Glossary

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Cap

A cap is a ceiling, or the highest level to which something can go. For example, an interest rate cap limits the amount by which an interest rate can be increased over a specific period of time.A typical cap on an adjustable rate mortgage (ARM) limits interest rate increases to two percentage points annually and six percentage points over the term of the loan. In a different example, the cap on your annual contribution to an individual retirement account (IRA) is $6,000 for 2020, provided you have earned at least that much. If you're 50 or older, you can make an additional catch-up contribution of $1,000, so your cap is $7,000.

Capital gain

When you sell an asset at a higher price than you paid for it, the difference is your capital gain. For example, if you buy 100 shares of stock for $20 a share and sell them for $30 a share, you realize a capital gain of $10 a share, or $1,000 in total. If you own the stock for more than a year before selling it, you have a long-term capital gain. If you hold the stock for less than a year, you have a short-term capital gain.Most long-term capital gains are taxed at a lower rate than your other income while short-term gains are taxed at your regular rate.You may be exempt from paying capital gains tax on profits of up to $250,000 on the sale of your primary home if you're single and up to $500,000 if you're married and file a joint return, provided you meet the requirements for this exemption.

Capital loss

When you sell an asset for less than you paid for it, the difference between the two prices is your capital loss. For example, if you buy 100 shares of stock at $30 a share and sell when the price has dropped to $20 a share, you will realize a capital loss of $10 a share, or $1,000. Although nobody wants to lose money on an investment, there is a silver lining: You can use capital losses to offset capital gains in computing your income tax.However, you must use short-term losses to offset short-term gains and long-term losses to offset long-term gains. If you have a net capital loss in any year - that is, your losses exceed your gains - you can usually deduct up to $3,000 of this amount from regular income on your tax return. You may also be able to carry forward net capital losses and deduct on future tax returns.

Cash value

Cash value is the amount that an account is worth at any given time. For example, the cash value of your 401(k) or IRA is what the account is worth at the end of a period, such as the end of a business day, or at the end of the plan year, often December 31. The cash value of an insurance policy is the amount the insurer will pay you, based on your policy's cash reserve, if you cancel your policy. The cash value is the difference between the amount you paid in premiums and the actual cost of insurance plus other expenses.

Catastrophic illness insurance

Many health insurance policies cap, or limit, the amount they will pay to cover medical expenses. But you can buy catastrophic illness insurance to cover medical expenses above the maximum your regular health insurance will pay.

Certificate of deposit (CD)

CDs are time deposits. When you purchase a CD from a bank, up to $250,000 is insured by the Federal Deposit Insurance Corporation (FDIC). You generally earn compound interest at a fixed rate, which is determined by the current interest rate and the CD's term, which can range from a week to five years or more.However, rates can vary significantly from bank to bank. You usually face a penalty if you withdraw funds before your CD matures, often equal to the interest that has accrued up to the time you make the withdrawal.

Collateral

Assets with monetary value, such as stocks, bonds, or real estate, which are used to guarantee a loan are considered collateral. If the borrower defaults and fails to fulfill the terms of the loan agreement, the collateral, or some portion of it, may become the property of the lender. For example, if you borrow money to buy a car, the car is the collateral.If you default, the lender can repossess the car and sell it to recover the amount you borrowed. Loans guaranteed by collateral are also known as secured loans.

Compounding

Compounding occurs when your investment earnings or savings account interest is added to your principal, forming a larger base on which future earnings may accumulate. As your investment base gets larger, it has the potential to grow faster. And the longer your money is invested, the more you stand to gain from compounding. For example, if you invested $10,000 earning 8% annually and reinvested all your earnings, you'd have $21,589 in your account after 10 years. If instead of reinvesting you withdrew the earnings each year, you would have collected $800 a year, or $8,000 over the 10 years. The $3,589 difference is the benefit of 10 years of compound growth.

Cost-of-living adjustment (COLA)

A COLA results in a wage or benefit increase that is designed to help you keep pace with increased living costs that result from inflation. COLAs are usually pegged to increases in the consumer price index (CPI). Federal government pensions, some state pensions, and Social Security are usually adjusted annually, but only a few private pensions provide COLAs.

Countercyclical stock

Stocks described as countercyclical tend to have better relative performance and provide regular income when the economy is slowing down or staying flat and gain in value as the economy expands. Companies whose stocks fall into this category are those whose products are always in demand, such as food or utilities. They may also be companies whose services reduce the expenses of other companies, such as providers of temporary office help. Or they could be financial services companies that specialize in cash-equivalent or other stable value investments. By including some countercyclical stocks in your equity portfolio, you can balance the potential volatility of cyclical investments.

Credit

Credit generally refers to the ability of a person or organization to borrow money, as well as the arrangements that are made for repaying the loan and the terms of the repayment schedule. If you are well qualified to obtain a loan, you are said to be credit-worthy. Credit is also used to mean positive cash entries in an account. For example, your bank account may be credited with interest. In this sense, credit is the opposite of debit, which means money is taken from your account.

Creditor

A person or company who provides credit to another person or company functions as a creditor. For example, if you take out a mortgage or car loan at your bank, then the bank is your creditor. But if you buy a bond issued by a corporation or other institution, you are the creditor because the money you pay to buy the bond is actually a loan to the issuer.

Credit bureau

The three major credit bureaus - Equifax, Experian, and TransUnion -collect information about the way you use credit and make it available to anyone with a legitimate business need to see it, including potential lenders, landlords, and current or prospective employers. The bureaus keep records of the credit accounts you have, how much you owe, your payment habits, and the lenders and other businesses that have accessed your credit report.Credit bureaus, also known as credit reporting agencies, store other information about you as well, such as your present and past addresses, Social Security number, employment history, and information in the public record, including bankruptcies, liens, and any judgments against you. However, there are certain things, by law, your credit report can't include, including your age, race, religion, political affiliation, or health records.You are entitled to a free copy of your credit report from each of the three major credit bureaus once a year, but you have to request them through the Annual Credit Report Request Service (www.annualcreditreport.com). If you've recently been denied credit, are unemployed, on public assistance, or have a reason to suspect identity theft or credit fraud, you're also entitled to a free report. In those cases, you should contact the credit bureaus directly.

Credit limit

A credit limit, also known as a credit line, is the maximum amount of money you can borrow under a revolving credit agreement. For instance, if you have a credit card with a credit limit of $3,000, and you charge $1,000, you can spend $2,000 more before you reach your credit limit. And if you repay the $1,000 before the end of the month without making additional purchases, your credit limit is back up to $3,000 again. Most credit issuers charge additional fees or penalties if you exceed your credit limit.

Custodial account

If you want to make investments on a minor's behalf, or transfer property you own to that person, you can open a custodial account with a bank, brokerage firm, mutual fund company, or insurance company.You name an adult custodian for the account - either yourself or someone else - who is responsible for managing the account until the child reaches the age of majority. That age may be 18, 19, 21, or 25 depending on the state and the type of account you choose. At majority, the child has the legal right to control the account and use the assets as he or she chooses.One drawback of a custodial account is that the assets are considered the property of the child, and may reduce the amount of financial aid the child qualifies for when he or she enrolls in a college or university.

Cyclical stock

Cyclical stocks tend to rise in value during an upturn in the economy and fall during a downturn. They usually include stocks in industries that flourish in good times, including airlines, automobiles, and travel and leisure.In contrast, stocks in industries that provide necessities such as food, electricity, gas, and health care products tend to be more price-stable. Companies that provide services that reduce the expenses of other companies also are usually more stable. Those stocks are sometimes called countercyclicals.
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