The Motley Fool: Cut through the financial jargon

New investors are often confused by financial jargon. Here’s a mini-glossary that can help you be more financially literate.

“Asset classes: The three major asset classes are cash (also called cash reserves, money market instruments or moolah), bonds and stocks.

“Board of directors: A group of people elected by a corporation’s shareholders to oversee the management of the company. The board members meet several times each year, are paid in cash and/or stock, and take on legal responsibility for corporate activities.

“Correction: A short-term drop in stock market prices. The term “correction” comes from the notion that, when this happens, an overpriced individual stock, market segment or stocks in general are returning back to their “correct” values. The term, for reasons that elude us, is never used when a stock or the stock market returns to a higher level after momentarily visiting a lower level.

“High-yield bonds: Bonds that are rated as below investment grade. The issuers of these bonds — which are judged to be at a higher risk of default — have to pay an attractive dividend to compensate investors for the additional risk. These are also often called “junk bonds.”

“Prospectus: A legal document usually written in extraordinarily tedious language that provides information about a potential investment, including discussions of its investment objectives, policies, past performance, risks and cost.

“Securities: A fancy name for stocks, bonds or any kind of financial asset that can be traded.

Learn more at www.fool.com/school/Glossary/ glossary.htm and www.investo pedia.com/dictionary.

Ask the Fool

Q: Should I do my investing through my 401(k) account or by investing directly in individual stocks? — C.P., Tacoma, Wash.

A: Do both, if you can. Individual stocks offer you more control and opportunity for rapid appreciation. Still, ignoring 401(k)s, which tend to offer mostly mutual funds, can be costly. As they’re tax-deferred, 401(k)s are one of the best ways to save for retirement, and if your employer matches any part of your contribution, that represents free money rarely worth passing up You should at least learn more about your company’s 401(k) (or other available retirement) plan. As with any investing process, it’s best to start contributing as early as possible, because the longer your nest egg has to grow, the bigger it’ll get. Also, consider plunking most or all of your 401(k) contributions into a broad-market index fund. If your plan doesn’t offer one, ask for it.

Learn more about retiring well at www.fool.com/retirement.htm and by trying our retirement newsletter for free at www.RuleYourRetirement.com.

Q: What kind of education and training do stockbrokers need? — K.D., Anderson, S.C.

A: A college degree generally isn’t required, but they must pass the “Series 7” licensing examination, and sometimes a “Series 63” exam, too. The successful completion of these tests permits brokers to advise you, solicit business from you, and execute transactions on your behalf. These tests don’t measure the ability to discern outstanding investments, though. Just because someone passed an exam doesn’t necessarily mean they know what’s best for you.

My smartest investment

Having noticed that the main parties realizing profits in heavy construction projects (in which my husband was involved) were the banks, I found a low-priced one and bought 500 shares for almost $3,000. The bank grew steadily, splitting three times and paying dividends quarterly. When it was bought out by a bigger bank in 2000, my 1,687 First Virginia Bank shares became 2,125 BB&T shares, recently worth $92,000 or so. Lucky me! — E.W.S., Prairie Village, Kan.

The Fool Responds: Be careful if you’re thinking that low-priced stocks are bargains. It doesn’t work that way. A stock can be extremely overvalued at $6 per share (or even 50 cents per share), destined to sink back to its true value eventually.

Meanwhile, a $50 or $200 stock can be undervalued and on its way to higher levels. You did well to hold on to a good performer, and you were also smart to look for an industry that was reaping hefty profits.