15 Complicated Financial Terms Made Simple
There’s a certain amount of jargon that goes with every profession. Whether you’re a steel worker, a computer programmer, or an engineer for NASA, there are certain terms and lingo that are specific to your industry. The financial world is no different. Unfortunately, a lot of that lingo is confusing and overly complicated for no real reason.
If you’re interested in the world of investing, or just want to be more informed when you speak with a financial professional (or watch the money channel), here are fifteen terms that sound complicated, but are actually quite simple when explained.
Financial Terms Explained
Basis Point: A single basis point is just 1/100th of a percent. One percent, for example, is 100 basis points. You’ll hear basis points brought up often when describing fees paid for an investment fund, earnings as a percentage of how much you have invested, or if the Federal Reserve adjusts interest rates.
CFP: Stands for Certified Financial Planner. Anyone who wants to become a CFP has to study and pass a rigorous exam administered by the Certified Financial Planner Board of Standards.
Codicil: An odd word that sounds like something from a sci-fi movie. A codicil is simply a legal document that’s created to edit, or amend, a will.
Compounding: Describes the benefit of earning interest in a bank account or investment, and continuing to earn more interest on the interest you’ve already accumulated. Over many years, this can add up to a lot of money.
Dead Cat Bounce: This is when a company’s stock price falls sharply, appears to quickly recover, but then immediately resumes its sharp decent. That illusory bounce on the way down is known as the “dead cat bounce”. It’s a bizarre phrase to describe an equally odd phenomenon.
Decumulation: When you save for retirement you’re in an accumulation phase. Once retired, you start a decumulation phase, or selling your investments for income.
Dollar-Cost-Averaging: If you had $12,000, you could sink it all into the stock market in one day and hope you buy at a low price. Or, you invest $1,000 each month and get twelve shots at hitting the market low. The odds are you average into a decent price. This is one way to negate market volatility worries if you are planning to invest a large sum of money. It’s also what you’re already doing if you divert a portion of every paycheck toward retirement.
Dry Powder: “Dry powder” is just cash investors keep on hand that’s ready to be invested when opportunity strikes.
Equities: It’s just another word for stocks. If you’re buying equities, you’re buying stocks.
Equity: Not to be confused with equities. Equity is the difference between the value of something you own, and the amount you still owe. If your mortgage balance is $150,000 and your home is worth $250,000, you have $100,000 in equity. Keep in mind, equity can also be negative.
Estate Planning: This is the process of building a will and planning how your assets (AKA your estate) will be distributed to family, friends or organizations after you die. If you have a family, it’s a good idea to have an estate plan. Otherwise, a judge may make decisions about things like who cares for your children if you and your spouse die unexpectedly.
Intestacy: This is what happens when a person dies without having a will in place. When a person dies intestate, a court-appointed administrator will determine how their assets are distributed. An intestate estate can also be a will that a court deemed invalid.
Junk Bond: A term that describes bonds issued to companies that may have trouble repaying the debt. Because of this, junk bonds generate higher interest payments or yields to you as an investor, but they also come with a higher risk that you won’t get all your money back. Junk bonds are often referred to as high-yield bonds.
RMD: This stands for Required Minimum Distribution. When you reach the age of seventy and a half, you are required to start withdrawing a minimum amount from your retirement savings accounts each year (there are a few exceptions). RMD exists because you haven’t paid taxes on this money yet and the IRS has decided now is the time to collect. The balance in your account, as well as your age, will affect the amount of your RMD each year.
Volatility: Simply refers to the inevitable ups and downs in the stock market. An asset with wide upward and downward swings in value is more volatile. The technology sector, especially startups that have just gone public, tend to be more volatile than older, more established companies for example.
What To Do Next
If you’re interested in learning more about the world of money and investing, consider looking through some additional posts that we’ve published dealing with a wide range of investment-related topics.
If you’d like to speak with a financial professional, we offer a free financial planning consultation. You can use the form below, or call us at your convenience to schedule an appointment.
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