DEFINITIONS Clean and Simple

Definition of "Alternative Investment"

Investments considered outside of the traditional asset classes of stocks, bonds and cash. Examples of alternative investments include real estate, commodities, options and financial derivatives. Alternative investments are often used by hedge funds.

Definition of "Inverse Relationship"

A relationship between two numbers in which an increase in the value of one number results in a decrease in the value of the other number.

Definition of "Quantitative Easing"

A process of increasing the money supply, typically only seen when interest rates have already been reduced to zero and when the government is still trying to stop a credit crunch situation. The first notable usage of quantitative easing was by the Bank of Japan in the early 2000s, and similar tactics were used again in 2008 by the Federal Reserve to deal with the United States credit crisis.

Definition of "Federal Funds Rate"

The interest rate that banks charge each other for the use of Federal funds. It changes daily and is a sensitive indicator of general interest rate trends. The Federal funds rate is one of the of two interest rates controlled by the Fed. While the Fed can't directly affect this rate, it effectively controls it in the way it buys and sells Treasuries to banks. This is the rate that reaches individual investors, though the changes usually aren't felt for a period of time.

Definition of "Traditional IRA"

Individual Retirement Account. A tax-deferred retirement account for an individual that permits individuals to set aside money each year, with earnings tax-deferred until withdrawals begin at age 59 1/2 or later (or earlier, with a 10% penalty). The exact amount depends on the year and your age. IRAs can be established at a bank, mutual fund, or brokerage. Only those who do not participate in a pension plan at work or who do participate and meet certain income guidelines can make deductible contributions to an IRA. All others can make contributions to an IRA on a non-deductible basis. Such contributions qualify as a deduction against income earned in that year and interest accumulates tax-deferred until the funds are withdrawn. A participant is able to roll over a distribution to another IRA or withdraw funds using a special schedule of early payments made over the participant's life expectancy.

Definition of "Roth IRA"

A new type of IRA, established in the Taxpayer Relief Act of 1997, which allows taxpayers, subject to certain income limits, to save for retirement while allowing the savings to grow tax-free. Taxes are paid on contributions, but withdrawals, subject to certain rules, are not taxed at all. Contributions to the Roth IRA are invested in mutual funds, stocks, or other securities, and the amount that someone is able to contribute is dependent upon their income, age, and tax filing status. Unique features of a Roth IRA are that it does not require you to start making withdrawals at a certain age, and also it allows an individual to make a qualified withdrawal up to $10,000 for a first time home purchase.

Definition of "Real Estate"

A piece of land, including the air above it and the ground below it, and any buildings or structures on it. Real estate can include business and/or residential properties, and are generally sold either by a relator or directly by the individual who owns the property (for sale by owner). In most situations in the United States, real estate is a legal designation, and is subject to legislation. Also called realty.

Definition of "Investment Real Estate"

1. The fee charged by a lender to a borrower for the use of borrowed money, usually expressed as an annual percentage of the principal; the rate is dependent upon the time value of money, the credit risk of the borrower, and the inflation rate. Here, interest per year divided by principal amount, expressed as a percentage. Also called interest rate.
2. The return earned on an investment.
3. Partial or total ownership in an asset.

Definition of "Residential Rental Property"

A property from which the owner receives payment from the occupant(s), known as tenants, in return for occupying or using the property. Rental properties may be either residential or commercial. The owner of rental property may be allowed to take certain tax deductions such as mortgage interest and depreciation.

Definition of "Passive Income"

Income derived from real estate and business investments in which the individual is not actively involved, such as a limited partnership.

Definition of "Flipping Houses"

Quick-profit strategy in which an investor purchases real estate at a discount price and improves the property in order to sell it at a higher price. This can be a very lucrative profit strategy if the housing market is doing well. Old homes and foreclosures are popular properties use in house flipping because the investors can acquire these properties fairly cheap thus increasing the potential profit. Sometimes contractors are used to do the upgrades to the property, but an experienced house flipper may do the work his or herself.

Definition of "Tangible Asset"

Assets having a physical existence, such as cash, equipment, and real estate; accounts receivable are also usually considered tangible assets for accounting purposes. opposite of intangible asset.

Definition of "Assessed Value"

The dollar value of an asset assigned by a public tax assessor for the purposes of taxation.

Definition of "Land"

1. General: Primary input and factor of production which is not consumed but without which no production is possible. It is the resource that has no cost of production and, although its usage can be switched from a less to more profitable one, its supply cannot be increased. The term "land" includes all physical elements in the wealth of a nation bestowed by nature; such as climate, environment, fields, forests, minerals, mountains, lakes, streams, seas, and animals. As an asset, it includes anything (1) on the ground (such as buildings, crops, fences, trees, water), (2) above the ground (air and space rights), and (3) under the ground (mineral rights), down to the center of the Earth. Perhaps the oldest form of collateral, land is still very attractive to lenders because it cannot be destroyed, moved, stolen, or wasted. All a lender needs is the borrower's clear title to it.
2. Accounting: Land owned for productive use is referred to as a fixed asset account (not subject to depreciation due to its un-wasting nature) and is listed under the equipment, land, and plant subheading in a balance sheet. It is recorded at its purchase price plus legal and development costs (such as for surveying, draining, excavation, filling, and grading). Land held for investment is listed under investments; a real estate firm, however, may list it under inventory. See also land development and land improvement.

Definition of "Depreciation"

1. A noncash expense that reduces the value of an asset as a result of wear and tear, age, or obsolescence. Most assets lose their value over time (in other words, they depreciate), and must be replaced once the end of their useful life is reached. There are several accounting methods that are used in order to write off an asset's depreciation cost over the period of its useful life. Because it is a non-cash expense, depreciation lowers the company's reported earnings while increasing free cash flow.
2. A decline in the value of a given currency in comparison with other currencies. For instance, if the U.S. dollar depreciates against the Euro, buyers would have to pay more dollars in order to obtain the original amount of euros before depreciation occurred.

Definition of "Fixed Income Investment"

Money invested in bonds, certificates of deposit, preferred stock (preference shares), etc., which regularly generate a fixed amount of interest income. Such investments are preferable during periods of low inflation, but their worth is eroded during periods of high inflation. Also called fixed interest investment.

Definition of "Inflationary concern"

Something that has the ability to cause - or has already caused - inflation. "Gas prices are a serious inflationary concern at the moment."

Definition of "Consumer Price Index - CPI"

CPI. An inflationary indicator that measures the change in the cost of a fixed basket of products and services, including housing, electricity, food, and transportation. The CPI is published monthly. also called cost-of-living index.

Definition of "Holding Company"

A company that owns enough voting stock in another firm to control management and operations by influencing or electing its board of directors. also called parent company.

Definition of "Interest"

1. The fee charged by a lender to a borrower for the use of borrowed money, usually expressed as an annual percentage of the principal; the rate is dependent upon the time value of money, the credit risk of the borrower, and the inflation rate. Here, interest per year divided by principal amount, expressed as a percentage. Also called interest rate.
2. The return earned on an investment.
3. Partial or total ownership in an asset.

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