Financial Terms from A to Z
Diana Castro, CPA, CFP® | Senior Financial Advisor
When it comes to financial planning and investing, the media tries to grab your attention with catchy news bites using buzzy financial terms such as “The Market” and “The Fed.” Here at Goodman Financial (GFC), we use many of the same financial terms during our market commentary and planning meetings. However, we are not doing it for clicks but instead to set the foundation for various topics. Recognizing that our clients and partners come from many different backgrounds, we want to provide a resource guide for some of the most used financial terminology. Whether you are learning the basics yourself or are a seasoned pro looking to share your knowledge, let’s dive in.
Asset allocation – A breakout of assets between cash, fixed income, and equities that equals 100%. It may also include real estate or alternative investments. This is determined based on your risk tolerance and risk capacity (i.e. your ability to take on risk). You may also see this referred to as your portfolio target allocation, especially if you have more than one account.
AUM – Assets under management represent the dollars invested and managed by the financial advisory firm. Fees can be calculated based on AUM.
Beneficiary – A person or entity that will receive property or assets from someone else, generally as part of an inheritance. Beneficiaries should be designated for retirement accounts, life insurance policies and trusts. Property transferring to a beneficiary does not pass through your will as it will be a direct transfer to the named beneficiary. The primary beneficiary is the first option to receive the property. A contingent beneficiary will only receive the property if the primary beneficiary does not receive the property.
Bond – A loan or debt instrument by a corporation or government (national, state or local) to raise money. The investor receives the face value of the bond (also referred to as the par value or redemption value) at the maturity date, and may receive periodic interest payments based on the coupon rate until the bond matures. Bonds are rated based on their quality of credit by one or more reporting agencies such as Standard & Poor’s and Moody’s Investor Service.
BPS – Basis points are used as a unit of measurement for interest rates and changes in value or rates of financial instruments. 100 bps is equivalent to 1% and 1 basis point represents 0.01%. You may hear this pronounced “bips.”
Custodian – The financial institution used by your financial advisor to hold the clients’ securities (equities, bonds, and cash), and handle account related services such as providing monthly statements and annual tax reports such as 1099s. For GFC clients, our primary custodians are Charles Schwab and Fidelity.
Dow Jones – The Dow Jones Industrial Average (“DJIA” or “the Dow”) was created in 1896 to be a proxy for the broader U.S. economy. It is a price-weighted benchmark index (i.e., the higher a stock’s price, the higher the index weight) that tracks 30 large, publicly traded companies found on the New York Stock Exchange and the Nasdaq.
Equity – Ownership in a company represented by shares, generally via common stock, that entitles the shareholder to dividends and potential capital gains.
ETFs – Exchange-traded funds are similar to stocks in that they are bought and sold on a stock exchange and the price fluctuates throughout the day. There are a variety of ETFs, which contain different types of investments such as stocks, commodities, and bonds.
FDIC – The Federal Deposit Insurance Corporation is an independent agency created by Congress.
FDIC deposit insurance – In the event of an insured bank failure, the FDIC deposit insurance will automatically cover at least $250,000 in traditional deposit accounts such as checking, savings and certificate of deposits (CDs) per depositor, per ownership category. Visit fdic.gov to determine the amount of FDIC insurance coverage you may be entitled to.
Fed – The Federal Reserve System (“the Fed”) was created by Congress in 1913. As the central bank of the U.S., its main duties are as follows. It sets the federal funds rate, which is what banks use to charge other financial institutions with overnight loans. It is responsible for the nation’s monetary policy and regulating banks. It operates through three entities: the Board of Governors (7 members), 12 Federal Reserve Banks and the FOMC.
FOMC – The Federal Open Market Committee is the Fed’s monetary policymaking body composed of 12 members (7 from the Board of Governors and 5 of the 12 Reserve Bank Presidents). It buys and sells government securities to influence bank reserves.
Goodman Financial – A 24-person firm serving clients for over 35 years, passionate about “Doing Good, Helping People and Providing Peace of Mind.”
IRMAA – Income-Related Monthly Adjustment Amount is an additional amount paid for Medicare Parts B and D along with your premiums. It is based on your modified adjusted gross income (“AGI”) from your tax return two years prior (2022 tax returns will be used for 2024 thresholds).
Market cap – Market capitalization is calculated by multiplying the number of outstanding shares of stock by the current market price of a single share. Large cap stocks are generally defined as $25 billion and up, mid cap as $5-$25 billion, and small cap as $400 million-$5 billion.
Nasdaq – A global stock marketplace that handles electronic securities trading. It is generally known for companies in the technology and innovation space, which are considered more growth-oriented (ex. Apple, Google, Microsoft).
Nasdaq 100 – An index of the biggest 100 non-financial companies by market cap that are listed on the Nasdaq stock exchange. Currently, technology stocks make up the majority of this index.
New York Stock Exchange – The NYSE is another stock market exchange, and it has a physical trading floor, though most trading takes place electronically. It is the oldest American exchange that still exists, and generally lists mature, traditional companies.
QCD – A qualified charitable distribution allows individuals who are 70.5 years old or older to donate directly to charities from a traditional IRA instead of taking taxable distributions. QCDs can count toward your RMD. In 2024, the maximum QCD is $105,000 per individual donor.
RMD – A required minimum distribution is the amount of the annual withdrawal from various tax-deferred retirement accounts such as an IRA and 401(k) based on the prior December 31 balance. For your own accounts, RMDs start once the owner reaches age 73 after December 31, 2022 (75 if you are born on or after January 1, 1960). RMDs may be required by the beneficiary of inherited tax-deferred accounts regardless of the age of the beneficiary.
S&P 500 – A market-cap weighted index composed of the common stock of 500 leading companies in leading industries of the U.S. economy created by Standard and Poor’s in 1957. It is commonly referred to as “the market” due to the diversity of the companies.
SIPC – The Securities Investor Protection Corporation protects against the loss of cash and securities held by customers in a SIPC member brokerage firm, in the event that it becomes financially troubled. It applies when a brokerage firm undergoes a liquidation to replace missing stocks and securities. It does not protect against market volatility.
Trusted contacts – A trusted individual, who is at least 18 years old, who can be reached to confirm your contact information, health status, authorized parties’ information, or unusual account activity or other red flags. This individual is not able to act on your behalf or authorize transactions. You can add trusted contacts to your account at the custodian and with GFC.
Z Score – A statistical measure of a data point from the mean of a data set. This is included since the article promised terms from A-Z.
