Financial dictionary

37 terms explained in plain English, with formulas and worked examples.

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401(k) PlanAn employer-sponsored U.S. retirement plan funded through payroll contributions.

A

Asset AllocationHow a portfolio is split across asset classes such as stocks, bonds, and cash.

B

Bear MarketA period when a broad market index falls 20% or more from its recent high.BetaA measure of how much a stock moves relative to the overall market.BitcoinThe first decentralized cryptocurrency, with a fixed maximum supply of 21 million coins.BlockchainA shared, append-only ledger that records transactions in linked blocks.BondA loan an investor makes to a government or company in exchange for interest payments.Bull MarketA period of rising prices, often defined as a 20% gain from a recent low.

C

Capital GainThe profit from selling an asset for more than its purchase price.Compound InterestInterest earned on both the original principal and on interest already earned.CorrectionA decline of 10% to 20% from a recent peak.Cost BasisThe original value of an asset for tax purposes, usually the purchase price plus fees.CouponThe annual interest a bond pays, stated as a percentage of its face value.

D

DiversificationSpreading money across many investments to reduce the impact of any one loss.DividendA share of company profits paid to shareholders, usually in cash.Dividend YieldThe annual dividend per share divided by the share price.DurationA measure of how sensitive a bond's price is to changes in interest rates.

E

Earnings Per Share (EPS)A company's net profit divided by its shares outstanding.Exchange-Traded Fund (ETF)A fund that holds a basket of assets and trades on an exchange like a stock.Expense RatioThe yearly fee a fund charges, as a percentage of assets.

G

Gross Domestic Product (GDP)The total value of goods and services produced in a country over a period.

I

Index FundA fund built to match the performance of a market index.Individual Retirement Account (IRA)A tax-advantaged U.S. account for retirement savings.InflationThe rate at which the general level of prices rises, eroding purchasing power.Interest RateThe cost of borrowing money, or the return for lending it, as a percentage per year.

L

LiquidityHow quickly an asset can be turned into cash without moving its price.

M

Market CapitalizationThe total market value of a company's outstanding shares.Mutual FundA pooled investment managed by professionals and priced once a day.

P

Price-to-Earnings Ratio (P/E)A company's share price divided by its earnings per share.

R

RebalancingBuying and selling holdings to bring a portfolio back to its target mix.RecessionA significant, widespread decline in economic activity lasting more than a few months.Return on Investment (ROI)The gain or loss on an investment relative to its cost.Risk ToleranceHow much loss an investor is willing and able to accept in pursuit of returns.

S

StablecoinA cryptocurrency designed to hold a steady value, usually pegged to the U.S. dollar.

T

Time Value of MoneyThe idea that money now is worth more than the same amount later.

V

VolatilityHow widely an asset's price swings over time.

Y

YieldThe income an investment produces, as a percentage of its price.