April is National Financial Literacy Month, and as a certified financial planner I’ve seen the positive impact that financial planning has on individuals, families and our communities. It’s not too much of an overstatement to say that financial education and planning can literally transform lives.
Financial literacy is the cornerstone of better financial planning. According to the CFP Board, which sets and enforces the requirements for CFP certification, financial planning is a collaborative process that helps people maximize their ability to meet life goals.
Financial advisors integrate relevant elements of their clients’ personal and financial circumstances to help them reach their financial potential. To that end, the CFP Board’s consumer site, Letsmakeaplan.org, offers relevant content on various personal finance topics, and I am passionate about these types of financial education efforts.
A big part of financial planning is knowing the investing definitions and financial terms that form the structure for decision-making. When I created financial planning firm Blue Ocean Global Wealth, I wanted to help women, families and entrepreneurs gain confidence and clarity when it comes to finances so they can make better decisions and take control of their money. Learning the lingo of the financial world and being unafraid of judgment are some of the first steps.
With that in mind, here are 53 investing-related definitions and financial terms that everyone should know when they start to make a financial plan. This A-to-Z list can start you or someone you know on the path to a higher level of financial literacy:
Annuities are financial instruments/products that offer guaranteed and consistent streams of income for a given period to those who invest in them.
Why investors care: Investors typically use annuities to guarantee a monthly stream of income during retirement.
A bear market is a period of falling stock prices due to general market conditions, when securities prices suffer a 20% decline from recent highs.
Why investors care: It provides an opportunity for value investors to find undervalued stocks, and for those who use dollar-cost averaging to get more shares for the same price.
Beta is the measure of how volatile an asset is in comparison to the general market. A beta greater than 1 means the asset is more volatile than the market, while a beta less than 1 means the asset is less volatile than the market.
Why investors care: Investors use beta as a measure of systematic risk – the inherent risk that cannot be diversified away with portfolio structure.
A bull market is a period of rising stock prices due to general market conditions.
Why investors care: It often leads to economic growth, low unemployment, higher levels of investment and rising profits.
The capital asset pricing method, or CAPM, is a financial model for calculating/estimating the expected returns of an asset given its beta.
Why investors care: CAPM is one of the inputs used by investors to design efficient portfolios.
This is a bond issued by a public or private company.
Why investors care: Corporate bonds have higher yields than Treasury bonds, but they are also riskier.
Dollar-cost averaging, or DCA, is an investing strategy in which investors choose to split a lump sum into smaller amounts and consistently invest them in their chosen asset over a defined period.
Why investors care: Investors use DCA as a way to take emotion out of the equation by investing on a particular day irrespective of how the market is doing, or to avoid taking on too much risk at the same time by investing in smaller chunks instead of entering the market all at once.
Dow Jones Industrial Average
Why investors care: Just like the S&P 500, the DJIA is seen by investors as a good measure of the overall performance of the U.S. stock market.
Exchange-traded funds, or ETFs, are baskets of securities (stocks, bonds, real estate investment trusts) that track a market index and are traded on security exchanges during trading hours.
Why investors care: ETFs help investors achieve broad diversification and portfolio completion. They offer enhanced transparency and tax efficiency.
This is the percentage of their total investment that investors pay to the managers of mutual funds, index funds, and ETFs for administration, distribution and marketing expenses.
Why investors care: The expense ratio represents the cost of a fund, and investors use it as a determining factor in choosing one fund over another.
The Federal Reserve is the U.S. central bank, which is responsible for coordinating the country’s monetary policy in a bid to maintain stable prices, ensure maximum employment and moderate long-term interest rates.
Why investors care: The Federal Reserve’s monetary policy choices affect the stock market.
A financial advisor is a financial professional who provides a wide range of services to clients, including wealth management, robo advisor services, financial planning, investment management and stock brokerage.
Why investors care: Both active and passive investors require the services of an advisor to execute their investment strategies.
The Financial Industry Regulatory Authority, or FINRA, is a nongovernmental organization that regulates the activities of member brokers, brokerage firms, broker-dealers and exchanges.
Why investors care: Brokers, broker-dealers and exchanges that are registered and regulated by FINRA are often held to higher standards.
These are bonds that are issued for the purpose of raising funds for environmental sustainability.
Why investors care: Investors who care about climate change and environmental sustainability prefer to buy green bonds as part of their contribution to the cause.
These are stocks with market prices, earnings and revenue that grow at a higher rate than the industry average.
Why investors care: Many investment strategies are built around selecting growth stocks.
These are securities that are intended to be held until they mature, or reach the end date of their life.
Why investors care: Held-to-maturity, or HTM, securities are low-risk and provide protection from interest rate fluctuations.
This is the value of a property after outstanding mortgage balances have been deducted from its appraised value.
Why investors care: Real estate investors will consider a property’s home equity before making a purchase.
An index fund is a basket of securities that tracks the performance of a specific market index.
Why investors care: Index funds, such as ETFs, usually are low-cost and tax efficient, and form the foundation of passive investing.
Inflation is a persistent rise in the general price level and fall in a currency’s purchasing power.
Why investors care: The inflation rate affects the real value of investments.
The January effect is a description of the tendency of stock prices to rise in January as investors increase their purchases after selling off (for tax purposes) in December.
Why investors care: Some investors make purchase and sale decisions based on the January effect, while others see it as evidence against the efficient market hypothesis.
A joint venture is a form of business organization created by two or more parties that share ownership and risk.
Why investors care: They can be a cost-effective way for businesses to enter into a new market.
A junk bond is a bond that a rating agency has rated as below investment grade, meaning there is a higher risk of default. They are considered very risky, though the higher risk is compensated for with higher yield.
Why investors care: Investors with high risk tolerance buy junk bonds for their higher yields, while those with low risk tolerance avoid them for their high risk.
This is a document that stakeholders in partnerships, S corporations and other pass-through entities that share profit before paying taxes use to report their income, losses and dividends for tax purposes.
Why investors care: Those who invest in pass-through vehicles have to file the K-1 form to avoid trouble with the IRS.
Kappa measures how the price of an options contract reacts to the implied volatility in the price of an underlying financial instrument.
Why investors care: Options traders use Kappa as a measurement of risk.
Why investors care: Large-cap stocks provide more stability – they are less volatile in market downturns.
Liquidity is the ease of converting an asset into cash.
Why investors care: Liquid assets are easier to quickly buy and sell, thereby limiting the bid-ask spread on them.
The market price is the current price at which a share of a stock is selling on a particular exchange.
Why investors care: The market price is a measurement of the market value of a stock. Investors compare it with the intrinsic value to determine if a stock is undervalued or overvalued.
A mutual fund pools together the resources of investors to invest in various securities.
Why investors care: Retail investors use mutual funds to achieve diversification and earn above-market returns.
Net asset value
Net asset value, or NAV, is the price of an investment fund’s share. It is the fund’s net assets divided by its outstanding shares.
Why investors care: It is the price investors have to pay for a single share of an investment fund.
The net income of a company is the income available for distribution to shareholders and/or as retained earnings for further investment.
Why investors care: The market prices of stocks over the long term are linked to the earnings of the company.
An option is a contract that gives the buyer an option, but not an obligation, to purchase or sell a particular security at an agreed-upon price within a certain period.
Why investors care: Investors use options as a risk-management tool.
Why investors care: OTC markets provide opportunities for buying into foreign companies and startups. They also provide more flexibility and wider room for hedging.
This is an investment strategy in which investors track the performance of a market index instead of attempting to outperform it.
Why investors care: Passive investing is often more cost-effective (lower fees, lower taxes, lower risk), and it helps investors focus on long-term performance rather than short-term volatility.
A price-earnings ratio, or P/E ratio, is the ratio of a company’s current share price to its earnings per share, or EPS.
Why investors care: Investors often use a P/E ratio as a factor in determining whether a stock is undervalued or overvalued.
A quant is a quantitative analyst who uses advanced mathematics, statistics and computer skills to evaluate investment assets and make investment decisions.
Why investors care: Quant trading is deployed by individuals and institutions for algorithmic, automated trading, usually by professionals with high educational levels and skill sets.
The quick ratio is a measure of a company’s liquidity that excludes inventories.
Why investors care: It’s one of the liquidity ratios investors use to measure a company’s ability to pay its short-term debts.
A recession is a downturn in economic activity. Investors often define it as two consecutive quarterly drops in gross domestic product, or GDP.
Why investors care: Recessions are often accompanied by a drop in stock prices, and stock market crashes also lead to recessions.
The level of risk you are willing to assume is not the same thing as the level of risk you should assume. Risk capacity is an objective determination of the level of risk you should assume to achieve your financial goals.
Why investors care: Knowing your risk capacity and adjusting your investments to suit it will help keep you on track to meet your life goals, including retirement.
Risk tolerance is a measure of how much risk an investor is willing to assume.
Factors like age, income, financial goals and psychological and emotional conditions influence your risk tolerance. For example, a 60-year-old who is closer to retirement is generally a more conservative investor than a recent college graduate who just entered the workforce.
Why investors care: Investors in the stock market need to get some sleep, too.
The Sharpe ratio is a measure of risk-adjusted returns. It is the amount of excess returns an investor earns by taking on a particular level of risk (as measured by the standard deviation).
Why investors care: This is another tool for determining your risk capacity and whether an investment fits the profile for your portfolio.
These are stocks with a market cap between $250 million and $2 billion.
Why investors care: Small-cap stocks may provide higher-than-average returns over longer time horizons than other investments.
This is a standard-deviation measurement that shows how the returns of a fund deviate from a benchmark.
Why investors care: It is the measurement of the risk that comes from active investing.
These are bonds that are issued and backed by the U.S. federal government.
Why investors care: Treasury bonds are treated as risk-free assets and their returns are fundamental to financial management.
This is a situation in which a company does not have enough capital to fund its operations.
Why investors care: Investors consider capitalization when evaluating a stock.
An underwriter is a financial organization or individual who evaluates and/or assumes the risk of another party in a transaction.
Why investors care: Underwriters are key players in risk management.
Value investing is an investment strategy that involves investors buying fundamentally sound stocks that are undervalued by the market.
Why investors care: Value investing is a common investment strategy that has been successfully used by legendary investors such as Warren Buffett.
The volatility of an asset is how often, and by how much, its price fluctuates.
Why investors care: Some investors use volatility as a measure of risk.
This is a street in Manhattan, New York, where many financial institutions are located. It is often used as a metonym for the entire U.S. financial industry and its players.
Why investors care: The movers and shakers of the financial industry are on Wall Street.
A company’s working capital is the money available to meet its short-term obligations (current liabilities).
Why investors care: Working capital is a measure of liquidity and it is used as part of fundamental analysis.
U.S. Secretary of the Treasury Janet Yellen has been in office since Jan. 26, 2021. She’s an economist by training and was chair of the Federal Reserve from 2014 to 2018.
Why investors care: Yellen oversees the Treasury’s role of protecting the financial system’s integrity and managing the U.S. government’s finances and resources.
Yield is the annual percentage return on a particular asset. It is calculated as the annual interest or dividend paid by the asset divided by its current price.
Why investors care: It is an important input in the valuation of fixed-income securities.
A zero-beta portfolio has a beta of zero, which means there is no systematic risk in holding it.
Why investors care: The returns on a zero-beta portfolio can also be used as the risk-free rate in stock valuation.
A zero-coupon bond is a bond that does not pay any interest.
Why investors care: Zero-coupon bonds trade at a discount to their face value.
More financial terms for investors
Check out U.S. News’ Investing Dictionary for more terms that investors of all experience levels should know. And in observance of Financial Literacy Month, consider sharing this list with someone who could benefit from a first step toward more solid financial planning, such as a young graduate who’s about to handle their own finances, a beginning investor or a conservative saver who is considering ways to boost their retirement stash.
U.S. News makes no representations or warranties in connection with the information provided herein, nor to the accuracy or applicability thereof. U.S. News does not give, offer, or render tax, credit, or legal advice. Before making financial or investment decisions, U.S. News recommends that you contact an investment advisor, or tax or legal professional.
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53 Investing Definitions You Should Know, A to Z
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