Your Money Bible: 25 Financial Terms Everyone Should Know
7. Rebalancing The process of buying or selling securities over time in order to maintain your desired asset allocation. For example, if your target allocation is 60% stocks, 20% bonds and 20% cash, and the stock market has performed particularly well over the past year, your allocation may now have shifted to 70% stocks, 10% bonds and 20% cash.
To rebalance your portfolio, you could sell some of your stocks and reinvest the proceeds in bonds, or invest new money in bonds to bring the portfolio back to the original balance.
8. Stocks Also called equities or shares, stocks give you ownership in a company. When you buy stocks, you become a company shareholder, giving you a claim on part of that company’s assets and earnings. The two main types of stocks are common and preferred.
If you hold common stock, you can vote at shareholders’ meetings and receive dividends—however, you’re also lowest on the totem pole in the corporate ownership structure. Preferred stockholders have a higher claim on assets and earnings than owners of common stock (for example, they receive their dividends first), but they don’t have voting rights.
With an ARM, your monthly mortgage payment may start out low, but then rise (sometimes significantly) after the fixed-rate period is over.
Handy Real Estate Terms
9. Amortization This is the process of paying off your debt in regular installments over a fixed period of time. Your mortgage is amortized using monthly payments that are calculated based on the amount borrowed, plus the interest that you would pay over the life of the loan.
10. ARM An acronym for adjustable rate mortgage, a type of mortgage in which the interest you pay on your outstanding balance rises and falls based on a specific benchmark. ARMs usually start out at a fixed rate for a short period of time, and then the rate resets annually based on the benchmark, plus an additional amount.
For example, if you have a five-year ARM, you will have a set rate for the first five years. Then the rate will change based on the terms of your mortgage. This means your monthly mortgage payment may start out low, but then rise (sometimes significantly) after the fixed-rate period is over.
11. Escrow An account held by an impartial third party on behalf of two parties in a transaction. During the home-buying process, the buyer will deposit a specified amount in an escrow account that the seller can’t touch until the terms of the contract, such as passing an inspection, have been fulfilled and the sale is completed.
An escrow account can also hold money that will later be used to pay your homeowner’s insurance and property taxes. You can put money in escrow every month, so that when your premiums and taxes are due, you have enough to cover those bills.
12. Fixed-rate mortgage A mortgage that carries a fixed interest rate for the entire life of the loan. With a fixed-rate mortgage, you don’t have to worry about your payments going up if interest rates rise. The downside is that you could be locked into a more expensive mortgage if interest rates go down.