Glossary: every word this site uses, defined once

Financial vocabulary is not difficult, it is just unshared. Most of these words describe something an ordinary person already understands, wearing a name that was chosen by somebody who was not thinking about you. Where a definition matters enough to deserve a full treatment, it links to the guide that gives it one.

Growth, time and cost

Compounding

Growth calculated on a balance that already includes earlier growth. It is the reason a long, dull, uninterrupted period beats a short, clever one. Worked out across four decades in compound interest explained.

Interest

What a lender is paid for the use of money, set in advance by a contract. A savings account pays you interest because you are lending to the bank.

Return

What an investment gained or lost, usually stated as a percentage of what it was worth at the start. Unlike interest, nobody promises it and it can be negative for years.

Nominal and real

A nominal figure is the number on the statement. A real figure is that number after inflation has been subtracted, which is the one that tells you what it buys. See how inflation affects your savings.

Rule of 72

A mental shortcut: divide 72 by an annual growth rate to estimate how many years the money takes to double. At 6 percent, roughly twelve years. It works on debt and on rising prices too.

Expense ratio

The annual cost of holding a fund, charged as a percentage of the amount held. It is deducted whether the fund rose or fell, and because it is charged every year it compounds against you.

Total return

Price change plus any income received, which is the only version of return that can be compared fairly between an investment that pays income and one that does not.

What you can own

Share

A unit of ownership in a company. Owning one entitles you to a proportional slice of whatever the company is worth and whatever it decides to distribute. Explained in stock market basics.

Bond

A loan you made, written down and tradable. The borrower agrees to pay a stated amount of interest on a schedule and to return the face value on a stated date. See bonds explained for beginners.

Fund

A pooled container. Many people put money in, a single portfolio is bought with it, and each holder owns a proportional slice. The container says nothing by itself about what is inside.

Index

A published, rule based list of holdings and their weights, maintained by whoever owns the index. It is a measurement, not a product, until a fund is built to track it.

Index fund

A fund whose only job is to hold what an index says to hold, in the stated proportions. Compared with the alternative in index funds and mutual funds, side by side.

Actively managed fund

A fund where a person or team decides what to hold, aiming to do better than a chosen benchmark. It costs more to run, because judgement is more expensive than a rule.

Fractional share

A slice of a single share or fund unit. Where it is offered, the price of one unit no longer sets your minimum, so a small contribution can be fully invested instead of sitting in cash.

Cash equivalent

Something so short dated and stable that it behaves like cash for practical purposes. Useful shorthand, and worth remembering that equivalent is not the same word as identical.

Prices and quoting

Market price

What the most recent buyer and seller agreed on. It is a fact about one transaction, not a valuation of everything else that exists.

Market capitalisation

Share price multiplied by the number of shares. A company with 10 million shares priced at 40 has a market value of 400 million, whatever the price of a single share suggests.

Price to earnings ratio

Price per share divided by earnings per share. A company earning 2 per share priced at 30 has a ratio of 15, which is another way of saying the price equals fifteen years of current earnings. Used in value and growth, side by side.

Yield

Annual income divided by the price paid. A holding worth 10,000 that pays 300 a year yields 3 percent. Yields move when either the income or the price moves, which is why a rising yield is sometimes bad news.

Dividend

Cash a company chooses to hand to its owners out of profits. It is not free money: the company is worth exactly that much less the moment it leaves. See dividend investing for beginners.

Coupon

The fixed interest a bond pays, quoted as a percentage of face value. A 1,000 bond with a 4 percent coupon pays 40 a year regardless of what the bond later trades for.

Par value

The amount a bond returns at maturity, also called face value. Bonds trade above or below it as interest rates elsewhere move.

Spread

The gap between the price at which you can sell and the price at which you can buy at the same moment. It is a real cost even though no one sends you a bill for it.

Risk, and the words that describe it

Volatility

How much a price moves around, in either direction. Often used as a stand in for risk, which is only fair if your real risk is having to sell on a bad day.

Drawdown

The fall from a previous high point to a later low point, quoted as a percentage. The number that actually tests people, because it is what they see on the statement.

Risk tolerance

The size of a fall you can watch without selling. It is a behavioural fact about you, not a score, and most people overestimate it until the first real test. Unpacked in how much risk can you actually live with.

Risk capacity

How much of a fall your circumstances can absorb, regardless of how you feel about it. Someone who needs the money in two years has low capacity even if they have a strong stomach.

Diversification

Holding enough different things that no single one can decide your outcome. It reduces the damage a single mistake can do; it does not prevent losses. See diversification explained.

Correlation

Whether two holdings tend to move together. Twenty holdings that all rise and fall in unison are twenty names, not twenty different bets.

Liquidity

How quickly something can be turned into cash at a fair price. A savings account is liquid, a house is not, and an emergency fund only works if it is the first kind.

Concentration

The opposite of diversification: a large part of a portfolio depending on a single outcome. It is how the largest fortunes are made and also how they are undone.

Household money

Emergency fund

Cash held specifically so that an ordinary setback does not force you to sell an investment or borrow expensively. Sized and located in how to build an emergency fund.

Fixed and variable spending

Fixed costs arrive on a schedule and are hard to change quickly, such as rent. Variable costs move with your choices week to week. Separating them is the first useful thing a spending record does.

Savings rate

The share of what you take home that you do not spend. The one input in this entire subject that you fully control. Discussed in what percentage of income should I save.

Dollar cost averaging

Investing the same amount on the same schedule regardless of price, so that the timing decision disappears. The worked example is in what is dollar cost averaging.

Asset allocation

The split of a portfolio between broad types of holding, such as shares and bonds. It decides more about how a portfolio behaves than any individual choice inside it.

Rebalancing

Returning a portfolio to its written split after growth has pulled it out of shape. The one maintenance job a simple portfolio needs, covered in how to build a first portfolio.

Time horizon

How long until you need the money for its actual purpose. It does more to decide where money should sit than any opinion about markets.

Passive income

Income that arrives without ongoing work, which in practice means income produced by capital you already have. The capital is the part usually left out of the sentence, and it is written back in on this page.

Definitions are written for a general reader and kept deliberately short. Legal and regulatory meanings of some of these terms differ by country, and none of these entries is advice about what to hold.