We’ve talked about the different types of investment accounts one might choose, and the importance of getting started now rather than later.
Once you do start dabbling in investing (whoo-hoo! go, you!) you may come up against some terms that might sound completely foreign. There is a belief that this is all done on purpose to either exclude you, or require that you pay someone to manage investing for you.
Don’t let this stop you from getting started! Below are a few of the most common terms associated with certain types of accounts. Don’t be bogged down by terminology. Most important is to get started—that means choosing the type of account you want and putting money into it regularly, or even once or once in awhile. Remember: if it’s an account managed by someone else, making sure they are investing your money for you rather than simply collecting it, and that it’s spread across more than a single investment—known as diversification (defined below) is key.
Need investing advice? Talk to someone certified to give it–not me!
Brokerage Investment Account Common Terminology:
When you’re thinking about investing, and you want more control over when you can take the money out, you may turn to a Brokerage Account. Here are a few common terms you may come across:
Brokerage Account: An investment account that is not tied to a specific goal, such as retirement, thus the tax-advantages may be less and the fees on withdrawals and growth could be more.
Capital Gains: The gains realized in the account if you sell at a price higher than you paid for it.
Capital Gains Taxes: Tax obligations incurred when you sell anything in the account, based on how long you had the account. Generally, the shorter you had the account, the more expensive the tax.
Tax-Advantaged Investment Account Common Terminology:
When you’re thinking about putting money away for the long-term, particularly for use once you stop working, you may turn to a tax-advantaged account like a Retirement Account through an employer, or set one up on your own. Here are a few common terms you may come across:
401(k), 403(b), Thrift Savings Plan (TSP): Employer sponsored Retirement Accounts.
Individual Retirement Account (IRA): Retirement Accounts available outside of your employer.
Traditional IRA: A type of IRA. This is a tax-deferred account, meaning, your money goes in and you get a tax deduction on your tax return now, and you pay the taxes later when you pull the money out, as long as you’ve met the minimum age to do so.
ROTH IRA: This is not a tax-deferred account, meaning you use your after-tax dollars and there are no taxes owed when you take the money out later, as long as you’ve met the minimum age to do so.
Contributions: The money you put into your retirement investment account before it is invested. These may be tax deductible, depending on the account type.
Target Date Fund: Funds that are specifically managed to be in line with the date you need the money, when you plan to retire.
Qualified Withdrawal: Certain accounts allow you to take money out for specific purposes, without penalty, before meeting the minimum age for retirement. An example of this is you can make qualified withdrawals from a Health Savings Account (HSA) for medical expenses.
Required Minimum Distribution: 401(k), 403(b), TSP or Traditional IRA’s may force you to take money out at a certain age, in retirement, even if you don’t need it yet. Taxes on what you take out will be owed at that time.
Some General Investing Terminology:
When you’re thinking about investing in general, several terms will come up again and again, that apply to all facets of investing. Here are a few of the most common:
Portfolio: Your entire collection of investments. When you log in and see how your investments are doing, you are looking at your portfolio.
Diversification: The way you have spread out your investments, to lessen risk, across many different investment classes (types) or bought into a fund that does it for you. Essentially, not putting all of your eggs into one basket.
Asset Allocation: How your money is distributed across the entire investment portfolio. The percentage breakdowns of how much you have in cash, stocks, bonds, etc.
Dollar Cost Averaging: Making consistent investments overtime, in equal dollar amounts, in order to average out your returns, rather than making an investment in one lump sum.
Gains/Losses: The ups and downs your money experiences as it is invested overtime, depending on how the market is performing.
Stock: An investment option that is essentially a slice of ownership of a public company; you hold a slice as a shareholder. You can buy and trade stocks all day that the market is open.
Mutual Fund: An investment option that is managed for you, made up of a selection of similar types of investments. For example a Mutual Fund made up of sneaker companies rather than investing in NIKE singularly. You can buy Mutual Funds at the end of market day price only. They might have higher fees, because they are actively managed for you, and you might get higher returns.
Exchange Traded Fund (ETF): Described as the love-child of a Stock and a Mutual Fund. You can trade these funds all day that the market is open like a stock, but the funds are more like Mutual Funds in that they are baskets of like types of investments. They can have lower fees than Mutual Funds.
Fees (Front-Load and Back-Load): Fees associated with purchasing investments. Each quantity you purchase might have fees up front when you buy (Front Load) or when you sell (Back Load), or both.
Bond: Another investment option where-as projects that need funding are paid for by the investor and then the investor is paid back with interest by a maturity date. The pricing and interest on these can be inline with inflation and federal interest rates, and are sometimes thought to be lower risk than stocks, mutual funds and ETF’s.
Expense Ratio: Fees built into Mutual Funds and ETF’s, for managing the funds, that are usually a percentage of the money you are putting in.
The more you know! Now get going!
Unlocking Abundance 