|The Dow Jones Industrial Average, since 1974|
A security is a type of financial instrument - a tradeable asset, a contract that describes ownership of something or an obligation to receive or deliver cash or other instruments. Securities may represent equity (ownership of the security issuer by the investor) or debt (a loan made to the issuer by the investor). The typical investor will most often invest in equity securities in the form of stocks and debt securities in the form of bonds.
A contract representing ownership of the issuing company. Stockholders are owners, and can influence the direction of a corporation by voting on the board of directors and other policies. Stockholders may also receive dividends, which are payments of corporate profits to shareholders. Companies sell common stock directly to investors in a public offering; a company's first public offering of shares, the act which transforms it from a private company into a public company, is the Initial Public Offering (IPO). After a public offering, stocks are bought and sold by investors on a stock market, where the value of the stocks fluctuates with the perceived fortunes of the issuing company. If a company declares bankruptcy, it is not required to repay anything to its shareholders, and the stock price will often drop to zero. Stocks, overall, historically appreciate in value significantly faster than bonds.
A contract representing indebtedness of the bond issuer to the investor. As a bond investor, you are loaning money with interest to the bond issuer. Bonds are a negotiable instrument - they can be resold on the secondary bond market. The market value of a bond will fluctuate with the bond issuer's perceived ability to pay (and many other factors). If a company declares bankruptcy, bond holders are in line to receive repayment from the company's liquidation, after bank lenders and deposit holders get their share.
A collective investment scheme in which a professional manager collects money from many investors and uses it to purchase securities (stocks, bonds, etc). The fund manager may seek to actively beat the market (actively managed fund) or passively match the returns of a public financial market index (index fund). Because a fund holds many securities, the mutual fund's share price is called its Net Asset Value (NAV); unlike common stock, an investor can purchase fractional shares of a mutual fund, and it is therefore possible to invest any dollar amount. The investors in a mutual fund pay the expenses of running the fund in the form of the 'expense ratio' - the percentage of total holdings the fund consumes each year to run. Expense ratios may be anywhere from 0.05-3.50%; index funds typically have the lowest expense ratios. Some mutual funds may also have sales (front-end load) or redemption (back-end load) charges.
An increase in asset value of a security. Capital appreciation is 'realized' as a capital gain when the asset is sold.
A portion of corporate profits paid out to the corporation's shareholders. A stock's value will drop after a dividend is paid.
Your tax bracket is the marginal rate at which you are taxed on something. If you are in the 25% tax bracket, that means that you would be taxed 25 cents on the next dollar that you make. For the mathematically-minded, your tax bracket is the first derivative of taxes owed with respect to income, taken at your current income - it's a 'bracket' because finance refuses to use smooth functions. The important thing to keep in mind is that your tax bracket is not necessarily equal to your overall tax rate.
Capital Gains and Dividend Tax
Investment income is taxed at rates that depend on the source of the income and your total income.
Capital gains from assets held for less than a year and from ordinary dividends are taxed at the ordinary income tax rates (10-39.6%) (1).
Capital gains from assets held for more than a year and from 'qualified dividends' (from a US corporation on stock held more than 60 days before the dividend date (2)) are taxed at the following rates for single filers (3):
Total Income Tax Rate
<$400,000 18.8% (the extra 3.8% starting at $200k is a Medicare tax, new in 2013 (4))
Note that these are tax rates, not tax brackets. If you have your money in a Roth-style post-tax investment account such as a Roth IRA, you do not pay any capital gains tax.
Market indices seek to represent the state of a piece of the economy by tracking the stock prices of multiple companies. An index might track certain industrial sectors, geographic regions, or market capitalizations (company sizes). The most-followed indexes include:
Dow Jones Industrial Average (DJIA) - tracks 30 huge public US companies
Standard & Poor's 500 (S&P500) - 500 public companies, chosen to represent the US economy overall
Nasdaq Composite (NASDAQ) - tracks companies listed on the NASDAQ stock exchange; primarily tech companies
Russell 3000 - tracks 3000 public US companies, representing 98% of the investible US market
Russell 2000 - the smallest 2000 companies in the Russell 3000; common small market capitalization index
This post researched and prepared by Brandon Curtis; follow him on Google+