Simply put, a stock is an ownership share in the company. Owning one single share of Apple* stock quite literally means that you own part of the company, albeit a very tiny percentage. So, if you own one share of Apple*, go ahead and brag to your friends that “your” company makes all those expensive devices they all have! 

By owning a stock, you’re entitled to all the rights an owner of a company should have - the right to a portion of assets and earnings, and the right to vote on management issues. By owning a single share of stock, you’re entitled to vote on who the board of directors overseeing the company are, the CEO, and usually even CEO pay. You may only have a single vote verses tens of millions total votes, but you still get that vote.

A bond is a debt instrument. Basically, owning a bond is like lending money to a company or government. Because it’s a contractual obligation, the company or government is legally obligated to make all your interest and principal payments on time. This contractual obligation generally gives bonds a higher level of safety than stocks offer.

A pooled investment vehicle. In essence, a mutual fund is comprised of a large amount of individual investors pooling their money together in a portfolio issued by a management company. The management company hires a portfolio manager, and that manager selects investments based on the investment objective of the fund. Investing in Mutual Funds offers a high level of diversification, oftentimes more diversification than an investor would be able to achieve without a mutual fund.

Similar to a mutual fund, an ETF is a pooled investment vehicle. These trade on exchanges like stocks throughout the trading day. ETFs oftentimes invest only in a select type of stock, such as an economic sector or only companies of a certain size. These offer the ability to customize allocations, while retaining diversification.

If you purchase a stock, bond, ETF, mutual fund, or really any asset, then subsequently sell it for more than you paid, you have a Capital Gain. As an example, if you purchase $1,000 worth of Apple* stock and sell it 2 years later for $2,000, you have a $1,000 Realized Capital Gain. This means you’ve actually experienced the gain and cashed it in, and owe taxes to the IRS on the gain. Conversely, if that Apple* stock has grown to $2,000 and you don’t sell it, you have an Unrealized Capital gain, and do not owe any taxes until you actually sell it.

When you have a Realized Capital Gain, it’s classified as either Short Term or Long term, and this classification is very important to you tax-wise. If the capital gain is from the sale of an asset you owned less than one calendar year, it’s a Short-Term gain. Short-term gains are taxed as ordinary income, as if it was earned from a paycheck. Long-term gains are from the sale of an asset you owned more than one calendar year, and are taxed at the preferential Long Term Capital Gains rates, which are typically lower than ordinary income tax rates.

A dividend payment is a payout from a corporation to the shareholders of corporate profits. Many large companies pay dividends, such as Proctor and Gamble*, General Electric*, Lowe’s*, Home Depot*, PPL*, and hundreds more. Dividends may be paid as either additional shares of stock, or as cash. Most public companies pay a dividend in cash. Dividends are taxed as long-term capital gains.

An IRA is a retirement savings account. Most people are able to deduct contributions to an IRA on their taxes. While funds are in an IRA, they grow tax-deferred, meaning no taxes are due on capital gains and income inside an IRA. When you withdraw money from an IRA, you pay taxes on the withdrawal as ordinary income, no different than if you went and earned that income from a job in the year of withdrawal. Generally, you may not make withdrawals before age 59 ½ without a tax penalty.

A Roth IRA is also a retirement savings account, but has the opposite tax ramifications as a traditional IRA. You may not deduct contributions to a Roth IRA on your taxes. You still retain tax-deferral on capital gains and income inside a Roth IRA. However, when you withdraw funds from a Roth IRA, assuming the account has existed for 5 or more years and you’re 59 ½ or older, all investment gains are tax-free.

These are employer-sponsored retirement plans. If you are offered one of these by your employer, you can make contributions directly from your paycheck, and your employer may also offer a matching contribution for you. In a traditional 401(k) or SIMPLE IRA, the tax ramifications are similar to a traditional IRA. Your contributions are tax-deductible, your account can grow tax-deferred, and you pay taxes when you make withdrawals.