65 terms

General Investing — 65 terms defined

Every general investing term in the StockTools glossary, in plain language with a worked example — and connected to the free calculator that puts it to work.

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401(k)A 401(k) is an employer-sponsored retirement account that lets employees contribute a portion of pretax salary, often with an employer matching contribution up to a set percentage. Contributions and investment growth are tax-deferred until withdrawal in retirement, when withdrawals are taxed as ordinary income.General Investing ArbitrageArbitrage is the practice of simultaneously buying and selling related securities to profit from a temporary price discrepancy, with little or no net risk if executed correctly. Classic arbitrage exploits the same asset trading at two different prices in two different places at the same instant.General Investing Asset AllocationAsset allocation is the split of a portfolio across asset classes, stocks, bonds, cash, and sometimes real estate or commodities, expressed as target percentages like the classic 60/40 stock/bond mix. Landmark attribution studies found allocation explains the large majority of a diversified portfolio's return variability over time, dwarfing security selection.General Investing Asset ClassAn asset class is a group of investments that share similar characteristics and behave similarly in the market: stocks, bonds, cash and cash equivalents, real estate, and commodities are the major traditional categories. Assets within a class tend to move together more than assets across classes do.General Investing BetaBeta measures how much a stock tends to move relative to the overall market: a beta of 1.0 moves with the market, 1.5 amplifies it by half, and 0.5 dampens it by half. Statistically it is the covariance of the stock's returns with the market's, divided by the variance of the market — the slope of the regression line through their paired returns, typically computed over 2-5 years of weekly or monthly data.General Investing Blue Chip StockA blue chip stock is shares of a large, well-established, financially sound company with a long history of reliable performance, often (though not always) paying a dividend. The term borrows from poker, where the blue chip carries the highest value at the table.General Investing BondA bond is a loan an investor makes to a borrower, government or corporate, in exchange for periodic interest payments (the coupon) and repayment of the original amount (the principal, or face value) at a set maturity date. Bonds are the core building block of fixed-income investing.General Investing Buffett IndicatorThe Buffett Indicator divides the total market capitalization of a country's stock market by its GDP, gauging how large equity valuations have grown relative to the economy beneath them. For the US, the numerator is typically the Wilshire 5000 total market index; Warren Buffett called the ratio "probably the best single measure of where valuations stand at any given moment" in a 2001 Fortune article.General Investing Capital GainsA capital gain is the profit from selling an asset for more than its cost basis, and the US tax code splits it by holding period: positions held one year or less are short-term gains taxed at ordinary income rates (10-37%), while positions held more than one year qualify for long-term rates of 0%, 15%, or 20% depending on income.General Investing Closed-End FundA closed-end fund raises a fixed amount of capital in an initial public offering and then trades on an exchange like a stock, with a fixed number of shares, rather than continuously issuing and redeeming shares the way an open-end mutual fund or ETF does.General Investing CommissionA commission is the fee a broker charges for executing a trade, historically a flat or per-share charge on every buy and sell order. US retail stock trading commissions largely went to zero starting in 2019, as brokers shifted to earning revenue through payment for order flow and interest on client cash instead.General Investing Common StockCommon stock is the standard form of equity ownership in a company, giving holders voting rights on major corporate matters and a claim on residual profits (through dividends, if declared) and residual assets in a liquidation, after all creditors and preferred shareholders are paid first.General Investing Compounding$10,000 growing at 8% a year becomes $21,589 in 10 years, $46,610 in 20, and $100,627 in 30. That acceleration, returns earning returns on prior returns, is compounding, and the lopsided back half is the whole point: the last decade in that example adds more dollars than the first two combined.General Investing Convertible BondA convertible bond is a corporate bond that can be exchanged for a predetermined number of the issuing company's shares, at the bondholder's option, instead of being repaid in cash at maturity. It behaves like a regular bond most of the time but gains stock-like upside if the share price rises above the conversion price.General Investing Corporate BondA corporate bond is debt issued by a company to raise money, paying investors a fixed or floating interest rate in exchange for the loan. Corporate bonds carry more default risk than government bonds, since a company can go bankrupt in a way a government issuing its own currency generally cannot, so they pay a higher yield to compensate.General Investing Cost BasisCost basis is what you paid for an investment, including commissions, adjusted for events like splits, return-of-capital distributions, reinvested dividends, and wash sales. It is the number your gain or loss is measured against when you sell.General Investing Credit RatingA credit rating is a letter-grade assessment, issued by agencies like S&P, Moody's, and Fitch, of how likely a borrower is to repay its debt in full and on time. Ratings run from AAA (the highest quality) down through the investment-grade tiers to speculative, junk-rated tiers.General Investing DiversificationDiversification is spreading a portfolio across enough different holdings that no single position, sector, or country can sink it. Its power comes from imperfect correlation: assets that do not move together smooth each other's swings, cutting portfolio volatility without cutting expected return proportionally.General Investing Dividend AristocratA Dividend Aristocrat is an S&P 500 company that has increased its dividend every year for at least 25 consecutive years, a formal designation tracked by S&P Dow Jones Indices. The list currently runs to several dozen companies across a range of industries.General Investing Dividend Growth RateDividend growth rate is the annualized pace at which a company raises its per-share dividend, usually quoted as a 3-year, 5-year, or 10-year compound annual growth rate. For income investors it is the second half of the return equation: starting yield tells you what the position pays now, growth rate tells you what it will pay later.General Investing Dollar-Cost Averaging (DCA)Dollar-cost averaging is investing a fixed dollar amount on a fixed schedule regardless of price, so the same $500 buys more shares when the price is low and fewer when it is high. The mechanical result: your average cost per share lands below the average of the prices you bought at whenever prices moved at all.General Investing DRIP (Dividend Reinvestment Plan)A DRIP is a dividend reinvestment plan: instead of receiving cash dividends, the payout automatically buys more shares (including fractional shares) of the same stock or fund, usually commission-free. Each dividend then earns its own dividends, which is compounding running on autopilot.General Investing Efficient Market Hypothesis (EMH)The efficient market hypothesis holds that asset prices fully reflect all available information at all times, which implies it should be impossible to consistently beat the market through stock picking or market timing, since any advantage would already be priced in. It comes in weak, semi-strong, and strong forms depending on what kind of information is assumed to be reflected.General Investing EquityEquity is ownership: a claim on an asset after all debts against it are subtracted. For a public company, equity is its stock; for a homeowner, it is the home's value minus the remaining mortgage; on a balance sheet, shareholders' equity is total assets minus total liabilities.General Investing Expense RatioAn expense ratio is a fund's annual fee expressed as a percentage of assets, deducted continuously from the fund's returns rather than billed to you. Broad index ETFs now charge 0.03-0.20%; actively managed mutual funds commonly charge 0.50-1.00% or more for the same asset class.General Investing FiduciaryA fiduciary is legally required to act in a client's best interest, ahead of their own financial interest, when giving advice or managing money. Registered investment advisors are generally held to a fiduciary standard; many brokers historically operated under a lower "suitability" standard, which only required recommendations to be appropriate, not necessarily optimal.General Investing Futures ContractA futures contract is a standardized, exchange-traded agreement to buy or sell an asset (a commodity, an index, a currency, or an interest rate) at a set price on a set future date. Unlike options, both parties to a futures contract are obligated to complete the transaction, not just given the right to.General Investing Graham NumberThe Graham Number is the square root of 22.5 x EPS x book value per share — a ceiling price a defensive investor should pay for a stock under Benjamin Graham's rules. The 22.5 is not arbitrary: Graham capped the P/E at 15 and price-to-book at 1.5, and 15 x 1.5 = 22.5, so the formula blends both limits into one number.General Investing Growth InvestingGrowth investing focuses on companies expected to grow revenue and earnings faster than the market average, often paying a premium valuation (a high P/E or P/S ratio) for that expected growth rather than looking for statistically cheap stocks. The bet is that future earnings growth will eventually justify today's higher price.General Investing Income InvestingIncome investing prioritizes generating regular cash flow from a portfolio, through dividends, bond interest, or other distributions, over pursuing capital appreciation. It is common among retirees and others who need a portfolio to fund ongoing expenses rather than simply grow over decades.General Investing Index FundAn index fund is a mutual fund or ETF built to replicate the holdings and weighting of a specific benchmark, like the S&P 500, rather than trying to beat it through active stock picking. Because there is no research team trying to outsmart the market, index funds charge dramatically lower fees than actively managed funds.General Investing Insider OwnershipInsider ownership is the percentage of a company's shares held by its officers, directors, and beneficial owners of more than 10% — the people the SEC formally classifies as insiders. The data is public by law: holdings appear in the annual proxy statement, and every change is disclosed on a Form 4 within two business days.General Investing Investment GradeInvestment grade describes a bond rated BBB-/Baa3 or higher by the major credit rating agencies, signaling a relatively low risk of default. Many pension funds, insurance companies, and conservative bond funds are restricted by their own rules to holding only investment-grade debt.General Investing IRA (Individual Retirement Account)An IRA is a tax-advantaged retirement account individuals can open independently of an employer, with annual contribution limits set by the IRS. A traditional IRA offers a tax deduction on contributions, with withdrawals taxed as ordinary income in retirement.General Investing Junk Bond (High-Yield Bond)A junk bond is a corporate bond rated below investment grade (BB+ or lower at S&P, Ba1 or lower at Moody's), issued by a company with a higher perceived risk of default. To compensate for that risk, junk bonds pay meaningfully higher yields than investment-grade debt from more stable issuers.General Investing Large-Cap StockA large-cap stock is generally defined as a company with a market capitalization above $10 billion, a threshold that includes most household-name businesses and the bulk of the S&P 500's total value. Large caps tend to be more stable and more heavily analyzed than smaller companies.General Investing Load FundA load fund is a mutual fund that charges a sales commission (the "load") on top of its ongoing expense ratio, either when you buy shares (front-end load) or when you sell them (back-end load, sometimes called a contingent deferred sales charge). Loads typically run from 3% to 6% of the amount invested.General Investing Magic FormulaThe Magic Formula ranks every stock twice — once on earnings yield (EBIT / enterprise value) and once on return on capital (EBIT / (net working capital + net fixed assets)) — then adds the two ranks and buys the best combined scores. Joel Greenblatt published it in The Little Book That Beats the Market (2005) as a mechanical way to buy good businesses (high return on capital) at cheap prices (high earnings yield).General Investing Mega-Cap StockA mega-cap stock is a company with a market capitalization above roughly $200 billion, a tier occupied by only a handful of the largest companies in the world at any given time. Mega caps carry outsized weight in cap-weighted indexes like the S&P 500, so their moves can dominate the index's overall return.General Investing Micro-Cap StockA micro-cap stock generally has a market capitalization between $50 million and $300 million, sitting just above penny stocks in size. Micro caps often trade on thin volume, carry wide bid-ask spreads, and file with the SEC but attract little to no analyst coverage, leaving investors to do their own research from primary filings.General Investing Mid-Cap StockA mid-cap stock generally falls between $2 billion and $10 billion in market capitalization, occupying the space between small, higher-growth companies and large, more mature ones. Mid caps are sometimes described as the sweet spot for growth: established enough to have survived the riskiest early years, but not yet so large that rapid growth becomes mathematically difficult.General Investing Municipal BondA municipal bond ("muni") is debt issued by a state, city, or local government agency, typically to fund public projects like schools, roads, or utilities. The defining feature is that interest income is usually exempt from federal income tax, and often from state and local tax if you live in the issuing state.General Investing NAV (Net Asset Value)NAV is the per-share value of a fund's holdings: total assets minus total liabilities, divided by shares outstanding. Mutual funds are priced and traded once a day at NAV, calculated after the market close.General Investing Net Current Asset Value (NCAV)Net current asset value is current assets minus total liabilities — what would be left for shareholders if a company's factories, patents, and goodwill were all worth zero and only the cash, receivables, and inventory counted. Benjamin Graham's "net-net" strategy bought stocks below two-thirds of NCAV per share, a discount so deep the liquidation value alone covered the purchase.General Investing Peter Lynch Fair ValuePeter Lynch fair value is a heuristic, not a valuation model: it says a growth stock is fairly priced when its P/E equals its earnings growth rate, so fair value = growth rate x EPS. A company growing earnings 20% a year with $2.50 in EPS gets a fair value of 20 x $2.50 = $50 — the price at which its PEG ratio is exactly 1.0.General Investing PortfolioA portfolio is the full collection of investments an individual or institution holds, considered together rather than position by position. Portfolio-level thinking is the basis of modern risk management: a single stock's volatility matters less than how that stock behaves relative to everything else you hold.General Investing ProspectusA prospectus is the legal document a company or fund must file and provide to investors before selling securities to the public, disclosing the business, the risks, the terms of the offering, and (for funds) the fees and past performance. It is the primary source document regulators require to make sure investors have the information to make an informed decision.General Investing Random Walk TheoryRandom walk theory holds that stock price changes are unpredictable and independent of past movements, meaning a stock's chart history contains no reliable signal for where the price goes next. It is closely related to the efficient market hypothesis and is most associated with Burton Malkiel's book "A Random Walk Down Wall Street."General InvestingRebalancingRebalancing is selling what has grown past its target weight and buying what has shrunk below it, restoring a portfolio to its intended allocation. Left alone, portfolios drift toward whatever ran hottest: a 60/40 mix left untouched through a long bull market quietly becomes 75/25, carrying far more equity risk than its owner signed up for.General Investing REIT (Real Estate Investment Trust)A REIT is a company that owns, operates, or finances income-producing real estate, and trades on an exchange like a stock, giving investors a way to own real estate without buying property directly. To maintain their special tax status, REITs must distribute at least 90% of their taxable income to shareholders as dividends.General Investing Robo-AdvisorA robo-advisor is an automated investment service that builds and manages a diversified portfolio, usually of low-cost ETFs, based on an investor's goals and risk tolerance, with little or no human advisor involvement. Fees are typically a small percentage of assets annually, well below traditional human financial advisory fees.General Investing Roth IRAA Roth IRA is a retirement account funded with after-tax contributions, meaning there is no upfront tax deduction, but qualified withdrawals in retirement, including all investment growth, are entirely tax-free. It is the mirror image of a traditional IRA's tax treatment.General Investing Rule of 72The Rule of 72 is a quick mental-math shortcut for estimating how many years it takes an investment to double at a given annual rate of return: divide 72 by the rate. At 8% a year, money doubles in about 9 years (72 divided by 8); at 6%, about 12 years.General Investing Sector RotationSector rotation is the strategy of shifting portfolio weight between different market sectors (technology, energy, financials, healthcare, and so on) based on where each sector sits in the economic cycle. Cyclical sectors tend to lead coming out of a recession, while defensive sectors tend to hold up better heading into one.General Investing Shiller P/E (CAPE)The Shiller P/E divides an index's price by its average inflation-adjusted earnings over the trailing ten years, smoothing out the boom-bust earnings swings that make a single-year P/E lie at cycle turns. Robert Shiller and John Campbell built the measure — CAPE, for cyclically adjusted price-to-earnings — and Shiller's data on it runs back to 1881.General Investing Small-Cap StockA small-cap stock generally has a market capitalization between $300 million and $2 billion. Small caps offer more room for percentage growth than large caps (doubling a $500M company is a very different task than doubling a $500B one) but come with thinner trading volume, less analyst coverage, and more volatility.General Investing Tax-Loss HarvestingTax-loss harvesting is selling an investment at a loss to realize that loss for tax purposes, then using it to offset capital gains elsewhere in the portfolio (and up to $3,000 of ordinary income per year), while staying invested by buying a similar (but not "substantially identical") replacement security.General Investing Total Addressable Market (TAM)Total addressable market is an estimate of the total revenue opportunity available to a company or product if it captured 100% of its potential market, used most often to argue how much room a growth company has left to expand. It is a ceiling, not a forecast of what the company will actually capture.General Investing Treasury Bill (T-Bill)A Treasury bill is short-term US government debt with a maturity of one year or less, sold at a discount to its face value rather than paying a periodic coupon: you buy it below par and it matures at par, with the difference being your return.General Investing Treasury BondA Treasury bond is a long-term debt security issued by the US federal government, with maturities of 20 or 30 years, paying interest every six months until maturity. Because it is backed by the full faith and credit of the US government, it is treated as one of the closest things to a risk-free asset in global finance.General Investing Treasury NoteA Treasury note is US government debt with a maturity between 2 and 10 years, paying interest every six months, sitting between the short-term T-bill and the long-term Treasury bond in maturity. The 10-year Treasury note yield in particular is one of the most closely watched numbers in all of finance.General Investing Value InvestingValue investing is a strategy of buying stocks that appear cheap relative to their fundamentals (low P/E, low price-to-book, high dividend yield) on the theory that the market has temporarily mispriced them below their intrinsic worth. The approach was popularized by Benjamin Graham and later Warren Buffett.General Investing Wash Sale RuleThe wash sale rule is an IRS regulation that disallows a tax loss on a security if you buy the same or a substantially identical security within 30 days before or after the sale, a 61-day window counting the sale date itself. The rule exists to stop investors from harvesting a tax loss while never actually giving up the position.General Investing Yield on CostYield on cost divides a stock's current annual dividend by the price you originally paid, rather than by today's price. Hold a dividend grower long enough and the two yields diverge dramatically — the position pays an ever-larger percentage of the capital you actually invested, even while new buyers see an ordinary current yield.General Investing Yield to Maturity (YTM)Yield to maturity is the total annualized return a bond will deliver if held until it matures and all coupon payments are reinvested at the same rate, accounting for the bond's current price, coupon, face value, and time remaining. It is the single number bond investors use to compare bonds with different coupons, prices, and maturities on an apples-to-apples basis.General Investing