Glossary of Investing Terms

Plain-English definitions of 55 terms used across the lessons. Terms link here automatically wherever they appear in articles.

0–9
401(k): A U.S. employer-sponsored retirement plan that lets employees contribute pre-tax (traditional) or after-tax (Roth) dollars, often with an employer match. Contribution limits change — verify with IRS.gov.
A
Asset allocation: How a portfolio is divided among asset classes such as stocks, bonds, and cash. Allocation choices generally reflect an investor’s goals, time horizon, and tolerance for risk.
Asset class: A group of investments with similar characteristics and behavior, such as stocks, bonds, real estate, or cash. Different asset classes tend to perform differently under the same economic conditions.
B
Bear market: A period in which prices fall substantially — commonly defined as a decline of 20% or more from a recent high.
Behavioral finance: The study of how psychology affects financial decisions — documenting systematic biases such as loss aversion, overconfidence, and herding.
Benchmark: A standard, usually a market index, against which an investment’s performance is compared.
Bid-ask spread: The gap between the highest price buyers will pay (bid) and the lowest price sellers will accept (ask). A hidden trading cost, usually small for heavily traded securities.
Bond: A loan an investor makes to a government or company. The issuer typically pays interest on a schedule and repays the principal at maturity.
Bull market: A sustained period of rising prices, often accompanied by investor optimism.
C
Capital gain: The profit realized when an asset is sold for more than its purchase price. In many jurisdictions, capital gains are taxable in the year the asset is sold.
Compound interest: Growth earned on both the original amount and on previously accumulated growth. Over long periods, compounding is why small, regular contributions can grow into large balances.
Concentration risk: The risk that comes from having too much of a portfolio in a single investment, sector, or asset class, so that one poor outcome causes outsized losses.
Correlation: A statistical measure of how two investments move relative to each other, from −1 (opposite directions) to +1 (same direction). Combining assets with low correlation is the mechanical basis of diversification.
Credit risk: The risk that a bond issuer fails to make promised interest or principal payments. Bonds with higher credit risk generally offer higher yields to compensate.
D
Developed markets: Stock markets in high-income countries with mature, highly accessible market infrastructure — such as the United States, Japan, the United Kingdom, and most of Western Europe.
Diversification: Spreading investments across many holdings, sectors, geographies, or asset classes so that no single failure dominates the outcome of a portfolio.
Dividend: A portion of a company’s profits paid to shareholders, usually in cash and typically on a quarterly schedule in the United States.
Dollar-cost averaging: Investing a fixed amount on a regular schedule regardless of price. The approach buys more shares when prices are low and fewer when prices are high, and reduces the role of timing decisions.
Duration: A measure of a bond’s sensitivity to interest-rate changes. As a rule of thumb, a bond with a duration of 5 years falls roughly 5% in price if rates rise by one percentage point.
E
Emergency fund: Cash set aside for unexpected expenses such as job loss or medical bills — commonly three to six months of essential living costs held in an easily accessible account.
Emerging markets: Stock markets in countries classified by index providers as investable but not yet fully developed — based on income, market access, and liquidity. China, India, Taiwan, and Brazil dominate emerging-market indexes.
ETF: An exchange-traded fund: a basket of securities that trades on an exchange like a single stock. Many ETFs track an index and have low expense ratios.
Expense ratio: The annual fee a fund charges, expressed as a percentage of assets. An expense ratio of 0.05% costs $5 per year on a $10,000 investment; 1% costs $100.
F
Factor: A broad, persistent characteristic — such as size, value, or profitability — that research links to differences in long-run returns. Factor investing tilts a portfolio toward such characteristics, accepting stretches of underperformance.
G
Growth stock: A stock trading at a high multiple of its current earnings or book value because investors expect its earnings to grow quickly. The price embeds high expectations; returns depend on results relative to them.
H
HSA: A U.S. Health Savings Account, available with qualifying high-deductible health plans. Contributions, growth, and qualified medical withdrawals are all untaxed. Rules change — verify with IRS.gov.
Hyperscaler: One of the handful of technology giants operating cloud data centers at massive scale. Their capital spending on servers and chips is a central force in the AI-era economy.
I
Index: A rules-based list of securities used to measure a market segment, such as the S&P 500 for large U.S. companies. Indexes are benchmarks; index funds attempt to replicate them.
Index fund: A mutual fund or ETF designed to match the performance of a market index rather than beat it, typically with very low fees and broad diversification.
Inflation: A general rise in prices over time, which reduces the purchasing power of money. At 3% annual inflation, $100 buys roughly what $74 bought ten years earlier.
Interest rate risk: The risk that a bond’s market price falls when prevailing interest rates rise, because newer bonds pay more attractive rates.
IRA: An Individual Retirement Arrangement: a U.S. tax-advantaged account for retirement savings. Traditional IRAs may offer tax-deductible contributions; Roth IRAs offer tax-free qualified withdrawals. Rules and limits change — verify with IRS.gov.
L
Large-cap: A company with a large market capitalization — commonly above $10 billion. Large caps are typically mature, globally diversified businesses and dominate cap-weighted indexes like the S&P 500.
Liquidity: How quickly and cheaply an asset can be converted to cash. Publicly traded stocks are highly liquid; real estate is not.
Lump-sum investing: Investing an available amount of money all at once rather than spreading it out over time.
M
Market capitalization: The total market value of a company’s shares: share price multiplied by shares outstanding. Used to classify companies as large-, mid-, or small-cap.
Market timing: Attempting to predict short-term market moves and buy or sell ahead of them. Research repeatedly finds that consistent timing is extremely difficult, even for professionals.
Mutual fund: A pooled investment that buys a portfolio of securities on behalf of its shareholders. Priced once daily, unlike ETFs which trade throughout the day.
N
Nominal return: An investment return before subtracting inflation. Contrast with real return, which measures growth in actual purchasing power.
P
P/E ratio: Price-to-earnings ratio: a company’s share price divided by its earnings per share. A rough gauge of how much investors pay for each dollar of earnings.
Portfolio: The complete collection of investments a person or institution owns, viewed as one whole.
Principal: The original amount of money invested or borrowed, before any earnings, losses, or interest.
R
Real return: An investment return after subtracting inflation — the change in what the money can actually buy.
Rebalancing: Restoring a portfolio to its target asset allocation after market moves shift the weights — for example, selling some stocks and buying bonds after a strong stock rally.
REIT: A Real Estate Investment Trust: a company that owns income-producing real estate and, in the U.S., must distribute at least 90% of taxable income to shareholders as dividends.
Risk tolerance: An investor’s ability and willingness to endure losses and volatility without abandoning their plan. It has both a financial dimension (capacity) and an emotional one.
S
Securities: Tradable financial instruments, such as stocks and bonds.
Small-cap: A company with a small market capitalization — commonly below $2 billion. Small caps are historically more volatile, more domestically focused, and less covered by analysts than larger companies.
Stock: A share of ownership in a company, entitling the holder to a portion of the company’s assets and earnings, and usually to vote on corporate matters.
T
Thematic fund: A fund built around a narrative theme, such as artificial intelligence or clean energy. Thematic funds often launch after a theme has performed strongly, charge higher fees, and overlap heavily with broad indexes.
Time horizon: How long an investor expects to keep money invested before needing it. Longer horizons generally allow more exposure to volatile assets like stocks.
Total return: An investment’s overall gain or loss including both price change and income such as dividends or interest, usually expressed as a percentage.
V
Value stock: A stock trading at a low price relative to its current fundamentals, such as earnings or book value. Historically, broad baskets of value stocks have earned a long-run premium that arrives irregularly.
Volatility: How much and how quickly an investment’s price fluctuates. Higher volatility means larger swings in both directions — it is a common (though incomplete) proxy for risk.
Y
Yield: The income an investment produces, expressed as a percentage of its price — for example, a bond’s annual interest divided by its market price.