Financial Terms Dictionary
A Plain-Language Guide to Investment Terminology
Understanding financial terminology is the first step toward confident investing. Our comprehensive glossary explains complex concepts in clear, accessible language—empowering you to make informed investment decisions.
Essential Investment Terms
Start here if you're new to investing
Alpha
A measure of investment performance compared to a benchmark
Learn MoreBeta
How sensitive an investment is to market movements
Learn MoreDiversification
Spreading investments to reduce risk
Learn MoreROI (Return on Investment)
The gain or loss from an investment relative to cost
Learn MoreVolatility
The degree of price variation over time
Learn MoreLiquidity
How quickly an asset can be converted to cash
Learn MoreHedge Fund
A pooled investment using advanced strategies
Learn MoreCompound Interest
Interest earned on both principal and accumulated interest
Learn MoreCommon Investor Questions
Quick answers to frequently asked financial questions
Browse by Category
Investment Basics
25 terms
Fund Types
18 terms
Trading & Markets
22 terms
Financial Metrics
20 terms
Cryptocurrency & DeFi
12 terms
Corporate Finance
15 terms
Risk Management
14 terms
Retirement & Tax
10 terms
Alternative Investments
12 terms
Complete Financial Terms Dictionary
150+ terms organized A-Z
A
Absolute Return
An outright return achieved irrespective of overall market direction. Whereas traditional investments typically measure success by tracking or outperforming a benchmark index (relative returns), hedge funds and alternative investment strategies aim to achieve positive returns regardless of whether asset prices rise or fall.
Accredited Investor
An individual or entity that meets SEC criteria for investing in private securities offerings. For individuals: net worth exceeding $1 million (excluding primary residence) OR annual income exceeding $200,000 (single) / $300,000 (married) for the past two years. Accredited investors have access to investments not available to the general public.
Algorithm
A set of instructions for solving a problem or accomplishing a task. In finance, algorithms are used in automated and high-frequency trading (HFT) systems, as well as in pricing sophisticated financial instruments like derivatives.
Alpha
A measure of an investment's performance relative to a benchmark, representing the "value added" by investment management skill. Positive alpha indicates outperformance; negative alpha indicates underperformance. Alpha is widely regarded as a proxy for manager skill.
Alternative Investment
Investments beyond traditional stocks, bonds, and cash—including hedge funds, private equity, venture capital, real estate, commodities, and collectibles. Alternative investments typically pursue absolute returns regardless of market direction.
Altcoins
Cryptocurrencies other than Bitcoin. As of 2025, there are thousands of altcoins, accounting for a significant portion of total cryptocurrency market capitalization. Examples include Ethereum, Solana, and Cardano.
Arbitrage
The technique of exploiting pricing anomalies between related securities within and between markets to produce returns independent of market direction. Arbitrageurs establish long positions in undervalued assets and short positions in overvalued assets.
Asset Class
A category of investments with similar characteristics that behave similarly in the marketplace. Major asset classes include equities (stocks), fixed income (bonds), cash/cash equivalents, real estate, commodities, and alternative investments.
B
Basic Earnings Per Share (EPS)
A measure showing how much of a company's net income is allocated to each share of common stock. Calculated by dividing net income by the number of outstanding shares. EPS is a key metric for comparing profitability across companies.
Basis
The original cost or purchase price of an asset, used to calculate capital gains or losses for tax purposes. Also called "cost basis" or "tax basis." When you sell an investment, your taxable gain or loss equals the sale price minus your basis.
Basis Points (BPS)
A common unit of measure equal to 1/100th of one percent (0.01%). Used to denote percentage changes in financial instruments, particularly interest rates and investment fees. 1% = 100 basis points.
Bear Market
A market characterized by falling prices and pessimistic investor sentiment. Generally defined as a decline of 20% or more from recent highs over at least two months. The opposite of a bull market.
Beta
A measure of how sensitive an investment portfolio is to market movements. A beta of 1.0 means the investment moves in line with the market. Beta greater than 1.0 indicates higher volatility than the market.
Bitcoin
A decentralized digital currency created in 2009 following a whitepaper by the pseudonymous Satoshi Nakamoto. Bitcoin operates without central authority, using cryptography for security and a public blockchain ledger for transparent record-keeping.
Blockchain
A distributed digital ledger that records transactions across multiple computers in a way that cannot be altered retroactively. Each "block" contains transaction data and is linked to previous blocks, creating a chain.
Blue Chip Stock
Stock in a large, well-established, financially sound company with a history of reliable performance. Blue chip companies are typically industry leaders with stable earnings, often paying dividends.
Bond
A debt security representing a loan from an investor to a borrower (typically a corporation or government). The issuer promises to repay the principal (face value) at maturity and make periodic interest payments (coupon).
Bottom-Up Investing
An investment strategy focusing on individual company analysis rather than macroeconomic or sector trends. Bottom-up investors select stocks based on company fundamentals—financial health, management quality, competitive position.
Bull Market
A market characterized by rising prices and optimistic investor sentiment. Generally defined as a rise of 20% or more over at least two months. The opposite of a bear market.
C
Capacity
The maximum amount of investment capital a manager or strategy can effectively deploy without diminishing returns. As funds grow larger, it becomes harder to execute strategies without moving markets.
Capital
Funds invested in a company or project with expectation of generating returns. In corporate finance, capital includes equity (ownership) and debt (borrowed funds).
Capital Adequacy Ratio (CAR)
A measurement of a bank's available capital as a percentage of risk-weighted assets, used to protect depositors and ensure financial system stability.
Capital Gains
Profit from selling an asset for more than its purchase price (cost basis). Capital gains are classified as short-term (held one year or less, taxed as ordinary income) or long-term (held over one year, taxed at preferential rates).
Commodity
A raw material or primary agricultural product that can be bought and sold—examples include oil, gold, wheat, and natural gas. Commodities are traded on specialized exchanges.
Commodity Trading Advisor (CTA)
A manager or adviser of a managed futures fund. CTAs trade futures contracts across commodities, currencies, interest rates, and equity indices, typically using quantitative or technical analysis.
Compound Annual Growth Rate (CAGR)
The annualized average rate of return for an investment over a specified period, assuming profits are reinvested. CAGR smooths out volatility to show what consistent annual return would have produced the same end result.
Compound Interest
Interest calculated on both the initial principal and accumulated interest from previous periods—"interest on interest." Compound interest creates exponential growth over time, making it one of the most powerful concepts in investing.
Convertible Bond
A corporate bond that can be converted into a predetermined number of the company's shares. Convertibles offer features of both bonds (regular interest payments, principal protection) and stocks (potential upside through conversion).
Correlation
A statistical measure of how two investments move in relation to each other, ranging from +1 (perfect positive correlation) to -1 (perfect negative correlation). Zero correlation means no relationship.
Cost of Capital
The required return a company must earn on investments to maintain its value and satisfy capital providers. It represents the weighted average of costs for all capital sources—debt and equity.
Credit
An agreement allowing a buyer to receive something of value now with an obligation to repay later, typically with interest. In finance, "credit" also refers to a borrower's creditworthiness.
Crowdfunding (Reg CF)
A method of raising capital from many small investors through online platforms. Regulation Crowdfunding (Reg CF) allows companies to raise up to $5 million annually from both accredited and non-accredited investors.
D
Dealing Day
The specific day on which investors can subscribe (buy) or redeem (sell) holdings in a fund, as specified in the fund's legal documents. Dealing frequency varies—daily, weekly, monthly, or quarterly.
Decentralized Finance (DeFi)
A financial system built on public blockchain networks that enables peer-to-peer transactions without traditional intermediaries like banks or brokerages. DeFi uses smart contracts to automate lending, borrowing, trading, and other financial services.
Delta
The sensitivity of an option's price to changes in the underlying asset's price. A delta of 0.50 means the option price moves $0.50 for every $1 move in the underlying.
Derivatives
Financial contracts whose value derives from an underlying asset, index, or rate. Common derivatives include futures, options, swaps, and forwards. Derivatives can be used for hedging, speculation, or gaining leveraged exposure.
Diversification
The strategy of spreading investments across different assets, sectors, and geographies to reduce risk. Based on the principle that different investments perform differently under various conditions—losses in one area may be offset by gains in another.
Dividend
A payment made by a corporation to shareholders, typically from profits. Dividends can be paid in cash or additional shares. Dividend-paying stocks can provide income and often indicate financial stability.
Dollar-Cost Averaging
An investment strategy of investing fixed amounts at regular intervals regardless of market conditions. This approach reduces the impact of volatility by automatically buying more shares when prices are low and fewer when prices are high.
Drawdown
The decline from an investment's peak value to its lowest point before recovering. Maximum drawdown represents the worst peak-to-trough decline over an investment's history.
Due Diligence
The comprehensive investigation and analysis conducted before making an investment decision. Due diligence may include reviewing financial statements, legal documents, management background, competitive position, and risks.
E
EBITDA
Earnings Before Interest, Taxes, Depreciation, and Amortization—a measure of operating profitability that excludes financing and accounting decisions. EBITDA provides a clearer view of cash-generating ability.
Efficient Frontier
The set of optimal portfolios offering the highest expected return for each level of risk (or lowest risk for each level of return). Developed by Harry Markowitz as part of Modern Portfolio Theory.
Enterprise Value (EV)
A comprehensive measure of a company's total value, calculated as market capitalization plus debt minus cash. EV represents the theoretical takeover price—what you'd pay to acquire the entire business.
Equity
Ownership interest in an asset or company. For companies, equity equals assets minus liabilities (net worth). Stock represents equity ownership in corporations.
Equity Long-Short
An investment strategy that takes long positions in undervalued stocks while simultaneously shorting overvalued stocks. The goal is to profit from relative value differences while reducing overall market exposure.
ESG Investing
Investment approach considering Environmental, Social, and Governance factors alongside financial returns. ESG criteria evaluate how companies manage environmental impact, treat employees and communities, and maintain ethical governance.
ETF (Exchange-Traded Fund)
An investment fund traded on stock exchanges, typically tracking an index, commodity, or basket of assets. ETFs combine features of mutual funds (diversification, professional management) with stocks (intraday trading, transparency).
F
Fiduciary
A person or entity with a legal obligation to act in another's best interest. Investment advisors registered with the SEC have fiduciary duty to clients.
Financial Health
The overall state of an individual's or company's financial affairs—including income, expenses, savings, debt, and ability to meet obligations.
Financial Ratio
A quantitative measure derived from financial statements, used to evaluate and compare companies. Common ratios measure profitability, liquidity, leverage, and efficiency.
Financial Technology (Fintech)
Technology applied to improve and automate financial services—including payments, lending, investing, insurance, and banking.
Fixed Income
Investments that provide regular, predetermined payments—primarily bonds. Fixed income offers more predictable returns than stocks and is often considered lower risk.
Forward Contract
A customized agreement between two parties to buy or sell an asset at a specified future date and price. Unlike standardized futures, forwards are private contracts traded over-the-counter.
Fundamental Analysis
Security analysis based on evaluating intrinsic value through examination of economic, financial, and other qualitative and quantitative factors.
Futures
Standardized contracts to buy or sell an asset at a predetermined price on a specific future date. Futures trade on exchanges and can be settled in cash or by physical delivery.
G
Gearing
The relationship of a company's debt to equity—also called leverage. High gearing (more debt relative to equity) amplifies both potential returns and potential losses.
Gearing Ratio
Financial ratios measuring the proportion of debt in a company's capital structure. Common gearing ratios include debt-to-equity and debt-to-capital.
Green Bonds
Fixed-income securities specifically earmarked to raise money for climate and environmental projects. Green bonds finance renewable energy, clean transportation, sustainable buildings, and other environmentally beneficial projects.
Growth Investing
Investment strategy focusing on companies expected to grow faster than average. Growth investors seek companies with accelerating revenue, expanding market share, and strong competitive positions.
H
Hedge Fund
A private investment partnership using sophisticated strategies to generate returns regardless of market direction. Hedge funds may employ leverage, short selling, derivatives, and arbitrage. They're typically available only to accredited investors.
High-Frequency Trading (HFT)
Trading strategy using powerful computers to execute large numbers of orders in fractions of a second. HFT uses algorithms to analyze markets and exploit small price discrepancies.
Hurdle Rate
The minimum return an investment must earn to be considered worthwhile. For funds, the hurdle rate is the return that must be achieved before performance fees are charged.
Hybrid Fund
A fund investing in multiple asset classes—typically combining stocks and bonds. Hybrid funds offer diversification in a single investment.
Hybrid Security
A financial instrument combining characteristics of different security types. Convertible bonds (combining bond and stock features) are the most common example.
I
Income Investing
Investment strategy focusing on generating regular income through dividends, interest, and distributions. Income investors prioritize cash flow over capital appreciation.
Index Fund
A mutual fund or ETF designed to track the performance of a specific market index (like the S&P 500). Index funds use passive management—simply holding the same securities in the same proportions as the index.
Inflation
A general increase in prices that reduces purchasing power over time. Measured by indices like the Consumer Price Index (CPI). Inflation erodes the real value of cash and fixed payments.
Intangible Assets
Non-physical assets with value—including patents, trademarks, copyrights, brand recognition, and goodwill.
IPO (Initial Public Offering)
The first sale of a company's stock to the public, transitioning from private to public ownership. IPOs raise capital for the company and provide liquidity for early investors.
IRA (Individual Retirement Account)
A tax-advantaged account for retirement savings. Traditional IRAs offer tax-deductible contributions and tax-deferred growth; Roth IRAs use after-tax contributions but offer tax-free growth and withdrawals.
J
Joint Venture (JV)
A business arrangement where two or more parties agree to pool resources for a specific project while maintaining separate identities. JVs allow companies to share risks, access new markets, and combine complementary capabilities.
K
Kaizen
A Japanese business philosophy meaning "continuous improvement." Kaizen emphasizes ongoing, incremental improvements to processes, efficiency, and quality through employee engagement at all levels.
Key Performance Indicators (KPIs)
Quantifiable metrics used to evaluate success in achieving objectives. In investing, KPIs might include return on investment, alpha, Sharpe ratio, and drawdown.
L
Leverage
The use of borrowed capital to increase potential investment returns. Leverage amplifies both gains and losses—a leveraged investment can generate higher returns but also larger losses.
Liquidity
How quickly an asset can be converted to cash without significant price impact. Highly liquid assets (public stocks, government bonds) can be sold immediately at market price.
Lock-Up Period
A time interval during which investors cannot sell or redeem their investment. Lock-ups are common in hedge funds, private equity, and IPOs.
Long Position
Owning a security with the expectation that its price will rise. Going "long" is the traditional way of investing—buy low, sell high.
Long-Short Strategy
An investment approach combining long positions in undervalued securities with short positions in overvalued securities. Long-short strategies aim to profit from relative value differences.
M
Macroeconomics
The study of economy-wide factors including GDP, unemployment, inflation, interest rates, and government policy. Macroeconomic analysis helps investors understand the broader environment affecting all investments.
Managed Futures
Investment strategies that trade futures contracts across commodities, currencies, interest rates, and equity indices. Managed futures funds are typically run by Commodity Trading Advisors (CTAs).
Margin
Borrowed money used to purchase securities, using the securities as collateral. Margin allows investors to amplify returns (and losses) through leverage.
Market Capitalization
The total market value of a company's outstanding shares, calculated by multiplying share price by shares outstanding. Market cap categorizes companies: large-cap ($10B+), mid-cap ($2-10B), and small-cap (under $2B).
Market Neutral
An investment strategy aiming to generate returns regardless of market direction by balancing long and short positions. Market neutral portfolios typically have beta near zero.
Modern Portfolio Theory (MPT)
A framework for constructing portfolios that maximize expected return for a given level of risk through diversification. Developed by Harry Markowitz.
Monte Carlo Simulation
A mathematical technique using random sampling to model probability distributions of outcomes. In finance, Monte Carlo simulations model potential investment paths and estimate Value-at-Risk.
Mutual Fund
An investment vehicle pooling money from many investors to purchase a diversified portfolio of securities. Mutual funds offer professional management, diversification, and liquidity.
N
Net Asset Value (NAV)
The per-share value of a fund, calculated as total assets minus liabilities, divided by shares outstanding. Mutual funds trade at NAV (calculated daily).
Net New Highs
When an investment's price exceeds its previous peak level (the "high watermark"). Performance fees are typically charged only on net new highs.
O
Open-Ended Fund
A fund that continuously issues and redeems shares at net asset value. Mutual funds are open-ended—investors can buy or sell any dealing day at NAV.
Option
A derivative giving the holder the right—but not obligation—to buy (call option) or sell (put option) an asset at a specified price (strike price) within a specified period.
Opportunity Cost
The potential benefit foregone by choosing one alternative over another. In investing, opportunity cost is the return you could have earned on the best alternative investment.
P
P/E Ratio (Price-to-Earnings)
A valuation ratio comparing a company's stock price to its earnings per share. High P/E may indicate expectations of future growth or overvaluation; low P/E may indicate undervaluation or poor prospects.
Passive Investing
Investment strategy seeking to match market returns rather than beat them, typically through index funds or ETFs. Passive strategies have lower costs than active management.
Portfolio
A collection of investments held by an individual or institution. Portfolios are constructed to achieve specific objectives—growth, income, preservation—while managing risk through diversification.
Principal Protection
An investment feature guaranteeing return of initial investment at maturity, regardless of performance. Principal protection may be provided through bank guarantees, structured products, or insurance.
Private Equity
Investment in companies not publicly traded on stock exchanges. Private equity firms raise capital from institutional and accredited investors to acquire, improve, and eventually sell companies.
Private Placement Memorandum (PPM)
A legal document provided to prospective investors in private offerings, detailing the investment's terms, risks, structure, and other material information.
Q
Qualitative Analysis
Evaluation of non-quantifiable factors affecting an investment's value—including management quality, competitive position, brand strength, and industry dynamics.
Quantitative Analysis
Use of mathematical and statistical methods to evaluate investments and develop trading strategies. Quantitative analysts ("quants") use computer models to identify patterns and automate trading decisions.
R
Real Estate Investment Trust (REIT)
A company that owns, operates, or finances income-producing real estate. REITs allow investors to invest in real estate without directly owning property. They must distribute at least 90% of taxable income as dividends.
Rebalancing
The process of realigning portfolio weightings to maintain desired asset allocation. As investments perform differently, allocations drift from targets—rebalancing involves selling winners and buying underperformers to restore balance.
Required Rate of Return
The minimum return an investor requires to justify an investment's risk. Required return depends on the risk-free rate, market risk premium, and investment-specific risk.
Return on Investment (ROI)
A performance measure comparing the gain or loss from an investment relative to its cost. Calculated as: (Current Value - Cost) / Cost × 100%.
Risk-Adjusted Return
Performance measurement accounting for the risk taken to achieve returns. Common risk-adjusted measures include Sharpe ratio, Sortino ratio, and alpha.
Risk Tolerance
An investor's ability and willingness to withstand investment losses. Risk tolerance depends on financial situation (ability) and psychological comfort (willingness).
S
Securities
Financial instruments representing ownership (stocks), debt obligations (bonds), or rights to ownership (options). Securities are regulated by the SEC and state securities laws.
Sharpe Ratio
A measure of risk-adjusted return calculated as: (Return - Risk-Free Rate) / Standard Deviation. Higher Sharpe ratios indicate better risk-adjusted performance—more return per unit of risk.
Short Selling
Selling borrowed securities with the expectation of buying them back at a lower price. Short sellers profit when prices fall. Short selling carries unlimited loss potential if prices rise.
Slippage
The difference between expected trade price and actual execution price. Slippage typically increases with trade size and decreases with market liquidity.
Smart Contract
Self-executing code on a blockchain that automatically enforces agreement terms when conditions are met. Smart contracts enable DeFi applications, automating lending, trading, and other financial transactions.
Sortino Ratio
A variation of the Sharpe ratio that only penalizes downside volatility. The Sortino ratio recognizes that investors are primarily concerned with downside risk, not overall volatility.
Standard Deviation
A statistical measure of volatility—how much returns deviate from their average. Higher standard deviation indicates greater volatility and risk.
Structured Product
An investment combining traditional securities with derivatives to create customized risk-return profiles. Structured products can offer principal protection, enhanced yield, or leveraged exposure.
T
Target-Date Fund
A mutual fund that automatically adjusts asset allocation over time based on a target retirement date. These funds become more conservative as the target date approaches.
Technical Analysis
Investment analysis based on historical price and volume patterns to predict future movements. Technical analysts use charts, indicators, and patterns—believing that price trends persist and history repeats.
Top-Down Investing
An investment approach starting with macroeconomic analysis before selecting specific investments. Top-down investors first evaluate economic conditions, then identify attractive sectors, and finally choose individual securities.
Total Return
The complete return on an investment, including capital appreciation and income (dividends, interest). Total return provides a comprehensive performance measure.
Track Record
The historical performance of an investment, manager, or strategy—typically represented by audited returns. Track records help evaluate consistency, risk, and skill.
Trend Following
A trading strategy that attempts to capture gains through analysis of price momentum. Trend followers buy when prices are rising and sell when they're falling.
Troubled Business
A business that has existed for at least two years and incurred net losses of at least 20% of net worth in the prior 12-24 months. In EB-5 investing, troubled businesses have special rules.
U
Unit
A generic term for the instrument (share, bond, unit, note) issued by an investment product. Investors buy units when investing and sell units when redeeming.
Unrealized Gain/Loss
A profit or loss that exists on paper but hasn't been captured through selling. Unrealized gains become "realized" when the asset is sold and are then subject to taxation.
V
Valuation
The process of determining an asset's current worth. Methods include discounted cash flow analysis, comparable company analysis, and asset-based valuation.
Value-at-Risk (VaR)
A statistical measure quantifying potential financial losses over a specific time period at a given confidence level. VaR is widely used for risk management but has limitations during extreme events.
Value Investing
Investment philosophy seeking stocks trading below intrinsic value—"buying dollars for fifty cents." Value investors look for strong fundamentals at discounted prices, believing the market will eventually recognize true value.
Venture Capital
Financing provided to early-stage, high-potential companies in exchange for equity. Venture capitalists take on significant risk for potentially outsized returns if companies succeed.
Volatility
A measure of how much and how quickly prices change over time, typically measured by standard deviation of returns. Higher volatility indicates greater uncertainty and risk.
W
Wall Street Prime Rate
The base interest rate banks charge their most creditworthy customers, published as an aggregate of major bank rates. The prime rate influences many consumer and business lending rates.
Weighted Average Cost of Capital (WACC)
A company's average cost of all capital sources (debt and equity), weighted by their proportions in the capital structure. WACC represents the minimum return a company must earn on existing assets.
X
X-Efficiency
The degree of efficiency a company maintains under imperfect competition. In competitive markets, firms must maximize efficiency to survive. With less competition, companies may operate less efficiently without penalty.
Y
Year-Over-Year (YOY)
A method of comparing financial data for a period against the same period in the previous year. YOY comparisons remove seasonal effects and show true growth trends.
Yield
The income return on an investment, expressed as a percentage. For bonds, yield represents the annual interest divided by price. For stocks, dividend yield is dividends divided by price.
Z
Zero-Coupon Bond
A bond that doesn't pay periodic interest but is sold at a discount to face value. The return comes entirely from the difference between purchase price and face value at maturity.
Zero-Sum Game
A situation where one party's gain exactly equals another's loss—total wealth is unchanged. In financial markets, options and futures are approximately zero-sum. Stock investing is not zero-sum because companies create value over time.
Investment Fundamentals
Why Financial Literacy Matters
Understanding financial terminology isn't just academic—it's essential for making informed decisions about your money, career, and future.
Better Investment Decisions
Informed investors can evaluate opportunities, understand risks, and avoid costly mistakes. Knowledge is the foundation of wealth building.
Confident Communication
Whether working with financial advisors or negotiating business deals, speaking the language of finance puts you in control.
Long-Term Success
Financial literacy correlates with better outcomes—higher savings rates, better investment returns, and greater financial security.
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DISCLAIMER: This glossary is for educational purposes only and does not constitute investment, legal, or tax advice. Definitions are general in nature; specific terms may have different meanings in different contexts. Consult qualified professionals before making investment decisions. Investing involves risk, including potential loss of principal.
Last updated: January 2026