"A loan and bill payment history kept by a credit bureau [such as Equifax, Experian, or TransUnion]
and used by financial institutions and other potential creditors
to determine the likelihood that a future debt will be repaid."
- St. Louis Federal Reserve Glossary
Credit Score
“A credit score is a prediction of your credit behavior,
such as how likely you are to pay a loan back on time,
based on information from your credit reports.”
- consumerfinance.gov
Overdraft
“An overdraft occurs when you don't have enough money in your account to cover a transaction,
but the bank pays the transaction anyway.“ - consumerfinance.gov
Unless you have “overdraft protection” as a feature of your account, there will often also be
a fee charged for the occurrence of an overdraft (assuming you’ve agreed to this fee ahead of time).
- fdic.gov
Debits
“Charges to or withdrawals from an account.
In a bank account register, debits are subtracted from the balance.”
- St. Louis Federal Reserve Glossary
Expenses
“Expenses are dollars going out, usually to buy goods and services. Recurring expenses are expenses that you incur on a regular basis, usually on a set schedule (for instance, every year, month, or week).
Recurring expenses can be fixed or variable. Fixed expenses are expenses, like bills, that are paid on a set schedule and generally cost the same amount.”
Examples include rent, car payments, and student loans. Variable (recurring) expenses are expenses that change in amount from one period to the next, such as month to month or week to week. Examples include utilities and groceries. “Non-recurring expenses occur without a schedule, often on a one-time or infrequent basis.”
Examples include moving expenses or sign-up fees for a gym membership.
- consumerfinance.gov
Savings
“Money you have set aside in a secure place,
such as in a bank account, that you can use for future emergencies or to make specific purchases.”
- consumerfinance.gov
High-Yield Savings or High-Yield Checking Account
– An account that pays the customer a higher rate of interest (compared to a
typical savings or checking account) and often requires the customer to meet certain conditions.
More information about High-Yield Checking Accounts
Budget
“A budget is a plan that outlines what money you expect to earn or receive (your income) and how you will
save it or spend it (your expenses) for a given period of time; also called a spending plan.”
- consumerfinance.gov
Income
“Income is money earned or received such as wages or salaries, tips, commissions, contracted pay,
government transfer payments, dividends on investments, tax refunds, gifts, and inheritances.”
- consumerfinance.gov
Net vs. Gross Income
“Net income is the amount of money you receive
in your paycheck after taxes and other deductions are taken out; also called take-home pay.”
- consumerfinance.gov
“ Gross income is total pay before taxes and other deductions are taken out.”
- consumerfinance.gov
Interest
“Interest is a fee charged by a lender, and paid by a borrower, for the use of money.
A bank or credit union may pay you interest if you deposit money in certain types of accounts.”
- consumerfinance.gov
Compound Interest
“When you earn interest
on both the money you save and the interest you earn, that is called compound interest.”
- consumerfinance.gov
A payment of money from citizens to federal, state or local government
to fund essential public goods or services meant to benefit the community as a whole.
- IRS Lesson 1
Regressive Tax
A tax, such as an excise tax (on the sale or use of specific products or transactions)
or a tariff (on the importation of specific goods),
which takes a larger percentage of the income of lower-income groups than of higher-income groups.
- IRS Lesson 1
Progressive Tax
A tax (such as an income tax employing graduated rates which increase with income leve)
which takes a larger percentage of the income of higher-income groups than of lower-income groups.
- IRS Lesson 3
Income Taxes
“Taxes on income, both earned (salaries, wages, tips, commissions) and unearned (interest, dividends).
Income taxes can be levied
on both individuals (personal income taxes) and businesses (business and corporate income taxes).”
- IRS Glossary
Property Taxes
– “Taxes on property, especially real estate, but also can be on boats, automobiles
(often paid along with license fees), recreational vehicles, and business inventories.”
- IRS Glossary
Tax Credits, Deductions, and Exemptions
A tax deduction is an amount (often a personal or business expense)
that reduces income subject to tax.
A tax exemption is a part of a person's income on which no tax is imposed.
A tax credit is a dollar-for-dollar reduction in the tax that can be deducted directly from taxes owed.
“Tax deductions [such as for charitable contributions],
exemptions [such as for children], and tax credits
[such as for purchases of energy-efficient equipment] may lower tax liability. The government allows this special tax treatment
to support or encourage behaviors, spending patterns, and lifestyles considered desirable.”
- IRS Lesson 3
Debt
Debt
“Money owed in exchange for loans or for goods
or services purchased with credit.”
- St.Louis Federal Reserve
Loan
“A sum of money provided temporarily
on the condition that the amount borrowed be repaid, usually with interest.”
- St.Louis Federal Reserve
“The price of using someone else's money,” with the interest rate either
fixed (not changing during the borrowing term) or variable (fluctuating over the borrowing term).
- St.Louis Federal Reserve
Debt-to-Income Ratio
“Your debt-to-income ratio (DTI) is all your monthly debt payments divided by your gross monthly income.
This number is one way
lenders measure your ability to manage the monthly payments to repay the money you plan to borrow.”
consumerfinance.gov
Retirement
Defined Benefit vs. Defined Contribution Plans
A defined benefit plan (such as a traditional pension plan) provides a set monthly benefit at retirement,
while in contrast a defined contribution plan (such as a 401(k) plan) provides no set benefit but rather invests the contributions made to the plan (whether by the employee or the employer, or both)
with the ultimate benefit level depending on such investment results over time.
- U.S. Department of Labor
In either type,
distributions from the plan are included in taxable income
(unless an exception applies, such as a Roth account – see below),
with both contributions and earnings being tax-deferred until withdrawal.
- IRS
Individual Retirement Arrangments (IRAs)
A set of options allowing employees to make contributions to retirement accounts,
with contributions either tax-deductible (with taxes deferred until withdrawals are made, such as with traditional IRAs)
or not tax-deductible but with eventual withdrawals not included in taxable income (such as with Roth IRAs).
- IRS
An account into which an employee makes contributions on a pre-tax basis (excluded from current income)
with withdrawals used to pay qualified healthcare expenses likewise not taxed.
- IRS
Medicare
Federal health insurance for people at least 65 years old
(and partially free for those who qualify for Social Security).
- medicare.gov
Social Security
– Federal retirement system which pays monthly benefit if a taxpayer
is at least 62 years old and has paid in to social security for at least 10 years of work.
- ssa.gov
Investing Terms
Foundational Concepts
Capital
Includes physical capital (capital goods such as buildings, tools or equipment), financial capital (assets or money, such as currency, debt or equity),
and human capital (humans capable of work, including their accumulated knowledge and abilities).
- St.Louis Federal Reserve
Depreciation in the context of taxes refers to the recovery of the cost of property used for business or investment (not personal) purposes over a
number of years by deducting a portion of its cost from taxable income each period. Eligible property excludes land and certain intangibles but includes tangible property
such as buildings, equipment and machinery, vehicles, furniture, etc., with each type of
property depreciable according to specified predetermined schedule covering its assumed useful life.
-IRS
Capital Gain/Loss
A capital gain is the profit that comes from selling an investment for more than you paid for it.
A capital loss is the loss that comes from selling an investment for less than you paid for it.
- consumerfinance.gov
Short-Term vs Long-Term Capital Gains/losses
“ Generally, if you hold the asset for more than one year before you dispose of it,
your capital gain or loss is long-term. If you hold it one year or less,
your capital gain or loss is short-term.”
-IRS
Short-term capital gains are generally taxed at higher rates than long-term capital gains,
making it advantageous (all else equal) to hold assets for more than one year, if possible.
Bond
"A certificate of indebtedness issued by a government or a corporation."
-St.Louis Federal Reserve
Treasury Bills, Notes, and Bonds
Debt securities issued by the US government with (respectively) a maturity (when issued)
of one year or less (for a bill),
of more than one year but not more than ten years (for a note), or of more than ten years (for a bond).
-St.Louis Federal Reserve
Stock, Common Stock, or Common Share
“Common stock is a type of security that represents an ownership interest—or equity—in a company.
Holders of common stock have rights that typically include the right to vote to elect members to a
company’s board of directors and to vote on certain corporate actions (such as takeover bids),
and may have rights to dividend payments based on the company’s profits.
While common stockholders may have authority to exercise some control over the company through voting,
they are typically last in the liquidation preference. For example, if the company is sold, common stockholders usually have rights
to the company’s assets only after debtholders and preferred stockholders have been paid in full.”
-SEC
Stock Market
“A general term for the organized
trading of stocks through exchanges, over-the-counter, and computerized trading venues.”
-investor.gov
Mutual Fund
“A mutual fund is a company that pools money from many investors and invests the
money in securities such as stocks, bonds, and short-term debt. The combined holdings of the mutual
fund are known as its portfolio. Investors buy shares in mutual funds.
Each share represents an investor’s part ownership in the fund and the income it generates.”
-investor.gov
Exchange-Traded Fund (ETF)
“Exchange-traded funds (ETFs) are SEC-registered investment companies.”
-investor.gov
“Like mutual funds, ETFs offer investors a way to pool their money in a fund that makes
investments in stocks, bonds, or other assets and, in return, to receive an interest in that
investment pool. Unlike mutual funds, however, ETF shares are traded on a national stock exchange
and at market prices that may or may not be the same as the net asset value (“NAV”) of the shares,
that is, the value of the ETF’s assets minus its liabilities divided by the number of shares outstanding.”
-investor.gov
Dividend
“A portion of a company's profit paid to shareholders.”
-consumerfinance.gov
Broker vs. Dealer
“A broker is any person engaged in the business of buying or selling securities for the account of others.
A dealer is any person engaged in the business of buying or selling securities, but for their own account.
Identifying when a person is
acting as a broker or a dealer is important because generally broker-dealers must register with the SEC.”
-SEC
Diversification
“Diversification is an investment strategy to reduce the impact of any single loss by
allocating investments across multiple asset classes, categories, [sectors] or companies.
Investors in early-stage companies often use
portfolio diversification, whether through pooled investment vehicles or as an individual angel investor.”
-SEC
Financial Statements
The four main financial statements are the balance sheet, the income statement,
the cash flow statment, and the statement of owner's equity.
Balance Sheet
The balance sheet shows a company’s assets, liabilities, and
shareholder’s equity at a specific point in time (e.g. the end of a quarter).
-SEC
Income Statement
The income statement includes a company’s revenue, expenses and net income (profit) for the period (e.g. quarterly).
-SEC
Cash Flow Statement
The cash flow statement measures how cash
flows in and out during the period. It assesses cash flows from operating, investing, and financing activities.
-SEC
Assets
“Assets are things that a company owns that have value. This
typically means they can either be sold or used by the company to make products or provide services that can be sold.”
Examples of assets include
physical property, such as factories and inventory, as well as cash and intellectual property such as trademarks.
SEC
Liabilities
“Amounts of money that a company owes to others. This can include all kinds of obligations, like money borrowed from a
bank to launch a new product, rent for use of a building, money owed to suppliers
for materials, payroll a company owes to its employees, environmental cleanup costs, or taxes owed to the government.”
-SEC
Shareholder's Equity
“The money that would be left if a company sold all of its assets and paid off all of its liabilities.
This leftover money belongs to the shareholders, or the owners, of the company.”
-SEC
Fundamentals and Fundamental Analysis
Profit
Profit is the earnings remaining after subtracting a company's expenses from its revenue.
Gross profit is calcuated by subtracting the cost of goods sold (COGS) from revenue.
Operating profit is calculated by subtracting operating expenses, depreciation, and amortization from gross profit.
Net Profit is calculated by adding other income to, and subtracting taxes, interest, and other expenses from, operating profit.
Price-Earnings (P/E) Ratio
A company's P/E ratio is a way of gauging whether the stock price is high or low compared to the past or to other companies.
The ratio is calculated by dividing the current stock price by the current earnings per share.
-investor.gov
Enterprise Value
Enterprise value is the total value of a company, incorporating both equity and debt. It is calculated by adding its
market capitalization (total value of a company's equity; share price x number of shares outstanding) and total debt, then subtracting cash and cash equivalents.
Current Ratio
The current ratio is calculated by dividing a company's current assets by its current liabilities.
It measures a company's ability to meet its short-term obligations.
Quick Ratio
The quick ratio is calculated by dividing quick assets (cash and cash equivalents + marketable securities + accounts receivable)
by current liabilities. Like the current ratio, it measures a company's ability to meet short-term obligations (current liabilities), but using more liquid assets
(assets that more quickly convert to cash).
Other Metrics and Technical Analysis
Volatility
Volatility is the degree of fluctuation or variation in a stock price. A stock with lower volatility
has more stable prices while a stock with higher volatility tends to have larger price swings.
Rate of Return (RoR)
An investment's rate of return is the percentage change in the its value over a given period (e.g. annual, monthly).
For example, an initial investment of $100 worth $105 after 1 year had an annual rate of return of 5% for this year.
Sharpe Ratio
The Sharpe Ratio is used to measure the excess return
an investor receives for holding a riskier (more volatile) asset compared to a risk-free asset, such as 1-year treasury bills.
A Sharpe ratio of 1.0 or above is considered good, indicating that the investment is generating strong excess returns relative to the risk.
A Sharpe ratio below 1.0 suggests that the investment is generating smaller excess returns relative to the risk.
Beta
Beta is a measure of how volatile a stock is compared to a benchmark index (e.g. the S&P500). A stock
with a beta of 1 moves 100 percent for every 100 percent move in the benchmark index, meaning it has
similar volatility, or risk, as the benchmark. A stock with a beta above 1 tends to be more volatile than the
benchmark index, and vice versa for stocks with beta less than 1.
-finra.org
Simple Moving Average
The simple moving average is calculated by adding the closing prices of a stock over a given number of periods
and dividing this sum by the number of periods. For example, to find the 100-day simple moving average for a stock,
the sum of its closing prices for the last 100 days is divided by the number of days (100).
Moving averages, such as the simple moving average, help smooth out short-term
fluctuations and indicate underlying trends (e.g. upward).
