I am using the recent occasion of Financial Literacy Month to define the most frequently asked financial words or terms that I find myself defining for readers, listeners and viewers. I will use the letters of the alphabet to help and if I miss something you would like defined, just shoot me a note and I will add to the Jill on Money Financial Glossary. Here is the M-Z list!
Market Timing: The (misguided) strategy that an investor can find the precise moment when an individual security or market will rise or fall. It requires not just one perfect decision, but also two: when to get out and then, when to get back in.
Net Worth: The value of everything you own (assets), minus the total of everything you owe (liabilities).
Options (aka Derivatives): Financial contracts that derive their value from another instrument. Option buyers have the right, but not the obligation, to buy or sell the underlying security, at a fixed price within a specific period of time.
Permanent Life Insurance: Insurance coverage that includes a way to accumulate money over time on a tax-deferred basis. Permanent coverage has different types, including: whole, universal and variable universal or adjustable life.
Qualified Charitable Distribution (QCD): An IRS rule that allows you to direct some or all of your Required Minimum Distribution (see below) to the charity of your choice. You don’t get to count a QCD towards your charitable deduction, but you avoid being taxed on the money.
Required Minimum Distributions (RMD): The amount of money that Uncle Sam requires that you withdraw from retirement accounts after you turn 70 ½, unless you are still working. Withdrawals must occur by Dec. 31st and failure to do so, results in a whopping 50 percent penalty on the amount you should have taken.
Sales Charge (Load): The cost that some mutual fund companies charge to purchase shares from financial salesperson. These charges are calculated as a percentage of the amount you invest and vary among companies.
Term Life Insurance: Insurance coverage for a specific term of time. On the death of the insured, it pays the face amount of the policy to the named beneficiary. Premiums for term insurance are affordable for people in good health up to about age 50. After that age, premiums start to get progressively more expensive.
Unit Investment Trust (UIT): This type of investment company is similar to a mutual fund, with some notable differences. A UIT usually makes only a fixed number of shares available through a one-time public offering and its securities are generally fixed.
Volatility/VIX: The statistical measure price fluctuation within a period of time. The VIX is the most widely used snapshot of stock market volatility. VIX values below 20 generally correspond to low volatility, values greater than 30 are associated with elevated volatility. The VIX’s all-time high was 89.53 on October 24th , 2008, the height of the financial crisis.
Whole Life Insurance: A type of permanent insurance, which remains in force for your whole life, as long as you pay the premiums. In addition to the death benefit, there is an investment component, which is known as the policy’s cash value.
X-Dividend: Ex-dividend date, also known as the reinvestment date, is an investment term involving the timing of payment of dividends on stocks of corporations, income trusts, and other financial holdings, both publicly and privately held.
Yield to Maturity (YTM): The yield of a bond is usually expressed as an annual percentage rate, but that’s just part of the story. The yield to maturity is the overall interest rate earned by an investor, who holds the bond until it matures.
Zero-Coupon Bond: A type of bond that does not pay interest while you own it. You buy a “zero” at a discount to its face value (less than the amount stated on the bond), and when the bond matures, you redeem it for the stated amount.