(Not your average) Glossary
Any topics or definitions you’d like to see on here? Let me know. This will always be a work in progress.
An investment strategy focused on continuous evaluation and trading of a portfolio of securities, with a focus on finding mis-pricing and short-term moves in the market. Active management has fallen under scrutiny in recent years because these managers generally charge much higher fees than passive managers. Also see passive investing.
Taxable income minus taxes withheld. This is your take home pay, the amount that actually hits your bank account every month.
A slang term that refers to the biggest, most well-established, and financial secure companies in the US. These stocks are seen to be safer and lower risk investments, but they also tend to grow slower than many smaller companies.
The term comes from poker chips, where blue chips are the most valuable.
Examples: General Electric, Johnson & Johnson, Wal-Mart, Coca Cola
An account used for trading securities in the open market. Could be stocks, bonds, ETFs, mutual funds, or options. There are tons of options out there, so I would recommend picking one with low-cost ETFs and low trading commissions.
Where you keep your working capital, and nothing more. These accounts usually have 0% interest, so there is no reason to keep any more money than necessary in a checking account.
Certificate of Deposit (CD)
An account similar to a savings account, but with better returns and a lock-up period where you cannot take out your money without paying a penalty. It is common to find 1 year, 2 year, 5 year, and 7 year CDs. A bank is willing to give you a better interest rate because you are giving up the right to take out your money for a given amount of time. The longer the lock-up, the higher the interest rate, generally speaking.
Money you spend on items that are recurring every single month (i.e. Rent, internet, cell phone, utilities, etc). Also see "Variable expenses."
Your total salary before taking out taxes or deductions (the "headline" number). Also see taxable income and after-tax income.
A way to track the performance of a subsection of the broader market. In the stock market, this usually refers to the S&P 500 or the Dow Jones Industrial Index. These two indices follow the performance of a pre-defined portfolio of stocks and are accepted as representative of the "market" portfolio. An index can also follow a more specific subsection, such as "Technology" or "Industrials."
Indices are widely used as a way to measure relative performance. Let's say a diversified portfolio manager returns 3% in a given year, while the S&P 500 Index returns 2%. Even though 3% is not a great performance compared to average stock market returns, this manager "outperformed" the market (index).
The tendency to scale your lifestyle along with promotions, raises, and other life events. Just because you can afford that Mercedes, it doesn't mean you should buy it. Victims of lifestyle creep lock themselves into a job (even if it's unsatisfying) because they can't afford a pay cut.
A qualitative measure of how easily a given investment can be converted into cash. For example, a portfolio of stocks is highly liquid because stocks can be sold in the market every day between 9:30am and 4pm EST. On the other hand, a Real Estate investment is highly illiquid because it typically takes time to find a buyer and close a sale.
- Liquid: Stocks, Bonds, ETFs, Mutual Funds, CDs, Savings accounts
- Illiquid: Real Estate, Private Equity/Hedge Funds, Start ups, Peer to peer lending
A basket of stocks monitored by a mutual fund manager. These funds typically have a "theme" such as growth or value or large or small capitalization. Until recently, mutual funds were the most popular vehicle of diversification, but once people realized that a smart ETF strategy is just as effective and has lower fees, a lot of money flowed away from mutual funds and into ETFs.
A term used to describe an investment that had a better return when compared with another investment, typically an index. The most common use is to describe a stock versus the S&P 500 index. Also see underperformance.
A sustainable source of income that requires minimal ongoing time or effort. Real estate investments are the classic example; after putting in some legwork to find a property and securing financing, you can rent it out with minimal involvement. Over time you will collect rent payments and pay off the mortgage.
An investment strategy focused on building a portfolio of securities that track an index. This strategy generally involves little trading or ongoing evaluation of specific securities. In recent years passive funds have gained popularity as an option with lower fees than active management. Also see active investing.
Amateur personal finance expert determined to help you get your act together. I'm here to teach, learn, and dish out tough love.
Personal finance has been a passion of mine for longer than I even realized and I hope I can bring some of that to you!
A place to park your excess cash. It's important to understand that not all savings accounts are created equal. Traditional savings accounts through the big banks offer laughably low interest rates (as low as 0.01%). "High Yield" savings accounts are currently offering rates in the ballpark of 1.20%! Ditch the traditional savings account and switch to something better.
Every year between January 1 and April 15, when Americans are filing their taxes in droves. A very sad time for public accountants, until they start wondering where to stack all the dollar bills they just made.
A unique identifier for a specified security, usually a company's stock. Sometimes they make sense, sometimes they don't. Netflix is NFLX and Ford is F. Ok, fine. AT&T is just T. I guess that makes sense? Southwest is LUV. You do the math.
A term used to describe an investment that had a worse return when compared with another investment, typically an index. The most common use is to describe a stock versus the S&P 500 index. Also see outperformance.
Money you spend on items that are dependent on what you decide to do in a given month (i.e. Eating out, bars, sporting events, travel, etc). Also see "Fixed expenses."
Think of this as your spending money for a given amount of time, to be used for bills, routine expenses, and paying off your credit card. Also see checking account.