Trading & Finance Glossary

A

Asset Allocation

The strategy of dividing an investment portfolio among different asset categories — such as stocks, bonds, and cash — to balance risk and expected return.

B

Bear Market

A prolonged period, commonly defined as a 20% or greater decline from recent highs, during which prices in a market are falling and pessimism dominates.

Bid-Ask Spread

The difference between the highest price a buyer is willing to pay (bid) and the lowest price a seller will accept (ask) for an asset at a given moment.

Blue Chip Stock

Shares of a large, well-established, financially sound company with a long track record of reliable performance.

Bond

A debt instrument in which an investor lends money to a government or company in exchange for periodic interest payments and the return of principal at maturity.

Bull Market

A period during which prices in a market are rising or expected to rise, generally accompanied by investor optimism.

C

Compound Interest

Interest calculated on both the original principal and the accumulated interest from previous periods, causing growth to accelerate over time.

D

Diversification

Spreading investments across different assets, sectors, or geographies so that poor performance in one area doesn't disproportionately harm the overall portfolio.

Dividend

A portion of a company's profits distributed to its shareholders, typically paid in cash on a regular schedule.

E

ETF (Exchange-Traded Fund)

A basket of securities, such as stocks or bonds, that trades on an exchange like a single stock and often tracks an index.

Expense Ratio

The annual fee, expressed as a percentage of assets, that a fund charges investors to cover its operating costs.

F

Fiat Currency

Government-issued money, like the US dollar or euro, that has value because a government maintains it and people accept it, rather than being backed by a physical commodity like gold.

I

Inflation

The rate at which the general level of prices for goods and services rises over time, eroding the purchasing power of a given amount of money.

Interest Rate

The cost of borrowing money, or the return earned on savings, usually expressed as an annual percentage of the amount borrowed or deposited.

IPO (Initial Public Offering)

The first time a private company sells shares of stock to the public, transitioning it into a publicly traded company.

L

Leverage

Using borrowed capital to increase the potential return of an investment, which also proportionally increases the potential loss.

Liquidity

How quickly and easily an asset can be converted into cash without significantly affecting its price; cash itself is the most liquid asset.

M

Market Capitalization

The total value of a publicly traded company's outstanding shares, calculated by multiplying share price by the number of shares outstanding.

Mutual Fund

A pooled investment vehicle managed by professionals that combines money from many investors to buy a diversified portfolio of stocks, bonds, or other securities.

N

Net Worth

The total value of everything a person or entity owns (assets) minus everything they owe (liabilities).

O

Options Contract

A financial derivative giving the holder the right, but not the obligation, to buy (call) or sell (put) an asset at a set price within a specific time frame.

P

P/E Ratio (Price-to-Earnings)

A valuation metric calculated by dividing a company's share price by its earnings per share, used to gauge whether a stock is relatively expensive or cheap.

Portfolio

The complete collection of financial investments — stocks, bonds, funds, cash, and other assets — held by an individual or institution.

R

Recession

A significant, widespread decline in economic activity lasting more than a few months, commonly associated with falling GDP, rising unemployment, and reduced spending.

Risk Tolerance

The degree of variability in investment returns that an individual is willing and able to withstand, shaping how aggressively or conservatively they invest.

S

Short Selling

A trading strategy that profits from a price decline by borrowing and selling an asset, intending to buy it back later at a lower price to return to the lender.

Stock

A unit of ownership in a company, entitling the holder to a proportional share of its assets and profits.

Stock Split

A corporate action that increases the number of a company's outstanding shares while proportionally reducing the price per share, without changing the total value held.

V

Volatility

A statistical measure of how much and how quickly the price of an asset fluctuates over a given period; higher volatility generally implies higher risk.

Y

Yield

The income return on an investment, typically expressed as a percentage of its price, such as a bond's interest payments or a stock's dividend relative to its price.