Investment Terms

The ask is the lowest price an owner is willing to accept for an investment.

An asset is something that has the potential to earn money for you. It is something you own that can reasonably be expected to produce value. Assets include stocks, bonds, commodities, real estate, and other investments.

Asset allocation is one way to divide the holdings in your portfolio — in this case, by asset class. Because different assets often perform differently from one another, allocating (or diversifying) your portfolio by asset type can help limit some of your risk.

A balance sheet is a statement showing what a company owns, the liabilities it carries, and its outstanding shareholder equity.

A bear market is a market that is falling (i.e., one with a downward trend). Someone who believes the market is headed for a drop is often called a “bear.” Bear markets can last anywhere from a few weeks to several years.

A bid is the highest price a buyer is willing to pay for an investment. Today, electronic trading makes it possible for asks and bids to be matched up automatically and almost instantly.

Blue chip companies generally have long operating histories, strong balance sheets, and a history of regular dividends. They are generally considered financially strong, well-established companies and are often viewed as relatively stable investments.

A bond is an investment that represents what an entity owes you. Essentially, you lend money to a government or a company, and you are promised that your principal will be returned plus interest.

Book value generally refers to a company’s assets minus its liabilities. It is often viewed as the company’s shareholders’ equity on the balance sheet and may differ from the company’s market value.

A broker is a firm or individual that engages in the business of buying and selling securities – stocks, bonds, mutual funds, exchange-traded funds (ETFs), and certain other investments on behalf of its customers.

A brokerage account is an investment account that allows an investor to deposit funds and buy or sell investments such as stocks, bonds, mutual funds, and ETFs. The investor owns the assets held in the account. Investment income and gains in the account may be subject to taxes.

A time when stock prices are rising and market sentiment is optimistic. Generally, a bull market occurs when there is a rise of 20% or more in a broad market index over at least a two-month period. If you think the market is going to go up, you’re considered a “bull.” Like “bear,” the term can also apply to how you feel about an individual investment. If you’re “bullish” on a specific company, you think its stock price will rise.

A capital gain or loss is the difference between what you paid for an investment and what you sell it for. If you buy 100 shares of a stock at $10 a share (spending $1,000) and later sell them for $25 a share ($2,500), you have a capital gain of $1,500. A loss occurs when you sell for less than you paid. If you sell that same stock for $5 a share ($500) and you have a capital loss of $500.

Financial instruments whose performance is derived, at least in part, from the performance of an underlying asset, security or index.

Diversity is a portfolio strategy designed to ensure that you hold more than one type of asset. It also means choosing investments across different sectors, industries, or geographic locations.

A dividend is a company’s decision to divide up some of its profits among shareholders. Dividends can be paid once, as a special distribution, or more regularly — monthly, quarterly, semi-annually, or annually.

The dividend yield is the current yield of a common stock based on its present dividend rate. It is the ratio between the dollar value of the dividend a company pays and its current share price. If a stock trades at $100 per share and pays out $5 in annual dividends, the dividend yield would be 5%.

Dollar cost averaging is an investment strategy in which an investor divides the total amount to be invested across periodic purchases of a target asset (often a stock) to reduce the impact of price changes on the overall purchase. Purchases occur at regular intervals regardless of the asset’s price. The aim is to avoid making one poorly timed lump-sum investment.

The Dow Jones Industrial Average is a stock market index that tracks 30 large, publicly traded, blue-chip companies trading on the New York Stock Exchange and the NASDAQ. It was designed to serve as a proxy for the health of the broader U.S. economy.

An exchange is a place where investments, such as stocks, bonds, commodities, and other assets, are bought and sold, connecting brokers (buyers and sellers) and others. While many exchanges have “trading floors,” most orders these days are executed electronically.

An ETF is a type of investment fund that trades like a stock, bought and sold on the same exchanges as shares of stock. ETFs can track indexes, sectors, commodities, or other assets, allowing investors to gain diversified exposure through a single investment.

Form 10-K is an annual disclosure document that certain public companies are required to file with the Securities and Exchange Commission. It contains in-depth information about a business, including its finances and business model.

A hedge fund is a private investment fund that pools money from investors and invests according to a specified strategy. Hedge funds often have greater flexibility than mutual funds and are generally available only to investors who meet certain eligibility requirements, such as accredited investor or qualified purchaser standards.

A high-water mark ensures that a fund only takes performance-related fees on new profits. For example, suppose a $1,000,000 investment is made and the fund declines 20% in year one, leaving $800,000. In year two, the fund returns 25%, bringing the value back to $1,000,000. With a high-water mark, the fund would not take incentive fees on year two’s return, because the investment did not exceed its previous high value. The fund only takes incentive fees once the investment rises above its prior high-water mark of $1,000,000.

A hurdle rate is the minimum rate of return a hedge fund must achieve before it can collect performance fees. For example, if a hedge fund has a 5% hurdle rate, it generally may collect incentive fees only when returns exceed 5%.

An index is a tool used to statistically measure the progress of a group of investments that share characteristics, such as a group of stocks, bonds, or other assets.

An index fund is a type of mutual fund that lets an individual buy investments that mimic the trends of an index. These are generally more passive investments with lower fees than actively managed mutual funds.

An IRA (Individual Retirement Account) is a tax-advantaged retirement account. There are several types of IRAs. Generally, individuals with taxable compensation may be eligible to contribute to an IRA, subject to IRS contribution limits and eligibility requirements.

Liquidity is the ease with which an investment product or fund can be sold or redeemed without significantly impacting its market value. Hedge funds, for example, may only offer quarterly or annual liquidity, meaning they allow investors to redeem their shares that often.

Margin is money borrowed from a broker to purchase investments. It allows investors to increase their buying power and invest more than the cash available in their account, but it also increases investment risk because losses can be magnified.

A company’s market cap is calculated by multiplying its current public market price of one share by the number of total shares outstanding.

A money market account is an interest-bearing bank account that may pay a higher interest rate than a traditional bank savings account.

A mutual fund pools money from many investors to invest in a portfolio of stocks, bonds, or other securities. Mutual funds may be actively or passively managed and generally charge management and operating fees.

NASDAQ is a U.S. securities exchange where stocks and other securities are bought and sold. The term “NASDAQ” may also refer to stock market indexes such as the NASDAQ Composite, which tracks many companies listed on the exchange.

The New York Stock Exchange (NYSE) is one of the most well-known stock exchanges in the world. It is a marketplace where stocks of U.S. and international companies are bought and sold.

Offshore funds are investment funds organized outside an investor’s home country. They are often used by non-U.S. investors and certain tax-exempt investors and may offer tax, regulatory, or operational benefits depending on the fund structure.

Onshore funds are investment funds organized within an investor’s home country. They are commonly used by domestic investors and are generally subject to the country’s local tax and regulatory rules.

A performance fee is a fee paid to a fund manager based on the fund’s investment performance. The fee is typically calculated as a percentage of profits and may be subject to conditions such as a high-water mark or hurdle rate.

A personal investment strategy is exactly what it sounds like: your own approach to investing. There is no single right way to invest: learn how investing works, then define and execute the strategy that fits you.

A company’s price-to-earnings (P/E) ratio compares its stock price to its earnings per share. Investors often use the P/E ratio to compare a company’s valuation to its historical levels, industry peers, or the broader market. For example, if a company earns $5 per share and its stock trades at $75 per share, its P/E ratio is 15.

The price/earnings-to-growth (PEG) ratio is a modified form of the P/E ratio that factors growth into the metric. For example, a company growing earnings at 15% per year and trading at 20 times earnings may have a lower PEG ratio than a company trading at 8 times earnings whose earnings are shrinking.

To be considered a “qualified purchaser,” at least one of the following criteria must be met:

• The purchaser is an individual or family-owned business that owns $5 million or more in investments. A family-owned business cannot be formed solely for the purpose of investing in the fund.
• The purchaser is a trust sponsored and managed by qualified purchasers that was not formed for the sole purpose of investing in the fund.
• The purchaser is an individual or other entity that invests at least $25 million, either for their own account or on others’ behalf, and was not formed specifically to invest in the fund (e.g., a professional investment manager or a corporation).
• Any entity in which all owners are qualified purchasers.

A period of significant decline in economic activity across the economy. While recessions are often associated with two consecutive quarters of declining GDP, in the United States the official determination is made using a broader range of economic indicators.

The sale of shares or interests back to an investment fund, or the repayment of a security by its issuer, in exchange for cash.

A firm or individual that provides investment advice and portfolio management services for compensation and is registered with securities regulators. RIAs are required to act in their clients’ best interests and to place clients’ interests ahead of their own when providing investment advice.

An IRA designed to receive assets transferred from an employer-sponsored retirement plan, such as a 401(k). The account preserves the tax advantages of retirement savings and generally operates like a Traditional IRA.

A Roth IRA is an individual retirement account funded with after-tax contributions. Earnings grow tax-free, and qualified withdrawals in retirement are generally not subject to federal income tax. Eligibility to contribute is subject to income limits.

The Standard & Poor’s 500 is a stock market index that tracks the value of 500 large-cap companies in the United States. By comparison, the Dow Jones Industrial Average tracks 30 of the largest American companies.

A retirement plan available to small businesses with 100 or fewer employees. Both employers and employees can contribute, helping employees save for retirement on a tax-advantaged basis.

A stock represents ownership in a company. Companies divide their ownership into shares, and the number of shares an investor owns reflects their ownership stake. Investors typically buy stocks with the expectation that the company’s value will grow over time, allowing them to sell their shares at a profit.

A SEP-IRA can be used by self-employed people and small business owners under certain circumstances. Its contribution limits are generally higher than those of a Traditional or Roth IRA.

A taxable account is one you can use for trading stocks, bonds, mutual funds, and more. Taxable accounts do not carry any tax advantages, so you will be taxed on your investment income and capital gains.

An account that offers special tax benefits designed to encourage saving and investing. Depending on the type of account, contributions may be tax-deductible, investment earnings may grow tax-deferred or tax-free, and withdrawals may receive favorable tax treatment.

The degree to which the price of an investment or market rises and falls over time. Frequent or significant price swings, whether upward or downward, are generally considered signs of higher volatility.

Volume is the number of shares being traded in the entire market during a given period. Each transaction during trading hours adds to the total volume count.

The income generated by an investment, expressed as a percentage of its value or purchase price. For example, a stock paying $5 in annual dividends and trading at $100 per share has a dividend yield of 5%.

A retirement savings plan available to employees of public schools and certain nonprofit organizations. Like a 401(k), it allows employees to save for retirement through payroll contributions and may include employer contributions.

A tax-advantaged savings plan designed to help pay for qualified education expenses. Earnings grow tax-free, and withdrawals used for qualified expenses are generally tax-free.