Below you will find an abridged version of some of the investing basics concepts and terms. These concepts will be explored deeper in the book I am writing but this should be enough to get you started in the right direction.
401K. A 401K is generally a retirement account that is offered by employers to their employees. These accounts allow you to put aside pre-tax dollars to be invested until the age of 59 1/2 (the minimum age of withdrawal). By using pre-tax dollars this gives you a roughly 25% advantage and growth enhancer. Sometimes employers may offer a “matching” program which will allows them to match up to a certain percentage of contributions. If your company does not offer a 401K (or similarly 403(b) see the Roth IRA option).
Roth IRA. A Roth IRA is a retirement account that is funded by your own after-tax money. The largest benefit of a Roth IRA is that the money in the account grows tax free. This means because you are already taxed on the principle (original investment you put in) anything that grows beyond that is tax-free.
Mutual Funds. Is a type of investment security that pools different types of securities under one banner. A mutual fund is an actively managed investment security that invests the money of if investors into different market securities (stocks). Mutual funds can be extremely convenient but you should pay close attention to the fees charged.
Index funds. An index fund is similar to a mutual fund in that it purchases different types of securities under one fund name. However, there is a big difference from mutual funds in that index funds and passively managed and have a lot lower fees. Index funds are funds that match a stock market fund (S&P 500) and others market funds and as the makeup of the index changes so does the index fund. One item to note is that the index funds typically invest in all stock equities and this is a consideration for your asset allocation.
Exchange Traded Funds (ETFs). An exchange traded fund can track an index fund, commodity, bonds, or group of assets and trades close to its net asset value (NAV) during the course of a day. ETFs are values for their low cost, tax efficiency, and stock like qualities.
Lifecycle Funds. A lifecycle fund also know as a target-date fund is an easy way to manage both asset allocation and fund selection. A lifecycle fund is typically made up of other funds and securities (mid-cap, small-cap, international), bonds, and other investments. These funds typically adjust based on your age to select the right blend of investments to maximize your current asset allocation. A lifecycle fund offers convenience by being a low maintenance account that has higher fees.
Asset Allocation. Is the strategy used to balance long-term risk versus reward in relation to age. For example younger people who have a longer time to invest can tolerate more risk so they would likely have a higher percentage of stocks (which tend to be a riskier investment) versus someone who is nearing retirement age who would want a more stable investments (such as bonds). Your asset allocation should be balanced on an annual or semi-annual basis to maximize your returns and match your risk tolerance level.