Glossary of key terms

Definitions are simplified for education. Rules and limits change, so check official sources for details.

General money terms

25x rule

A shortcut that multiplies the annual amount you need from savings by 25. It is based on the 4% rule.

4% rule

A rule of thumb that retirees can withdraw about 4% of savings in the first year and adjust for inflation. It has limits and no guarantee.

401(a)

A workplace retirement account plan, used by some governments and public schools, where contributions are often a required percentage of pay set by the plan. See 401(a) plans and pensions.

401(k)

An employer-sponsored retirement plan that lets you contribute from your paycheck, sometimes with an employer match.

403(b)

A retirement plan similar to a 401(k) offered by public schools, colleges, churches and 501(c)(3) nonprofits such as many hospitals. It shares one yearly employee limit with any 401(k) or TSP. See 403(b) plans.

457(b)

A deferred compensation plan for state and local government workers (governmental 457(b)) or for select staff of some tax-exempt employers (non-governmental 457(b)). Its yearly limit is separate from 401(k), 403(b) and TSP limits. See 457(b) plans.

529 plan

A state-sponsored, tax-advantaged account for education savings.

Annuity

A contract with an insurance company that can provide income payments in exchange for premiums.

Asset allocation

How your money is divided among investment types such as stocks, bonds and cash.

Asset location

Choosing which account type (taxable, tax-deferred, tax-free) holds which investments, for tax reasons.

Bear market

A prolonged decline in market prices, often described as a drop of 20% or more.

Beneficiary

The person or entity you name to receive an account or insurance benefit when you die.

Bond

A loan to a company or government that pays interest and returns principal at maturity.

Brokerage account

An account at a firm that lets you buy and sell investments.

CAGR

Compound annual growth rate: the steady yearly rate that would produce the same ending value.

Capital gain

The profit when you sell an investment for more than you paid.

Cash flow

The money coming in and going out over a period.

Catch-up contribution

An extra amount people age 50 and older can add to retirement accounts. People aged 60 to 63 can add a higher amount in workplace plans. See this year’s limits.

Compound growth

Growth on top of growth: the returns your money earns are added to the balance and start earning returns of their own. Try the Future Value calculator.

Compound interest

Earning interest on both your original money and on previously earned interest. See also: compound growth and the Future Value calculator.

Credit score

A number summarizing your credit history, used by lenders.

DIME

A checklist for estimating life insurance needs: Debt, Income, Mortgage, Education.

Discretionary expenses

Spending that is wanted but can flex, such as travel, hobbies and gifts.

Diversification

Spreading investments to reduce the effect of any single one performing poorly.

Dividend

A payment some companies make to shareholders from profits.

Dollar-cost averaging

Investing a fixed amount at regular intervals regardless of price.

Emergency fund

Cash set aside for unexpected expenses or income loss.

Essential expenses

Spending that must be covered every month, such as housing, food, health care, insurance and taxes. See Build a retirement income plan.

ETF

Exchange-traded fund: a basket of investments that trades on an exchange like a stock.

Expense ratio

The annual cost of owning a fund, as a percentage of what you have invested.

FDIC insurance

Federal insurance that protects bank deposits up to a limit if an insured bank fails.

Full retirement age

The age at which you can claim an unreduced Social Security retirement benefit; 67 for people born in 1960 or later.

Future value

What an amount of money today, plus any regular additions, could grow to by a future date at an assumed rate of return. It is a hypothetical estimate, not a promise. Try the Future Value calculator.

HSA

Health savings account: a tax-advantaged account for medical costs, available with a qualifying high-deductible health plan.

Index fund

A fund designed to track a market index rather than pick individual investments.

Inflation

The general rise in prices over time, which reduces purchasing power.

IRA

Individual retirement account that you open yourself, such as a traditional or Roth IRA.

IRMAA

Income-related monthly adjustment amount: a higher Medicare Part B and Part D premium for people whose income two years earlier was above set levels. Medicare.gov posts this year’s amounts. See Health care.

Limit order

An order to buy or sell at a specific price or better.

Long-term care

Help with everyday activities such as bathing, dressing or eating, at home or in a facility, often over a long period. Medicare generally does not pay for most long-term care. See Long-term care.

Longevity risk

The risk of living longer than your savings last. See Longevity.

Margin

Borrowing from a brokerage firm to buy investments, which adds interest costs and risk. See also: Options terms (many options spreads need a margin account).

Marginal tax rate

The tax rate on your next dollar of income.

Market order

An order to buy or sell immediately at the best available price.

Medicare

The federal health insurance program, generally for people 65 and older and some people with disabilities.

Mutual fund

A pooled investment managed by a company that holds many securities.

Net worth

What you own minus what you owe.

Pension (defined benefit plan)

A plan that promises a set monthly income in retirement, usually based on salary, age and years of service. The plan, not the worker, manages the investments.

Required minimum distribution (RMD)

The minimum amount that generally must be withdrawn each year from traditional IRAs and workplace plans, starting at age 73 (75 for people born in 1960 or later). Roth IRAs have no RMDs while the owner is alive. See Retirement accounts.

Roth account

An account funded with after-tax money, where qualified withdrawals are generally tax-free.

Rule of 72

A shortcut: divide 72 by an annual growth rate to estimate years to double money. See it in the Future Value calculator guide.

Sequence-of-returns risk

The risk that poor returns early in retirement, while withdrawing, hurt long-term results. See Market volatility.

SIPC

Securities Investor Protection Corporation, which helps customers if a brokerage firm fails. It does not protect against market losses.

Social Security Fairness Act

A law signed on January 5, 2025, that ended the Windfall Elimination Provision (WEP) and Government Pension Offset (GPO), which had reduced Social Security for some people with a pension from work not covered by Social Security. See the details.

Stock

A share of ownership in a company.

Survivor benefits

Social Security payments to a widow, widower or other family member after a worker dies. A surviving spouse generally receives the larger of the two benefits, not both.

Target-date fund

A fund that adjusts its mix of investments over time toward a target year, often for retirement.

Thrift Savings Plan (TSP)

The retirement savings plan for federal employees and members of the uniformed services, with traditional and Roth options and the same yearly limit as a 401(k). See TSP.

Traditional account

A retirement account where contributions may be tax-deductible and withdrawals are generally taxed as income.

Vesting

When employer contributions to your account become fully yours.

Volatility

How much and how quickly an investment’s price moves up and down. See also: implied volatility in the Options terms.

Withdrawal rate

The share of savings taken out each year, for example $40,000 from $1,000,000 is 4%. See Withdrawal rate.

Options terms

Terms used in Options Blueprint. Examples use a made-up Stock XYZ and are education only. Options involve significant risk and are not suitable for all investors; read the options risk disclosure.

American / European style

American-style options can be exercised on any business day before expiration; European-style options only at expiration. Learn more

Assignment

When an option seller is told to fulfill the contract: deliver shares at the strike (short call) or buy shares at the strike (short put). Learn more

Bid-ask spread

The gap between the highest price buyers offer and the lowest price sellers accept. A wide spread is a hidden trading cost. Learn more

Breakeven

The stock price at which a strategy neither makes nor loses money at expiration. Learn more

Calendar spread

Options at the same strike with different expiration dates. Learn more

Call option

The right to buy the underlying at the strike price until expiration. Learn more

Cash-secured put

Selling a put with enough cash set aside to buy the shares if assigned. Learn more

Collar

Owning shares, buying a put and selling a call to set both a floor and a ceiling. Learn more

Contract multiplier

The number of shares one contract covers, usually 100. Learn more

Covered call

Selling a call on shares you already own. Learn more

Debit / credit spread

A spread you pay for up front (debit) versus one that pays you up front (credit). Learn more

Delta

About how much an option’s price moves when the stock moves $1. Learn more

Diagonal spread

Options with different strikes and different expiration dates. Learn more

Early exercise

Exercising an American-style option before expiration, which can lead to early assignment for the seller. Learn more

Ex-dividend date

The cutoff date for receiving a stock’s next dividend. It matters for early assignment of short calls. Learn more

Exercise

Using an option’s right to buy (call) or sell (put) the underlying at the strike. Learn more

Expiration date

The last day an option exists. After that it is either exercised or worthless. Learn more

Extrinsic (time) value

The part of the premium beyond intrinsic value. It pays for time and uncertainty and shrinks toward $0 by expiration. Learn more

Gamma

How fast delta itself changes. Highest for at-the-money options near expiration. Learn more

Implied volatility (IV)

The market’s expected size of future moves, built into option prices. Learn more

In / at / out of the money

Whether an option would be worth exercising right now. A call is in the money when the stock is above the strike; a put is in the money when the stock is below the strike. Learn more

Intrinsic value

How far an option is in the money. A $45 call with the stock at $50 has $5.00 of intrinsic value. Learn more

Iron butterfly

Like an iron condor, but the short put and short call share the same strike. Learn more

Iron condor

A put credit spread plus a call credit spread. It profits if the stock stays inside a range. Learn more

Naked (uncovered) option

Selling an option without owning the shares or holding the cash. It can carry very large or, for calls, unlimited risk. Learn more

OCC

The Options Clearing Corporation, which clears and guarantees U.S. listed options. Learn more

Open interest

How many option contracts are currently open (not yet closed, exercised or expired). Learn more

Option

A contract giving the buyer the right, not the obligation, to buy or sell (usually) 100 shares at a set price by a set date. The seller takes on the obligation. Learn more

Options approval level

The tier of options strategies a broker allows in your account. Levels and rules differ by broker. Learn more

Options Disclosure Document (ODD)

The OCC booklet “Characteristics and Risks of Standardized Options,” which investors must receive and read before buying or selling options. Learn more

Payoff diagram

A chart of profit or loss at expiration across a range of stock prices. Learn more

Pin risk

Uncertainty about whether you will be assigned when the stock closes right at a short strike at expiration. Learn more

Premium (option)

The price of an option, quoted per share (× 100 per standard contract). The buyer pays it and the seller keeps it. Learn more

Protective put

Buying a put to set a floor under shares you own, for a cost. Learn more

Put option

The right to sell the underlying at the strike price until expiration. Learn more

Rho

Sensitivity to interest rates. Usually small for short-dated stock options. Learn more

Rolling

Closing an option and opening a similar one with a later date and/or a different strike. Learn more

Straddle

A call and a put at the same strike and expiration. Learn more

Strangle

A call and a put at different strikes, same expiration. Learn more

Strike price

The price at which an option lets you buy (call) or sell (put). Learn more

The Greeks

Measures of how an option’s price reacts to changes: delta, gamma, theta, vega and rho. Learn more

The wheel

Cycling between cash-secured puts and covered calls on the same stock. Learn more

Theta

Time decay: about how much value an option loses per day, all else equal. Learn more

Underlying

The stock, ETF or index an option is based on. Learn more

Vega

How much an option’s price changes when implied volatility changes by 1 point. Learn more

Vertical spread

Buying and selling the same type of option, same expiration, different strikes. Learn more

Volatility crush

A quick drop in option prices after a big expected event, such as earnings, has passed. Learn more

More: Investor.gov Glossary and SEC Investor Bulletin: An Introduction to Options.

Back to resources