Financial words can be fun. They’re the domain of some of the most brilliant people on the planet — even if they don’t see it or act like it.
These are definitions that are useful to know if you want to understand:
Money market funds invest in short-term debt instruments such as certificates of deposit (CDs), commercial paper, and U. S. Treasury bills.
The money market fund is designed to maintain a constant net asset value (NAV). The fund's board of directors determines a minimum share price, which is a dollar amount per share that no single share can fall below at any time. When the current market price falls below this level, the fund will issue a cash redemption to cover the difference at the current share value. This protects the investor from losing any money through fluctuations in price because it is considered "self-liquidating." A money market mutual fund is similar to a money market account offered by some banks, although investors in money market mutual funds typically have more investment flexibility and liquidity than investors in bank accounts do. Any eligible financial institution can become an approved money market fund custodian and offer this investing option as an alternative to investors who want higher returns and liquidity than savings account interest rates can provide without incurring all of the risk of investing in individual securities or other types of fixed income investments such as bonds or certificates of deposit (CDs).
A mutual fund is an investment tool containing numerous stocks, bonds, or other assets that distributes its earnings (profits) among its shareholders on a regular basis when it earns profits from its investments and pays taxes on its income when it comes from investments held outside tax-advantaged retirement accounts like IRAs and 401(k) plans. Mutual funds that specialize in purchasing shares of stock for their portfolio are called equity funds or stock funds; mutual funds that specialize in purchasing shares of bonds for their portfolio are called fixed income or bond funds; some mutual funds specialize in both stocks and bonds; others specialize only in large company stocks (also known as large cap), while still others specialize only in small company stocks (also known as small cap). Mutual funds are considered one type of investment company, which is regulated by both federal securities laws and state blue sky laws depending on where they operate.
Investment companies are divided into two main categories: closed-end funds and open-end funds. Closed-end fund shares are traded on a stock exchange, while open-end funds, also known as mutual funds, are not listed and cannot be traded. Mutual funds may be actively managed or passively managed. In the case of actively managed funds, a portfolio manager may pick the stocks or bonds they think will perform best in the future. In the case of passive management, investors choose to invest in an index fund that invests in all of the stocks that make up a particular market index (such as the S&P 500) to try to achieve market returns with less risk. Mutual fund managers charge an expense fee for their services that is subtracted from each investor's returns as a percentage of assets under management (a total amount invested by all investors). Typical expense ratios range from 0. 50% per year to more than 1. 00%. The higher the expense ratio, the lower your returns will be over time because you are paying more money out of your investment profits. The average total expense ratio for equity mutual funds is 1.18%.
A no-load mutual fund does not charge an upfront sales charge when you purchase shares or an exit load when you sell them back to the fund company. No-load mutual funds typically carry annual expenses of 1% or less per year; however, many investors are unaware that even share classes with no upfront sales charge (also called no load) can have ongoing fees associated with them which could reduce returns over time if hidden costs aren't taken into account when considering investment options from different companies within any asset class or category available to investors within their brokerage account or financial institution where they hold their investments.
A stock split increases a company's share value by lowering its share price and increasing its number of outstanding shares by splitting each existing share into multiple shares based on a predetermined ratio that is based on how many shares were outstanding prior to the split and how many new shares will be created with each existing share being split into after it occurs; this makes it easier for small investors to buy more shares while still spending only as much money as before on additional purchases because each individual new share is worth less than its previous value prior to any splits occurred since there are now more outstanding shares trading at each lower price level; this also makes it easier for small investors who own fewer stock units to sell their holdings because there are now more units being sold at each new lower price level instead of having fewer units being sold at each higher price level (which would occur without splits).
A bond is a type of debt security issued by corporations, municipalities, and U. S. government agencies in order to raise cash for operations such as expansion projects or general operating costs like employee salaries and benefits; bonds can also be used for capital projects such as building construction. Bonds have an established maturity date when the issuer must repay the principal amount of the loan, plus any interest owed to bondholders; bonds may have a fixed rate of return on the face value of the bond or they may have a floating interest rate that changes periodically based on a benchmark (for example, the LIBOR rate). Bonds are called fixed income investments because they provide regular cash inflows in the form of interest payments (also called coupons) for investors, and investors can hold them to maturity so that they receive their full cash face value, regardless of how much their prices fluctuate in the market between purchase and maturity.
A stock is a security issued by corporations that represents partial ownership in that corporation; this ownership can be transferred from one person to another through an exchange or over-the-counter trading system. Stock values fluctuate based on market conditions specific to each company's industry niche or product offerings. The total value of all outstanding shares is called market capitalization and represents that company's overall financial value. Publicly traded stocks are those who are listed on a stock exchange for trading purposes, so small investors can buy and sell shares easily without having to contact each company directly about their availability for purchasing shares.
These words are fun because you get to say them out loud with gusto. That’s not all — you also get insights into how money moves around and how valuable it really is.
There’s more: Knowing investment terms will make you look smart at cocktail parties -- and even more important -- help you make smart investment decisions!
Pay attention here! Words like strategy, asset allocation, risk tolerance... these are powerful words with powerful meanings!
The language I've just shared with you is fascinating but not particularly useful unless you're going into finance as your profession -- which can be lucrative but isn't easy -- or if you want to sound smart at parties or have intelligent conversations with your financial advisor or broker.