Investing Words to Know
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Annual Percentage Rate (APR) - A yearly rate of interest that includes fees and costs paid to acquire the loan. The law requires that lenders inform you what the APR is.
Annual Percentage Yield (APY) - The percentage that reflects the total interest to be earned based on an institution’s compounding method, assuming funds remain in the account for a 365-day year. Truth in Savings regulations require that APY be disclosed on interest-bearing deposit accounts.
Bond - A debt instrument issued for more than one year with the purpose of raising money by borrowing. The Federal government, states, cities, corporations, and many other types of institutions sell bonds. Generally, a bond is a promise to repay the principal along with interest on a specified date (maturity). Some bonds don’t pay interest, but all bonds require a repayment of principal.
Broker - An individual or firm that acts as a “go-between” for the buyer and the seller, usually charging a commission.
Cash Flow- A measure of a company's financial health. Cash flow equals cash receipts minus cash payments over a given period of time.
Certificate of Deposit (CD) - A time deposit, FDIC-insured to $100,000 per person, with a fixed maturity date, usually from three months to five years. It usually pays higher interest than a savings account and a penalty is charged for withdrawing funds before the maturity date.
Debt Instrument- A written promise to repay a debt.
Equity - This word has a few meanings, depending on the context of its usage. 1) Ownership interest in a corporation in the form of stock; 2) Total assets minus total liabilities; also called shareholder's equity or net worth or book value; 3) The value of a property minus the owner's outstanding mortgage balance.
FDIC - Federal Deposit Insurance Corporation. A federal agency that insures deposits in member banks and thrifts up to $100,000.
Limited Partnership - A business organization with one or more general partners, who manage the business and take on legal debts and obligations, and one or more limited partners, who are liable only to the extent of their investments. Limited partners have rights to the partnership's cash flow, but are not legally responsible for company obligations
Long-term - A period of time, as for a bond (e.g. 10 or more years)
Money Market Deposit Account - A high-yield savings account, FDIC insured, that allows depository financial institutions to be more competitive with money market mutual funds.
Money Market Mutual Fund - A mutual fund that invests in short-term debt instruments such as Treasury bills, commercial paper, and large CDs. Also referred to as money market fund (MMF).
Mutual Fund - An open-ended fund operated by an investment company which raises money from shareholders and invests in a group of assets, in accordance with a stated set of objectives. Mutual funds raise money by selling shares of the fund to the public. Mutual funds then take the money they earn from the sale of their shares and use it to purchase a variety of investment tools, such as stocks, bonds and money market instruments.
Principal - The amount borrowed, or the part of the amount borrowed which remains unpaid. (This does not include the interest.)
Security - An investment tool issued by a corporation, government, or other organization which offers evidence of debt or equity.
Sell Short - Borrowing a security from a broker and selling it, with the understanding that it must later be bought back (hopefully at a lower price) and returned to the broker. Short selling (or "selling short") is a technique used by investors who try to profit from the falling price of a stock.
Share - Certificate representing one unit of ownership in a corporation, mutual fund, or limited partnership.
Shareholder - One who owns shares of stock in a corporation or mutual fund.
Short-term - Usually one year or less, often used to refer to bonds or loans.
Stock - An instrument that signifies an ownership position (called equity) in a corporation, and represents a claim on its proportional share in the corporation's assets and profits. Ownership in the company is determined by the number of shares a person owns divided by the total number of shares remaining. For example, if a company has 1000 shares of stock outstanding and a person owns 50 of them, then he/she owns 5% of the company.
Stock Split - An increase in the number of outstanding (remaining) shares of a company's stock, such that proportionate equity of each shareholder remains the same. This requires approval from the board of directors and shareholders. A corporation whose stock is performing well may choose to split its shares, distributing additional shares to existing shareholders. The most common split is two-for-one, in which each share becomes two shares.