Navigating the investment world can feel like learning a new language. Whether you’re a novice or a seasoned investor, it’s easy to get lost in jargon that seems to be constantly evolving.
Many of today’s investment terms have roots in the early days of Wall Street, while others have emerged over the years as the financial landscape has become increasingly complex. Understanding this terminology can be beneficial for making informed decisions about your investments.
This guide is designed to help you decode the common terms you may encounter when speaking with financial professionals, reviewing your monthly statements, or following financial news. Keep it close as a quick reference or share it with someone who might benefit from a better grasp of investment language.
Accrued interest: The amount of interest that a bond has earned since the last interest payment was paid out. A bond buyer pays the market price plus accrued interest.
Alternative minimum tax (AMT): A federal income tax calculated by adding back certain tax deductions and income exclusions used in the regular tax calculation. To ensure that individuals who take advantage of such deductions and income exclusions pay at least a minimum amount of tax, the AMT applies whenever it is greater than a person’s regular federal income tax.
Annual report: An annual financial document published by a publicly owned corporation. The annual report provides shareholders with information about a firm’s operations and financial conditions over the previous year. According to SEC rules, all shareholders must receive a copy of this report, which includes making it available on the company’s website.
Annual return: An investment’s yearly percentage change in value. Sources of annual return can include dividends (or interest) and capital gains (or losses) excluding commissions, fees, and taxes. Also known as an annualized return.
Ask price: (or offer price) The current price at which a security may be purchased. It is the lowest price any seller will accept at a given time. In the case of a mutual fund, it is the net asset value plus the sales charge (if any).
Asset allocation: The process of selecting and blending investments from different asset categories (groups and classes), such as stocks, bonds, real assets, alternative strategies, and cash/cash alternatives, to help manage investment risk and reach long-term investment goals. Investors typically aim to balance investment risks and rewards based on financial goals, risk tolerance, and time horizon.
Asset class: A way to categorize different investment vehicles that exhibit similar characteristics. Some basic asset classes are stocks, bonds, commodities, and real estate.
Bear market: The cycle of the financial market in which stock prices fall, generally 20% or greater, for an extended period of time.
Bid price: The current price at which a security may be sold. It is the highest price a buyer is willing to pay for a security at a given time.
Blue chip: The common stock issued by a large, well-established, financially sound company with an excellent reputation for the quality of its products or services. Blue chip companies typically have a lengthy history of dependable earnings and dividend payments.
Bond: A debt (or fixed income) instrument in which the issuer promises to pay the bondholders a designated amount of interest for a specified length of time and to repay the par value on a given maturity date.
Bond insurance: Insurance purchased by a bond issuer for either an entire issue or specific maturities, which guarantees the repayment of principal and/or all associated interest payments to bondholders in the event of default.
Bull market: The cycle of the stock market in which the market rises for an extended period and stock prices are driven up by market optimists (or “bulls”).
Call (option): A right to purchase a specific asset at a predetermined price until a certain date. In the case of a bond, it is the issuer’s right to repurchase an issue of bonds at a certain price on or after a specific date before the maturity date.
Capital gain or loss: Profit or loss from the sale of an investment.
Cash: Legal tender—currency or coinage—that can be used for the exchange of goods, debt, or services. Sometimes cash or cash alternatives include the value of assets that can be easily converted into cash at face value.
Certificate of deposit (CD): (Time-deposit investments) A type of savings account with a stated date of maturity and interest rate. CD rates are usually higher than those of traditional savings accounts, but with less withdrawal flexibility.
Closed-end fund: A type of mutual fund with a fixed number of shares that trade on an exchange or over-the-counter. In contrast, open-end mutual funds have an unlimited number of shares and issue new shares and buy back existing shares on demand.
Collateralized mortgage obligation (CMO): A mortgage-backed security that contains a pool of mortgages bundled together and sold as an investment vehicle. (See also “Mortgage-backed security.”)
Committee on Uniform Securities Identification Procedures (CUSIP) number: A unique nine-digit identification number assigned to most securities in the United States and Canada.
Commodity: A product traded on an authorized commodity exchange. Types of commodities include agricultural products, metals, petroleum, foreign currencies, and financial instruments and indexes. Many investors view an allocation to commodities as an inflation hedge.
Common stock: Securities that represent an ownership interest in a corporation. Shareholders have the right to vote on major decisions (usually one vote per share owned). In liquidation, common stockholders receive the portion of assets that remain after creditors, bondholders, and preferred stockholders are paid. (See also “Stock.”)
Concentrated equity position: A substantial or significant portion of stock holdings in a single industry sector or individual security.
Confirmation: (or trade confirm) Written acknowledgment of a security trade detailing the security, price, commission or fee, and trade date of the transaction.
Consumer price index (CPI): This index is calculated monthly by the Bureau of Labor Statistics. It is used to show economic trends in the changes in prices and to measure the rate of inflation. The factors contributing to the CPI include categories like housing, food, transportation, medical care, clothing, education, and entertainment. The index is used to adjust Social Security benefits and determine cost-of-living increases in pensions and wages.
Convertible security: A security that can be converted from one asset into another, such as a convertible bond can be converted into common stock or another security at a specified rate or price.
Corporate bond: A bond (debt security) with a stated interest rate and maturity issued by a corporation to raise capital. Corporate bonds are generally viewed as somewhat riskier than U.S. government bonds, so they usually have higher interest rates to compensate for additional risk.
Cost basis: A means of measuring the original value of a security or other assets for tax purposes. When a security is sold, the selling price is compared to its cost basis to determine a realized taxable gain or a tax-deductible loss.
Coupon rate: The rate of interest paid on a bond, usually semiannually. This term originated when bond certificates were issued with coupons attached to be clipped and presented for payment of interest. While bonds are no longer issued with coupons, this term is still used synonymously with interest rate.
Coverdell Education Savings Account (ESA) (formerly known as the Education IRA): An education savings plan established to fund qualified elementary and secondary school and higher education expenses for the account’s designated beneficiary Contributions are nondeductible, and distributions are generally free from federal income tax when used for qualified education expenses. See your financial or tax advisor for specific details and suitability.
Cryptocurrency (crypto): A digital or virtual currency secured by cryptography, which makes it nearly impossible to counterfeit or double-spend. Most cryptocurrencies exist on decentralized networks using blockchain technology.
Cumulative return: The aggregate amount an investment has gained or lost over time. Expressed as a percentage, a cumulative return is calculated as follows:
[(Current Price of Security) - (Original Price of Security)] / (Original Price of Security)
Current yield: The annual rate of return of an investment based on current price rather than par value. It is calculated by dividing annual income (interest or dividends) by the security’s current price. Current yield represents the expected return of an investment for one year. It is not the actual return if the investor holds a bond to maturity.
Debt: An obligation to repay an amount owed. Debt can be secured or unsecured, with a fixed ending date or revolving. Bonds are a type of debt instrument often issued by corporations or governments to raise capital.
Defined benefit plan: A pension plan in which the retirement benefits, rather than the contributions to the plans, are specified. Employee eligibility and benefits are computed using a formula that considers several factors such as, age, length of employment, and salary history. For example, a retiring employee who has reached a certain age with a given number of years of service at a certain income level is entitled to a specific monthly payment.
Derivative: A contract or payment exchange agreement whose value is derived from an underlying asset, reference rate, or index. A derivative is set between two or more parties that can trade on an exchange or over the counter (OTC).
Discount: The amount by which a security is trading below its fundamental or intrinsic value. This often pertains to fixed income trading when a bond is trading below its par (or face) value. (See also “Premium.”)
Diversification: An investment strategy that creates a mix of various investments within a portfolio. A diversified allocation contains a mix of asset groups and classes in an attempt to limit exposure to a single asset or type of risk. (See also “Asset allocation.”)
Dividend: A percentage of a company’s earnings that is paid to shareholders as their share of profits. The payment is designated by the board of directors and is distributed pro rata among the shares outstanding of common or preferred stock.
Dollar cost averaging: A systematic approach to investing that involves purchasing a fixed dollar amount of securities at regular intervals, (monthly, quarterly etc.). This results in the purchase of more shares when prices are low and fewer shares when prices are high.
Dow Jones Industrial Average (DJIA): One of the most widely recognized U.S. market indexes, made up of 30 large, publicly owned, and actively traded blue-chip company stocks.
Earnings per share: The portion of a company's profit earned by each outstanding share of common stock. Healthy earnings per share usually corresponds with a high stock price for a company.
Equity: Ownership position in a company. Also known as stock.
Estate: All assets an individual owns at the time of death, such as securities, real estate, interests in businesses, physical possessions, and cash.
Exchange: A system for the organized trading of securities. The major U.S. exchanges are the New York Stock Exchange, NYSE American, and Chicago Board Options Exchange. There are also regional exchanges throughout the country.
Exchange-traded funds (ETFs): Funds designed to track the performance of certain indexes. They allow investors to gain diversified exposure. Can be bought and sold throughout the day just like stocks and are priced continuously during the trading day.
Ex-dividend: “Without dividend”; the buyer of a stock selling ex-dividend does not receive the recently declared dividend. After the ex-dividend date, the stock tables include the symbol “x” following the stock name.
401(k): An employer-sponsored retirement plan that lets employees make payroll-deduction contributions to a tax-deferred savings account. Contributions to 401(k) plans may be made on a tax-deferred basis (traditional) or after-tax basis (Roth).
403(b): A retirement plan, also known as a tax-sheltered annuity, that lets employees of tax-exempt charitable, educational, or religious organizations contribute a certain portion of their wages or salary into a tax-sheltered fund. Taxes on income earned in the plan are deferred. The annuity may include a death benefit and an option to receive income for life.
529 plans: Qualified tuition-assistance programs used to pay education expenses. These plans allow individuals to save on a tax-deferred basis. Contributions may grow tax deferred and withdrawals are typically free from federal income tax if used for qualified educational expenses. Contributions may also provide a deduction on state income taxes but are generally still taxed at the federal level. See a tax advisor for details.
Financial Industry Regulatory Authority (FINRA): The Financial Industry Regulatory Authority (FINRA) is the largest nongovernmental regulator for all securities firms doing business in the United States. FINRA was created in July 2007 through the consolidation of NASD and the member regulation, enforcement, and arbitration functions of the New York Stock Exchange.
Fixed annuity: An annuity policy in which the issuing insurance company guarantees a fixed interest rate for a specified period.
Fixed-income security: A security that pays a regular income on a set time schedule. Bonds are fixed-income investments.
Futures: Contracts traded on an exchange specifying a future date of delivery or receipt of a specific commodity.
Ginnie Mae: A mortgage-backed security issued and backed by the Government National Mortgage Association (GNMA), an agency of the federal government. (See also “mortgage-backed security”).
Government bond: A direct debt obligation of the U.S. government, including Treasury bonds, notes, bills, and savings bonds.
Growth investing: An investment approach focused on capital appreciation. Growth investors invest in companies with above-average growth prospects. As generally new and expanding companies, growth stocks may carry more risk than low-growth shares as well as the potential for higher- than-average returns.
Hedge funds: A limited partnership of investors that uses high risk or non-traditional methods, such as investing with borrowed money, in hopes of realizing large capital gains or returns less tied to the overall stock market.
Index of leading economic indicators: The average of 10 leading indicators released monthly by government economists that provides an easy way to gauge the state of the economy. The indicators that are averaged include durable goods, housing starts, jobless claims, new factory orders, monthly averages of stock prices, and several other measures of manufacturing performances:
Durable goods: Measures orders of a wide range of products that have a useful life over a number of years. A backlog of orders usually indicates an expanding economy.
Housing starts: Measures the number of residential building permits being issued. In a growing economy, there is usually an increased demand for new housing.
Jobless claims: Reports the number of new unemployment claims for state unemployment insurance. A falling number is reported in a growing economy.
New factory orders: Measures the number of manufacturers’ orders. An increase in orders usually shows a willingness by consumers to spend.
Individual retirement account (IRA): An account that allows individuals to set aside earned income on a tax-deferred basis that is separate from an employer-sponsored retirement plan. For some individuals, traditional IRA contributions may be deductible from taxable income. Check with a tax advisor. (See also “Coverdell Education Savings Account” and “Roth IRA”).
Inflation: The overall increase in the prices of goods and services over time. The consumer price index (CPI) is a common measure of the rate of inflation.
Initial public offering (IPO): A corporation’s first sale of stock to the public. Also referred to as “going public.”
Interest: Payments a borrower makes to a lender for use of the lender’s money (e.g., a corporation pays interest to its bondholders).
Large-cap stock: A stock of a company with market capitalization of more than $10 billion.
Life insurance: An insurance company contract that provides for payment to beneficiaries upon the death of the insured. Some life insurance policies provide a tax-deferred cash buildup that can be accessed by the policy owner and may have a variety of other modifications, or riders, available.
Limit order: An order to buy or sell a stated amount of a security at a specified price (the limit) or better. A limit order to buy would be at the limit price or lower, and a limit order to sell would be at the limit price or higher.
Limited partnership: An organization made up of a general partner, who manages the partnership, and limited partners, who invest money but have limited liability to the organization’s creditors.
Load: A sales charge that an investor must pay when buying certain mutual fund shares.
Long: Signifies the net ownership position in a particular security.
Long-term care insurance: The type of coverage that pays for the assistance people may need when they can no longer take care of themselves due to illness or prolonged disability or if they have difficulty performing daily living tasks. Care can be provided in their own home, an assisted care facility, an adult day care facility, or a nursing home.
Margin: Purchasing securities “on credit” by using other securities as collateral.
Market capitalization: The aggregate value of a firm’s total outstanding shares. This is calculated by multiplying the market price per share by the total number of shares outstanding.
Market order: An order to buy or sell a stated amount of a security at the best price available when the order reaches the marketplace.
Market price: The last price or current quote at which a security trades in the secondary market.
Maturity: The date on which the issuer of a bond or CD is scheduled to repay the par value to the bondholder or CD holder.
Mid-cap stock: A stock of a company with a market capitalization between $2 billion and $10 billion.
Money market mutual fund: A mutual fund that invests in high-quality, short-term securities, such as Treasury bills, CDs, and cash alternatives.
Mortgage-backed security: A bond that represents a share in a pool of mortgages issued by government agencies, government-sponsored enterprises, or mortgage lenders. Investors receive regular (normally monthly) interest payments, and the principal is returned incrementally over the life of the investment. (See also “Collateralized mortgage obligation” [CMO] and “Ginnie Mae” [GNMA].)
Municipal bond: A bond issued by a public entity for public projects that pays interest which is usually free from federal, and sometimes state, taxes. (See also “Alternative minimum tax [AMT].”)
Mutual fund: An investment that lets a group of people pool their assets in a diversified portfolio of stocks, bonds, or a combination of stocks and bonds. An investment company then professionally manages the assets in the portfolio in an effort to achieve a specified investment objective, such as growth or income.
Nasdaq: An electronic information network that provides brokers and dealers with current price quotations on many actively traded over-the-counter (OTC) securities.
Net asset value (NAV): The per-share value of a mutual fund figured by taking the total market value of a fund’s assets and dividing the figure by the total number of shares outstanding. Also, the price at which you sell mutual fund shares.
New issue: The first offering to the public of a stock, bond, or mutual fund.
No-load: A mutual fund that does not impose a sales charge when an investor purchases or sells shares.
Odd lot: Shares are typically sold in “lots” of 100. Purchases for shares in amounts of less than 100 are called “odd lots.”
Offer price: (See “Ask price.”)
Official statement: The document that provides key information regarding a municipal bond new issue.
Open-end fund: A fund that sells as many shares as investors are willing to purchase. As money comes in, the fund increases in value. If investors want to sell, the fund buys their shares back. Most mutual funds are open-end funds.
Option: A contract that lets an investor sell or purchase an asset at a fixed price until a specific date. An option to purchase an asset is a call; an option to sell an asset is a put.
Over-the-counter (OTC): Securities that trade directly between parties and are not listed on any exchange. All government bonds and all other unlisted stocks and bonds are traded on the OTC network.
Par value: The dollar amount on which a bond’s interest is calculated and the amount paid to bondholders at maturity. Also known as face value.
Preferred stock: A class of stock that entitles holders to receive dividends before dividends are paid to common stockholders; dividends are usually fixed. Should the company liquidate, preferred stockholders have prior claim on assets over common stockholders. (See also “Stock.”)
Premium: The amount by which a bond sells above its par value. (See also “Discount.”)
Price-earnings ratio (P/E): The current price of a share of stock divided by the earnings per share of the issuing firm. The P/E is used to compare stocks selling at different price levels to other firms within its industry, or the overall market, and helps to assess the relative value of a company’s stock.
Principal: The amount of invested dollars.
Professional money management: Provides full-time management of individual portfolios, which includes evaluating the overall market and its risks, the risks of individual securities, and exposure and investment opportunities.
Prospectus: The official document highlighting the key information about securities registered with the Securities and Exchange Commission.
Rating: A rating is an assessment tool assigned by an analyst or rating agency to a stock or bond. The rating assigned indicates the stock or bond’s level of investment opportunity and risk.
Real estate investment trust (REIT): A company that owns and manages a portfolio of real estate properties. REITs serve as conduits through which rental income is passed from real estate holdings to shareholders.
Rollover: Occurs when an individual reinvests the money from one investment into a similar investment without creating a taxable event. For example, you can take the proceeds from your 401(k), tax-deferred annuity, or IRA and deposit the proceeds into another qualified plan or IRA. Or you can roll over funds from a maturing CD and deposit them into another CD.
Roth IRA: Created by the Taxpayer Relief Act of 1997, the Roth IRA permits individuals within certain income limits to contribute yearly. Contributions are not tax-deductible, but they can accumulate tax free; after five years’ ownership and upon reaching age 59 1/2, individuals can withdraw the contributions and earnings without paying taxes on this income.
Round lot: An order to trade 100 or a multiple of 100 shares of stock. If an order consists of fewer than 100 shares, it is called an “odd lot.”
Savings bond: A debt security issued by the U.S. government that can be purchased in relatively small denominations through most financial institutions. The principal and interest are backed by the full faith and credit of the U.S. government, and the interest is exempt from local and state income tax.
Sector: A general segment of the economy that contains similar industries.
Securities and Exchange Commission (SEC): A federal agency established in 1934 to protect investors, enforce regulations, and maintain the integrity of the securities markets.
Securities Investor Protection Corporation (SIPC): A nonprofit organization created by an act of Congress. SIPC provides funds for use, if necessary, to protect customers’ cash and securities that are on deposit with a SIPC member firm in the event the firm fails and is liquidated (does not protect against market losses). SIPC protects the lost securities and cash of its members up to $500,000, including $250,000 for claims for cash. Explanatory brochure available upon request or at sipc.org.
Settlement date: The date by which either cash (for a buyer) or a security (for a seller) must be delivered to an investment firm to complete a securities transaction.
Short: A net investment position in a security in which the security has been borrowed and sold but not yet replaced. A short position is established when a trader sells a borrowed security with the intention of repurchasing it or covering it later at a lower price.
Small-cap stock: A stock of a company with a market capitalization above $250 million but less than $2 billion. Typically, a small-cap stock is more volatile than a large-cap or mid-cap stock, but the potential for growth can be greater.
Spin-off: An independent company created when a parent corporation separates a subsidiary or a division from itself through the sale or distribution of shares in the new company.
Spread: The difference between two values for a security. For example, the difference between the price a seller seeks for a stock and the price a buyer is willing to pay for it is called the bid-ask spread.
Standard & Poor’s 500 Stock Index (S&P 500): A market cap weighted index of 500 leading publicly traded companies in the U.S. The index currently includes 503 stocks because three companies in the S&P have two share classes listed.
Stock: A share of ownership in a company. (See also “Common stock” or “Preferred stock.”) Also known as equity.
Stock split: An increase in a company’s number of authorized shares by issuing additional stock to shareholders. For example, in a 2-for-1 split, an investor who owned 100 shares of ABC Company at $50 per share would receive 200 shares at $25 per share. A stock split does not change the shareholder’s percentage of equity in the company. A reverse split is a decrease in the number of shares.
Stock symbol (or ticker symbol): The unique identification symbol given to every corporation whose stock is traded on a stock exchange.
Stop-limit order: A variation of a stop order where the trader sets a stop and limit price. Once the stop price has been reached, the trade will be triggered. After the trade has been triggered, the trader sets the limit price, which is the price at which the trader wants to buy or sell the security. (See also “Limit order” and “Stop order”).
Stop order: An order to buy or sell a stated number of securities that becomes a market order when the market price of the security reaches the price specified in the stop order (the stop price). (See also “Market order.”)
Strategic asset allocation: A long-term investment approach that is based on setting and adhering to target allocations (or mixes) over multiple market cycles. Over time, as variation in investment returns will tend to skew a portfolio’s allocation percentages, periodic rebalancing helps to return the mix back to target allocations.
Street name: Securities held by a brokerage firm on behalf of a client. A security is held in street name to simplify trading because no certificate delivery or signature is required. In margin accounts, securities must be held in street name.
Tactical asset allocation: An investment strategy in which an investor makes provisional adjustments to a strategic allocation based on short-term (6 to 18 months) market differentials that deviate from a longer-term outlook. Tactical asset allocation aims to enhance strategic performance by taking advantage of near-term market anomalies or price distortions.
Taxable-equivalent yield: The yield an investor would need to obtain on a taxable investment to equal the tax-free yield on a municipal bond.
Total return: The total earnings from an investment, including dividends or interest and any profit or loss realized on the liquidation of the investment.
Trade date: The date on which a transaction is executed.
Trust: Fiduciary relationship in which a person, called a trustee, holds title to and manages property for the benefit of a beneficiary.
Unit investment trust: An investment company that invests in a defined portfolio of bonds and/or stocks. Unlike a mutual fund, the portfolio’s investments are fixed over the life of the trust, are not managed, and have a stated or known maturity. Units of the trust’s investment portfolio are sold to investors as a pro rata share. Also known as a defined portfolio.
Variable annuity: An annuity with an income stream that rises or falls in value based on the market performance of the investments underlying the vehicle that fund the income. Annuities are commonly used to establish a regular stream of retirement income.
Value investing: An investment approach focused on selecting stocks that seem undervalued by the market. Stocks are considered undervalued if they trade at less than their intrinsic value as determined by the issuer’s earnings and assets.
Volatility: The fluctuation in value of a security or asset class. Volatility is typically measured by standard deviation, which evaluates the performance of a particular investment or an asset class by measuring the fluctuation of total returns around an average during a specified period.
Wash sale rule: Prohibits selling a security at a loss and purchasing the same or a “substantially identical security” within 30 calendar days before or after the sale date that established a loss. If an investor sells a security at a loss and purchases the same security during the 61-day period surrounding the sale, the wash rule bars investors from claiming the loss on this year’s tax returns. Check with tax advisor for details.
Wrap account: A professionally managed stock or bond portfolio that uses asset allocation to help meet investment needs. Wrap accounts have a periodic (i.e. quarterly or annual) wrap fee as opposed to charging commissions for each transaction.
Yield: Also known as return; the dividends or interest paid on a security calculated as a percentage of the price paid. In the case of a bond, this figure is known as current return.
Yield to maturity: The total rate of return earned when a bond makes all interest payments and repays the original par value. The yield to maturity on a bond is based on the interest rate, the purchase price in relation to the par value and the number of years left to maturity. For example, if an investor purchases a $1,000 bond for $800, the $200 profit ($1,000 – $800) the owner will receive at maturity will be added to the interest earned when calculating yield to maturity.
Zero-coupon bond: A bond that pays no interest to its owner but is issued at a fraction of its par value. The money invested in the bond grows at a fixed rate as the interest automatically compounds within the investment. Short-term U.S. Treasury bills are an example of zero-coupon bonds.
