There are many areas of personal finance and financial literacy that most experts assume people know and understand. If, in fact that is the case…so be it. Here, we take nothing for granted, and want our site to be THE resource for you to understand many of the basics. This is by no means a definitive list of terms and definitions, but consider it a reasonable start…
- Yield- The amount of money you receive for keeping your money in a bank or loaning it to a corporation (bond). If the yield on a bond is 5%, this is the amount being paid to you for allowing the corporation to use your money.
- Capital Appreciation- The amount a stock (or bond) increases during a certain period of time. If a stock is $10.00 per share on January 1, 2009 and is $12.00 on December 31, 2009, the stock has had a capital appreciation of 20%.
- Total return- The sum of the yield and capital appreciation. If the company has paid a 3% dividend (yield) and the price of the stock has increased by 10%, the total return of the stock for that year is 13%.
- Vesting-The easiest way to describe vesting is to refer to it as “what do I get when I quit.” For example, an employee is always 100% vested in their own contribution to a 401 (k) plan. For an employer match, there may be a vesting schedule attached. If the schedule calls for the employee to receive 20% of the employers matching contribution for each year worked, that means they would have to be employed for five years to receive all of the employers money. If they left, for example, after three years, they would only receive 60% of the employer contribution.
- Stock-Defines ownership in a company. Ownership is shown through the issuance of a certificate, which shows how many shares are owned. Stock pay be “publicly traded” meaning it is traded on an exchange which brings buyers and sellers together, or it may be “closely held” which means there may not be a readily available market to buy and sell the security. Common stock is the most popular form of ownership, and one that is traded most frequently on the exchanges. Common stockholders are LAST in line to receive any assets should a company go out of business. In addition, owning common stock does not provide ANY guarantees about future capital appreciation.
- Bond- a debt obligation that a company has to the entity that lent them the money. For example, if you buy a bond the company is obligated to pay you a rate of interest and, once the bond is due, you are due back the principle amount. If a company goes out of business, bondholders, as “secured” debt holders are second in line after the IRS to receive any of the company assets. Common stockholders, on the other hand, are LAST in line to receive any company assets.
- Mutual Fund- a mutual fund is a blind pool of money given to a money manager to invest the money as per the legal document known as the prospectus. To eliminate the legal-eze, and simplify, a mutual fund is a consortium of, for example, 200 stocks, which are bought and sold by the people who manage the fund. Each mutual fund has a certain objective and category, and the stocks purchased in these funds must fir the funds overall objective and direction. For example, if the prospectus says the fund may ONLY invest in large, well known companies (more popularly known as large cap), the it must adhere to his restriction and not invest in companies which would not meet this criteria. In most situations, owning shares of many companies would provide the consumer greater diversification and less risk than owning just ONE stock.
- Tax deduction- An amount of money (example: mortgage interest) which can be “written off” against your gross income. A deduction brings your gross income down to a particular level and tax bracket. The amount of tax is calculated from that level. A deduction is not as valuable as a tax credit.
- Tax credit- A dollar for dollar reduction on the amount of tax, which is owed. It is MORE valuable than a deduction as it is reduced from the bottom line once the lax liability has been established.