Reference

Investing glossary

59 terms that come up if you read about stock investing for any length of time. Plain-English definitions, no MBA-speak.

Bookmarkable — every term has its own anchor (#term-slug). Linked from blog posts and SEO articles throughout the site.

#A B C D E F G H I L M P Q R S T V W Y Z

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13F filing: Quarterly SEC disclosure required of US investment managers running over $100M. Lists their long equity holdings as of quarter-end. The basis for tracking what professional investors own.

A

Active investing: Picking individual stocks (or paying someone to) with the goal of beating the market. The opposite of passive (index) investing. Higher cost, higher effort, sometimes higher return.
Alpha: Excess return above what the benchmark delivered. If the S&P returned 10% and your portfolio returned 13%, your alpha is 3%. The whole point of active management is generating positive alpha.
Annualized return: Average yearly return expressed as if you got that exact rate every year. Smooths out lumpy real-world returns into a single comparable number. See CAGR for the version most often quoted.
Asset allocation: How you divide a portfolio across stocks, bonds, cash, and other asset classes. The single biggest decision in investing. Most everything else is detail.
Average true range (ATR): A volatility measure showing the average daily price range of a stock or index over a chosen window. Used by traders to size positions and set stop-losses.

B

Backtest: Running a strategy through historical data to see how it would have performed. Useful, but not a guarantee — past performance does not predict future results.
Bear market: A drop of 20% or more from the most recent peak. Roughly once every 4-5 years on average for the S&P 500. Always recovers; the question is how long.
Benchmark: The yardstick a portfolio is measured against. For US large-cap stocks, that's usually the S&P 500. A portfolio that beats its benchmark over a long window is generating alpha.
Beta: How much a stock or portfolio moves relative to the market. Beta of 1.0 = moves like the market. Beta of 0.8 = moves 20% less. Beta of 1.5 = moves 50% more (in both directions).
Bid-ask spread: Difference between the highest price a buyer will pay (bid) and the lowest a seller will accept (ask). Wider spreads = higher implicit cost when you trade.
Blue chip: Large, well-established, financially stable companies. Apple, Microsoft, Coca-Cola are blue chips. Slower growth, lower risk, often pay dividends.
Bond: A loan you make to a government or company in exchange for regular interest payments and your principal back at maturity. Generally less volatile than stocks, lower long-term return.
Bull market: Sustained period of rising prices, usually defined as a 20%+ gain from the most recent low. The opposite of a bear market.

C

CAGR: Compound Annual Growth Rate. The annualized return that takes you from start value to end value, assuming smooth compounding. The default way to compare long-term performance.
Capital gain: Profit from selling an asset for more than you paid. Short-term gains (under one year) taxed as income. Long-term gains taxed at lower rates.
Compound interest: Earning returns on your returns. The most powerful force in investing — over decades, the curve goes near-vertical. Time matters more than rate.
Concentration: How much of a portfolio sits in a small number of holdings. A 20-stock portfolio is concentrated. A 500-stock index is not. More concentration means more variance, both up and down.
Correction: A 10-20% drop from the most recent peak. Happens roughly once a year on average for the S&P 500. Not a bear market; usually short-lived.

D

Diversification: Spreading your money across enough different holdings that any one going to zero doesn't ruin you. The free lunch of investing — reduces risk without lowering expected return.
Dividend: Cash a company pays its shareholders, usually quarterly. Reflects mature businesses with steady cash flow. Reinvested dividends make up a meaningful share of long-run S&P 500 returns.
Dividend yield: Annual dividend divided by current stock price. A stock at $100 paying $3/year has a 3% yield. Higher yield often means slower growth (or trouble).
Dollar-cost averaging: Buying a fixed dollar amount at regular intervals regardless of price. Removes timing decisions; trades small underperformance for large peace of mind.
Drawdown: Decline from the most recent peak to the current value. The number behind every gut-check moment of investing. Max drawdown is the worst-ever from peak to trough.

E

Earnings per share (EPS): Net income divided by shares outstanding. The headline profit number. EPS growth is what most analysts care about quarter to quarter.
ETF: Exchange-Traded Fund. A basket of stocks (or bonds, etc.) that trades like a single stock. SPY tracks the S&P 500. Generally cheaper and more tax-efficient than mutual funds.
Expense ratio: Annual percentage a fund charges. 0.03% on a Vanguard ETF, 1%+ on actively managed funds. Compounds against you for as long as you hold the fund.

F

Forward P/E: Stock price divided by next year's expected earnings per share. Tells you what investors are willing to pay for a dollar of future earnings. Lower can mean cheaper or in trouble.
Free cash flow (FCF): Cash a company generates after paying for operations and capital expenditures. The number Buffett cares about — earnings can be massaged, FCF is hard to fake.

G

Growth stock: A company expected to grow earnings significantly faster than the market. Usually doesn't pay dividends; often expensive on traditional metrics. Tesla, Nvidia, and most tech are growth.

H

Hedge fund: Pooled investment vehicle for high-net-worth investors and institutions. Typically charges 2% management + 20% of profits. Uses leverage, derivatives, and short positions. Mostly accessible only to the wealthy.

I

Index fund: A fund that tracks a market index (e.g., S&P 500) by holding all or most of its components. Cheap, tax-efficient, hard to beat over the long run. The default for most retirement accounts.
Inflation: How much prices rise per year. Long-run average ~3% in the US. Eats your real return — a 10% nominal return at 3% inflation is a 7% real return.

L

Large cap: Companies with market capitalization over ~$10B. The S&P 500 is large-cap dominated. Generally lower volatility than small caps, but also lower expected return.
Liquidity: How easily an asset can be converted to cash without moving the price. AAPL is highly liquid; a small-town real-estate property is not.

M

Market cap: Shares outstanding × stock price. The market's total dollar value of the company. Apple at $3T means investors collectively value Apple at $3 trillion.
Max drawdown: The worst peak-to-trough loss a portfolio ever experienced. The number that tells you the most about how a strategy behaves in a crash. Lower is better, all else equal.
Momentum: Stocks that have done well recently tend to keep doing well, at least for a few months. One of the most studied effects in academic finance.
Mutual fund: Pooled investment fund that prices once a day after market close. Generally higher fees and worse tax efficiency than ETFs. Mostly being replaced by ETFs.

P

P/E ratio: Stock price divided by earnings per share. The most-used valuation metric. Higher P/E = more expensive (or higher expected growth). Long-run S&P 500 average is ~16.
Passive investing: Buying and holding broad-market index funds rather than picking individual stocks. Cheap, tax-efficient, and beats the average active manager over long windows.
Price return: Return from price change only, ignoring dividends. The S&P 500 price return over decades is roughly 2% lower than its total return because it excludes reinvested dividends.

Q

Quant: Quantitative — strategies driven by mathematical models, statistics, and code rather than human judgment. Renaissance Technologies, Two Sigma, AQR.

R

Rebalancing: Selling holdings that have grown over their target weight and buying ones that have shrunk. Forces you to sell high and buy low — counterintuitive, but historically value-additive.
Return on equity (ROE): Net income divided by shareholders' equity. How efficiently a company generates profit from the capital its owners have left in the business. Higher is better; consistent ROE matters more than peak ROE.
Risk: In finance, usually means volatility — how much a price swings. The everyday meaning (chance of loss) is closer to drawdown. Both matter.

S

S&P 500: Index of 500 large US companies. The default benchmark for US stock investing. Total return over the long run is ~10% nominal, ~7% after inflation.
Sharpe ratio: Excess return per unit of volatility. Higher = better return for the risk taken. Above 1.0 is good, above 2.0 is rare.
Short selling: Borrowing shares, selling them, buying them back later (hopefully cheaper), and pocketing the difference. Profits if the stock falls. Theoretically unlimited losses.
Sortino ratio: Like Sharpe but only counts downside volatility. Treats upside volatility as a feature, not a bug. Often the more honest measure of risk-adjusted return.
Standard deviation: Statistical measure of how much returns vary around the average. Higher SD = more volatile. Used as the denominator in Sharpe ratio.

T

Total return: Return including reinvested dividends. The honest number. Always look for total-return figures when comparing strategies.
Tracking error: How far a fund's returns deviate from its benchmark. Index funds aim for near-zero tracking error. Active managers accept tracking error in exchange for the chance at alpha.

V

Value stock: A company trading cheaply relative to fundamentals (earnings, book value, cash flow). Often slower-growing but with steadier cash flows and dividends. Benjamin Graham's domain.
VIX: The CBOE Volatility Index — the market's expectation of S&P 500 volatility over the next 30 days, derived from options prices. Spikes during crises. Sometimes called the fear gauge.
Volatility: How much prices move around. Usually measured as annualized standard deviation of returns. The S&P's long-run volatility is ~16%. Individual stocks are typically 30-50%.

W

Win rate: Percentage of years (or quarters, or trades) where the portfolio beat its benchmark. A useful sanity check. Hard to sustain a win rate above ~60% over decades.

Y

Yield: Income (dividends or interest) divided by price. A $100 stock paying $4/year has a 4% yield. A 10-year Treasury yielding 4% pays $4 per $100 face value annually.

Z

Zero-cost basis: When you've held a position so long, or sold off pieces over time, that your remaining shares effectively cost you nothing. A nice problem to have for tax planning.

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