Medicare is the federal health insurance program in the United States for people who are 65 or older. It also covers some people with disabilities who are younger than 65. Medicare coverage is broken into four parts. Part A provides hospital insurance, which helps pay for services such as inpatient hospital stays and hospice care. Part B provides medical insurance, which helps pay for services such as outpatient care and medical supplies. Part C provides Medicare Advantage, which is an alternative coverage option that allows an individual to receive all their Medicare benefits thought one plan. Part D provides prescription drug coverage.

Mutual Fund

Mutual funds are a kind of investment that allow you to pool your money together alongside other investors. The pooled funds are then invested by a professional manager into securities such as stocks and bonds. The shareholders in the mutual fund experience proportional gains and losses based on how the investments perform.

Portfolio

A portfolio is a collection of your financial assets including stocks, bonds, cash, cash equivalents, commodities, mutual funds, ETFs, real estate and more.

Prepaid Tuition Plans

A type of 529 plan that allows an individual to pay for future education costs at today’s prices. The amount paid into the account is guaranteed to grow at the rate of tuition. The account can only be used toward tuition and mandatory fees. As well, the account may pay less if the beneficiary does not attend a participating post-secondary institution. It cannot be used to pay tuition at elementary or secondary schools.

Principal

Principal refers to the original amount of money borrowed in a loan or put into an investment. It excludes any interest or dividends incurred.

Rate of Return (RoR)

Rate of return is a percentage that describes how much value an investment has gained or lost as compared to the original cost of the investment.

Real Estate

Real estate refers to property, which includes land, buildings, air rights above the land, and underground rights such as to the natural resources of the land. There are four types of real estate: residential, commercial, industrial and land.

Retirement Income

Retirement income is the amount of money an individual will earn after they retire. This amount may be calculated based on pensions, investment portfolios, Social Security, savings, home equity, rental incomes, and more.

Retirement Penalties

Withdrawing money from a qualified retirement plan before you reach 59.5 years of age may result in a tax penalty from the IRS. The penalty is usually 10% of the amount withdrawn. This is in addition to the income tax you will already owe on the amount withdrawn.

Risk

In broad terms, risk refers to the chance of an investment’s returns differing from its expected returns. On the one hand, if an investment is high risk it means there is the possibility of the investor losing some of or all their investment. On the other hand, if the investment does well then investors can expect to experience higher returns to compensate for the level of risk they were willing to tolerate.

Roth IRA

A Roth IRA is an investment account for retirement savings where contributions are not tax deductible. Contributions are made with after-tax dollars and therefore no deductions will be made when withdrawals are made from the account. You can also withdraw funds from the account at any time for any reason without penalty.

Shareholder

A shareholder is a person, company or organization that owns at least one share of stock in a company.

Stocks

A stock is a type of investment that means you own a share of a company. They are bought and sold primarily on the stock exchange. They allow investors to grow their wealth and companies to fund growth and initiatives.

Stockbroker

A stockbroker is the middleman between the stock market and investors. They are professionals who buy and sell stocks on behalf of clients.

Tax-deferred Savings plan

A tax-deferred savings plan is an investment account that allows the investor to postpone paying taxes on the amount invested until withdrawals are made. The money will only be taxed when it is withdrawn from the account.

Trust Fund

A trust fund is an agreement that lays out how assets will be held and managed for the benefit of another individual. A trust fund requires a grantor, who sets up a trust (account) and fills it with their assets. At the other end of the trust fund, there is a beneficiary (the person who receives the assets from the trust fund as per the agreement). Lastly, a trust fund needs a trustee: an individual or institution that manages the assets before they are passed onto the beneficiary.

Volatility

The term volatility is used to describe how much risk is associated with a security. It measures the fluctuations in returns of the security. High volatility means the prices of a security experience large fluctuations over a short period of time. Low volatility means the prices of a security remain fairly steady.