Glossary of investment terms:

This page isn't alphabetical because the later entries build on the earlier ones. You'll have to search on the page for a specific term.


Money you invest or are lent. For an investment, this is in contrast to gains. For instance, if you contribute $50/month to a savings account for 1 year, you will have $600 in principal, plus interest. If you borrow $200,000 for a house you have $200,000 in principal to pay, plus interest.

Capital gain/appreciation

The increase in price of an investment, or “capital”. If you buy a house at $200,000 and sell it at $300,000, you have made $100,000 in capital gains. This is in contrast with dividends or interest (payments you receive in exchange for your investment) or (on your tax forms) with earned income (wages or salary).


Annual Percentage Yield. The APY is the annual increase in the value of an investmest due to interest or dividends. After 1 year, a $1000 investment will grow to $1100 at 10٪ APY. The annual increase in your debt from interest when paying off a loan is called the APR (Annual Percentage Rate), but it's exactly the same concept. Credit cards can charge you 15-20٪ APR, which is very, very high. Savings accounts yield around 3-5٪ APY these days, which is better than a few years ago, but still low.

Interest rate

The amount an investment would yield in a year if the interest were only compounded annually. This number is lower than the APY because when interest is compounded that interest itself earns interest, making your overall yield for the year higher. For instance, 5٪ annual interest compounded daily (not uncommon) corresponds to 5.126٪ APY.


Return is the total increase in the value of an investment due to interest or dividends and capital appreciation. Unlike the yield, this number can be negative if the investment vehicle you're holding loses value. For instance, gold never pays dividends or interest (it just sits there), but its price changes a lot, so an investment in gold has a yield is 0 but the return could be large (largely positive or negative!). By contrast, money in a savings account accrues interest but the money itself never loses value (inflation aside), so its yield and return are the same. Stocks change in price and can offer dividends, so their return is a comibination of yield and capital gains.


Certificate of Deposit. A CD is like a savings account that exchanges a high APY for inconvenience. Let's say a bank offers a 1-year CD at 4٪ APY. You can purchase such a CD (in any denomination you like, though there may be a minimum) and file it away. Let's say you put in $1000. After 1 year, you'll have a CD worth $1040. You can then get your money, or allow the CD to automatically renew for another year at whatever APY the bank offers then.
But let's say you suddenly need that $1000 after only 6 months. In that case you can cash out the CD early, but you'll pay a penalty, often 3 months of interest. So you'll only earn interest on 3 of the 6 months you've held the CD, which comes out to $1010. Pretty paltry for a 6 month investment.
Thus, CDs are good if you know you won't use the cash and you're looking for the highest possible guaranteed rate.


A stock is a share of a publicly traded company. There are lots of kinds that come with various privileges. There are two ways to make money with stocks: appreciation and dividends. Stocks go up (on average) meaning that a given share increases in value (appreciates) on the stock market. Some companies offer dividends, which is each shareholder's share of the company's profits, and many stock brokers offer plans where you can automatically reinvest dividends into more stock. This is how you make money with huge companies that have little room to grow (like Microsoft or Coke).

Mutual Funds

Mutual funds are how those of us who don't really understand stocks safely make money from them. In a mutual fund, many individual investors pool their resources together and hire a professional fund manager to manage their stock holdings for them. The fund manager takes care of all of the details of owning stock including selling stinkers, researching new companies, worrying about the details of taxes, timing market trends, and all of that. All you do is buy shares of a fund, and watch it go. There are lots of ways that mutual fund companies charge their customers money, including various fees, “loads”, and expense ratios.


Bonds are sort of like CDs backed by governments or companies instead of banks. Bonds have ratings based on how likely the backer is to be able to make good on the bond. Poor ratings mean high yields. US savings bonds are the absolute safest and easiest to acquire (there's a website). Bonds pay interest annually according to their “coupon rate”. As far as I know, you can't cash bonds out early, but they can, in principle, be sold, which is what happens in the bond market. Bonds are generally considered to be a low-return, low-volitility alternative to stocks.

Bond fund

Bond funds are the easiest way to invest in bonds that aren't US savings bonds. These are mutual funds which trade on the various bond markets. You don't have to hold on to bond funds like you do bonds because the funds are constantly buying and selling bonds, so you can buy and sell shares of the fund at any time. The value of fund shares will vary day to day, but not as much as stock funds, and the rate of return of the fund will be more akin to bonds than stocks.

Index funds

Most mutual funds don't “beat the market”. That means that if you were to just stupidly buy stocks of the biggest 30 companies in the country and reinvest dividends, you'd do about as well as or better than most fancy “actively managed” funds after the managers take their cut. An index fund simply, stupidly, buys whatever companies are in a certain market index. There are lots of market indices, the most famous being the “Dow Jones Industrial Average” which is basically the 30 biggest companies in the country. A “broader” index is the S&P 500, Standard & Poor's list of the largest 500 companies (“large-cap” companies). Then there's the top 5000 companies, the top 5000 minus the top 1000, and many, many more.
Most mutual fund companies offer a variety of index funds. These funds have lower fees and expenses than other funds because they are “passively managed” and there's no reason to pay for all that fancy research and analysis that keeps other funds expensive. They also have the advantage that you can be pretty sure they'll do well in the long term, since they are diverse and so follow a large section of the US economy.
John Bogle, founder of the Vanguard Group, which specializes in low-expense index funds, offers a scathing (and persuasive) critique of “actively managed” funds.

Expense ratio

The fraction of your holdings you pay your mutual fund company each year. Should be very low for index funds (< 0.7٪). Vanguard has funds with expense ratios below 0.2٪.


A load is like a commission, meaning you pay a one-time fee when you buy (front-end load) or sell (back-end load) shares of a fund. In general, loads are rarely worth it, so avoid them. Vanguard and T. Rowe Price offer no-load mutual funds. Heh. I wrote “back-end load”.


Exchange Traded Fund. This is a hybrid of mutual funds and stocks. You buy and sell it like a stock, but it's not a share of a single company, it's a share of a whole basket of companies, like an index fund. In fact, most ETFs are designed to replicate a particular index. The most famous are SPDRs (which track the S&P 500) and VIPERs (which track a Vanguard index fund). Their practical differences with mutual funds are that you can purchase and sell ETFs throughout a trading day and capital gains are computed slightly differently. Their practical advantage over mutual funds is that there's no minimum holding – you can buy a single share if you want. The downside to ETFs is that you pay brokerage fees each time you buy or sell them (unlike no-load mutual funds) and you generally can't automatically reinvest dividends or make regular contributions. Bottom line: if you're making monthly contributions or saving for retirement, get regular index funds instead.

Large-, mid-, small- cap

“Cap” is short for “market capitalization”, roughly the value of all of a company's stock. “Large” roughly means more than $13 billion, “mid” between $13 and 2 billion, and “small” between $2 billion and $300 million (there's also mega-, micro-, and probably others). A “Large-cap growth” fund is a mutual fund composed of stocks of large-cap companies which have been classified as “growth” (see below).

Growth, Equity, Blend, Value, Income

These are descriptive terms used by investors, especially in mutual funds, to describe companies and funds appropriate for certain kinds of investment strategies.
A “growth” stock is one than is expected to grow in value because the company is growing or is expected to grow. These companies usually pay few or no dividends. Think internet startups, Krispy Kreme, Netflix, Hamburger Earmuffs Inc. The idea is to buy low and sell high. The trick is deciding what's low and what's high.
A “value” stock is one that is undervalued by the market and/or pays high dividends for its price. Think boring companies with good fundamentals like Coke, Gillette, Proctor & Gamble, and Microsoft, or out-of-favor companies with huge upside (such a major brand just after some non-fatal scandal).
A “blend” fund is a fund which holds both growth and value stocks.
An “equity” fund is one that owns primarily stocks, as opposed to bonds.
An “income” fund is one that is designed to produce income in the form of interest (for bond funds) or dividends (for equity funds) as opposed capital gains, usually on a quarterly or monthly basis. You might purchase one of these if you wanted to live off of your investments but not have to sell stock every month to pay rent.

Volitility and Risk

In investment-speak, “risk” usually refers to the volitility of the price of a holding, basically the variance of the price after removal of any long term trend. A US Savings bond or CD held until maturation has zero risk because its value at maturity is fixed and guaranteed. So-called “penny stocks” can vary in price by many multiples ($0.01 to $0.05!) in a single day, making them extremely volitile or “high risk”. Also see the risk section of these pages.

IRA, 401(k), 401(a), DCP, Roth, Tax-Deferred

These terms describe different kinds of “tax-advantaged” retirement accounts described in the Retirement section.


This term usually refers to a kind of contract where you pay a fee upfront in exchange for a series of regular payments in the future, to be used as a kind of retirement account. Their complex nature and the fact that independent agents can earn commissions from insurance companies by selling them make annuities common vehicles for scam artists and unscrupulous financial advisers. See the Retirement section or the wikipedia article for more details.

Efficient Market Hypothesis (EMH)

An axiom from academia which states that the markets quickly incorporate all publicly available information. The corollary is that it is impossible to consistently and reliably beat the market. Many financial gurus, especially when criticizing index funds, misrepresent the EMH as implying that stocks are at all times properly valuated. In fact, EMH does not imply that bubbles and undervalued equities cannot exist, just that they are effectively impossible to exploit without inside information.