Glossary

48 terms, defined in plain English. Definitions describe how things generally work and are not advice.

A

Asset allocation: The mix of broad asset classes, such as stocks, bonds, and cash, that makes up a portfolio. It is the main structural decision in investing and is usually shaped by goals, time horizon, and tolerance for risk. Basics

B

Basis point: One hundredth of a percentage point. Interest rates and fees are often quoted in basis points because small differences matter when applied to large sums or long periods. Markets
Bear market: A sustained decline in prices, conventionally described as a fall of twenty percent or more from a recent high. Bear markets are a recurring feature of investing rather than an exception to it. Markets
Beneficiary designation: The instruction on a retirement account, life insurance policy, or similar account naming who receives it at the owner's death. Designations generally pass assets directly, outside of a will and outside of probate. Taxes & estate
Bond: A loan from an investor to a government or company in exchange for regular interest and the return of principal on a set date. Bond prices move in the opposite direction from interest rates. Basics
Bull market: A sustained period of rising prices, usually accompanied by broad investor confidence. Bull markets can last for years and are typically identified only after they are well under way. Markets

C

Capital gain: The profit realized when an investment is sold for more than it cost. Gains are generally taxed differently depending on how long the investment was held. Basics
Compound growth: Growth that builds on earlier growth, as returns are earned on both the original investment and the returns already accumulated. Its effect is modest over a few years and large over decades. Basics
Correction: A decline in prices from a recent high that is sharper than everyday fluctuation but short of a bear market, conventionally around ten percent. Corrections are common and often brief. Markets
Cost basis: The original value of an asset for tax purposes, usually the purchase price plus certain adjustments. The difference between the sale price and the cost basis determines the taxable gain or loss. Taxes & estate
Credit spread: The extra yield investors demand to hold a corporate or other non-government bond instead of a Treasury of similar maturity. Widening spreads signal rising concern about borrowers' ability to repay. Markets

D

Diversification: Spreading investments across assets that do not move together, so that no single holding, sector, or asset class determines the outcome. It narrows the range of results without eliminating the possibility of loss. Basics
Dividend: A share of a company's profits paid to shareholders, usually in cash and on a regular schedule. Dividends are one of the two sources of return from owning stock, alongside changes in price. Basics
Dollar-cost averaging: Investing a fixed amount at regular intervals regardless of price, so that more shares are bought when prices are low and fewer when they are high. It is a way of removing timing decisions from the process. Basics
Donor-advised fund: A charitable account to which a donor contributes assets and then recommends grants to charities over time. It is often used to organize a family's giving and to involve the next generation in it. Family
Drawdown: The decline from a portfolio's peak value to its subsequent low, measured before it recovers. Drawdowns describe the experience of holding an investment through a difficult period, which volatility alone does not capture. Basics

E

ETF (exchange-traded fund): A pooled fund that holds a basket of securities and trades on an exchange throughout the day like a stock. Many ETFs track an index; others are actively managed. Basics
Expense ratio: The annual cost of owning a fund, expressed as a percentage of the assets invested and deducted from returns automatically. It is one of the few elements of investing that is known in advance. Basics

F

Family governance: The structures and practices a family uses to make decisions about shared wealth: meetings, written values, decision rules, and roles for each generation. Its purpose is to keep money from dividing the people it is meant to serve. Family
Federal funds rate: The interest rate at which banks lend reserves to one another overnight, and the main policy rate set by the Federal Reserve. Many short-term borrowing and savings rates move in step with it. Markets
Fiduciary: A person or firm legally required to act in a client's best interest, ahead of its own. The standard is stricter than a requirement that advice merely be suitable. Behavior
Fixed income: The broad category of investments that pay a set schedule of interest, chiefly bonds. Fixed income is generally held for income, stability, and diversification against stocks. Basics

G

Gross domestic product (GDP): The total value of goods and services produced in an economy over a period, usually a quarter or a year. Its growth rate is the most widely used summary of whether an economy is expanding or contracting. Markets

I

Index: A rules-based measure of a market or a segment of it, built from a defined list of securities. Indexes are used both to track performance and as the blueprint for index funds. Markets
Inflation: A general rise in prices across the economy, which reduces what each unit of money can buy. Investors care about it because it erodes the real value of returns and of future cash flows. Markets

L

Liquidity: How quickly and cheaply an asset can be turned into cash without moving its price. Publicly traded stocks are highly liquid; real estate and private investments are not. Basics
Loss aversion: The tendency to feel losses more strongly than gains of the same size. It helps explain why investors often sell after declines and hesitate to reinvest, even when their plan calls for the opposite. Behavior

M

Market capitalization: The total market value of a company's outstanding shares, calculated as share price multiplied by share count. It is the usual basis for describing companies as large, mid, or small cap. Markets
Mutual fund: A pooled investment vehicle that gathers money from many investors to buy a portfolio of securities managed according to a stated objective. Shares are bought and sold once a day at the fund's closing value. Basics

N

Nominal vs. real return: A nominal return is the stated gain on an investment; a real return is that gain after subtracting inflation. Real returns describe the change in what the money can actually buy. Basics

P

P/E ratio: The price of a stock divided by its earnings per share, a common shorthand for how much investors are paying for each dollar of profit. It is more useful for comparing expectations than for timing purchases. Basics
Power of attorney: A legal document authorizing someone to act on another person's behalf in financial or medical matters. A durable version remains in effect if the person becomes incapacitated. Taxes & estate
Probate: The court-supervised process of validating a will, settling debts, and distributing an estate. It is public, takes time, and applies only to assets that do not pass by designation, title, or trust. Taxes & estate

R

Rebalancing: Periodically bringing a portfolio back to its target allocation by reducing what has grown beyond its intended weight and restoring what has fallen below it. It keeps the level of risk from drifting with markets. Basics
Recency bias: The tendency to assume that what has happened lately will continue, giving recent events more weight than the longer record justifies. It is a common reason investors extrapolate both booms and busts. Behavior
Recession: A broad, sustained contraction in economic activity, typically visible in falling output, employment, and income. Recessions are usually declared after they have begun and sometimes after they have ended. Markets
Required minimum distribution (RMD): The amount that owners of certain tax-deferred retirement accounts must withdraw each year once they reach an age set by law. The rules and starting age have changed over time and depend on the account type. Retirement
Risk tolerance: The degree of variability in returns an investor is willing and able to accept in pursuit of a goal. It has an emotional component and a financial one, and the two do not always agree. Behavior
Roth account: A retirement account funded with money that has already been taxed, so that qualified withdrawals in retirement are generally tax-free. Eligibility, contribution rules, and withdrawal conditions are set by law and change over time. Retirement

S

Sequence-of-returns risk: The risk that poor returns arrive early in retirement, when withdrawals are being taken, and permanently reduce what a portfolio can support. The same returns in a different order can produce very different outcomes. Retirement
Standard deviation: A statistical measure of how widely returns have varied around their average. In investing it is the most common yardstick for volatility, with higher values indicating larger swings. Basics

T

Tax-loss harvesting: Selling an investment at a loss to offset realized gains elsewhere, while keeping the portfolio's overall exposure roughly intact. Rules about replacement purchases limit how it can be done. Taxes & estate
Time horizon: The length of time before invested money is expected to be spent. It is the single most important input in deciding how much short-term volatility a portfolio can reasonably carry. Basics
Trust: A legal arrangement in which one party holds assets for the benefit of another, according to written terms. Trusts are used for control, privacy, continuity across generations, and planning for incapacity. Taxes & estate

V

Volatility: The degree to which prices move up and down over a period, without regard to direction. High volatility means large swings; it is a measure of the ride, not of the destination. Basics

W

Will: A legal document stating who should receive a person's property after death, naming an executor and, where relevant, a guardian for minor children. It governs only assets that pass through probate. Taxes & estate

Y

Yield: The income an investment pays each year, expressed as a percentage of its price. For bonds, yield moves inversely to price; for stocks, it usually refers to the dividend. Basics
Yield curve: A line showing the yields on government bonds of different maturities, from a few months to thirty years. Its slope reflects expectations for growth, inflation, and central bank policy. Markets

Definitions are general and simplified for education. Rules, especially for taxes and retirement accounts, vary by situation and change over time. Read our important disclosures.