Glossary

C

A cap is a ceiling, or the highest level to which something can go. For example, an interest rate cap limits the amount by which an interest rate can be increased over a specific period of time.

A typical cap on an adjustable rate mortgage (ARM) limits interest rate increases to two percentage points annually and six percentage points over the term of the loan. In a different example, the cap on your annual contribution to an individual retirement account (IRA) is $6,000 for 2021, provided you have earned at least that much. If you're 50 or older, you can make an additional catch-up contribution of $1,000, so your cap is $7,000.

When you sell an asset at a higher price than you paid for it, the difference is your capital gain. For example, if you buy 100 shares of stock for $20 a share and sell them for $30 a share, you realize a capital gain of $10 a share, or $1,000 in total. If you own the stock for more than a year before selling it, you have a long-term capital gain. If you hold the stock for less than a year, you have a short-term capital gain.

Most long-term capital gains are taxed at a lower rate than your other income while short-term gains are taxed at your regular rate.

You may be exempt from paying capital gains tax on profits of up to $250,000 on the sale of your primary home if you're single and up to $500,000 if you're married and file a joint return, provided you meet the requirements for this exemption.

When you sell an asset for less than you paid for it, the difference between the two prices is your capital loss. For example, if you buy 100 shares of stock at $30 a share and sell when the price has dropped to $20 a share, you will realize a capital loss of $10 a share, or $1,000. Although nobody wants to lose money on an investment, there is a silver lining: You can use capital losses to offset capital gains in computing your income tax.

However, you must use short-term losses to offset short-term gains and long-term losses to offset long-term gains. If you have a net capital loss in any year - that is, your losses exceed your gains - you can usually deduct up to $3,000 of this amount from regular income on your tax return. You may also be able to carry forward net capital losses and deduct on future tax returns.

Cash value is the amount that an account is worth at any given time. For example, the cash value of your 401(k) or IRA is what the account is worth at the end of a period, such as the end of a business day, or at the end of the plan year, often December 31. The cash value of an insurance policy is the amount the insurer will pay you, based on your policy's cash reserve, if you cancel your policy. The cash value is the difference between the amount you paid in premiums and the actual cost of insurance plus other expenses.

Many health insurance policies cap, or limit, the amount they will pay to cover medical expenses. But you can buy catastrophic illness insurance to cover medical expenses above the maximum your regular health insurance will pay.

CDs are time deposits. When you purchase a CD from a bank, up to $250,000 is insured by the Federal Deposit Insurance Corporation (FDIC). You generally earn compound interest at a fixed rate, which is determined by the current interest rate and the CD's term, which can range from a week to five years or more.

However, rates can vary significantly from bank to bank. You usually face a penalty if you withdraw funds before your CD matures, often equal to the interest that has accrued up to the time you make the withdrawal.

Assets with monetary value, such as stocks, bonds, or real estate, which are used to guarantee a loan are considered collateral. If the borrower defaults and fails to fulfill the terms of the loan agreement, the collateral, or some portion of it, may become the property of the lender. For example, if you borrow money to buy a car, the car is the collateral.If you default, the lender can repossess the car and sell it to recover the amount you borrowed. Loans guaranteed by collateral are also known as secured loans.

Compounding occurs when your investment earnings or savings account interest is added to your principal, forming a larger base on which future earnings may accumulate. As your investment base gets larger, it has the potential to grow faster. And the longer your money is invested, the more you stand to gain from compounding.

For example, if you invested $10,000 earning 8% annually and reinvested all your earnings, you'd have $21,589 in your account after 10 years. If instead of reinvesting you withdrew the earnings each year, you would have collected $800 a year, or $8,000 over the 10 years. The $3,589 difference is the benefit of 10 years of compound growth.

A COLA results in a wage or benefit increase that is designed to help you keep pace with increased living costs that result from inflation. COLAs are usually pegged to increases in the consumer price index (CPI). Federal government pensions, some state pensions, and Social Security are usually adjusted annually, but only a few private pensions provide COLAs.