55 Finance Terms You Should Know Before Investing
You know that feeling when you run into someone and their name is on the tip of your tongue, but you just can’t place it? Then, when they remember you without hesitation, you just squirm and change the subject. Talking finance can feel a lot like that if you’re not familiar with the terminology.
That’s certainly an issue for anyone interested in investing—and that issue gets bigger if you have serious ambitions of someday pursuing a career in finance. You’re ready to learn more about how investing works and who the major players are, but you don’t want to be greeting your peers with a blank stare if they mentioned terms like the “Target-date fund” or “Bottom-up investing.”
The financial world can be intimidating, but once you debunk the jargon, it will be much easier to jump into the conversation with confidence.
We rounded up some of the most important—and sometimes confusing—finance terms to help you master the vocab.
Learn the lingo with these finance terms
Use this guide to familiarize yourself with 55 fundamental finance terms and you will be well on your way to becoming an investment expert.
1. Annual percentage rate (APR)
The rate that is earned from an investment over the length of a year, expressed in a percentage.
When any financial asset increases in value.
3. Asset allocation
This refers to how an investment portfolio is divided among different types of investments—usually with the intention of balancing risk.
Also known as capital or capital assets, assets refer to anything you own with financial value (e.g., shares, bonds, certificates of deposit, etc.)
5. Bear market
When prices of securities in a market are falling, causing pessimism among investors.
6. Blue chip
Companies that are notorious for being financially sound and enduring the ups and downs of the economy.
7. Bottom-up investing
When an investor focuses on the activity of individual stocks rather than the overall economic or market trends.
An estimation of how much can be spent as a result of how much is earned during a future period.
9. Bull market
When prices of securities in a market are rising or projected to rise, resulting in optimism and confidence among investors.
Money an investor loans to a company, city or government with the promise to be paid back in full with regular interest payments. U.S. Treasury bonds are generally considered a safe investment with small but guaranteed returns.
11. Bond rating
Used to evaluate the credit quality of a bond. This is indicated by a lettering system—“AAA” being the highest rating and “CCC” being low.
12. Capital gain
The profit that’s made when an asset is sold for more than its original purchase price.
13. Capital growth
When an asset or investment increases in value over a period of time.
14. Certificate of deposit (CD)
A sum of money deposited in a bank which accumulates interest over time. Unlike a savings account, the money cannot be accessed until an agreed-upon date—the trade-off being that CDs often have higher interest rates than savings accounts.
15. Common stock
The most common form of stock in which dividends depend on the success or failure of the company you invest in.
An investment strategy that focuses all investments in a single stock or sector.
17. Cutoff time
All stock exchange markets, such as the NYSE or the NASDAQ, only allow trading between certain hours each day. The cutoff time refers to when those markets close for the day.
Investing in different types of assets, companies or stocks in a variety of sectors or industries.
The distribution of profits a company pays to its shareholders.
20. Dow Jones Industrial Average
An index that consists of 30 significant stocks traded on the New York Stock Exchange and the NASDAQ; also known as the Dow or DJIA.
21. Earnings per share (EPS)
This figure is calculated by dividing a company’s profit by the number of outstanding shares of its common stock. This is one important figure for determining the value of a stock.
A combination of stocks that is used as a benchmark to reflect the overall performance of all investments within a sector.
The (typically) gradual rise in the cost of goods or services, often measured as an annual percentage increase.
A fee charged by a lender to a borrower for the use of assets, usually expressed in the form of an annual percentage rate.
The practice of committing money to something with the expectation of earning additional income or profit.
26. Large cap stocks
A term referring to companies that have a market capitalization of more than $10 billion.
The ability to quickly convert an asset to cash without losing much value. Stocks, mutual funds and short-term bonds are examples of liquid assets, while things like real estate investments and land are considered illiquid.
28. Market capitalization
The overall dollar value of a company’s outstanding shares, used to determine a company’s size.
29. Mutual fund
A pool of funds collected from several individuals to invest in a shared asset in which dividends are split between members.
An international electronic marketplace where securities can be bought and sold.
31. Net income (NI)
The amount of earnings or profit for an individual or company after all expenses have been subtracted.
32. Net worth
A business or individual’s total assets subtracted by their liabilities.
The ability to sell or buy an asset at a predetermined price for a set period of time.
34. Penny stocks
Shares that sell for less than a dollar, often a volatile investment.
35. Preferred stock
Investors with preferred stock receive set dividends at consistent intervals and have first claim on assets if the company goes under, but they typically do not have voting power and do not receive larger dividends if the company succeeds.
All of an investor’s financial assets: shares, bonds, CDs, etc.
A legal document required by the Securities and Exchange Commission (SEC) that informs an investor of a company’s history, management biographies, financial statements, best- and worst-case scenarios, and other information about an investment.
38. Put option
A put is a form of option contract that allows the owner the right to sell an asset at a set price within a certain time frame. This is used to hedge against asset prices falling—you pay a premium to have the option to sell at a set price, but if you own an option contract for multiple shares at $10 per share and the share value drops to $8, you’ll come out ahead.
Capital gains and other forms of income from investments, usually quoted as a percentage.
The total amount of money an individual or company earns during a period of time.
A catchall term for investments such as stocks, bonds, mutual funds, etc.
42. Securities and Exchange Commission (SEC)
A department of the U.S. government that seeks to enforce investment laws, protect investors and maintain a healthy economy.
Any individual who owns at least one share of a company’s stock, entitling them to a portion or percentage of the company’s profits.
44. Short-term investment
When an asset is purchased and sold within a year.
45. Small-cap stocks
A term for companies with a small market capitalization, usually between $300 million to $2 billion.
46. Stock exchange
A physical or electronic marketplace where securities are traded. Common exchanges include the New York Stock Exchange and NASDAQ.
47. Stock market
The general term referring to the act of trading and exchanging of stocks.
A share is a unit of ownership in a corporation or financial asset.
A security that shows partial and proportionate ownership of a business. Stockholders are entitled to a portion of that business’s earnings or assets. The more stock you own, the larger the share you receive.
50. Target-date fund
A fund that is tailored toward an end date—riskier investments at first and more conservative investments as the target or end date approaches. Often a 401(k) or a college investment fund.
51. Time horizon
When you expect to stop investing in an asset or security.
52. Top-down investing
An investment strategy that focuses first on analyzing the “big picture economy,” this approach prioritizes macro-level factors when evaluating investment options.
A measure of risk that refers to the frequency an investment rises or falls in value or the amount the value varies.
The number of shares or other assets that have been traded in a specific time period.
This term is used to refer to the specific dividends or income earned by an investor.
Invest in your financial future
Now that you can talk the talk, you’re one step closer to walking the walk. Working in finance can be an exciting and rewarding way to make a living—but you’ll need some additional education first.
Before getting too far, find out if this field is the right fit for you by reading our article, “9 Signs You Have What It Takes to Major in Finance.”
EDITOR’S NOTE: This article was originally published in August 2015. It has since been updated to include information relevant to 2019.