Helpful Glossary of Investment Terms
Navigating the World of Finance with Our Glossary of Investment Terms
Structuring your retirement income stream to accommodate your desired lifestyle along with contingencies.
A savings plan that is sponsored by the employer. The employee is given a chance to invest a part of their paycheck before it is taxed. The money is then taxed upon withdrawal.
The best-rated bonds by the major credit rating agencies. An AAA-rated bond has a high degree of creditworthiness.
Is a measure of how an active fund manager has performed compared to a benchmark index. For example, if a mutual fund outperforms its benchmark index by 1%, the Alpha is said to be “1.”
Is anything you own that is of value, such as home, land, car, boat. For investing purposes, assets include stocks, bonds, cash, commodities, and more.
This refers to the proportion of each asset in your overall portfolio i.e.i.e., how much of each investment do you own in the context of the overall value of your investments.
Each asset carries its own risks, and good money management requires that you allocate each asset in a way that fits your risk tolerance, expected returns, and investment time horizon.
This refers to the proportion of each asset in your overall portfolio i.e.i.e., how much of each investment do you own in the context of the overall value of your investments.
This is the lowest price a seller is willing to accept per unit of a stock or other financial security. It’s also known as the offer price.
Is a financial statement showing a company’s assets (what they own), liabilities (what they owe), and shareholders’ equity. A balance sheet is a snapshot of a company’s financial position at a specific point in time. Shareholders’ equity = company’s total asset – total liabilities.
A market in which most investors are selling because they expect asset prices to fall. The price trend in a bear market is downwards. You are considered ‘bearish” (a bear) on a stock if you are pessimistic about its prospects and intend to sell your holdings.
Is a measure of the volatility of a stock or other security compared to the general market. A beta greater than 1 infers that an investment is more volatile than the market, and if it’s less than 1, it is less volatile than the market. For example, say a stock traded on an exchange has a Beta of 1.50. This means that the stock is 50% more volatile than the exchange. (i.e., more volatile than the market).
This is the highest price that a buyer is willing to pay per share of a stock or other financial security.
What is the difference between the bid and ask price for a stock. For a very liquid stock, the spread between the bid and ask price is narrow.
Refers to the stocks (shares) of well-established companies that are known to consistently pay dividends and have withstood the test of time. Blue-chip stocks generally have a large market capitalization.
Are debt instruments in which an investor loans money to a company, government, or other entity for a period in exchange for interest payments and a return of principal on specified dates.
A group of people who are selected by shareholders in a company to ensure the management acts on their behalf and represent their interests
A market in which most investors are buying because they expect asset prices to rise. The price trend in a bull market is upwards. You are considered “bullish” (a bull) on a stock if you are optimistic about its prospects and intend to buy.
It is an asset that enables an individual or company to perform economic activities.
This is the profit or loss you realize after selling an investment. For example, when you sell a stock/property for a higher price than you paid for it, you realize a capital gain and vice versa.
Capital losses can be used to offset or eliminate capital gains from preceding years, or they can be carried forward to the future indefinitely.
Is a generic product or material which is interchangeable with another product of its kind and which can be traded on a commodities exchange. Commodities include agricultural products like wheat, corn, soybeans; and precious metals such as gold and silver.
Is equity ownership of a company. Common stockholders can vote on corporate policies and elect the board of directors
The rate of interest which the bond issuer will pay. It is expressed in percentages.
A financial account that has been set up for the beneficiary and is managed by a responsible person.
A trading order that is only good for the day it is placed. If trade execution does not occur by the close of the day, it is automatically canceled.
Is a measure of the rate of change in the price of a derivative (futures, options) relative to the price of the underlying asset (stocks, bonds, commodities).
A security whose value is derived from the performance of other underlying assets. Derivatives are complicated financial instruments (assets) that are packaged on the back of other financial instruments, such as stocks, commodities, mortgages, bonds, and interest rates. Examples of derivatives include futures, options, and swap contracts.
Is the practice of making a portfolio less risky by holding more than one type of security. For example, when you combine stocks with bonds in your portfolio.
Is a portion of a company’s profits (net income) that is paid to shareholders. Dividends may be paid periodically such as monthly, quarterly, semi-annually, or annually.
This is the percentage of a company’s earnings that is paid out as dividends to shareholders. The higher the payout ratio, the more attractive a stock is to dividend investors. After paying out dividends from net income, a company is left with what is referred to as “Retained Earnings.”
Is an investing strategy that allows investors to automatically reinvest their dividends by buying more units of the assets/security instead of receiving cash. The plan gives investors an opportunity to save on transaction fees or commissions.
While investing large sums of money into the market, the investor may decide to divide the money and invest it at specific intervals to reduce the risk of a market decline. We call that dollar-cost averaging.
Is a stock index of 30 major and publicly traded companies in the U.S. The price of company stocks is used as weighting for the DJIA, after adjusting for stock splits and dividends.
Is calculated by dividing a company’s net income by the number of its outstanding ‘common’ shares.
The measure of any company’s total value. It is used as a basis for evaluating a company performance.
Also commonly known as “Stock share” represents ownership in a company. Equity in a company may be in the form of common or preferred shares.
Are like index funds, but trade on a stock exchange like a stock, with prices reacting to supply and demand throughout a trading day. ETFs are usually passively managed and have lower MERs than mutual/index funds.
Both a legal and moral obligation of one party to act in the best interest of another.
Refers to investments that pay investors fixed periodic payments (interest) on specified dates. At the end of the investing term (at maturity), the principal investment is also paid back to the investor. Examples of fixed-income securities include bonds, and T-bills.
An annual report that an organization must present to its shareholders to summarize the company’s financial performance. It is presented once a company holds yearly meetings, and it includes information on business history, audited financial statements, among others.
Uses a company’s financial information as made available through its financial statements; business operations, relationship with suppliers, creditors and competitors, and other economic parameters, to evaluate its stock’s value.
Are contracts to buy or sell an asset at a future date and at a pre-determined price, as agreed upon by both buyer and seller. The physical product may be exchanged parties may choose to settle in cash. Futures are used to manage risk i.e., serve as a “hedge”. Day traders speculate on futures contracts with the aim of making money from price fluctuations.
This order stays open until the defined trading conditions are met or till it is canceled.
Is an investing risk management technique in which an investor protects an investment against loss by making a secondary investment. In other words, the investor wants to avoid a scenario where they lose all and so buy some level of insurance (hedging) to ensure that in the event the original investment fails, losses will be limited.
Is a financial statement that shows a company’s profitability over a period – usually one year. It is also referred to as a “profit and loss statement”
Index is a statistical measurement of the value of a security market. The security market that is being measured may be a national, regional, or global collection of stocks, bonds, or commodities. An index may also represent specific sectors of the market, such as industry sectors like Financials, Energy, Health Care, and Real Estate.
Is a type of mutual fund that tracks a specific index and attempts to replicate the performance of a benchmark index by holding all the securities (stocks, bonds) in that benchmark index. Index funds are passively managed and generally have lower management expense ratios (MERs) than mutual funds.
Is the initial price that shares of a company are sold when they move from being a “private” company to becoming a “publicly traded” company.
A bond that has a very high risk of default is issued by a company or government. They represent bonds by companies that are struggling financially and have a high chance of defaulting on interest payments.
An order to buy or sell a security (stock) at a specified price. A limit order ensures that the trade is only executed at either the exact price specified or better.
Business ventures that exist in the form of a publicly traded partnership.
Refers to how easy it is to buy or sell a particular security. A liquid stock can easily be bought or sold on a stock exchange without significantly affecting its price. Liquidity encourages investors to trade securities since they know they can easily acquire and/or dispose of them. An illiquid security is not easily traded.
Is a sales charge or fee that is levied when investors buy or sell mutual funds. When the fee is charged on the purchase of units of the mutual fund, it is known as “Front-end load.” If charged when you sell, it is referred to as “Back-end load.” Loads are an additional expense and increase your transaction costs. No-load funds have become more and more popular.
A long position refers to the ownership of a stock. For example, if you own 1,000 shares of a certain stock, you are said to be “long” that stock. Going “long” means that you anticipate a stock’s price will rise in the future and you are bullish on it.
The MER is a combination of fees charged for managing and administering a mutual fund or ETF. The MER includes a management fee (fees paid to the fund manager) and operating fees (fees for administration staff, audit, legal, stationery, and prospectus printing).
It is a trading account that allows an investor to use borrowed money to purchase investment assets.
This refers to the stock market value of a company. It is calculated by multiplying the total number of outstanding shares by their current market price per share. Market capitalization is an indication of the size of a company in relation to its peers. Companies may generally be categorized as – Large-cap, Medium-cap, and Small-cap.
Is an investment strategy that attempts to predict market outcomes using fundamental and technical analyses. For example, predicting that a stock would increase in price and buying at a “low” price in readiness for the rise in prices. When the price of the stock goes up, the investor may sell it to capture a profit (profit-taking), move to cash, and stay on the sidelines till they see another “signal” to buy or sell. Essentially, investors using this strategy want to buy low and sell high.
A trade order put in by an investor requesting the purchase or sale of a security (stock) at the current market price.
This is a fund that pools money from several investors to purchase multiple securities that are actively managed by a fund manager. Mutual Funds typically charge higher fees (MER) than index funds or ETFs.
Is a stock index of thousands of companies, the majority of which are technology companies. The Nasdaq composite uses a market value weighting.
The value of a company’s assets minus its liabilities.
The process of overseeing, management, and selection of a group of investments. For instance, stocks, bonds, index funds that meet the client’s goal, objective, and risk tolerance.
This ratio is used to value a company’s stock and whether it is overvalued or undervalued. It is calculated by dividing the current share price by the earnings per share (EPS). P/E ratio = current share price/EPS. Using the P/E ratio, investors can assess a stock and decide how much they are willing to pay for it based on its current earnings. The P/E ratio is also referred to as a “price multiple.”
A company or individual that manages the portfolio and advises big investors on investment strategies.
It is a calculation that determines how well a company has used its capital to generate returns—the efficiency of a company to create value relative to what is invested.
Is a decentralized market made up of dealers who connect with each other using telephone and computer networks. Financial assets not listed on an exchange are often traded through the OTC market, including many debt instruments and derivatives. Assets purchased through the OTC market may carry more risks due to illiquidity and a lack of transparency.
Is the amount of time it takes for an investor to recover the cost they incurred to make that investment. An investment with less payback time tends to be more desirable than those with a long one.
Represents a form of hybrid stock ownership in a company. Holders of preferred stock have a high claim to dividends and asset distribution.
Is the interest rate at which banks lend to their most creditworthy clients. The prime rate is also used by financial institutions to determine the interest rates they charge on variable loans, mortgages, and lines of credit.
A collection of the different securities/investments owned by an individual investor or institution. A portfolio may consist of a mix of assets such as bonds, stocks, mutual funds, ETFs, cash, and cash equivalents.
It is a document provided by a company or fund that discloses relevant information about a security so that investors are informed about what they are investing in. For example, a prospectus produced by an investment firm may list all the mutual funds they offer, investment objectives and strategy of the fund, fund managers, management fees and other fund costs, tax considerations, risks associated with investing in the fund, rules to follow when purchasing or redeeming funds, minimum investments, and some legal jargon.
Refers to when you sell an investment that has appreciated in price to convert your “paper” profit into cash.
This is the probability of loss or the possibility that expected returns (profit) on an investment may not be realized.
A retirement account that allows an individual to transfer funds from their previous employer-sponsored account.
An individual retirement account that is untaxed on the distribution if certain conditions are met.
An investment signifying a stake or ownership rights through shares (stocks) or debt (bonds) or other investment products that have value and which can be transferred or sold to another investor.
It is a trading strategy that involves an investor selling a stock (security) they don’t own with the aim of making a profit when the price of the stock (security) falls. If the stock’s price declines, the investor buys it back at the lower price, returns the borrowed stock to the broker, and makes a tidy profit.
It is a stock index of 500 of the largest publicly traded companies in the United States. The S&P 500 uses market capitalization for weighting companies tracked by the index. The S&P 500 is widely regarded as a representation of the broad U.S. stock market.
A professional who, on behalf of his clients, places buying and selling orders for stocks and securities. He acts as an intermediary between the investor and securities exchange.
Is the forecasting of the future price movement of a security based on analyzing its past price history. Investors who use technical analysis believe they can predict the future price behavior of a security (stock) based on what they can read from its historical price patterns.
Technical analysis stands in contrast to the Random Walk Hypothesis, which posits that investors cannot predict stock prices.
An individual retirement account that allows an individual to contribute pre-tax dollars. The investment grows tax-free until retirement, when it is taxed at the current income tax rate.
Is the rate at which the price of a security changes and moves up and down. Volatility is a measure of risk. A stock whose price tends to move rapidly during a short period of time is said to exhibit high volatility. When the price barely moves or is stable, it is said to have low volatility.
It is a measure of your return on an investment and is calculated as a percentage. For example, for a stock, the yield is calculated using: Annual Dividends/Current Stock Price.