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Making sense of financial matters can be difficult when you don’t understand the jargon. Learning some common terms will give you more confidence to invest in your future.

Inflation

An overall upward movement in the price of consumer goods and services. Any estimate of how much you will need in the future — for example, how much you will need to save for retirement — should take into account the potential impact of inflation.

Five C’s of credit

By understanding the 5 C's of your credit — character, capacity, capital, collateral, and conditions — you will be better prepared to qualify for the loan you want and obtain a better interest rate.

Tax deferral

Refers to the opportunity to defer current income taxes on certain investment accounts, such as a 401(k) plan or a traditional Individual Retirement Account (IRA), until you withdraw money in the future.

Compounding

The process of adding any investment earnings or interest to your principal balance, and then having the potential to accumulate additional earnings on that combined amount. Over time, compounding can produce powerful results.

Risk tolerance

Your degree of comfort with the possibility that you may lose money when you invest. The lower your risk tolerance, the more conservatively you may want to invest.

Time value of money

The concept that money you have today is worth more than the same amount of money in the future, because the money on hand today could be invested to earn interest and increase in value.

401(k)

A plan, offered by employers, that allows you to put a percentage of your salary (before taxes) into an account. Your contributions grow tax-free until withdrawn. Some employers will also make contributions to an employee’s 401(k) (called "matching contributions").

Mutual fund

Mutual funds pool funds together from several investors, which are then used to buy stocks, bonds, or other securities that are managed by a professional fund manager.

Roth IRA

A type of Individual Retirement Account to which you contribute money without deducting taxes. Then, you can withdraw your money — including any gains if you meet the requirements — tax-free in retirement.

CD

A certificate of deposit, in which you agree to keep your funds for a specified period of time (anywhere from three months to many years). In exchange, the account will earn a specified rate of interest, often higher than you would earn on your savings account.

Stocks

A share of ownership in a company. When you own stock, you can profit from the company's earnings or suffer a loss when the company loses money. Stocks are often classified based on their size of market capitalization: small cap, mid-cap, or large cap.

Bonds

A debt security in which you loan money to a government or corporation for a set period of time and they give you an IOU. When the time is up, you are paid the original amount, plus interest.

Pension Plan

Typically a tax-exempt retirement plan where an employer makes contributions to a pool of funds for its employees' future benefit.

Portfolio

The collection of all the investments you own.

Market volatility

The measure of the rate at which security prices move up and down. In times of rapid change, there is high volatility; in times of slower change, there is low volatility.

ROI

Short for "return on investment," this is a measurement of the gain or loss of an investment, relative to the original amount of money invested. It is often expressed as a percentage.

Diversification

An investment strategy that uses a variety of investment types (stocks, bonds, real estate, etc.) to reduce risk and avoid "putting all of your eggs in one basket."

Dividend

A payment of profits, typically quarterly, to shareholders who invest in a company.

Expense ratio

Expressed as a percentage, the expense ratio is a fund's annual operating expenses divided by the value of assets under management. Different funds will have different expense ratios.