Financial Glossary
50+ key financial terms explained with formulas, examples, and FAQs.
A
Annual Percentage Yield (APY)
The effective annual rate of return on savings or investments, accounting for compound interest.
Annual Percentage Rate (APR)
The annual rate of interest charged on borrowing or earned on savings, excluding compounding.
Amortization
The process of gradually paying off a debt through regular installments that cover both principal and interest.
Asset Allocation
The strategy of dividing an investment portfolio among different asset categories such as stocks, bonds, and cash.
Annuity
A financial product that provides a series of payments at regular intervals, often used for retirement income.
B
Bear Market
A market condition where prices fall 20% or more from recent highs, typically accompanied by widespread pessimism.
Bull Market
A market condition where prices rise 20% or more from recent lows, characterized by optimism and investor confidence.
Bond
A fixed-income instrument representing a loan made by an investor to a borrower, typically corporate or governmental.
C
Compound Interest
Interest calculated on the initial principal and the accumulated interest from previous periods.
Compound Annual Growth Rate (CAGR)
The mean annual growth rate of an investment over a specified time period longer than one year.
Capital Gains
The profit realized when a capital asset is sold for more than its purchase price.
Compounding Frequency
How often accumulated interest is calculated and added back to the principal balance.
Credit Score
A numerical rating (300-850) that represents your creditworthiness based on your credit history.
Compound Return
The cumulative effect of gains and losses on an investment over time, including reinvested earnings.
Cost Basis
The original value of an asset for tax purposes, used to calculate capital gains or losses when sold.
D
Debt-to-Income Ratio (DTI)
A personal finance measure comparing monthly debt payments to gross monthly income.
Dividend Yield
The annual dividend payment divided by the stock price, expressed as a percentage.
Dollar-Cost Averaging (DCA)
An investment strategy of investing equal amounts at regular intervals regardless of price.
Diversification
Spreading investments across various assets to reduce the impact of any single investment's poor performance.
Dollar-Weighted Return (IRR)
An investment return metric that accounts for the timing and size of cash flows in and out of a portfolio.
E
Emergency Fund
A cash reserve set aside to cover unexpected expenses or financial emergencies.
Expense Ratio
The annual fee charged by a mutual fund or ETF, expressed as a percentage of total assets under management.
Exchange-Traded Fund (ETF)
An investment fund that trades on stock exchanges like individual stocks, typically tracking an index.
F
I
Inflation
The rate at which the general level of prices for goods and services rises, eroding purchasing power.
Interest Rate
The percentage charged on borrowed money or earned on invested money over a period of time.
Index Fund
A mutual fund or ETF designed to track the performance of a specific market index like the S&P 500.
L
M
N
P
Principal
The original sum of money invested or borrowed, before any interest or returns.
Position Sizing
The process of determining how many shares or contracts to trade based on risk tolerance.
Portfolio Rebalancing
The process of realigning the weightings of a portfolio by periodically buying or selling assets.
Present Value (PV)
The current worth of a future sum of money given a specified rate of return.
Price-to-Earnings Ratio (P/E)
A valuation metric comparing a company's share price to its earnings per share.
R
Return on Investment (ROI)
A performance measure used to evaluate the efficiency or profitability of an investment.
Rule of 72
A quick formula to estimate the number of years required to double an investment at a given annual rate of return.
Risk Tolerance
The degree of variability in investment returns that an investor is willing to withstand.
Real vs Nominal Return
Nominal return is the raw percentage gain; real return adjusts for inflation to show actual purchasing power growth.
Refinancing
Replacing an existing loan with a new one, typically to get a lower interest rate or better terms.
S
Simple Interest
Interest calculated only on the original principal amount, not on accumulated interest.
Systematic Investment Plan (SIP)
An investment strategy of investing a fixed amount at regular intervals, typically monthly.
Safe Withdrawal Rate (SWR)
The percentage of a retirement portfolio that can be withdrawn annually without running out of money.
Savings Rate
The percentage of income that is saved or invested rather than spent on consumption.