Glossary of Terms

Basic Concepts

Asset Something of value that you own. In investing: stocks, bonds, real estate, etc.

Asset Allocation How your portfolio is divided among different asset classes. Example: 60% stocks, 40% bonds.

Compound Interest/Growth Earning returns on your returns. The snowball effect of investing.

Diversification Spreading investments across many holdings to reduce risk. Not putting all eggs in one basket.

Liquidity How easily an investment can be converted to cash without losing value.

Portfolio The collection of all your investments.

Types of Investments

Stock (Equity) Ownership share in a company. Value rises and falls with company performance and market sentiment.

Bond (Fixed Income) A loan to a government or company. Pays regular interest and returns principal at maturity.

Mutual Fund Pool of money from many investors, managed by a professional, investing in many securities.

ETF (Exchange-Traded Fund) Similar to mutual fund but trades on stock exchange like a stock. Usually lower cost.

Index Fund Fund that tracks a market index (like S&P 500) rather than trying to beat it. Low cost, passive.

Target-Date Fund Fund that automatically adjusts allocation as you approach a target date (usually retirement).

REIT (Real Estate Investment Trust) Company that owns real estate and pays dividends. Way to invest in real estate without buying property.

Risk and Return

Volatility How much an investment's value fluctuates. Higher volatility = bigger swings.

Risk The possibility of losing money or not achieving expected returns.

Return The gain or loss on an investment, usually expressed as a percentage.

Risk-Adjusted Return Return relative to the risk taken. A better measure than raw returns.

Risk Tolerance How much volatility you can handle financially and emotionally.

Standard Deviation Statistical measure of volatility. Higher = more volatile.

Beta Measure of how much an investment moves relative to the overall market.

Market Concepts

Bull Market Extended period of rising prices.

Bear Market Extended period of falling prices, usually defined as 20%+ decline.

Correction Market decline of 10-20%.

Market Capitalization (Cap) Total value of a company's shares. Large-cap, mid-cap, small-cap refer to company size.

Index A benchmark tracking a group of investments. S&P 500 tracks 500 large US companies.

Benchmark A standard to compare performance against.

Account Types

Brokerage Account Taxable investment account. Flexible but no tax advantages.

401(k) Employer-sponsored retirement account. Tax-advantaged, often with employer match.

IRA (Individual Retirement Account) Personal retirement account with tax advantages. Traditional or Roth.

Traditional (IRA/401k) Tax-deferred. Deduction now, taxes in retirement.

Roth (IRA/401k) Tax-free growth. No deduction now, no taxes on withdrawals.

HSA (Health Savings Account) Triple tax-advantaged account for healthcare expenses.

Costs and Fees

Expense Ratio Annual fee charged by funds, expressed as percentage of assets. Lower is better.

Basis Points (bps) One hundredth of a percent. 50 bps = 0.50%.

Commission Fee for buying or selling. Now $0 at most brokerages.

Load Sales charge on some mutual funds. Avoid these.

Advisory Fee Fee paid to financial advisor, usually percentage of assets.

Tax Terms

Capital Gain Profit from selling an investment for more than you paid.

Capital Loss Loss from selling an investment for less than you paid.

Long-Term Gain Gain on investment held over one year. Lower tax rate.

Short-Term Gain Gain on investment held less than one year. Taxed as regular income.

Dividend Payment from company to shareholders. Can be qualified (lower tax) or ordinary.

Tax-Loss Harvesting Selling investments at a loss to offset gains for tax purposes.

Cost Basis What you paid for an investment. Used to calculate gains/losses.

Portfolio Management

Rebalancing Adjusting portfolio back to target allocation by selling some assets and buying others.

Dollar-Cost Averaging (DCA) Investing fixed amounts regularly regardless of price.

Lump Sum Investing all available money at once.

Active Management Trying to beat the market through selection and timing.

Passive Management Matching the market through index funds.

Metrics and Ratios

P/E Ratio (Price to Earnings) Stock price divided by earnings per share. Measure of valuation.

Dividend Yield Annual dividend divided by stock price.

NAV (Net Asset Value) Per-share value of a fund's holdings.

YTD (Year to Date) Return from January 1 to current date.

CAGR (Compound Annual Growth Rate) Average annual return over a period, accounting for compounding.

Behavioral Finance

Behavior Gap The difference between investment returns and investor returns due to poor timing decisions.

Loss Aversion Tendency to feel losses more painfully than equivalent gains feel good.

Recency Bias Overweighting recent events when predicting the future.

FOMO (Fear of Missing Out) Anxiety about missing a profitable opportunity.

Other Terms

Fiduciary Legal obligation to act in client's best interest.

SEC (Securities and Exchange Commission) US agency that regulates securities markets.

FINRA Self-regulatory organization for brokers.

Prospectus Legal document describing an investment offering.