Common Financial Terminology & What It Means

By Cleveland Jernigan

Investing for the future is a wise decision for all of us, but many people simply have no idea how to invest or even understand the complexities of different types of investments. It is wise to meet with a financial planner so that you can set up investments and have a source to answer your questions. Here are a few common financial terms beginners should know and what they mean.

One item you hear a lot about is a CD, which is a Certificate of Deposit. Typically, you go to a bank or perhaps your credit union to invest in a CD. These usually pay higher interest than a savings account or a checking account, because you agree not to withdraw money from the CD for a fixed amount of time. This can be as little as three months or as high as a year or perhaps five years. This is a short-term investment, so while it might not help you plan for retirement, it offers you a way to earn a little extra interest quickly on your money rather than having it just sit in your checking account.

If you don't really want to tie up your money in a CD, but still want to earn a better rate of interest than a typical checking account, you might consider a money market account. These are a bit riskier, because you potentially can lose money if the bank doesn't invest well. However, the investments are usually pretty conservative, so the risk of loss is not as great as playing the stock market. In addition, a money market account can be used as a checking account, which you cannot do with a CD. Keep in mind that if you add money to the account, then you will earn more. You cannot add money to a CD once you have set it up.

If you haven't set up a retirement account, it is certainly wise to do this as soon as you possibly can. If your employer offers a 401 (k) plan, take advantage of it, especially since your employer will probably match a good amount of your investment, and that's really just free money for you (after taxes, that is). Investment Retirement Accounts are another option, and there are many different types of IRAs to consider. You can invest in both a 401 (k) and an IRA account, which provides you with two investment vehicles.

Even if you are wary of the stock market, which has certainly been volatile in the last decade, there are some safer ways to earn money from the financial markets around the world. A mutual fund is a highly diversified investment that offers you interest with far less risk than if you were to put all of your money into just one or two companies. Diversification simply means that the fund, which is professionally managed, contains many different holdings. For example, a mutual fund that is a China fund might include investments in a dozen or more companies from industries ranging from telecommunications to energy to technology.

A mutual fund sometimes pays you a monthly or quarterly dividend or perhaps the money can only be accessed when you sell your shares. Either way, mutual funds typically outperform any basic checking account or savings account, and these days, even CDs offer extremely low rates of return. With most types of mutual funds, you can sell some of your shares or all of them with no penalty, other than paying taxes on the interest that was earned. So if you need quick cash or want to put money in something else, this is usually an option.

About the Author:

Cleveland Jernigan enjoys writing about investments. For further details about dividend mutual funds or to find out more about mutual funds, check out these fund websites now.