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10 Investment Terms That We All Pretend To Know

You've heard these words before! But do you know what they actually mean? A little brushing up never hurt anyone. And for whatever help you may need, E*TRADE has the answers.

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1. APR

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Alpaca Performance Racing? Authoritative Pie Reviewers? Automatically Precious Reactions? Nope! It's short for Annual Percentage Rate. This is the fee — or interest rate — you pay to borrow money, expressed as a yearly percentage.

For example, let's say you borrow $1,000 at a 5% APR. If you’re charged yearly, at the end of the year you owe $50 in interest.

2. 401 (k)

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This is a retirement investing plan that allows an employee to make contributions from his or her paycheck. Some companies will even match what you contribute to the plan. But you gotta be careful about withdrawing it! If you withdraw before 59½ you’ll get slammed with a 10% penalty tax, and all taxes are due.

3. Traditional IRA

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IRA = Individual Retirement Account. It allows a person to set aside pre-tax income each year. With a Traditional IRA, you can begin taking money out of your retirement accounts without penalty when you turn 59½ (and you must start withdrawing by age 70½). And when you withdraw this money in retirement, you pay taxes on it...

4. Roth IRA

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...but with a Roth IRA, your withdrawals are tax-free (after age 59½ and the account has been open for five years), and there's no requirement to start withdrawing at 70½. However, there are income limits to contribute to Roth IRAs: You must make under $127K — or $188K if you file jointly — to be eligible. Contributions to Roth IRA made with after-tax dollars and are not tax deductible.

5. Bonds

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Bonds are like an IOU. When you buy a bond, you are loaning your money to companies, municipalities, and governments for a certain period of time. Bond holders get back the loan amount plus interest payments in return. However, there is a default risk; a bond issuer might be unable to make interest or principal payments when they're due.

6. Stocks

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This is more than just people screaming "buy!" and "sell!" somewhere on Wall Street. When you buy stocks, you're taking a share of ownership in a company. The company is collectively owned by all the shareholders, and these shares represent a claim on assets and earnings. Investing in stocks can lose money and shares, when redeemed, may be worth more or less than purchase price.

Everything from company developments (e.g. earnings reports, releasing an innovative product, firing/hiring of company executives, mergers) to world events (e.g. natural disasters, acts of terror, etc) can impact the stock price.

7. Dividends

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This is a sum of money paid by a company to its shareholders out of its profits. Not all companies pay dividends, and even if the firm has paid dividends regularly, they're not always guaranteed. Dividends are only paid at the companies' own discretion.

Let's say you own 500 shares of The Cat Corporation. At the end of the quarter, their board of feline directors declare a $0.05 dividend per share. This means that you are entitled to $0.05 x 500 shares = $25.

8. Asset Allocation

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This is an investment strategy that aims to balance risk vs. reward by allocating a portfolio's assets depending on a person's goals. Generally, those with more time until retirement can afford to put more of their assets in the stock market (where there's greater risk and potential return). There is no guarantee that asset allocation provides protection in declining markets.

9. Target Date Funds

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The target date is the approximate date you plan to start withdrawing your money (typically when you want to retire). And these type of funds are designed to adjust the asset allocation — going from more aggressive to more conservative — as that target date approaches.

10. ETFs

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Exchange Traded Funds offer a way to buy a diversified portfolio of investments. They're a basket of securities, are traded on stock exchanges, and have a fluctuating value (like stocks). They're typically passively managed and track a specific index, such as the S&P 500.

E*TRADE Financial Corporation and its affiliates do not provide tax advice, and you always should consult your own tax adviser regarding your personal circumstances before taking any action that may have tax consequences.

Securities products and services offered by E*TRADE Securities LLC, Member FINRA/SIPC.

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