In an article dated August 15, 2017, we gave the definition of some common terms in the investing world. We realize that not everyone has had reason to learn certain technical words unique to our business, so we decided to give a “30,000 foot” overview of some terms. This article continues by defining ten more terms.
IRA: IRA stands for individual retirement account (or individual retirement arrangement). The label of “IRA” denotes an investment account as receiving special tax treatment as a retirement vehicle. Inside the IRA are investments that must be chosen and managed. In other words, an IRA is an account type, not an investment product. A traditional IRA may offer a current year tax deduction for contributions, offers deferred taxes on the account’s growth, and faces taxes upon withdrawals during retirement.
401(k): A 401(k) is a retirement plan offered (or sponsored) through an employer. A traditional 401(k) account is similar to a traditional IRA in the way that it may offer a current year tax deduction for contributions, offers deferred taxes on the account’s growth, and faces taxes upon withdrawals during retirement. Many employers contribute a matching contribution of some amount to their employees’ 401(k) accounts.
Roth: A Roth account, named after Senator William Roth, denotes a retirement vehicle as having no tax deductions on contributions but offering tax-free growth and tax-free withdrawals during retirement (e.g. Roth IRA or Roth 401(k)).
Muni: This is an abbreviation of the word municipal. It is used in context with municipal bonds, the type of bond issued by a municipality.
Capital gain; Capital loss: A capital gain is a profit on an investment. A capital loss is a loss on an investment.
Long-term; Short-term: For tax purposes, a long-term holding period is greater than 12 months. A short-term holding period is 12 months or less. These words are usually seen in context with “capital gain” or “capital loss.”
Realized; Unrealized: A realized capital gain or loss is done; the investor has already made the transaction that will affect their taxes. An unrealized capital gain or loss is a theoretical gain or loss “on paper.”
Forex (FX): Forex, or the abbreviation FX, stands for foreign exchange. It refers to currencies.
Option: An option is a contract conveying a right to the buyer and an obligation to the seller. Options are a type of derivative, meaning that the option is based on an underlying security. Options convey the rights and obligations to the buyers and sellers at a specified price within a specified time.
Money market: The money market is the securities market that deals in short-term debt. Individual investors access the money market through money market funds, which are low-risk, low-return liquid mutual funds.
Alas, we don’t have the space to list every other investing term here, for there are tens or hundreds more we could mention! Rather, we hope this list of common ones was informative. We’re here to answer any questions you might have about investing lingo and to help in those endeavors.