Simple, jargon-free definitions of investing and finance terms. From P/E ratio to dollar cost averaging—learn as you go.
The 4% rule suggests you can withdraw 4% of your portfolio annually in retirement without running out of money over 30 years. A $1M portfolio = $40,000/year. It's a guideline, not a guarantee—adjust for your situation.
A 401(k) is an employer-sponsored retirement account. You contribute pre-tax dollars, reducing taxable income. Many employers match contributions up to a limit. Earnings grow tax-deferred until withdrawal in retirement.
Active management tries to beat the market by selecting securities. Managers charge higher fees. Most active funds underperform indexes after fees. Passive (index) investing is the low-cost alternative.
Alpha is excess return above a benchmark, often attributed to skill. Positive alpha means outperformance. It's the return not explained by beta (market movement). Active managers seek alpha; most fail to generate it consistently.
The Alternative Minimum Tax (AMT) is a parallel tax system that ensures high earners pay a minimum tax. It disallows certain deductions and has its own rates. You pay the higher of regular tax or AMT. AMT exemptions have increased.
An annuity is an insurance product that provides guaranteed income for life or a set period. You pay a lump sum or periodic premiums; the insurer pays you back. Fixed annuities guarantee returns; variable annuities invest in sub-accounts.
Annual percentage rate (APR) is the yearly cost of borrowing, including fees. It standardizes comparison across lenders. For savings, APY (annual percentage yield) includes compounding. Read the fine print.
Annual percentage yield (APY) includes compounding. It's the actual return you earn on savings. APY is higher than the stated rate when compounding is frequent. Use APY to compare savings accounts.
An asset is anything you own that has economic value and can be converted to cash. Assets include cash, stocks, bonds, real estate, and personal property. Your total assets minus your liabilities equals your net worth.
Asset allocation is how you divide your portfolio among different asset classes like stocks, bonds, and cash. It's one of the most important factors in long-term returns. Common rules: 60/40 stocks/bonds or age-in-bonds.
A balance sheet is a financial statement showing a company's assets, liabilities, and shareholders' equity at a point in time. The equation is: Assets = Liabilities + Equity. It reflects financial health.
A bear market is a prolonged decline of 20% or more from peaks. Pessimism and economic stress drive it. Historically, bear markets have been shorter than bull markets. Recovery follows.
A benchmark is a standard for measuring performance. The S&P 500 is a common stock benchmark. Compare your portfolio or fund to a relevant benchmark. Beating the benchmark consistently is difficult.
Beta measures a stock's volatility relative to the market. Beta of 1 = moves with market; above 1 = more volatile; below 1 = less. Used to assess risk and expected return. Beta is backward-looking.
The bid-ask spread is the difference between the highest price buyers will pay (bid) and lowest price sellers will accept (ask). It's a hidden cost of trading. Tight spreads indicate liquidity; wide spreads mean higher costs.
Bitcoin (BTC) is the first and largest cryptocurrency by market cap. Created in 2009, it's decentralized digital money with a fixed supply of 21 million. Used as store of value and for transactions. Very volatile.
Blockchain is a distributed ledger that records transactions in blocks linked cryptographically. It's the tech behind Bitcoin and most cryptocurrencies. Immutable and transparent. Also used for smart contracts and NFTs.
Blue chip stocks are large, stable, well-established companies with strong track records. They typically pay dividends and have lower volatility. Examples include Apple, Johnson & Johnson, and Coca-Cola. The term comes from poker's highest-value chips.
A bond is a loan you make to a company or government. In return, the issuer pays you interest (coupon) and repays principal at maturity. Bonds are generally less volatile than stocks and provide income. Government and corporate bonds are common types.
A bond fund holds many bonds in a single investment. It offers diversification without buying individual bonds. Bond funds don't have a maturity date—you sell shares when you want out. NAV fluctuates with interest rates.
Book value is a company's total assets minus liabilities—its net worth on the balance sheet. Price-to-book (P/B) compares stock price to book value per share. A P/B below 1 can suggest the stock trades below asset value.
A breakout occurs when price moves decisively beyond support or resistance. Breaking above resistance can signal further gains; breaking below support can signal further losses. Volume often confirms breakouts.
A budget is a plan for how you will spend and save your money. It tracks income and expenses to help you live within your means and reach financial goals. A good budget allocates money for needs, wants, and savings.
A bull market is a prolonged period of rising prices, typically 20%+ from lows. Optimism and economic growth drive it. The opposite of a bear market. Can last years.
A call option gives the right to buy a stock at the strike price by expiration. You pay a premium. Calls profit when the stock rises above strike + premium. Limited risk (premium); unlimited upside. Used for bullish bets or hedging.
Capital gains are profits from selling an investment for more than you paid. Short-term gains (held under 1 year) are taxed as ordinary income; long-term (1+ year) get preferential rates (0%, 15%, or 20%).
A capital loss occurs when you sell an investment for less than you paid. Losses can offset capital gains. Excess losses (up to $3,000/year) can reduce ordinary income. Unused losses carry forward.
Cash flow is the money moving in and out of a business. Operating cash flow is from core operations. Free cash flow (FCF) is what's left after capital expenditures. Healthy companies generate positive FCF.
Commodity ETFs provide exposure to raw materials like gold, oil, or agricultural products. Some hold physical assets; others use futures. They can hedge inflation but may have different return patterns than stocks and bonds.
Compound interest is interest earned on both your initial principal and on interest from previous periods. Over time, compounding accelerates growth exponentially. Albert Einstein reportedly called it the eighth wonder of the world.
Contribution limits cap how much you can add to tax-advantaged accounts yearly. 401(k) and IRA limits change annually. Exceeding them incurs penalties. Catch-up contributions for 50+ allow higher limits.
Corporate bonds are debt issued by companies to raise capital. They typically pay higher yields than government bonds but carry default risk. Investment-grade bonds are safer; high-yield (junk) bonds offer higher returns with more risk.
Correlation measures how two investments move together. Positive correlation (+1): they move in the same direction. Negative (-1): they move opposite. Zero: no relationship. Diversification works best with low or negative correlation.
Cost basis is what you paid for an investment, including commissions and reinvested dividends. It's used to calculate capital gains when you sell. Higher basis = lower taxable gain. FIFO, LIFO, or specific lot methods apply.
A coupon is the interest payment a bond pays, typically semi-annually. The coupon rate is fixed at issuance. A 5% coupon on $1,000 pays $50 per year. Bond prices can fluctuate, but the coupon stays the same.
The Consumer Price Index (CPI) measures changes in prices for a basket of consumer goods and services. It's the main inflation gauge. Core CPI excludes food and energy for a clearer trend. The Fed watches CPI for policy decisions.
A credit rating assesses an issuer's ability to repay debt. Major agencies include Moody's, S&P, and Fitch. AAA is highest; C or D indicates high default risk. Ratings affect borrowing costs and bond yields.
A crypto wallet stores your private keys to access cryptocurrencies. Hot wallets (online) are convenient but vulnerable; cold wallets (hardware) are more secure. Not your keys, not your coins—custodial exchanges hold keys for you.
Cryptocurrency is digital or virtual money that uses cryptography for security. It operates on decentralized networks (blockchains). Bitcoin and Ethereum are the largest. Highly volatile and speculative. Not backed by governments.
Discounted cash flow (DCF) estimates a company's value by projecting future cash flows and discounting them to present value. The discount rate reflects risk. Widely used in fundamental analysis. Sensitive to assumptions.
Debt is money owed to creditors. In personal finance, it includes mortgages, credit cards, and loans. In investing, companies with high debt may be riskier. Reducing high-interest debt often beats investing.
Default risk is the chance that a bond issuer fails to pay interest or principal. Higher for junk bonds; very low for Treasuries. Credit ratings reflect default risk. Diversification across issuers reduces it.
DeFi (Decentralized Finance) offers financial services (lending, trading, borrowing) on blockchains without traditional intermediaries. Built on Ethereum and others. Higher risk: smart contract bugs, volatility, and regulation.
A defined benefit plan promises a specific retirement payout based on salary and years of service. Traditional pensions are defined benefit. Employers bear investment risk. Rare in private sector today.
Derivatives are contracts whose value derives from an underlying asset (stock, index, commodity). Options, futures, and swaps are derivatives. Used for hedging or speculation. Complex and leveraged.
Diversification means spreading investments across different assets to reduce risk. Instead of owning one stock, you hold many stocks, bonds, or funds. If one investment falls, others may offset the loss.
A dividend is a portion of a company's profits paid to shareholders, usually quarterly. Not all stocks pay dividends; growth companies often reinvest profits instead. Dividend yield = annual dividend ÷ stock price.
Dividend ETFs hold stocks that pay dividends, often with a focus on high yield or dividend growth. They provide income and potentially lower volatility than pure growth strategies. Examples include SCHD and VYM.
Dividend yield is the annual dividend divided by the stock price, expressed as a percentage. Yield = (annual dividend ÷ stock price) × 100. It shows the income return from a stock. High yields can signal value or distress.
Dollar cost averaging (DCA) means investing a fixed amount at regular intervals regardless of market conditions. It reduces the impact of volatility by buying more shares when prices are low and fewer when high. It removes emotion from timing.
Drawdown is the peak-to-trough decline in portfolio value. A 20% drawdown means the portfolio fell 20% from its high. Recovery time matters. Larger drawdowns test investor discipline.
Duration measures a bond's sensitivity to interest rate changes. Higher duration means larger price swings when rates move. A 5-year duration bond may fall ~5% if rates rise 1%. Match duration to your time horizon.
Earnings growth is the rate at which a company's profits increase year over year. Strong earnings growth often drives stock prices. Sustainable growth matters more than one-time spikes. Used in PEG and DCF models.
The economic cycle has phases: expansion, peak, contraction (recession), and trough. Asset classes perform differently in each phase. Understanding cycles helps with allocation and expectations.
Effective tax rate is total tax divided by total income—your average rate. It's lower than marginal rate due to progressive brackets and deductions. Useful for planning and comparing.
An emergency fund is cash set aside for unexpected expenses like job loss, medical bills, or car repairs. Experts recommend 3–6 months of essential expenses in a high-yield savings account. It prevents selling investments during a downturn.
Emerging markets are developing economies like China, India, Brazil. They offer higher growth potential but more political and currency risk than developed markets. Often more volatile. Part of international diversification.
An employer match is when your employer contributes to your 401(k) based on your contributions. Common formulas: 50% of first 6% or 100% of first 3%. It's free money—contribute enough to get the full match.
Earnings per share (EPS) is a company's profit divided by its outstanding shares. EPS = net income ÷ shares outstanding. Higher EPS typically means stronger profitability. EPS is used in P/E ratio calculations.
An exchange-traded fund (ETF) is a basket of securities that trades on an exchange like a stock. ETFs offer diversification, low costs, and liquidity. You can buy or sell throughout the trading day at market price. Most track indexes.
Ethereum (ETH) is a blockchain platform for smart contracts and dApps. Its native token is Ether. Used for DeFi, NFTs, and tokens. Transitioned to proof-of-stake in 2022. Second-largest crypto by market cap.
The ex-dividend date is when a stock trades without the right to the upcoming dividend. Buy before this date to receive the dividend; buy on or after and you don't get it. The stock often drops by the dividend amount on this date.
Execution is when a buy or sell order is filled. Quality of execution—price and speed—affects returns. Market orders execute immediately; limit orders may not. Slippage is worse execution than expected.
Expense ratio is the annual fee a fund charges, expressed as a percentage of assets. A 0.5% expense ratio means you pay $5 per $1,000 invested yearly. Lower is better—index funds often charge under 0.2%.
Face value (par value) is the amount a bond pays at maturity. Most corporate and government bonds have $1,000 face value. Bonds can trade above (premium) or below (discount) face value before maturity.
The Federal Reserve (the Fed) is the U.S. central bank. It sets interest rates, regulates banks, and manages monetary policy. Rate hikes slow the economy; cuts stimulate it. The Fed aims for full employment and stable inflation.
Financial independence means your investments can support your lifestyle without working. The 4% rule is one measure. FIRE adherents pursue it early. Requires discipline, savings, and time.
FIRE stands for Financial Independence, Retire Early. adherents save aggressively (often 50-70% of income) to retire in their 30s or 40s. Lean FIRE uses minimal spending; Fat FIRE allows more comfort.
Forward P/E uses estimated future earnings instead of trailing earnings. It reflects analysts' expectations. Useful when past earnings are distorted. Compare to trailing P/E for context.
Fractional shares let you own less than one full share. If a stock costs $500, you can buy $50 worth (0.1 share). Brokers like Robinhood and Fidelity offer fractional investing, making expensive stocks accessible.
Fundamental analysis evaluates a company's financials, industry, and economy to estimate intrinsic value. It examines revenue, earnings, debt, cash flow, and competitive position. Used for long-term investing.
Gross Domestic Product (GDP) measures the total value of goods and services produced in an economy. It's a key indicator of economic health. Growing GDP usually means expansion; shrinking GDP indicates recession. Real GDP adjusts for inflation.
Growth stocks are companies expected to grow faster than the market. They often reinvest profits instead of paying dividends and typically have high P/E ratios. Tech companies like Tesla and Nvidia are often classified as growth stocks.
Guaranteed income is payments you can count on regardless of market conditions. Social Security, pensions, and annuities provide it. It reduces sequence-of-returns risk in retirement.
Holding period is how long you own an investment. It determines tax treatment: under 1 year = short-term (ordinary rates); 1+ years = long-term (preferential capital gains rates). Affects tax-loss harvesting and wash sales.
The income statement (profit & loss) shows revenue, expenses, and profit over a period. Revenue minus expenses = net income. It reveals profitability and growth. One of the main financial statements.
Income stocks pay steady dividends, appealing to investors seeking cash flow. Typically mature companies in stable industries. Lower growth but reliable payouts. Utilities and consumer staples are examples.
An index fund tracks a market index like the S&P 500. It holds the same securities as the index to mirror its performance. Index funds have low fees since they're passively managed. Can be an ETF or mutual fund.
Inflation is the rate at which prices for goods and services rise over time, reducing purchasing power. When inflation is 3%, a dollar buys 3% less than the year before. Central banks aim to keep inflation moderate (often around 2%).
An interest rate is the cost of borrowing money or the return earned on savings. When you borrow, you pay interest; when you lend or save, you earn it. Rates are expressed as a percentage of the principal per year.
International ETFs invest in stocks outside the U.S. They add geographic diversification. Developed markets (Europe, Japan) and emerging markets (China, India) have different risk-return profiles. Currency fluctuations affect returns.
Intrinsic value is an estimate of what a company is truly worth based on fundamentals. It's the present value of future cash flows. If market price is below intrinsic value, the stock may be undervalued. Subjective and varies by method.
Investment grade bonds have credit ratings of BBB or higher (S&P scale). They're considered lower default risk. Ratings from AAA (highest) down to BBB. Non-investment grade (junk) is BB and below.
An initial public offering (IPO) is when a private company first sells shares to the public. It raises capital and gives early investors an exit. IPOs can be volatile—prices often spike or drop sharply in early trading.
An Individual Retirement Account (IRA) is a tax-advantaged retirement savings account. Traditional IRAs offer tax-deductible contributions; Roth IRAs use after-tax money for tax-free withdrawals. Contribution limits apply annually.
Junk bonds (high-yield bonds) are rated below investment grade by credit agencies. They pay higher interest to compensate for higher default risk. Issuers may be newer companies or those with weaker finances. Suited for risk-tolerant investors.
Large cap refers to companies with market capitalization over $10 billion. They're typically established, liquid, and less volatile. The S&P 500 is a large-cap index. Large caps often pay dividends and have global reach.
Leverage is using borrowed money to amplify returns. Margin and options provide leverage. It magnifies gains and losses. High leverage increases risk of total loss. Used cautiously by experienced investors.
Leveraged ETFs use derivatives to magnify daily returns of an index (e.g., 2x or 3x). They're designed for short-term trading, not long-term holding. Compounding of daily returns can cause significant drift from the underlying index over time.
A liability is money you owe to someone else. Common liabilities include mortgages, car loans, credit card debt, and student loans. Liabilities reduce your net worth and may incur interest charges.
A limit order sets the maximum price you'll pay (buy) or minimum you'll accept (sell). It may not fill if the price never reaches your level. Good for controlling entry/exit prices. Remains open until filled or cancelled.
Liquidity is how easily an asset can be converted to cash without losing value. Cash is the most liquid; real estate is illiquid. High liquidity means you can access money quickly in an emergency.
A long position means you own an asset and profit when its price rises. Buying a stock is going long. The opposite of short. Most investors are long. Long-term typically means bullish.
Long-term capital gains apply to assets held over one year. They receive preferential tax rates: 0%, 15%, or 20% based on income. Much lower than ordinary income rates. Incentivizes long-term investing.
A lump sum is a single large investment made at once, as opposed to gradual contributions. Historically, lump sum investing has often outperformed dollar cost averaging because markets tend to rise over time. But DCA can feel less stressful.
Margin is borrowed money from your broker to buy securities. It amplifies gains and losses. Margin accounts have maintenance requirements; failing to meet them triggers a margin call and forced selling. Interest is charged on borrowed amounts.
A margin call occurs when your account falls below the broker's maintenance requirement. You must add funds or sell assets to restore the margin. Failure to meet it can trigger forced liquidation.
Your marginal tax rate is the tax you pay on an additional dollar of income. It's often higher than your effective (average) rate. Knowing your marginal rate helps with decisions like Roth vs Traditional contributions.
Market capitalization is total value of a company's outstanding shares. Market cap = share price × shares outstanding. Companies are often classified as large-cap ($10B+), mid-cap ($2-10B), or small-cap (under $2B).
A market correction is a short-term decline of 10-20% from recent highs. It's a normal part of market cycles, often triggered by overvaluation or bad news. Corrections can be buying opportunities for long-term investors.
Market makers provide liquidity by quoting bid and ask prices. They profit from the spread. Essential for smooth trading. Designated market makers on exchanges facilitate orderly markets.
A market order buys or sells at the best available price immediately. It guarantees execution but not price. Use when speed matters more than exact price. Can result in slippage in volatile or thin markets.
Market timing is trying to buy low and sell high by predicting market moves. It's extremely difficult; most investors fail. Studies show staying invested (time in market) beats timing. Dollar cost averaging is an alternative.
Maturity is when a bond's principal is repaid. Short-term bonds mature in 1-5 years; long-term in 10-30 years. Longer maturity usually means higher yield but more interest rate risk. At maturity, you receive face value.
Mid cap companies have market capitalization between $2 billion and $10 billion. They offer a balance of growth potential and stability. Mid caps can be nimble while having proven business models. S&P MidCap 400 tracks mid caps.
Momentum is the tendency of winning investments to keep winning (and losers to keep losing) over short to medium horizons. Momentum strategies buy recent outperformers. Used in technical and factor investing.
Monetary policy is how central banks influence the economy via interest rates and money supply. Tightening (raising rates) cools inflation; easing (cutting rates) stimulates growth. The Fed's main tool.
Money market funds invest in short-term, high-quality debt (T-bills, commercial paper). They aim to preserve capital and provide liquidity. Yields track short-term rates. Not FDIC insured but very low risk.
A moving average smooths price data over a period (e.g., 50 or 200 days). It identifies trends and support/resistance. Price above the MA is bullish; below is bearish. Golden cross (50 above 200) and death cross signal trend changes.
Municipal bonds are issued by state and local governments to fund projects. Interest is often exempt from federal taxes (and state taxes if you live in the issuing state). Munis appeal to high-tax investors. Default risk varies by issuer.
A mutual fund pools money from many investors to buy a diversified portfolio. It's priced once daily at NAV. Actively managed funds have higher fees; index mutual funds are low-cost alternatives to ETFs. Good for dollar cost averaging.
Net asset value (NAV) is the per-share value of a fund's assets minus liabilities. For mutual funds, NAV is calculated once daily. ETFs trade at prices that can differ from NAV; the difference is usually small for liquid ETFs.
Net worth is your total assets minus your total liabilities. It represents your financial position at a point in time. Positive net worth means you own more than you owe; negative net worth means you owe more than you own.
A non-fungible token (NFT) is a unique digital asset on a blockchain. Unlike interchangeable crypto, each NFT is one-of-a-kind. Used for digital art, collectibles, and membership. Highly speculative; prices can crash.
Nominal return is the raw percentage gain or loss on an investment before adjusting for inflation. It's what you see in statements. Real return subtracts inflation to show true purchasing power change.
Opportunity cost is what you give up when you choose one option over another. In investing, choosing a safe bond means giving up potentially higher stock returns. Every financial decision has trade-offs.
Options give the right (not obligation) to buy (call) or sell (put) a security at a set price by a date. Calls profit when the underlying rises; puts profit when it falls. Used for income, hedging, or speculation. Complex and risky.
The price-to-earnings (P/E) ratio compares a stock's price to its earnings per share. P/E = stock price ÷ EPS. A high P/E may mean the stock is overvalued or has strong growth expectations. Low P/E may indicate value or trouble.
The PEG ratio divides P/E by expected earnings growth rate. It adjusts valuation for growth. PEG under 1 may indicate undervaluation. Higher growth commands higher P/E; PEG normalizes that.
A pension is a retirement plan where an employer promises to pay you a fixed amount in retirement. Defined-benefit pensions are increasingly rare in the private sector. Pensions are funded by the employer and/or employee contributions.
Price-to-book (P/B) ratio compares a stock's market price to its book value per share. P/B = price ÷ book value per share. P/B under 1 can mean the stock trades below liquidation value, though some firms have intangible value.
Principal is the original amount of money you invest or borrow, before interest or returns. On a $10,000 investment, the principal is $10,000. Interest and gains are calculated on the principal.
Profit margin is net income divided by revenue, expressed as a percentage. Higher margins mean the company keeps more of each dollar of sales. Compare margins within the same industry.
Purchasing power is how much goods and services your money can buy. Inflation erodes purchasing power over time. $1,000 today buys less in 10 years if prices rise. Investments should aim to grow faster than inflation.
A put option gives the right to sell a stock at the strike price by expiration. Puts profit when the stock falls. Used for bearish speculation or protecting a portfolio (protective put).
Real return is your investment return after adjusting for inflation. Nominal return minus inflation equals real return. A 10% nominal return with 3% inflation gives a 7% real return—your actual purchasing power growth.
Rebalancing is periodically adjusting your portfolio to match your target asset allocation. When stocks outperform, you sell some and buy bonds (or vice versa) to restore the desired mix. It enforces buying low and selling high.
A recession is a significant decline in economic activity, often defined as two consecutive quarters of negative GDP growth. Recessions bring job losses, reduced spending, and market declines. They're part of the economic cycle.
Resistance is a price level where selling pressure tends to halt rallies. It's where the stock has stalled before. Breaking above resistance can trigger more buying. The opposite of support.
Retirement income comes from Social Security, pensions, annuities, and portfolio withdrawals. Plan for 70-80% of pre-retirement spending. Sequence of returns in early retirement matters. The 4% rule guides withdrawals.
Revenue (sales) is the total money a company brings in from operations. It's the top line on the income statement. Revenue growth indicates business expansion. Profits (net income) come after expenses.
Risk is the chance of loss or underperformance. Investment risks include market risk, interest rate risk, credit risk, and inflation risk. Higher potential return usually means higher risk. Diversification reduces risk.
Risk tolerance is how much investment loss you can stomach emotionally and financially. It depends on your time horizon, goals, and personality. Younger investors often tolerate more risk; retirees usually prefer less.
Required Minimum Distribution (RMD) is the minimum amount you must withdraw from traditional IRAs and 401(k)s each year after age 73. Failing to take the RMD incurs a 25% penalty. Roth IRAs have no RMDs during the owner's lifetime.
Return on equity (ROE) measures how efficiently a company uses shareholders' money. ROE = net income ÷ shareholders' equity. Higher ROE often indicates effective management. Compare ROE within the same industry.
A rollover moves money from one retirement account to another without taxes or penalties. Common when leaving a job—roll 401(k) to an IRA. Direct rollover avoids withholding; indirect rollover has 60-day deadline.
A Roth 401(k) combines 401(k) structure with Roth tax treatment. Contributions are after-tax; qualified withdrawals are tax-free. Not all employers offer it. Useful if you expect higher taxes in retirement.
A Roth IRA uses after-tax contributions; qualified withdrawals in retirement are tax-free. There's no deduction for contributions, but growth and withdrawals escape taxes. Income limits restrict who can contribute directly.
The Relative Strength Index (RSI) measures momentum on a 0-100 scale. Above 70 suggests overbought; below 30 oversold. It helps identify reversals. RSI = 100 - (100 / (1 + avg gain / avg loss)). Used with other indicators.
The Rule of 72 is a quick way to estimate how long it takes to double your money. Divide 72 by your annual return rate. At 8% return, money doubles in about 9 years. The formula: 72 ÷ rate ≈ years to double.
The S&P 500 is an index of 500 large U.S. companies, weighted by market cap. It represents roughly 80% of U.S. market value. Often used as a benchmark for U.S. stock performance. Many index funds track it.
Safe withdrawal rate (SWR) is the percentage you can withdraw annually without running out of money. The 4% rule is a common SWR. It depends on allocation, time horizon, and sequence of returns.
A sector ETF invests in a specific industry like technology, healthcare, or energy. It offers focused exposure without picking individual stocks. Sector ETFs can be more volatile than broad market funds. Useful for tactical allocation.
Sector rotation is moving investments between market sectors (tech, healthcare, energy) based on economic cycles. Defensive sectors (utilities, staples) do better in downturns; cyclicals (tech, industrials) lead in expansions.
A share is a single unit of stock. Owning shares means you own a portion of the company. Shares can be bought and sold on stock exchanges. The number of shares outstanding affects earnings per share and ownership percentage.
Short selling profits when a stock's price falls. You borrow shares, sell them, and hope to buy back cheaper later. Unlimited loss potential if the stock rises. Requires a margin account. Used for speculation or hedging.
Simple interest is calculated only on the principal, not on accumulated interest. I = P × r × t. Unlike compound interest, it doesn't grow exponentially. Used in some loans and short-term instruments.
Slippage is the difference between expected and actual execution price. Common with market orders in volatile or illiquid markets. Large orders can move the market. Limit orders avoid slippage but may not fill.
Small cap refers to companies with market cap under $2 billion. They offer higher growth potential but more risk and volatility. Small caps can be illiquid and less researched than large caps. Russell 2000 tracks small caps.
Specific identification lets you choose which tax lot to sell when you have multiple purchases. You can sell the highest-cost shares first to minimize gains (or maximize losses for harvesting). Must specify before settlement.
Staking is locking crypto to support a blockchain network and earn rewards. Used in proof-of-stake systems like Ethereum and Cardano. Rewards are typically paid in the same coin. Lock-up periods may apply.
Standard deviation measures the dispersion of returns around the average. Higher standard deviation means more volatility and risk. It's the square root of variance. Often expressed as annualized percentage.
A stock represents ownership in a company. When you buy a stock, you become a shareholder with rights to potential dividends and voting. Stock prices fluctuate based on company performance, market sentiment, and economic conditions.
A stock split increases the number of shares and proportionally reduces the price. A 2-for-1 split doubles shares and halves the price. Splits don't change total value—they make shares more accessible. Reverse splits reduce shares and raise price.
A stop-limit order combines stop and limit: when price hits the stop, a limit order is placed. It gives more price control than a plain stop but may not fill in fast markets. Good for disciplined exits.
A stop-loss order sells when price falls to a specified level, limiting losses. A stop at $90 on a $100 stock triggers a market sell if price hits $90. Doesn't guarantee that exact price in fast markets.
The strike price is the price at which an option can be exercised. Call holders buy at strike; put holders sell at strike. Options are in-the-money when strike is favorable vs current price.
Support is a price level where buying interest tends to halt declines. It's where the stock has bounced before. Breaking below support can trigger more selling. Often identified by previous lows or moving averages.
A take-profit order automatically sells when price reaches a target. It locks in gains and removes emotion. Used with stop-loss for defined risk-reward. Can limit upside if price keeps rising.
Tax brackets are income ranges taxed at specific rates. The U.S. has progressive brackets from 10% to 37%. Only income within each bracket is taxed at that rate—not your entire income.
A tax deduction reduces taxable income. Common deductions: 401(k) contributions, IRA, mortgage interest, charitable gifts. Standard deduction vs itemizing: choose the larger. Lowers your tax bill.
Tax-free growth means investment gains aren't taxed. Roth accounts offer this: contributions are after-tax but growth and qualified withdrawals are tax-free. HSA can also provide tax-free growth for medical expenses.
Tax-loss harvesting involves selling losing investments to realize losses and offset gains. You can then buy a similar (not substantially identical) investment to stay invested. Avoids the wash sale rule.
Technical analysis studies price charts and volume to predict future moves. It uses indicators like moving averages, RSI, and support/resistance. Assumes patterns repeat. Used for short-term trading. Controversial among academics.
Time horizon is how long you plan to hold an investment before needing the money. Longer horizons allow more risk (stocks); short horizons favor stability (bonds, cash). Retirement in 30 years vs 3 years changes strategy.
Tracking error measures how much a fund's returns deviate from its benchmark index. Low tracking error means the fund closely mirrors the index. Causes include fees, sampling, and cash drag. Index funds aim for minimal tracking error.
A Traditional IRA allows tax-deductible contributions (if eligible) and tax-deferred growth. You pay income tax on withdrawals in retirement. Good if you expect a lower tax rate when retired.
A trailing stop moves with the price, locking in profits as the stock rises. If price rises to $120, a 10% trailing stop moves to $108. Triggers a sell if price drops 10% from the highest point.
Treasury bonds are U.S. government debt securities. They're considered very low risk since the government backs them. Treasuries include bills (up to 1 year), notes (2-10 years), and bonds (20-30 years). Interest is federally taxable but state-tax exempt.
Valuation is the process of estimating what an asset is worth. Methods include P/E, P/B, DCF, and comparable companies. No single method is perfect. Undervalued assets may offer better returns.
Value stocks trade below their perceived intrinsic value, often with low P/E or P/B ratios. Value investors seek undervalued companies that may be overlooked. They often pay dividends and may be in mature industries.
Vesting determines when employer contributions to your 401(k) become yours. Immediate vesting means it's yours right away. Graded vesting might give 20% per year. If you leave before vesting, you forfeit unvested employer funds.
Volatility measures how much an asset's price fluctuates over time. High volatility means big swings; low volatility means steadier returns. Stocks are more volatile than bonds. Volatility is often measured by standard deviation.
A wash sale occurs when you sell a security at a loss and buy the same or substantially identical security within 30 days before or after. The IRS disallows the loss for tax purposes. The disallowed amount adds to the new position's cost basis.
Yield is the return you earn on a bond or other investment. For bonds, yield to maturity (YTM) considers coupon payments and price changes. When bond prices fall, yields rise. Current yield = annual coupon ÷ price.
The yield curve plots bond yields across maturities. Normally, long-term yields exceed short-term. An inverted yield curve (short > long) often precedes recessions. It reflects expectations about growth and inflation.
Yield to maturity (YTM) is the total return if you hold a bond to maturity, including coupon payments and any price change. It assumes reinvestment of coupons at the same rate. YTM is the standard way to compare bonds.
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