Glossary of Investment Terms

This glossary of investment terms provides a comprehensive guide to demystifying various essential terminologies commonly used in the investment landscape.

A

A

• Asset: An asset is anything of economic value owned or controlled by an individual or company with the expectation of getting future benefits or generating future income. This represents the “what you own” side of the net worth calculation and may include current assets (cash and inventories), fixed assets (building and machineries), and intangible assets (patents and trademarks).

• Asset Class: An asset class refers to a group of investments that show similar characteristics or trends in the marketplace. Therefore, such categories of investments are subject to the same regulations and laws. For example, equity or stocks is an asset class that represents ownership in a company. It typically offers higher potential returns and higher volatility and risk. Bonds, real estate, commodities are examples of other asset classes.

• Assets Under Management (AUM): AUM refers to the total market value of the financial assets that a financial institution or investment manager manages on behalf of a client. Such assets are typically detailed in the investment portfolio report, alongside their performance over the period in view.

• Annual Percentage Rate (APR): The annual rate charged for borrowing, or earned by an investment, without taking into account compounding.

• Annual Percentage Yield (APY): The effective annual rate of return taking into account the effect of compounding interest.

• Appreciation: An increase in the value of an asset over time.

• Annual Report: The annual report is a comprehensive document public companies provide to shareholders at the end of every financial year. This document provides comprehensive details on the financial performance and operations of the business over the previous business year. It is typically provided at the end of the year or the beginning of the new year.

• Alternative Investments: This is a broad category of investment vehicles that do not fall into the traditional bond, stock, and cash investment classes. They are often less liquid, more complex, and typically more suited to more sophisticated investors. Examples of alternative investment vehicles include hedge funds, real estate, private equity, derivatives, collectibles, and venture capital.

B

• Balance Sheet: The balance sheet is a critical component of the company’s financial statement showing an overview of the company’s financial position over a period. It reveals information about the company’s assets, liabilities, and shareholders’ equity. From the balance sheet, investors can analyze the debt levels and asset values of a company before making further investment decisions.

• Bear Market: A market condition where stock prices generally fall by 20% or more from a recent high. A bear market is also characterized by widespread pessimism and negative investor confidence, and is often induced by unfavorable economic conditions like economic recession and high unemployment.

• Benchmark: A benchmark is the standard or reference point against which the performance of an investment portfolio or investment manager can be measured. For example, the S&P 500 is a common benchmark for large-cap U.S. stocks while the Bloomberg US aggregate bond index is a common benchmark for investment-grade bonds. Traditionally, assets performing significantly above the benchmark in their asset class attract more investor confidence. 

• Bond: A debt instrument issued by governments or corporations to raise capital. When you buy a bond, you are essentially lending money to the issuer in exchange for regular interest payments and the return of your principal at maturity.

• Book Value: The net worth of a company which is calculated by subtracting the total liabilities from the total assets.

• Brokerage Account: An account opened with a brokerage firm that allows an investor to buy, sell, and hold various investment securities like stocks, bonds, and mutual funds.

• Bull Market: Being the opposite of a bear market, a bull market signifies a market condition where stock prices rise 20% or more from recent lows. This typically characterized by optimism and investor confidence.

C

• Capital Gain: Say you bought some Tesla shares two years ago at $300 per share and you sold it today at $415 per share, the capital gain is the profit you made from selling those shares. Simply put, capital gain is the profit realized from selling an asset at a higher price than its purchase price.

• Capital Loss: In contrast to capital gain, capital loss is the loss incurred when an asset is sold at a price lower than its purchase price. Using the Tesla shares example, say you sold the shares at $275 per share, the capital loss is the amount lost through the transaction.

• Cash Flow: Refers to the movement of money in and out of an account, business, or investment portfolio over a period. Typically, this breaks down into inflows (which is money coming in) and outflows (money going out). When the net amount of cash and cash equivalents moving into a business is more that the outflow, it results in a positive cash flow situation, and vice versa.

• Certificate of Deposit (CD): A certificate of deposit is a type of account that holds a fixed amount of money for a fixed period in return for a fixed interest rate at the time of maturity. Withdrawals done before the fixed maturity date typically attract a penalty. 

• Commission: Commissions are fees charged by a broker or financial advisor for executing a trade or providing a service on behalf of a client. There are several types of commissions payable depending on the type of service or transaction in question. For example a broker may take a fixed fee per stock trade as trading commissions while a financial advisor may charge a flat rate or a percentage of assets under their management.
   
  

• Compounding (Compound Interest): Often called the “eighth wonder of the world” in finance, compounding is a concept where interest made on investments are reinvested to generate additional earnings. So, instead of earning on the principal alone, compounding allows earning on the principal plus, the earnings accrued over the previous investment cycle. Therefore, over time, the money grows faster, making it a powerful tool for long-term wealth creation.

Future Value = Principal ×(1+Interest Rate)Number of Periods

• Diversification: This is an investment strategy that spreads investment within a portfolio across various asset classes, industries, risk profile, geography, and relative volatilities. The goal is to efficiently manage risk by not “putting all your eggs in one basket.” Therefore, the investor can ensure that asset classes or industries with poor performance have minimized impact on the entire portfolio.

• Dividend: A dividend is a portion of a company’s earnings distributed to shareholders periodically, typically annually, semi-annually.

E

• Equity: When people refer to equities in investments, they are typically talking about stocks or shares in a company, which means you have an “equity stake” in that company.

• Exchange-Traded Fund (ETF): An ETF is a type of investment fund that tracks an underlying index (like the S&P 500), sector, or basket of assets, to come up with its value. So, when you buy an ETF share, you inherently gain the projection of the entire basket of assets or sector being tracked. This type of investment has become popular for their low cost and diversification benefits. 

• Expense Ratio: This is the fee that all investors contributing to a mutual fund pay annually to cover the operating expenses. This fee typically covers management, administrative, marketing, and distribution costs. 

F

• Fiduciary Duty: This is a legal and ethical obligation that requires a financial professional like an advisor or investment manager, to act only in the best interest of the clients. That is, at every point in time, they must put the client’s interest above personal interest. In situations where there’s a conflict of interest, the professional must disclose it to the client.

• Fixed Income: This type of investment provides a regular and predictable stream of income payments to the investor.

H

• Hedge Fund: A hedge fund is a private investment fund that pools capital from multiple investors and employs various investment strategies to generate high returns.

• High-Yield Bond: Commonly called junk bond or speculative-grade bond, high-yield bond refers to a type of bond with lower credit rating which is below investment grade, however, offering higher interest rates to compensate for the increased risk.

I

• Income Statement: The income statement is otherwise called the profit and loss (P&L) statement. It is a document that reports a company’s financial performance over a period. It provides insights into the revenues, expenses, net profit and loss, interest, and taxes accrued within the period under review. This document is typically issued alongside the trial balance and balance sheet when filing annual and periodic financial statements.

• Inflation: The rate refers to the general increase in the price of goods and services, and the consequently fall in the purchasing power. As such, during inflation, each unit of currency buys fewer goods and services. Meaning, your money loses value over time.

• Initial Public Offering (IPO): IPO is the process where a private company offers its shares of stock to the general public for sale on the stock exchange for the first time. IPOs are typical instruments for raising substantial capital.

• Interest: Interest may refer to the cost of borrowing money or the return earned on an investment.

• Investment Policy Statement (IPS): A formal document outlining an investor’s financial goals, risk tolerance, and the strategies an investment manager will use to achieve those objectives.

• IRA (Individual Retirement Account): A retirement savings plan that allows individuals to save for retirement with tax advantages. Common types include Traditional IRA and Roth IRA. The traditional IRA is made with pre-tax dollars, therefore, it is tax-deferred as tax is only paid when withdrawing the investment. Roth IRA, however, is entirely tax free since the contributions are made with after-tax dollars.

L

• Liability: A liability is an obligation or debt owed by a company or individual to another party. Therefore, it represents something that needs to be paid or settled in the future. Typical examples are money owed to suppliers and wages owed to employees.

• Liquidity: Refers to how quickly an asset can be sold for its fair value. In other words, it points to the ease and speed with which an asset can be converted into cash without significantly affecting its market price. For example, cash is highly liquid; savings accounts are readily available, likewise, money market funds and stocks from large, frequently traded companies. In contrast, real estate, rare art, or collectibles can take weeks or months to find a buyer willing to pair at a fair price. Therefore, they have comparatively lower liquidity.

M

• Market Capitalization (Market Cap): The total value of a company’s outstanding shares is called the market capitalization. This gives a quick sense of the company’s size and stability as those with larger market caps are often more stable, however, showing slower growth progression. Market capitalization is calculated by multiplying the current share price by the total number of outstanding shares.
  
  Market cap = Current Share Price × Number of Outstanding Shares

• Mutual Fund: A mutual fund is an investment vehicle where several investors pool money together to invest in a diversified portfolio of securities like stocks, bonds, or even private equity. This mutual fund is typically managed by fund managers who research, select, and monitor investments based on the objective of the fund. The fund managers will also be responsible for providing timely reports to investors on the return on investment and impact of the fund objective.

N

• Net Asset Value (NAV): NAV is the the per-share value of a mutual fund or ETF. it represents the value of each unit of a fund’s asset after deducting liabilities. This value is the price investors will buy and sell the mutual fund share, and typically reflects the performance of underlying investments. An increase in the NAV suggests that investments have a positive performance. NAV is calculated by dividing the total value of the fund’s assets (minus liabilities) by the number of outstanding shares.

NAV = (Total Assets of the Fund – Total Liabilities of the Fund) ÷ Number of Outstanding Shares

• Net Worth: Net worth is the value of all assets owned minus all liabilities (debts).

Net Worth = Total Assets – Total Liabilities

P

• Portfolio: A portfolio refers to a collection of all the financial investments held by an individual or institution. It may contain a variety of investment assets including stocks, bonds, mutual funds, ETFs, real estate, cash, and alternative investments.

• Principal: In finance, principal may refer to either of two concepts. You may refer to principal as the initial amount of money invested before any interest, returns, or fees are added. So, an investment of $1,000 in a stock means that the principal is $1,000. 

Alternatively, principal can also refer to the face value of a bond, which is the amount the bond issuer promises to repay at maturity. As such, $1,200 paid at the maturity of a bond is the principal of the bond.

R

• Realized Gain/Loss: The profit or loss an investor incurs after selling an investment is called the realized gain/loss. Realized gain occurs when an investment is sold ata higher price than it was bought, while a realized loss points to selling an investment lower than the cost basis. Unlike unrealized gains which are only profit on paper, the realized gain means that the investor has withdrawn the profit and converted it to cash.

• Return on Investment (ROI): The return on investment (ROI) is a critical metric used to evaluate the efficiency and profitability of an investment. It reveals how much of return, relative to the cost an investment will give after maturity. A higher ROI typically suggests higher profitability. When deciding between several investment options, the ROI can to decide where to allocate capital.

ROI =   (Net Profit from Investment – Cost of Investment)​×100%

     Cost of Investment

• Risk Tolerance: This concept points to how much risk an investor is emotionally and financially comfortable with when making an investment. It speaks to how much loss the investor can withstand should the investment go south. 

Risk appetite varies per individual as some are more comfortable with risk than others. Other factors that play into the risk tolerance are the duration of investment, the aggressiveness of the goals, and the personality of the investor. Longer time horizons often allow higher risk tolerance. In contrast, aggressive goals may require higher.

• Roth IRA: A retirement savings plan where contributions are made with after-tax dollars, and qualified withdrawals in retirement are tax-free.

S

• Security: A security may represent an ownership position in a company in the form of stock,  a creditor relationship with a governmental body or a corporation in the form of bonds, or rights to ownership represented by an option.

• Stock: A type of security that represents a piece of ownership in a corporation, therefore gives claim on a piece of ownership of the corporation’s assets and earnings. Stocks are alternatively referred to as equity or share. Investors that buy stock from a company are called shareholders. The shareholders typically made money from stocks when the value appreciates over time, and through dividends.

• Share: See Stock.

• Shareholders: Investors who own stocks in a corporation are called shareholders. As part-owners, they have a claim to a piece of ownership of the company’s asset and certain rights. However, these rights may vary depending on the type of stock owned. Common stockholders typically have voting rights when selecting a board of directors, approving mergers, or making other significant corporate decisions. Preferred stockholders generally do not have voting rights, but they received fixed dividends before common stock owners.

T

• Tax-Deferred: These accounts are investment vehicles where investments grow and compound over time without being subject to annual taxes on the interest, dividend, or capital gains they generate. Examples of such accounts include 401(k), traditional IRA, 529 college saving plans, and health saving accounts.

• Taxable Account: Often called a brokerage account or non-qualified account, is a standard investment account where investments are subject to taxes each year on any income made, regardless of whether the gains have been converted to cash. Such accounts get taxed on annual interest earned, dividends, and gains realized from selling the investment for profit.

• Time Horizon: The time horizon refers to the total length of time an investor expects to hold an investment or the projected period over which the investment goals are expected to be achieved. This can range from a few months to many years.

U

• Unrealized Gain/Loss: When the value of an investment you still hold increases above the price initially paid for it, there’s said to be unrealized gain. It is classified unrealized gain because the profit hasn’t been converted into actual cash, therefore, only exists on paper. Likewise, unrealized loss refers to a decrease in the value of an investment you still hold, from the initial price paid for it. The unrealized gain/loss value typically fluctuates with the price of the investment vehicle. 

V

• Volatility: A statistical measure of the magnitude of fluctuation in price of a financial asset over a period of time. It measures how quickly and with what intensity the price moves up or down. Higher volatility means that the price of the asset can change dramatically over a short period of time. Therefore, higher volatility is often associated with higher risk, while lower volatility suggests a more stable and predictable condition.