US Investing and Tax Glossary

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401(k): A US employer-sponsored retirement plan that lets employees save part of their salary before tax (traditional) or after tax (Roth), often with an employer match. Withdrawals before age 59 and a half generally carry a 10% penalty on top of income tax, with some exceptions.Related: IRA, Compound Interest, Asset Allocation

A

Alpha: The excess return of an investment relative to a benchmark index. A positive alpha indicates outperformance; a negative alpha indicates underperformance. Alpha is often used to evaluate the skill of active fund managers.Related: Beta, Sharpe Ratio, Risk-Adjusted Return
Annual Report: A comprehensive document published yearly by a public company detailing its financial performance, business operations, and future outlook. It includes audited financial statements, management discussion, and corporate governance information. Required by the SEC for all publicly traded companies.Related: EPS, Free Cash Flow, Fundamental Analysis
Ask Price: The lowest price at which a seller is willing to sell a security. Together with the bid price, it forms the bid-ask spread. The ask price is always higher than the bid price in normal market conditions.Related: Bid-Ask Spread, Liquidity, Market Order
Asset Allocation: The strategy of dividing a portfolio among different asset categories such as stocks, bonds, and cash equivalents. Research shows asset allocation explains over 90% of portfolio return variability, making it the most important investment decision.Related: Diversification, Portfolio Rebalancing, Modern Portfolio Theory

B

Bear Market: A market condition where prices fall 20% or more from recent highs, typically accompanied by widespread pessimism and negative investor sentiment. Bear markets average about 9.6 months in duration and historically have always been followed by eventual recovery to new highs.Related: Bull Market, Drawdown, Volatility
Beta: A measure of a stock's volatility relative to the overall market. A beta of 1.0 indicates the stock moves with the market; above 1.0 means more volatile; below 1.0 means less volatile. Beta is used in the CAPM to estimate expected returns.Related: Alpha, Volatility, Value at Risk
Bid-Ask Spread: The difference between the highest price a buyer is willing to pay (bid) and the lowest price a seller is willing to accept (ask) for a security. Narrower spreads indicate higher liquidity and lower trading costs. Market makers profit from the spread.Related: Ask Price, Liquidity, Market Order
Blue Chip: A nationally recognized, well-established, and financially sound company with a history of reliable performance. Blue chip stocks are typically leaders in their industry, pay consistent dividends, and are components of major market indices like the Dow Jones.Related: Dividend Yield, Market Cap, Index Fund
Bond: A fixed-income debt instrument where an investor loans money to a borrower (government or corporation) for a defined period at a fixed or variable interest rate. Bonds pay periodic coupon payments and return the face value at maturity. They are generally less risky than stocks.Related: Duration, Yield Curve, Correlation
Bull Market: A market condition characterized by rising prices, typically defined as a 20% or greater increase from recent lows. Bull markets are driven by economic growth, rising corporate earnings, and positive investor sentiment. They tend to last longer than bear markets, averaging about 2.7 years.Related: Bear Market, Market Cap, Momentum

C

CAGR: Compound Annual Growth Rate: the annualized rate of return that smooths out year-to-year volatility. CAGR shows the steady rate at which an investment would have grown if it had compounded at a constant rate. It is calculated as (ending value / beginning value)^(1/years) - 1.Related: Compound Interest, Return on Equity, Risk-Adjusted Return
Capital Gains: The profit realized from selling an asset for more than its purchase price. Short-term capital gains (assets held under one year) are taxed at ordinary income rates, while long-term gains (over one year) receive preferential tax rates of 0%, 15%, or 20% depending on income level.Related: Compound Interest, Dividend Yield, Dollar Cost Averaging
Compound Interest: Interest calculated on both the initial principal and the accumulated interest from previous periods. Often called the eighth wonder of the world, compounding creates exponential growth over time. The Rule of 72 (divide 72 by the return rate) estimates the years needed to double your money.Related: CAGR, Capital Gains, Dollar Cost Averaging
Correlation: A statistical measure ranging from -1.0 to +1.0 that describes how two investments move relative to each other. Positive correlation means they move together; negative correlation means they move inversely. Low correlation between portfolio assets provides diversification benefits and reduces overall risk.Related: Diversification, Modern Portfolio Theory, Beta
Covered Call: An options strategy where an investor who owns the underlying stock sells a call option against it, collecting the premium as income. Maximum profit is capped at the strike price plus premium received. This is considered one of the safest options strategies because the obligation is covered by stock ownership.Related: Delta, Theta, Gamma

D

DCF: Discounted Cash Flow: a valuation method that estimates a company's intrinsic value by projecting future free cash flows and discounting them to present value using the weighted average cost of capital (WACC). DCF is considered the gold standard of valuation methods by fundamental analysts.Related: Free Cash Flow, P/E Ratio, Price-to-Book
Delta: An options Greek measuring the rate of change in an option's price per $1 change in the underlying stock price. Delta ranges from 0 to 1 for calls and -1 to 0 for puts. Delta also approximates the probability that an option will expire in-the-money.Related: Gamma, Theta, Covered Call
Diversification: The practice of spreading investments across multiple assets, sectors, and geographies to reduce risk. Harry Markowitz called it "the only free lunch in investing." Approximately 25-30 uncorrelated stocks eliminate most company-specific risk, but systematic (market) risk cannot be diversified away.Related: Asset Allocation, Correlation, Modern Portfolio Theory
Dividend Yield: The annual dividend payment divided by the stock price, expressed as a percentage. A stock at $100 paying $3 annually has a 3% yield. Dividend yield moves inversely with stock price: a falling price increases the yield, which can indicate either value or a potential yield trap.Related: Payout Ratio, Ex-Dividend Date, Capital Gains
Dollar Cost Averaging: An investment strategy of investing a fixed dollar amount at regular intervals regardless of market conditions. This approach reduces the impact of volatility by buying more shares when prices are low and fewer when prices are high, resulting in a lower average cost per share over time.Related: Compound Interest, Volatility, Portfolio Rebalancing
Drawdown: The peak-to-trough decline in portfolio value before a new peak is reached. Maximum drawdown measures the worst loss an investor experienced. A 50% drawdown requires a 100% gain just to break even, making drawdown avoidance a critical component of risk management.Related: Volatility, Value at Risk, Sharpe Ratio
Duration: A measure of a bond's price sensitivity to interest rate changes, expressed in years. A duration of 5 years means the bond's price will change approximately 5% for every 1% change in interest rates. Longer duration means higher interest rate risk but potentially higher returns.Related: Bond, Yield Curve, Correlation

E

EPS: Earnings Per Share: a company's net profit divided by its number of outstanding shares. EPS is one of the most widely used metrics for evaluating profitability and is the denominator in the P/E ratio. Diluted EPS accounts for potential dilution from stock options and convertible securities.Related: P/E Ratio, Free Cash Flow, Return on Equity
ETF: Exchange-Traded Fund: an investment fund that trades on stock exchanges like individual stocks while holding a diversified basket of securities. ETFs typically track an index, sector, or strategy and offer lower fees, better tax efficiency, and more flexibility than traditional mutual funds.Related: Index Fund, Mutual Fund, Diversification
Ex-Dividend Date: The date on or after which a buyer of a stock will not receive the upcoming dividend payment. You must own the stock before the ex-dividend date to qualify for the dividend. On the ex-date, the stock price typically drops by approximately the dividend amount.Related: Dividend Yield, Payout Ratio, Capital Gains

F

Form 1099-B: The US tax form a broker sends after the year ends, reporting the proceeds of each sale and, for covered securities, the cost basis and whether the gain or loss is short or long term. The figures carry into Form 8949 and Schedule D of the tax return.Related: Capital Gains, Wash Sale, Tax-Loss Harvesting
Free Cash Flow: Operating cash flow minus capital expenditures: the cash available after maintaining and investing in business operations. FCF represents the true cash available for dividends, buybacks, debt reduction, and acquisitions. Many analysts consider it a better measure of value than net income because it is harder to manipulate.Related: DCF, EPS, Payout Ratio
Fundamental Analysis: The method of evaluating a security by examining related economic, financial, and qualitative factors to determine its intrinsic value. Analysts study financial statements, competitive advantages, industry dynamics, and management quality. Contrasted with technical analysis, which focuses on price patterns.Related: DCF, P/E Ratio, Technical Analysis

G

Gamma: An options Greek measuring the rate of change of delta per $1 move in the underlying stock. High gamma means delta is changing rapidly, creating significant risk for options sellers. Gamma is highest for at-the-money options near expiration.Related: Delta, Theta, Covered Call

H

Hedge: An investment position taken to offset potential losses from another position. Common hedging techniques include buying put options for downside protection, holding bonds as equity hedges, and using collar strategies. Hedging reduces risk but also limits upside potential.Related: Covered Call, Diversification, Beta

I

Index Fund: A mutual fund or ETF designed to track the performance of a specific market index like the S&P 500. Index funds provide broad diversification at very low cost (expense ratios as low as 0.03%). Over 90% of actively managed funds underperform their benchmark index over 15-year periods.Related: ETF, Mutual Fund, Diversification
Inflation: The rate at which the general level of prices for goods and services rises, eroding purchasing power. The Federal Reserve targets 2% annual inflation. Investors must earn returns above the inflation rate to grow real (inflation-adjusted) wealth. TIPS bonds provide direct inflation protection.Related: Bond, Yield Curve, Dollar Cost Averaging
IPO: Initial Public Offering: the first time a private company offers its shares to the public. IPOs allow companies to raise capital and provide liquidity for early investors. IPO stocks tend to be volatile in their early trading days and have historically underperformed the market over 3-5 year periods.Related: Market Cap, Blue Chip, Liquidity
IRA: Individual Retirement Account: a US tax-advantaged retirement account. Contributions to a traditional IRA may be tax deductible and withdrawals are taxed as income; a Roth IRA is funded with after-tax money and qualified withdrawals are tax free. The IRS sets the yearly contribution limit.Related: 401(k), Compound Interest, Asset Allocation

L

Limit Order: An order to buy or sell a security at a specific price or better. A buy limit order executes at the limit price or lower; a sell limit order at the limit price or higher. Limit orders give price control but risk non-execution if the market does not reach the specified price.Related: Market Order, Stop Loss, Bid-Ask Spread
Liquidity: The ease with which an asset can be converted to cash without significantly affecting its price. Stocks of large companies like Apple are highly liquid; real estate and private equity are illiquid. Illiquid investments often offer a premium return to compensate for the difficulty of selling.Related: Bid-Ask Spread, Market Order, Volume

M

Market Cap: Market Capitalization: the total market value of a company's outstanding shares, calculated by multiplying the stock price by total shares outstanding. Companies are classified as mega-cap (>$200B), large-cap ($10-200B), mid-cap ($2-10B), small-cap ($300M-2B), and micro-cap (<$300M).Related: Blue Chip, IPO, Index Fund
Market Order: An order to buy or sell a security immediately at the best available current price. Market orders guarantee execution but not price: in fast-moving or illiquid markets, the execution price may differ significantly from the last quoted price (slippage).Related: Limit Order, Stop Loss, Bid-Ask Spread
Modern Portfolio Theory: A framework developed by Harry Markowitz in 1952 showing how investors can construct portfolios to maximize expected return for a given level of risk through diversification. MPT introduced the efficient frontier: the set of optimal portfolios, and won Markowitz the Nobel Prize in Economics.Related: Diversification, Correlation, Sharpe Ratio
Momentum: The tendency of assets that have recently outperformed to continue outperforming, and vice versa, over intermediate timeframes (3-12 months). Momentum is one of the most documented factor premiums in finance and is attributed to behavioral biases like underreaction and herding.Related: Moving Average, RSI, Technical Analysis
Moving Average: A technical indicator that smooths price data by calculating the average price over a specified number of periods. The 50-day and 200-day moving averages are most widely followed. A Golden Cross (50-day crossing above 200-day) is a bullish signal; a Death Cross is bearish.Related: Momentum, RSI, Technical Analysis
Mutual Fund: A professionally managed investment fund that pools money from many investors to buy a diversified portfolio of stocks, bonds, or other securities. Unlike ETFs, mutual funds trade only once daily at their NAV. They may be actively managed or passively track an index.Related: ETF, Index Fund, Diversification

P

P/E Ratio: Price-to-Earnings Ratio: a stock's current price divided by its earnings per share. The most widely used valuation metric, with the S&P 500 historical average around 16-17x. High P/E suggests investors expect high growth; low P/E suggests low expectations or undervaluation.Related: EPS, Price-to-Book, DCF
Payout Ratio: The percentage of a company's earnings paid out as dividends. Calculated as dividends per share divided by earnings per share. A ratio below 60% is generally sustainable for most companies; above 80% may signal an unsustainable dividend. REITs and MLPs typically have higher ratios by design.Related: Dividend Yield, Ex-Dividend Date, Free Cash Flow
Portfolio Rebalancing: The process of restoring a portfolio to its target asset allocation by selling overweight positions and buying underweight ones. Rebalancing forces a disciplined buy-low, sell-high approach and can add 0.5-1.0% annually in risk-adjusted returns. Annual rebalancing is typically optimal.Related: Asset Allocation, Diversification, Dollar Cost Averaging
Price-to-Book: A valuation ratio comparing a stock's market price to its book value per share (assets minus liabilities divided by shares outstanding). A P/B below 1.0 means the stock trades below its net asset value. The Price-to-Book ratio is a key metric in value factor investing and the Fama-French model.Related: P/E Ratio, DCF, Return on Equity

R

REIT: Real Estate Investment Trust: a company that owns, operates, or finances income-producing real estate. REITs must distribute at least 90% of taxable income as dividends, making them attractive for income investors. They provide real estate exposure without directly owning property.Related: Dividend Yield, Payout Ratio, Diversification
Return on Equity: Net income divided by shareholders' equity, measuring how effectively a company uses shareholder investment to generate profits. An ROE consistently above 15% indicates strong management and competitive advantages. Warren Buffett considers high ROE one of the most important indicators of a quality business.Related: EPS, P/E Ratio, Free Cash Flow
Risk-Adjusted Return: A measure of investment return that accounts for the level of risk taken to achieve it. Common metrics include the Sharpe Ratio (excess return per unit of total risk) and Sortino Ratio (excess return per unit of downside risk). Risk-adjusted returns enable fair comparison between investments with different risk levels.Related: Sharpe Ratio, Alpha, Beta
RSI: Relative Strength Index: a momentum oscillator measuring the speed and magnitude of price changes on a scale of 0 to 100. Readings above 70 indicate overbought conditions; below 30 indicate oversold. RSI divergences from price are considered more reliable signals than overbought/oversold levels alone.Related: Momentum, Moving Average, Technical Analysis

S

Sector Rotation: An investment strategy that shifts portfolio weightings between economic sectors based on the stage of the business cycle. Cyclical sectors (tech, discretionary) tend to lead in early recovery; defensive sectors (utilities, staples, healthcare) hold up best during recessions.Related: Asset Allocation, Diversification, Momentum
Sharpe Ratio: A measure of risk-adjusted return calculated as the portfolio's excess return over the risk-free rate divided by its standard deviation. A Sharpe Ratio above 1.0 is considered good; above 1.5 is excellent; below 0.5 is poor. It is the most widely used metric for comparing investment performance on a risk-adjusted basis.Related: Alpha, Beta, Risk-Adjusted Return
Short Selling: The practice of borrowing shares from a broker and selling them, with the intention of buying them back later at a lower price. Short sellers profit when stock prices decline. The risk is theoretically unlimited since a stock price can rise indefinitely. Short interest data indicates market sentiment.Related: Bear Market, Hedge, Stop Loss
Stop Loss: An order to sell a security when it reaches a specified price, designed to limit potential losses. A trailing stop moves up with the price, protecting gains. Stop-losses are essential risk management tools but cannot protect against gap-down scenarios where price jumps past the stop level.Related: Limit Order, Market Order, Drawdown

T

Tax-Loss Harvesting: Selling investments at a loss to offset realized capital gains and lower the tax bill. In the US, net capital losses beyond your gains can offset up to $3,000 of ordinary income a year and the rest carries forward to later years. Buying back the same or a substantially identical security within 30 days triggers the wash sale rule.Related: Capital Gains, Wash Sale, Form 1099-B
Technical Analysis: The study of past market data, primarily price and volume, to forecast future price movements. Based on three principles: the market discounts everything, prices move in trends, and history tends to repeat itself. Commonly used tools include candlestick charts, moving averages, RSI, and support/resistance levels.Related: RSI, Moving Average, Momentum
Theta: An options Greek measuring the rate of time decay: how much an option's value decreases per day, all else being equal. Theta accelerates as expiration approaches, which is why option sellers prefer selling 30-45 day options to capture the fastest decay period.Related: Delta, Gamma, Covered Call

V

Value at Risk: A statistical measure estimating the maximum expected loss over a specified time period at a given confidence level. A daily 95% VaR of $10,000 means there is a 95% probability the portfolio will not lose more than $10,000 in a single day. Used globally by banks and institutions for risk management.Related: Sharpe Ratio, Drawdown, Beta
Volatility: A statistical measure of the dispersion of returns for a given security or market index, typically measured by standard deviation. Higher volatility means larger price swings. The VIX index measures expected market volatility: readings above 30 indicate high fear; below 15 indicate complacency.Related: Beta, Drawdown, Value at Risk
Volume: The number of shares or contracts traded in a security or market during a given period. Volume confirms price movements: high volume moves are more likely to continue than low volume moves. Unusual volume spikes can signal important events or turning points.Related: Liquidity, Technical Analysis, Momentum

W

Wash Sale: A US tax rule: a loss on selling a security is disallowed if you buy the same or a substantially identical security within 30 days before or after the sale. The disallowed loss is added to the cost basis of the replacement shares, so it is deferred rather than lost.Related: Tax-Loss Harvesting, Capital Gains, Form 1099-B

Y

Yield Curve: A graph showing the relationship between bond yields and maturities for bonds of equal credit quality. A normal (upward-sloping) curve indicates higher yields for longer maturities. An inverted curve (short-term rates higher than long-term) has preceded every U.S. recession since 1955.Related: Bond, Duration, Inflation

US investing and tax glossary

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