You've Heard These Investing Terms. Here's What They Actually Mean
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401(k) vs. IRA

A 401(k) is an employer-sponsored retirement savings account, where you can contribute a maximum of $18,500 pre-tax ($24,500 if you’re over 50) in 2018. As an incentive to save, many employers match a portion of your contributions. (Free money!)

An IRA, which stands for Individual Retirement Account, is accessible to anyone who earns an income (or has a spouse with an income). This year, you can contribute up to $5,500, plus another $1,000 if you’re 50 or older, in a traditional IRA. And depending on your income and access to employer-sponsored retirement plans, you may be able to deduct your contributions from your taxes now. With a few notable exceptions, you’ll pay a 10-percent penalty for withdrawing funds from either of these retirement accounts before age 59½.

Roth IRAs are different. Provided you don’t earn more than the income limits, you can contribute up to $5,500 ($1,000 more if you’re 50 or older) in post-tax dollars that grow tax-free. You’re allowed to withdraw funds you contribute—but not any gains—anytime without penalty.

S&P 500 vs. Dow vs. Nasdaq

The Dow Jones industrial average, a.k.a “the Dow,” is an index that tracks 30 large, established, U.S.-based companies across all sectors. Today, these include companies like 3M, Coca-Cola, Apple, Nike and Walmart. As such, the state of the Dow often serves as a general pulse of the economy in the minds of the media, investors and general public.

When people refer to “The Nasdaq,” they’re typically talking about the Nasdaq Composite—a price-weighted index of more than 3,000 companies listed on the exchange of the same name. Because it’s is so much bigger than the Dow, a glance at the day’s Nasdaq can give a broader view of the economy, though it’s skewed toward the tech sector.

The S&P 500 refers to the Standard & Poor’s 500 index, which includes, yes, 500 primarily large-cap stocks selected by a team of analysts and economists at Standard & Poor’s. It’s often used as a benchmark for the stock market because it includes a significant portion of the market’s total value.   

This was post updated in November 2018.

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