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Be an investor -- or just sound like one

Investing termsYou don't need to watch an infomercial or pay $19.95 to sound like an investor. It's free right here on Bankrate.com. These 15 basic investing terms will start you on your way to making big money with your pocket change. And after further education on our investing home page, you might even find yourself hobnobbing with with the Wall Street big kahoonas. Lesson one: learn the basics. Repeat after me, 401(k) Plan ...

401(k) plan -- An employer-sponsored savings plan that allows employees to contribute a portion of their gross salary to a savings or profit-sharing plan. Employee contributions and income earned on the plan are tax-deferred until withdrawn at age 59½. Money directed to the plan may be partially matched by the employer, and investment earnings within the plan accumulate tax-free until they are withdrawn. The 401(k) is named for the section of the federal tax code that authorizes it.

Average annual yield -- The average yield per year over the life of the investment, assuming all principal and interest remain on deposit until maturity.

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Bond Buyer's 20 bond index -- Bond Buyer is a daily publication, commonly known as the Red Book, featuring many essential statistics and index figures relative to the fixed-income markets. This index tracks the prices of a selected group of municipal bonds. The index is used to set the cost of municipal debt. It helps indicate the direction of municipal bond prices but otherwise has little impact on most ordinary investors.

Capital -- Money that is used to make money, for example, to buy rental property or a business.

Capital asset -- An item that you own for investment or personal purposes, such as stocks, bonds or stamp collections. When you sell a capital asset, depending on the price, you earn a capital gain or a capital loss. Gains are taxed at a special rate, and losses can be used in many cases to reduce the amount that is taxed.

Capital gain distribution -- You receive capital gain distributions when the fund sells some of its assets and then passes along a portion to you. This distribution that you get is regarded by the IRS as a capital gain, not as ordinary dividends such as the interest you get from your bank account. It is important to separate capital gain distributions from ordinary dividends because capital gains are taxed more favorably.

Dividend -- Distribution of earnings to shareholders. In credit unions, it's the money paid to members for deposits, similar to the interest banks pay to their customers for deposits.

Effective federal funds rate -- The average interest rate that federal funds actually trade at in a day. The federal funds rate will remain stable for months at a time, but the effective rate is a volatile one that will vary every business day.

Government bond -- Debt obligations of the U.S. government, consisting of Treasury bills, notes and bonds, and carrying the highest credit rate possible. Also referred to as government securities.

Money Market Mutual Fund (also Money Market Fund or MMF) -- A mutual fund that invests in short-term debt instruments such as Treasury bills, commercial paper and large CDs.

Nontaxable distribution -- A dividend you receive from a company, not from its earnings but as a return of your investment in the stock. If you receive a nontaxable distribution, you must reduce your basis in the stock by the amount of the distribution. When you sell the stock, your gain or loss will be calculated using the adjusted basis.

Real Estate Investment Trust (REIT) -- A trust that invests primarily in real estate and mortgages and passes income, losses and other tax items to its investors.

SEP IRA -- Simplified Employee Pension IRA. Tax-deferred retirement plan for small businesses and self-employed. The employer makes contributions. Up to 15 percent of an employee's pretax gross wages may be contributed.

Short-term capital gain or loss -- Your profit or loss from the sale of a capital asset that you held for one year or less.

Tax shelter -- An investment that is planned to result in tax-favored treatment. The IRS has placed restrictions on tax shelters where the principal purpose of the activity appears to be the avoidance or evasion of taxes or where the activity might result in more deductible expenses than the investors have at risk.

Find more investing terms in our investing glossary.

-- Posted: Sept. 30, 2002

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Must-know terms
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