Your Investing Glossary: From (A)sset Allocation to (Z)ero- Coupon Bonds

When you start investing, you’ll quickly come across a new vocabulary. You don’t need to memorize every bit of lingo or talk like a Wall Street trader to make progress in your own investing—but it can be helpful to get familiar with some common terms. We prepared this simplified glossary to refresh key concepts and terms quickly.

We hope this helps you feel more confident in managing your own investments, or you can use it as a handy tool to explain investing basics to your kids (especially if you’ve opened an investment account on their behalf).

Glossary of Investing Terms

529 account beneficiary: The current or future student designated to use the money in the 529 account. You can open a 529 account for any U.S. citizen of any age, including your newborn—or yourself.

529 account owner: The person who opens and manages the 529 plan.

529 education savings plan: A kind of qualified tuition program, offered by a state, that lets you open a tax-advantaged investment account to use for qualified higher education expenses.

Annual return: This is the percentage gain or loss on an investment over a one-year period.

Annualized rate of return: The average annual return over a certain time period, factoring in the effects of compounding.

Appreciation: The increase in a financial asset’s value over time.

Asset: Any belonging that has inherent financial value. Your home is an example of a tangible asset, and a stock is an example of an intangible asset.

Asset allocation: How you divide your money across different categories (e.g., cash, stocks, bonds). This can help you diversify your portfolio and manage risk and reward opportunities.

Asset class: A category of financial securities with similar properties. The most common asset classes are bonds, stocks and cash or cash equivalents.

Basis point: One-hundredth of a percentage point (e.g. 100 basis points equals 1.00%).

Bear market: A condition when stock market prices are generally declining. A typical benchmark is if a broad market index falls 20% or more.

Bond: Buying a bond is essentially giving a loan to an organization in exchange for regular interest payments and the return of principal when the bond matures. Government entities and corporations use bonds to borrow cash from investors.

Broker: A firm or individual that buys and sells securities on an investor’s behalf.

Bull market: A condition when stock market prices are generally rising, sometimes defined as a 20% increase from recent market lows.

Capital gain: The profit you make when you sell an investment for more than the original purchase price.

Capital loss: Your loss if you sell an investment for less than what you paid for it at purchase.

Custodial account: A financial account one person manages on behalf of another, often a minor child. A UGMA account is an example of a custodial account.

Diversification: A strategy involving spreading money over a range of different investments. Diversification can help reduce volatility in an overall portfolio, since well-performing investments may help offset a particular investment loss.

Dividend: A portion of profit that a company pays out to shareholders.

Dollar cost averaging: An investment strategy where you invest similar amounts of money on a steady schedule, regardless of market performance. This may help manage risk and keep down the average costs of investing.

Exchange-traded fund (ETF): An ETF is a type of investment fund that holds a collection of assets, such as stocks, bonds, commodities or other securities. ETFs are traded on exchanges like stocks, allowing flexibility compared to mutual funds in terms of timing when you can buy or sell them, and they tend to be more tax efficient than mutual funds. There also might be greater risk than with a mutual fund of buying or selling at a different price than the net asset value (NAV), meaning you could more easily overpay or sell too low.

Federal Reserve Board (“The Fed”): The Fed is the central bank of the United States. The Fed manages monetary policy, sets interest rates and regulates the nation’s financial system.

Index: An index tracks and measures the performance of a wide group of investments as a way of demonstrating trends in the overall market for that kind of asset. For example, the S&P 500 tracks the stock performance of 500 largest U.S. companies and is generally considered a main benchmark of market performance.

Index fund: A kind of investment fund, either a mutual fund or ETF, that is designed to perform similarly to a particular market index.

Inflation: An increase in the cost of goods and services in an economy, which corresponds with a reduction in purchasing power.

Invest: Put your money into financial plans that involve risk, with the intention of making a profit.

Long-term investment strategy: A strategy based on long-term trends over the course of many years, rather than responding to short-term fluctuations in the market.

Maintenance fee: A fee that some accounts or investment plans charge for continued participation.

Management fee: A fee paid to an investment advisor or manager for their services for a portfolio.

Market timing: An investing strategy based on trying to anticipate rises and dips in the market. This is often considered a high-risk strategy because it’s difficult to predict short-term performance.

Mutual fund: A mutual fund combines money from a large group of investors and invests in a mix of assets that can include stocks, bonds and short-term debt. Mutual funds are professionally managed and generally more diversified than a single stock (i.e., not dependent on a single investment’s performance).

NASDAQ: National Association of Securities Dealers Automated Quotations system, a major stock exchange based in New York City.

Portfolio: The collected total of all your investments.

Qualified higher education expenses: Expenses a 529 plan will cover without incurring taxes or penalties; includes tuition, room and board for eligible students, books and equipment, special needs services and some other expenses.

Recession: An economic downturn, generally meaning at least two consecutive quarters of economic decline.

Retirement accounts: An IRA, Roth IRA, 401(k) or other retirement accounts may offer tax advantages. They may also come with more restrictions than other types of investment accounts.

Risk: The chance of losing money on an investment.

Risk tolerance: An individual’s degree of willingness to take the chance of losing investment value in exchange for higher potential returns.

S&P 500: Standard & Poor’s Index, a measure of stock market conditions based on the performance of 500 of the largest companies listed on stock exchanges in the U.S.

Securities: Financial instruments, like stocks or bonds that can be traded.

Stock: A security that represents ownership of a fraction of an issuing company. You can invest by buying a share of stock from a company you choose.

Target date fund: An investment fund that shifts from a more aggressive to a more conservative mix based on a future date when the investor plans to use the money. Target date funds can be used for planning for retirement or college, for example.

Time horizon: The amount of time you plan to hold onto an investment before selling it.

Treasury securities: Securities where an investor loans money to the U.S. Treasury. These are generally considered low-risk investments because the debt is backed by the full faith and credit of the U.S. government.

Yield: The annual rate of return, expressed as a percentage.

Zero-coupon bond: A bond that pays no actual interest rate (“coupon” is another word for the interest rate a bond will pay). You make money by buying it at a discount, meaning for less than it’s worth. Then, when it matures, you get the full face amount that it’s worth.

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