Financial terms people mix up

33 pairs of terms that are easy to confuse - each compared side by side, with the one difference that matters.

Positions & Trade Mechanics

Long Position vs Short Position (Short Selling) Long = own it, bet on up, loss capped at cost. Short = borrowed it, bet on down, loss uncapped. Margin vs Short Position (Short Selling) Margin is the loan; short is the direction of the bet. A short trade is funded on margin, but you can also be long on margin. Students collapse these two constantly. Cash Account vs Margin Cash account = no leverage and no shorting. Margin account = both are available, plus interest costs and margin calls. Maintenance Margin vs Initial Margin (Reg T) Initial margin is what you need to get in (50%); maintenance margin is what you need to stay in (~25-30%). Market Order vs Limit Order Market order guarantees execution, not price. Limit order guarantees price, not execution.

Securities & Instruments

Preferred Stock vs Common Stock Common = votes, variable dividend, unlimited upside. Preferred = no votes, fixed dividend, priority, bond-like behavior. Mutual Fund vs Exchange-Traded Fund (ETF) Mutual fund = one price a day, trades with the fund, distributes capital gains. ETF = trades all day on an exchange, generally more tax-efficient. Call Option vs Put Option Call = right to buy, bullish for the buyer. Put = right to sell, bearish for the buyer.

Risk & Return

Systematic Risk (Market Risk) vs Unsystematic Risk (Specific Risk) Systematic = market-wide, undiversifiable, compensated. Unsystematic = company-specific, diversifiable, uncompensated. Beta vs Alpha Beta = how much market risk you took. Alpha = how much return you earned beyond what that risk explains.

Taxes & Account Types

Traditional IRA / 401(k) vs Roth IRA / Roth 401(k) Traditional = deduction now, taxed later, RMDs apply. Roth = no deduction, tax-free later, no RMDs for the original owner. Choose on the bracket now versus in retirement. Asset Location vs Asset Allocation Allocation = what you own. Location = which account you own it in. Nearly identical words, entirely different decisions.

Regulation & Professional Duty

Fiduciary Duty vs Suitability Standard Fiduciary = must be the client's best option. Suitability = must merely be appropriate. The gap is where most conflicted advice lives. Securities Act of 1933 vs Securities Exchange Act of 1934 1933 = new issues, primary market, prospectus. 1934 = trading, secondary market, created the SEC. Remember: issue first, then trade.

Planning, Insurance & Estate

Term Life Insurance vs Whole Life Insurance Term = temporary need, cheap, no cash value. Whole life = permanent, expensive, builds cash value. The commission difference is the conflict of interest to watch for.

Economics & Financial Reporting

Deflation vs. Disinflation vs Inflation Inflation = prices rising. Disinflation = still rising, but slower. Deflation = prices actually falling. Income Statement vs Balance Sheet Income statement = performance over a period (a movie). Balance sheet = position at a moment (a photograph). Current Ratio vs Quick Ratio (Acid-Test Ratio) The quick ratio is the current ratio with inventory removed from the top. Inventory is the least liquid current asset. Systematic vs. Unsystematic Risk (Exam Classification) vs Systematic Risk (Market Risk) The general concept is in the Risk & Return unit. This card is the exam's specific sorting of named risks.

Bonds & Cash Equivalents

Treasury Inflation-Protected Securities (TIPS) vs Treasury Securities Ordinary Treasuries protect against default but not inflation. TIPS protect against both - the principal adjusts to the CPI. General Obligation (GO) Bond vs Revenue Bond GO = backed by taxes, usually needs voter approval. Revenue = backed only by the project's income, no voter approval, feasibility study instead.

Equities, Funds & Alternatives

Technical Analysis vs Fundamental Analysis Technical asks when to buy (price patterns). Fundamental asks what to buy (business value). Closed-End Fund vs Mutual Fund Open-end (mutual) funds issue and redeem shares continuously at NAV. Closed-end funds have fixed shares that trade at market prices, above or below NAV. Exchange-Traded Note (ETN) vs Exchange-Traded Fund (ETF) An ETF owns a basket of assets held for shareholders. An ETN owns nothing - it is an unsecured IOU from the issuer. Variable Annuity vs Fixed Annuity Fixed = insurer bears investment risk, guaranteed rate, not a security. Variable = owner bears risk in subaccounts, is a security.

Clients, Strategy & Tax

C Corporation vs S Corporation C corp = taxed twice, unlimited shareholders. S corp = pass-through, 100 or fewer shareholders, one class of stock.

Retirement Plans, Accounts & Trading

Defined Benefit Plan vs Defined Contribution Plan Defined benefit = the payout is promised, employer bears risk. Defined contribution = only the contribution is defined, employee bears risk. Nonqualified Plans (Deferred Compensation) vs Defined Contribution Plan Qualified plans: nondiscriminatory, IRS-approved, employer deducts when contributed, assets protected in trust. Nonqualified: can favor executives, deduction when paid, assets at risk. Coverdell Education Savings Account vs 529 Plan Coverdell: $2,000 a year cap, income limits, age limits. 529: very high contribution limits, no income limits, state-sponsored. Joint Tenants with Right of Survivorship (JTWROS) vs Tenants in Common (TIC) JTWROS = share goes to the surviving owners, bypassing probate. TIC = share goes to the deceased's estate, through probate.

Uniform Securities Act & Registration

Excluded from the Investment Adviser Definition vs Exemptions from State Adviser Registration Excluded = not an investment adviser at all. Exempt = is an adviser, but need not register in the state. The exam tests this distinction constantly. Exempt Securities vs Exempt Transactions Exempt security = the security itself never needs registration. Exempt transaction = a normally registrable security is sold in circumstances that don't require it.

Ethics & Fiduciary Obligations

Principal Transactions by Advisers vs Agency Cross Transactions Principal = the adviser is the other side of the trade; consent per transaction. Agency cross = the adviser brokers between two parties, one an advisory client; prior written consent, and it cannot have recommended both sides.