Financial Glossary

Active Investing

  • the goal of active money management is to beat the stock market’s average returns and take full advantage of short-term price fluctuations

  • a portfolio manager usually oversees a team of analysts who look at qualitative and quantitative factors, then gaze into their crystal balls to try to determine where and when that price will change

  • active investing requires confidence that whoever is investing the portfolio will know exactly the right time to buy or sell

  • successful active investment management requires being right more often than wrong

Allocation (Portfolio Allocation)

  • the percentage of stocks and bonds held in a portfolio

  • for example, an aggressive risk tolerance would yield an 80/20 allocation, meaning 80% of the portfolio is made up of stocks and 20% in bonds

Automatic Rebalancing

  • utilizing technology to maintain your specific portfolio allocation

  • market fluctuations may cause some of the securities in your portfolio to appreciate or depreciate in value…when this occurs, we use automatic rebalancing to bring your portfolio back to its specified allocation

  • Benefit

    • when certain securities increase (gain) we sell them (sell high) and use the proceeds to buy other securities that may have been stagnant or decreased in value (buy low)

Bond

  • bonds (also known as fixed income) are units of corporate debt issued by companies and securitized as tradeable assets

  • a bond is referred to as a fixed income instrument since bonds traditionally paid a fixed interest rate (coupon) to debt holders

  • bond prices are inversely correlated with interest rates: when rates go up, bond prices fall and vice-versa

  • bonds have maturity dates at which point the principal amount must be paid back in full or risk default

Dividend

  • a sum of money paid regularly (typically quarterly) by a company to its shareholders out of its profits (or reserves)

Dividend Reinvesting Plan (DRIP)

  • commonly abbreviated as DRIP, is an automatic investment plan that allows investors to use their dividends from a company to buy additional shares or fractional shares from that company

  • Benefit

    • compound effect when more shares are bought, the future dividends becomes exponentially larger overtime

Exchange Traded Fund (ETF)

  • an exchange traded fund (ETF) is a basket of securities that trade on an exchange, just like a stock

  • ETFs typically track an exchange such as the S&P 500, Nasdaq, Dow Jones Industrial Average, etc.

  • ETF share prices fluctuate all day as the ETF is bought and sold; this is different from mutual funds that only trade once a day after the market closes

  • ETFs can contain all types of investments including stocks, commodities, or bonds; some offer U.S. only holdings, while others are international

Liquidity

  • the availability of funds for use or spending (cash is most liquid)

Passive Investing

  • also referred to as passive management – is an investing strategy that involves buying and holding investments for a long period of time, rather than making frequent trades to try to beat the market

Risk Tolerance

  • your ability to tolerate losses when your investments perform poorly

Stock

  • a stock (also known as equity) is a security that represents the ownership of a fraction of a corporation. This entitles the owner of the stock to a proportion of the corporation's assets and profits equal to how much stock they own. Units of stock are called "shares."

Taxable Accounts

  • taxable accounts are also called individual or brokerage accounts that hold investments such as stocks, bonds, ETFs, and mutual funds

  • any income (dividends, capital gain distributions, bond interest, bank interest) is taxed in the year that it is earned

  • any gains or losses on the sale of a security are also taxed in the year that they are sold

Tax-deferred Accounts

  • tax-deferred status refers to investment earnings such as interest, dividends, or capital gains that accumulate tax-free until the investor takes constructive receipt of the profits

  • some common examples of tax-deferred investments include individual retirement accounts (IRAs) and deferred annuities

Tax Reduction Strategies

  • Asset Location

    • asset location is a tax-minimization strategy that takes advantage of different types of investments getting different tax treatments

    • using this strategy, an investor determines which securities should be held in tax-deferred accounts and which in taxable accounts to maximize after-tax returns

    • retirement accounts (401k, IRA), health savings accounts (HSA), and education savings (529) accounts are typically utilized in this strategy

  • Tax Loss Harvesting

    • tax loss harvesting is the practice of selling a security that has experienced a loss

    • by realizing, or "harvesting" a loss, investors are able to offset taxes on both gains and income

    • the sold security is replaced by a similar one, maintaining an optimal asset allocation and expected returns

  • Income Tax Reduction

    • moving money into certain accounts (typically tax deferred) in order to receive income tax breaks in years where income is higher than others

Time Horizon

  • the time frame in which you need or would like your investment to be available for withdrawal

Source: https://www.investopedia.com/

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