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Personal finance: A glossary of terms and concepts

June 30, 2021

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Despite having some of the highest corporate taxes in the developed world, few American companies pay those rates --- and many pay no taxes at all, The New York Times reported.

Like your files, your glossary of personal finance terms and concepts will keep expanding. Here’s a list of what you should know when you start covering personal finance on the business beat. 

Adjusted Gross Income

AGI is a measure of income used to determine your taxable income. It is calculated as your gross income minus deductions, such as unreimbursed business expenses, medical expenses, and deductible retirement plan contributions.

Annual Percentage Rate 

APR tells you the annual cost of a loan and is stated as a percentage. The APR consists of the base interest rate and loan fees and costs. With credit cards, the APR is charged on credit card balances each month that there is an outstanding balance.


An annuity is a contract between you and an insurance company designed to meet retirement and other long-range goals. You make a lump-sum payment or series of payments to the insurance company. In return, the insurer agrees to make periodic payments to you beginning immediately or at some future date.

In a fixed annuity, the insurance company pays you a specified rate of interest during the time that your account is growing. The insurance company also agrees that the periodic payments will be a specified amount per dollar in your account. These periodic payments may last for a definite period, such as 20 years, or an indefinite period, such as your lifetime or the lifetime of you and your spouse.

In a variable annuity, you typically invest your purchase payments in mutual funds. The rate of return and the amount the insurance company pays you will vary depending on the performance of the investment options you have selected.

Asset allocation

Asset allocation is determining how to divvy up your money among various investments, such as stocks, bonds, or cash.

Once you determine what asset classes you want in your investment portfolio, you then determine how to mix those in the right proportions so you can reach your investment goals at the level of risk you’re comfortable with.

Bond prices and interest rates

Bonds are extremely sensitive to interest rates, so bond prices move inversely to interest rates. This means that when interest rates rise, bond prices fall. Conversely, when rates fall, bond prices rise. Many readers do not understand this concept, so it is important that you are able to explain it to them.

When interest rates rise, it depresses the prices of previously issued bonds because their interest rates are fixed. So, if you have a bond that is paying 6 percent interest and market rates rise to 8 percent, the only way you could sell your bond is to lower its price. If rates fall to 3 percent, your bond that’s paying 6 percent interest will be more valuable to investors and you could sell that bond at a premium over its face value because the 6 percent rate would be higher than the market rate.

This does not affect investors who hold a bond until it matures, because the value of the bond does not change because interest rates fluctuate; they still get back the full principal back at maturity. Those who buy and sell bonds must pay close attention to interest rates.

Capital gain

The profit you get from selling a stock over your original purchase price.

Capital loss

The loss you incur from selling a stock from your original purchase price.

Cost basis

The basis is the purchase price of an investment, including commissions and other expenses. The basis is also adjusted for stock splits, dividends and return of capital distributions. The basis is a critical figure because it is used to determine capital gains and losses for income tax.

Credit bureau: Also called a “credit reporting agency,” a credit bureau is a company that collects and sells information about a person’s creditworthiness. The three major credit bureaus are Experian, TransUnion, and Equifax.

Credit report

Issued by a credit bureau, a credit report contains information on a person’s payment history, bankruptcies, loans, and recent inquiries to obtain credit. By federal law, consumers are entitled to one free credit report once every 12 months from each of the three credit bureaus. Consumers can get their free credit report by going to www.annualcreditreport.com.

Credit score

A credit score is a three-digit number that is designed to predict the likelihood of your repaying a loan. The score is based on a snapshot of your credit report at a particular point in time. The most widely used scores are FICO scores. Lenders can buy FICO scores from all three major credit bureaus.

Data breach

A hacker—an online thief—steals sensitive, proprietary, or confidential information, such as a credit card or Social Security number from a consumer, or a trade or national security secret from a business or government. Data breaches can lead to identity theft. In the first half of 2020, eight of the 10 largest data breaches occurred at medical and health-care facilities.

Discount (or Online) Brokerage

An online brokerage allows individual investors to buy and sell stocks and other investments over the Internet. This increasingly popular type of brokerage lowers costs by eliminating brokers for these investors, who self-manage their own accounts. Unlike traditional brokerages, discount or online brokerages do not provide individual investment advisory services. In 2020, the top-rated online brokerages included: Charles Schwab, Fidelity Investments, Interactive Brokers, tastyworks, and TD Ameritrade.


This reduces the risk in your investment portfolio by including a variety of investments, such as U.S. stocks and stocks from other countries, as well as bonds and cash. The rationale behind this technique is that different types of investments will pose a lower risk than any one investment that you hold. Diversification differs from asset allocation in that in asset allocation, you decide what percentage of your money you want to go to stocks, bonds, and cash.


This is income that a company pays its shareholders and is distributed from a portion of the company’s earnings. It is typically quoted as a dollar amount per share.

Exchange-Traded Funds 

Like a mutual fund, an ETF is a “pool” or a collection of stocks, bonds, or other securities that track an underlying market index. Unlike a mutual fund, an ETF is listed on stock exchanges and can trade shares throughout the day, like ordinary stock. 

Identity Theft

Identity theft (ID) is a growing consumer issue because of the rise of online thieves. This insidious type of online theft occurs when a thief steals personal information, such as a credit card or Social Security number, and applies for credit in the consumer’s name, steals their tax refund, or pays for medical services. ID theft can damage a consumer’s credit status for years and cost them a lot of time and money to resolve.

Index Fund

An index fund is a type of mutual fund or ETF that tracks a financial market index, such as the Standard & Poor’s 500 Index (S&P 500). Instead of buying an individual stock, bond, money market fund, or other asset, the mutual fund investor buys a “slice” of all the companies represented on the underlying index. The low cost and low turnover of these funds makes them a core holding in retirement portfolios.

Mutual Fund

This type of fund has professional money managers who give small or individual investors access to managed portfolios of stocks, bonds, money market instruments, and other assets. 

Price/earnings ratio

Also known as the P/E ratio, the term signifies a stock’s current price divided by the earnings per share. It is a widely used tool of stock analysis and gives you an idea of how expensive or cheap a stock is.


Adjusting your investment portfolio to bring it back to your original asset allocation mix. Movements in the stock market can throw your asset allocation out of kilter. For example, if you originally wanted 50 percent stocks and 50 percent bonds in your portfolio, strong performance of your stocks can lift the stock portion of your portfolio to 70 percent. To bring that portion back to 50 percent, you “rebalance” by selling some of your stocks and buying bonds to bring the allocation back to 50/50.

Retail trading

Retail traders buy or sell securities for personal accounts. Do not confuse them with institutional traders, who buy and sell securities for accounts they manage for a group or institution.

Risk tolerance

An investor’s ability to tolerate declines in the value of his or her investment portfolio.

Tax Deduction

An expense that is subtracted from your adjusted gross income and reduces your taxable income. An example is the home mortgage interest deduction. A deduction differs from a tax credit, which is a direct dollar-for-dollar reduction of your tax liability. Examples are the child tax credit and Earned Income Tax Credit.

Term life insurance

Term life insurance pays off only if the policyholder dies within a specified time period or “term.” This differs from “whole life insurance,” which provides coverage for your whole life instead of a specified term. A whole life policy also has a savings component called cash value, which builds over time.

Time horizon

The length of time you expect to invest your money before you cash out.

Trading apps

A trading app is a mobile application of a computer program or software application that allows investors to buy and sell stocks, bonds, ETFs, and other types of investments on a mobile device, such as a phonea tablet, or a watch.


A legal vehicle you set up in estate planning that enables you to transfer legal title to an asset to another party, the trustee, who has the duty to hold and manage the asset for the benefit of a beneficiary or beneficiaries. You can use a trust to pass assets to your children, disabled adults, heirs who are not good at managing money and any others you believe lack management skills and judgment.


  • Dorianne Perrucci

    Since 2001, Dorianne's freelance bylines have appeared in leading print and digital news outlets, including The New York Times, Newsweek, The Wall Street Journal, TheStreet.com, The Star-Ledger and NJ Biz. During the financial crisis of 2007-2009, Do...

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