If you’re new to the investing game, you’ve probably come across a slew of unfamiliar investing terms.
As with new jargon, these terms can initially be difficult to understand. But with consistent exposure and research, they become regular parts of your vocabulary. This list of definitions makes it easier to decipher and manage your investment portfolio long-term.
Investing Terms and Definitions
Here are 30 of the most prominent investing terms you should know, complete with brief definitions.
A 13F filing via the SEC can be viewed as a quick snapshot of all the holdings of a fund manager's portfolio at the end of a quarter. 13F filings must be submitted to the SEC's EDGAR site no later than 45 days after the end of a quarter. A 13F must be filed for an institutional money manager with equity assets under management of at least $100 million. 13F filings indicate the stocks and options contracts a fund holds and the exact number of shares held at the time of filing. The filings also indicate the fund's total value as of the end of the quarter.
Asset allocation is a measurement of your portfolio’s diversity. It measures how you’ve dispersed your investments across various asset classes. For example, your portfolio may be 40% stocks, 30% bonds, 20% real estate and 10% mutual funds.
An asset class is a group of commodities that have something in common. The three general asset classes are stocks, bonds and cash (or cash equivalents). From there, classes can be broken down further (real estate, mutual funds, energy stocks).
A bear market is a period of slow economic growth or price drops. The rule of thumb is that when asset prices have dropped 20% from recent peaks, it’s a bear market.
A bond is a tool through which corporations or governments fund certain projects. When investors purchase bonds from a certain entity, they’re essentially loaning that entity money in hopes of future dividends.
Just as banks give you checking and savings accounts, financial companies offer brokerage accounts for investing. Funds in a brokerage account go toward buying and selling commodities.
Conversely, a bull market is when things are good — prices are 20% higher than recent lows. Sentiment is positive, trading volume is up and the market’s doing well.
Capital gains are the profit you make after selling a given security. It’s the difference between the price you paid for the asset and the price you sold it for.
The concept of capital preservation centers on protecting the original value of an investment as opposed to growing it. Investors with this motive tend to buy low-risk securities across diverse asset classes.
Compound interest is a way to speed financial gains by which you earn interest on not just your initial principal but also the interest generated on your investment.
It’s preferable to distribute investment funds in your portfolio across several different asset types rather than to put all your eggs in one basket. Called diversification, it’s used to manage portfolio risk. A category of stocks that is performing well at the moment may offset categories that are seasonal or in decline.
When a corporation has a profitable period, it may choose to give its shareholders cash payouts to share the success. These payouts are known as dividends and are usually distributed quarterly or annually.
Dollar-cost averaging is a strategy in which an investor regularly purchases stock shares at a fixed amount over a certain period, regardless of the share price. It’s an effective long-term growth tactic.
Exchange-Traded Fund (ETF)
An ETF is like a mutual fund you can buy on the stock exchange. ETFs line up several commodities by certain groups or themes. You purchase shares in them just like stocks.
EBIT refers to a company's Earnings Before Interest & Tax. EBIT measures a company's profitability before taking into consideration its cost of capital or tax implications. The EBIT figure is already tabulated by the company and included in its income statement. Investors would look at the EBIT figure to gain a better understanding of a company's operating performance without considering taxes and other unavoidable interest expenses.
EBITDA refers to a company's Earnings Before Interest, Taxes and Amortization Depreciation. EBITDA takes the EBIT figure one step further and evaluates a company's performance by excluding factors outside of its control, such as depreciation and amortization.
Investors use fundamental analysis to evaluate a company’s structural strength and potential. This process may include reviewing public financial statements, company management, historical profit and loss and other factors.
Growth vs. Value Stocks
Stock profitability is often measured in terms of growth or value stocks.
Shares in growth stocks may be expensive, but the companies issuing them are expected to be profitable in short order. Value stocks are cheaper because they may be undervalued — the market may be overlooking certain elements that may someday turn them into growth stocks. Growth stocks are riskier, while value stocks are safer.
Index funds are commonly used to measure the rise and fall of the general stock market. They include the Dow Jones Industrial Average, S&P 500 and others. They contain enough of the top commodities to gauge the market's overall health.
When consumer prices of goods, utilities and services increase over a given period, the overall situation is called inflation. It affects every industry and aspect of economic life, from supermarkets to realtors.
When lenders make a loan, they earn money by charging a percentage of the premium on top of the repayment. The percentage they charge is the interest rate.
Liquidity refers to how quickly an asset can be sold and converted into cash. Investments with high liquidity (fast) include stocks, funds, bonds and cash itself. Low-liquidity (slow) assets include real estate, venture capital and limited partnerships.
Market capitalization is a calculation of how much a company is worth. It’s done by multiplying the company’s total number of shares by the current share price. Analysts use market cap to compare how strong companies are.
Market Order vs. Limit Order
These terms refer to the timing of sale interactions. In market orders, you buy or sell commodities right now, regardless of price. In limit orders, you wait to buy or sell until the share price reaches a predetermined point.
Master Limited Partnerships
A master limited partnership (MLP) is simply a limited partnership company that is publicly traded. The limited partner is the group that supplies capital to the MLP and, in exchange, receives distributions, mostly in the form of dividends, from the MLP's cash flow.
Mutual funds, like ETFs, are groups of commodities packaged into a single investment vehicle. Mutual funds are more formal than ETFs — you can only buy them after markets close. Mutual funds are closely monitored and could have tax implications for investors.
The price-to-earnings ratio compares a company’s current share price with its earnings per share. A company with a high P/E ratio may have an inflated value, while one with a low P/E ratio may be undervalued.
Just as a writer or artist’s portfolio contains selections from all their work, an investment portfolio is a collection of all an investor’s assets. These include stocks, bonds, funds and real estate holdings.
Return on Investment (ROI)
ROI is a basic calculation to measure how much profit you earn from investments. You can find it by dividing the dollar amounts of the returns you’ve earned by the total price you paid for the commodity.
Every investment involves risk. Profitability is never guaranteed, the markets can become extremely volatile, and there’s always a chance of losing money. You must decide how much risk you can tolerate when building your portfolio.
The risk-adjusted return metric measures the projected profitability of an investment in terms of how much risk it entails. It’s usually represented as a number or rating.
When you buy a stock, you purchase shares in a company’s ownership. In return for your investment, you earn profits when the company’s share price goes up and incur losses when it goes down.
In order to short sell or "short" a company, an investor must borrow shares from someone (usually through a bank) with an agreement to return those shares to the lender at the same price the security was originally borrowed at. Oftentimes, the investor must put up collateral worth the same amount the investor borrowed the shares at. This collateral would be returned once the investor returned the borrowed stock.
When someone talks about a stock’s volatility, they’re talking about its price fluctuations. High-volatility stocks go up and down in price frequently over a given period. They may be risky but could be lucrative.
Yield gauges how much revenue or income an investment creates measured against its current value or cost. It’s generally presented as a percentage of the original cost.
Master More than the Lingo
This guide aims to dispel some of the mystery surrounding investing terms. To sharpen your knowledge even more, take a deeper dive into each term.
Frequently Asked Questions
What are the 4 types of investing?
The four primary types of investing are stocks, bonds, mutual funds and exchange-traded funds (ETFs).
What is the vocabulary of investing?
The investment market has its own unique terminology, just like any other business. There are many turns of phrase, like the ones in this post, that describe and summarize market events and philosophies.
What is another word for stock investments?
Synonyms for stock investments include equities, shareholdings and positions. Your complete lineup of stock investments is called a portfolio.