Glossary of investment terms
Table of Contents
Alternative Investments
Investment products and strategies that are not part of traditional investment classes, such as stocks, bonds, and cash. Examples include private equity, hedge funds, and real estate.
Angel Investor
Asset Allocation
The process of dividing an investment portfolio among different asset categories, such as stocks, bonds, and cash, with the goal of balancing risk and reward.
Asset Class
A group of securities or investments that have similar characteristics, such as stocks, bonds, or real estate.
Bear Market
A market condition in which stock prices are falling, typically characterized by investor pessimism. Bull Market: A market condition in which stock prices are rising, typically characterized by investor optimism.
Capital Gain
The profit earned from the sale of a capital asset, such as a stock or real estate.
Circular Economy
An economic model that aims to produce goods and services in a sustainable way by minimizing waste and making the most of resources.
This approach contrasts with the traditional ‘linear economy,’ which follows a ‘take-make-dispose’ pattern.
In a circular economy, resources are reused, repaired, refurbished, and recycled for as long as possible, extending the lifecycle of products.
This model reduces the environmental impact, promotes sustainability, and fosters a more efficient use of resources.
Capital Loss
The loss incurred from the sale of a capital asset for less than its original cost.
Commodities
Raw materials or primary agricultural products that can be bought and sold, such as gold, oil, and wheat.
Consumer Surplus
The difference between the price charged, and the amount at which the consumer values the product.
Crowdfunding
The practice of funding a project or venture by raising small amounts of money from a large number of people, typically via the internet.
Custodian
An IRA custodian is a financial institution responsible for holding and safeguarding the assets in an Individual Retirement Account (IRA).
They manage the account by executing transactions, ensuring legal compliance with IRS regulations, maintaining records, and providing services like investment advice.
Custodians can be banks, brokerage firms, or trust companies, and they play a key role in helping individuals manage their retirement savings.
Defined Benefit Plan
A Defined Benefit Plan is a type of pension plan in which an employer promises a specified pension payment upon retirement, based on an employee’s earnings history, tenure of service, and age.
The company manages the plan’s investments and bears the investment risk, ensuring that employees receive a stable, predictable income after retirement. The benefits are typically calculated using a formula considering factors such as the number of years worked and the salary earned during the final years of employment.
This contrasts with Defined Contribution Plans, where the retirement benefits depend on investment returns from contributions made by the employee and/or employer.
Deglobalization
Deglobalization refers to the process of reducing interdependence and integration among nations in terms of trade, investment, and cultural exchange.
This trend is often characterized by a shift towards more protectionist policies, reduced international trade, and a greater focus on local or national economies over global markets.
Deglobalization can be driven by various factors, including economic crises, political shifts, trade wars, and a growing emphasis on national security and self-sufficiency.
The movement away from globalization may lead to the reshoring of manufacturing, stricter immigration controls, and a reevaluation of global supply chains. It represents a significant shift from the prevailing trend of increasing globalization that has marked the last few decades.
Derivatives
Financial contracts that derive their value from an underlying asset, such as a stock or commodity.
Diversification
The practice of spreading investments among different types of assets or securities, with the goal of reducing risk.
Dividend
A payment made by a corporation to its shareholders, usually in cash or additional shares of stock.
Elastic Demand
Elastic demand refers to a situation in which the quantity demanded of a good or service is highly responsive to changes in price.
In other words, a small percentage change in price leads to a relatively larger percentage change in quantity demanded.
When demand is elastic, consumers are more sensitive to price fluctuations, and a price increase typically results in a significant decrease in quantity demanded, while a price decrease leads to a substantial increase in quantity demanded.
Exchange-Traded Fund (ETF)
A type of investment fund that holds a basket of assets, such as stocks or bonds, and trades on a stock exchange like a stock.
Hedge Fund
An investment fund that pools money from accredited investors and uses a variety of strategies, such as short selling and leverage, to generate high returns.
Inflation
The rate at which the general level of prices for goods and services is rising, reducing the purchasing power of currency.
Index Fund
A type of mutual fund or ETF that seeks to track the performance of a specific market index, such as the S&P 500.
Internal Rate of Return (IRR)
Internal Rate of Return (IRR) is a financial metric used to evaluate the profitability of potential investments.
In simple terms, IRR can be seen as the annualized effective compounded return rate that can be earned on the invested capital.
IRR is useful in capital budgeting to rank various projects or investments.
A higher IRR indicates a more profitable investment, assuming other factors are equal.
However, it’s important to note that IRR should not be the sole criterion for decision-making, as it doesn’t consider factors like the size of the project, external factors like interest rates, or the potential for fluctuating returns over time.
Interest Rate
The cost of borrowing money, usually expressed as a percentage of the amount borrowed.
Liquidity
The ease with which an asset can be bought or sold in the market.
Margin
Margin is the difference between the seller’s cost of goods sold (COGS) and the sales price (revenue) expressed as a percentage. For example, if selling a single item costs the seller $7 and they sell it for $10, the profit is $3, which is a 30% margin (margin = profit / revenue).
Market Capitalization
Margin is the difference between the seller’s cost of goods sold (COGS) and the sales price (revenue) expressed as a percentage. For example, if selling a single item costs the seller $7 and they sell it for $10, the profit is $3, which is a 30% margin (margin = profit / revenue).
Mark-to-Market
“Mark-to-market” is an accounting practice where the value of an asset is recorded based on its current market price, rather than its book value.
This method adjusts the value of an asset to reflect its current market value, which can fluctuate over time due to changes in the market conditions.
Mutual Fund
An investment vehicle that pools money from multiple investors to purchase a diversified portfolio of securities.
Options
Financial contracts that give the buyer the right, but not the obligation, to buy or sell an underlying asset at a predetermined price on or before a specified date.
Price-to-Earnings (P/E) Ratio
A valuation metric that compares a company’s stock price to its earnings per share.
Real Estate Investment Trust (REIT)
A type of investment fund that owns and operates income-generating real estate properties, such as apartment buildings and shopping malls.
Return on Investment (ROI)
The amount of profit or loss generated by an investment, expressed as a percentage of the initial investment.
Risk Tolerance
The level of risk an investor is willing to accept in pursuit of higher returns.
Securities
Financial instruments that represent ownership in a company or government entity, such as stocks and bonds.
Short Selling
The practice of selling borrowed securities in the hope of buying them back at a lower price to make a profit.
Stock
A type of security that represents ownership in a company.
Stock Market
A marketplace where stocks and other securities are traded.
Tax Loss Harvesting
The practice of selling securities at a loss to offset capital gains and reduce taxes owed.
Ticker Symbol
A unique series of letters assigned to a security for identification purposes on a stock exchange.
Time Value of Money
This concept reflects the idea that money available now is worth more than the same amount in the future due to its potential earning capacity.
This core principle of finance holds that, provided money can earn interest, any amount of money is worth more the sooner it is received.
It underpins the foundation of concepts like interest rates, present and future value calculations, and is crucial for making informed decisions in investing, lending, and saving.
Essentially, it recognizes the opportunity costs associated with waiting for money and quantifies the benefits of receiving money sooner rather than later.
Total Return
The total amount of profit or loss generated by an investment, including both capital appreciation and income.
Trading
Volatility
The degree of variation in the price of a security or the overall market.
Total Yield
The income generated by an investment, expressed as a percentage of the initial investment.
Total Zero-Coupon Bond
A type of bond that pays no interest but is sold at a discount to its face value, with the difference between the purchase price and face value representing the investor’s return.
Veblen Good
A Veblen good is a type of product that defies the usual laws of economics by having a demand that increases as its price goes up, rather than decreases.
Named after economist Thorstein Veblen, these goods are often seen as status symbols. As their prices rise, they become more desirable for those wanting to showcase wealth or status.
This phenomenon is contrary to most other goods, where higher prices typically lead to lower demand. Luxury items like high-end cars, designer clothing, and exclusive jewelry often fall into the category of Veblen goods.
401(k)
A type of retirement savings account offered by employers that allows employees to contribute a portion of their pre-tax income.
529 Plan
A tax-advantaged savings plan designed to encourage saving for education expenses, such as tuition, fees, and room and boa
