Finance is full of confusing terms, so we defined them for you here. If you’d rather see our most commonly asked questions, visit our FAQ's.
An increase in the value of an asset. If a home, stock, or bond you own increases in value, it appreciated. And everyone appreciates appreciation.
The mix between different asset classes, like stocks and bonds, in an account. Asset allocation is one of the most important decisions an investor makes, as this mix determines both the risk (volatility) and return ($$$) of an investment.
Types of investments with similar risk and return characteristics. The three major asset classes are stocks, bonds and cash.
Investors use these representative samples of asset classes to compare or "benchmark" their investment performance to an average. A popular benchmark for stocks of large U.S. companies is the Standard and Poors 500 Index. A popular benchmark for the U.S. Bond Market is the Bloomberg Barclays Aggregate US Bond Index.
A bond is a loan made by an investor (the bondholder) to a borrower (the issuer) which is paid back with interest over a specified time period. Governments and corporations use bonds to finance their operations, and investors buy bonds for income. Bonds (typically) have lower risk and return characteristics than stocks, and can provide diversification and reduced volatility to a portfolio.
The profit after selling an investment that has appreciated in value. If you buy an investment for $100 and sell it later for $150, you have a capital gain of $50.
The difference between income and expenses for an individual or a corporation over a set period of time. If more cash is coming in than is going out, your cash flow is positive (and you're probably a happy camper). If you spend more than you make you're like most tech companies: cash flow negative.
The Centre for Fiduciary Excellence. A global independent assessment and certification organization that provides comprehensive programs to evaluate the trustworthiness of investment fiduciaries.
A country with a high standard of living, a well-run stock market, and mostly free trade. Developed markets include the United States, most of Europe, Australia, Canada, and Japan.
The strategy of investing in a broad mix of investments to reduce overall investment risk. Proper diversification typically involves diversifying within asset classes (like investing in many stocks in different business sectors, rather than just one company), across markets (including companies from both the U.S. and other countries), and across asset classes (between stocks, bonds, and cash).
Company profits paid out to stockholders, typically in the form of cash. Dividends are usually paid out on a quarterly basis as a fixed dollar amount per share. For instance, if you owned 10 shares a of a company paying a dividend of 10 cents per share, your annual dividend payment would be $1. Many companies do not pay dividends, and companies can raise or lower their dividend. Mutual funds and ETFs also pay investors dividends from companies held by the fund.
A steady approach to investing that involves setting aside the same dollar amount every week, month, paycheck, etc. to invest into your investment portfolio. People who dollar cost average can benefit by buying more shares when prices are low and fewer shares when prices are high.
A theory stating that markets incorporate all information into prices, making markets "efficient" at pricing securities like stocks and bonds. Market efficiency makes it impossible to consistently "beat the market" over the long term.
A cash reserve of three months to a years' worth of expenses, set aside for unexpected costly events like a job loss, medical event, or home repair. An emergency fund provides peace of mind as an additional cushion for life's surprises, and can protect an investor from having to sell out of investments to cover large expenses.
Countries with an expanding role in the world economy that are becoming more advanced, usually by means of rapid growth and industrialization. Examples include China, India, Brazil and Thailand. Typically, emerging market countries have younger demographics leading to higher growth prospects. Investing in emerging markets involves unique risks that drive the potential for losses and gains larger than in developed markets.
Or ETFs for short. These investment vehicles are similar to mutual funds in that they hold a bunch of securities, but unlike mutual funds they are traded throughout the day on an exchange. ETFs typically track an index and are favored by investors for their low costs, tax efficiency, and ease to purchase.
One cost investors incur for owning a mutual fund or ETF. The expense ratio is calculated annually as a percentage of the fund's total value and includes management fees, administrative fees, and any marketing and distribution fees.
An individual or corporation entrusted to manage the assets of a client. A fiduciary is required ethically and legally to manage assets in the best interest of the client, acting at all times with the highest degree of loyalty and prudence when providing advice and making investment decisions.
A company with rising revenue and strong projections for future revenue and earnings growth. These companies tend to pay low dividends, instead investing income back into the business to drive continued growth (think Amazon, Netflix).
A mutual fund or ETF that tracks a representative index, such as the Standard and Poors 500 Index or Russell 3,000 Index. Index funds have grown immensely in popularity and assets under management in recent years due to their low costs, broad diversification, transparent structure, and outperformance relative to actively managed funds.
IRAs for short. These tax-advantaged retirement investment accounts come in many varieties, but the two most common are Traditional and Roth IRAs.
Short for market capitalization. The total value of a company is it's market cap, calculated as the total number of shares multiplied by the price per share. Publicly traded companies are often classified by their size as large-, mid-, or small-cap stocks. Large-cap stocks have a market cap over $10 Billion, mid-caps range between $2-10B, and small-caps are valued at less than $2B.
A theory first put forward by Harry Markowitz stating that proper diversification can reduce specific risks without necessarily compromising return. Modern Portfolio Theory focuses on the impact of each investment on an overall portfolio, rather than thinking about investments on their own. This helps investors to take a broad view of their portfolio, tailoring it to the amount of risk and return necessary to reach an investor's goals.
A pool of money, invested by shareholders, which is managed by an investment company. The mutual fund manager can invest the pool in many types of securities: stocks, bonds, gold, commodities, or even real estate holdings. The main benefit of a mutual fund is diversification. By purchasing shares of one fund you can own a tiny amount of many individual stocks or bonds.
The value of all your assets (savings, investments, real estate, personal property), minus all your liabilities (mortgage, auto loans, education loans, credit card debt).
All the investments held by a mutual fund or owned by a person or institution. E.g. Growth in my mutual fund's stock portfolio led to overall gains in my investment portfolio this year.
Over time, market movements will cause investments to drift from their original asset allocation. This drift changes the risk in a portfolio. Rebalancing brings the portfolio back on track. For instance, a run-up in U.S. Stocks could push a 60% stock and 40% bond allocation to 70% stocks and 30% bonds. A disciplined investor could rebalance by increasing the weight of bonds in the portfolio and decreasing stock exposure.
Also known as an RIA, a person or firm registered with the Securities and Exchange Commission that gets paid for providing investment advice or recommendations. BrightPlan is a registered investment advisor.
The gain or loss on an investment. A positive return indicates a gain and a negative return indicates a loss.
A form of Individual Retirement Account named after Senator William Roth. These retirement investment accounts take contributions of after-tax dollars (unlike their traditional counterparts) and enjoy tax-free growth as long as investors meet certain income and withdrawal requirements.
The Securities and Exchange Commission.
A tradable financial asset. The most common examples of securities are stocks and bonds, which are traded in public markets and regulated by organizations like the Securities and Exchange Commission.
An ownership share of a company. Each share of stock is a stake in the company's assets and profits, some of which could be paid out as dividends.
The original Individual Retirement Account. Depending on your income contributions to these retirement investment accounts can be tax deductible investments in the account enjoy tax-deferred growth. Withdrawals are subject to your income tax rate at retirement, and must meet certain requirements to avoid penalties.
These companies typically have stable profits but have gone down in price compared to other companies in their industry. This could be due to falling out of favor with investors, disruption from competitors, or failure to meet short-term profit targets. People buy value stocks believing the stock has gone on sale and will recover in price. Value stocks often have higher dividends compared to growth stocks. Over the long term, historically value stocks have had higher returns than growth stocks (think AT&T or IBM).
BrightPlan LLC is an SEC-registered investment adviser that only offers digital investment advice. Plancorp LLC is an affiliated SEC-registered investment adviser. Registration does not imply a certain level of skill or training nor does it imply endorsement by the SEC. All investing involves risk, including the loss of principal. Past performance does not guarantee future results. BrightPlan is a trademark of BrightPlan LLC, registered in the U.S. Patent and Trademark Office.
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For educational purposes; should not be used as investment advice. BrightPlan LLC is an SEC-registered investment adviser that only offers digital investment advice. Plancorp LLC is an affiliated SEC-registered investment adviser. Registration does not imply a certain level of skill or training nor does it imply endorsement by the SEC. All investing involves risk, including the loss of principal. Past performance does not guarantee future results. BrightPlan is a trademark of BrightPlan LLC, Plancorp is a registered trademark of Plancorp LLC, both registered in the U.S. Patent and Trademark Office.