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If you're new to investing, you may encounter some unfamiliar terms. Understanding the following definitions may help you become a more confident investor.
Glossary
401(k)
A 401(k) is an employer-sponsored retirement investment plan, which offers potential tax advantages to the investor.
Asset Allocation
Asset allocation is a deliberate approach to diversifying, investing a certain percentage of your overall portfolio into a number of different categories or asset classes, such as equity (stocks), fixed income (bonds), cash or cash equivalents, real estate, and more. Asset allocation does not ensure a profit or protect against a loss.
Bear/Bull Market
A bear market is generally defined as a period in which the prices of securities are falling, resulting in a downturn of 20% or more in several broad market indexes over a period of several months or longer. A bull market is a sustained period in which the market is rising and investor optimism is high, usually occurring over several months or years. Either of these market trends can influence the attitudes and behaviors of investors.
Bond
A bond is a fixed-income security issued by a government entity or corporation to raise money needed for ongoing operations or to finance new projects. Investors who buy bonds are essentially lending money to the issuing organization and become a creditor. Bondholders typically receive interest payments at regular, predetermined intervals. These payments are based on a fixed annual interest rate, also known as the bond's coupon rate. Bondholders can expect to be paid the bond's full face amount at its stated maturity date, barring default by the issuer.
Note: The principal value of bonds may fluctuate with market conditions. Bonds redeemed prior to maturity may be worth more or less than their original cost.
Capital Gain
When a fund sells a security that has increased in value, the profits generated from the sale are called a capital gain.
Cash
Cash is another investment type, or asset class. It includes currency and cash alternatives that offer low risk and high liquidity. Some examples of common cash alternatives are savings accounts, certificates of deposit (CDs), and U.S. Treasury bills.
Note: The FDIC insures CDs and bank savings accounts, which generally provide a fixed rate of return, up to $250,000 per depositor, per insured financial institution. CDs typically differ from savings accounts in that the CD has a specific, fixed term before money can be withdrawn without penalty.
Note: U.S. Treasury securities are backed by the full faith and credit of the U.S. government as to the timely payment of principal and interest. To earn the full face value, Treasury bills must be held to maturity.
Dividends
Dividends are the distributions of a company's earnings to shareholders, generally paid in cash or additional shares of the company's stock on a quarterly basis. The dividend amount per share is decided by the company's board of directors. Dividends must be reported as income by shareholders in the year received. Investors often view dividend payments as an indicator of the company's financial strength and future prospects.
Note: Investing in dividends is a long-term commitment. In exchange for less volatility and more stable returns, investors should be prepared for periods when dividend payers drag down, not boost, an equity portfolio. The amount of a company's dividend can fluctuate with earnings, which are influenced by economic, market, and political events. Dividends are typically not guaranteed and could be changed or eliminated.
Diversification
Diversification is based on the idea of spreading risk by putting your investment dollars into multiple baskets. There is no one-size-fits-all strategy for how to diversify your portfolio. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
Exchange-Traded Fund (ETF)
An exchange-traded fund (ETF) is also a portfolio of securities assembled by an investment company. But unlike mutual funds, ETF shares can be traded throughout the day on stock exchanges, like individual stocks, and the price may be higher or lower than the NAV because of supply and demand. ETFs typically have lower expense ratios than mutual funds, but you must pay a brokerage commission whenever you buy or sell ETFs, so your overall costs could be higher, especially if you trade frequently.
Note: The return and principal value of mutual funds and ETFs fluctuate with changes in market conditions. Shares, when sold, may be worth more or less than their original cost. Before investing, carefully consider the fund's investment objectives, risks, fees, and expenses, which can be found in the prospectus. Read it carefully before investing.
Index
An index is a statistical composite used to track changes in economic conditions (such as inflation) or financial markets over time. Investors use some indexes as benchmarks against which the performance of certain investments can be measured. For example, the S&P 500 Index is considered to be representative of the U.S. stock market in general, but there are hundreds of other indexes based on a wide variety of asset classes (stocks/bonds), market segments (large/small cap), and styles (growth/value).
Note: The performance of an unmanaged index is not indicative of the performance of any specific investment. Individuals cannot invest directly in an index. Past performance is not a guarantee of future results. Actual results will vary.
Individual Retirement Account (IRA)
An Individual Retirement Account (IRA) is a tax-advantaged account that helps you save for retirement.
Mutual Fund
A mutual fund is a collection of stocks, bonds, and/or other securities purchased and managed by an investment company with funds from a group of investors. Shares are typically bought from and sold back to the investment company at the end of the trading day, with the price determined by the net asset value (NAV) of the underlying securities. Mutual funds offer investors the advantages of diversification and professional management.
Note: Diversification is a method used to help manage investment risk; it does not guarantee a profit or protect against investment loss.
Portfolio
An investment portfolio is a collection of investments owned by an individual or an institution. Typically, a portfolio comprises a mix of asset classes such as stocks, bonds, and cash. An investor's risk tolerance, time horizon, and investment goals generally determine a portfolio's asset allocation.
Roth IRA
Roth IRA contributions are not tax-deferred, meaning you must pay taxes on income earned before you invest in a Roth IRA. However, you may withdraw Roth contributions without paying taxes or penalties at any age for any reason. And you aren't required to make required minimum withdrawals from a Roth IRA upon retirement.
Withdrawals of earnings prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.
Rollover IRA
A rollover IRA is an account used to move money from one eligible retirement plan to another, such as from a 401(k) plan to a traditional or Roth IRA.
Stock
A stock is a security that represents ownership (or equity) in a corporation. An investor who purchases shares of stock owns a piece of the company and has a claim on a portion of the assets and earnings. Shareholders are subject to the potential benefits and risks of that position, which means they can make money if the company does well or lose money if the company does poorly.
Note: The return and principal value of stocks fluctuate with changes in market conditions. Shares, when sold, may be worth more or less than their original cost.
Traditional IRA
A Traditional IRA defers taxes on your contributions until you withdraw them upon retirement. Contributions may be tax-deductible if you don't have access to a company-sponsored 401(k). But if you do, Traditional IRA contributions are only deductible to a certain amount then phased out.
Yield
Generally, the yield is the amount of current income provided by an investment. For stocks, the yield is calculated by dividing the total of the annual dividends by the current price. For bonds, the yield is calculated by dividing the annual interest by the current price. The yield is distinguished from the return, which includes price appreciation or depreciation. Investments seeking to achieve higher yields also involve a higher degree of risk.
Talk to a Financial Advisor
Financial advisors at BECU Investment Services are here to help. Our team will take the time to get to know you, understand your goals and plan, and implement a financial and retirement strategy that's appropriate for you. Set up a complimentary consultation or call 206-439-5720 today.
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Important Disclosures
Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.
Asset allocation does not ensure a profit or protect against a loss.
Investing in mutual funds involves risk, including possible loss of principal. The funds value will fluctuate with market conditions and may not achieve its investment objective. Upon redemption, the value of fund shares may be worth more or less than their original cost.
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