Glossary

Glossary of markets and money

64 terms you will meet in financial news, defined in plain English.

401(k): An employer-sponsored U.S. retirement account that lets workers invest part of each paycheck before taxes (or after taxes, in a Roth 401(k)). Many employers match a portion of contributions, which is effectively part of the worker's pay.
Annual percentage rate (APR): The yearly cost of borrowing, including interest and certain fees, expressed as a percentage. Because it folds in fees, APR is a better basis for comparing loans than the headline interest rate alone.
Asset allocation: How a portfolio is divided among broad asset classes such as stocks, bonds, and cash. Research on diversified portfolios consistently finds that the allocation explains most of the variation in their returns over time.
Basis point: One hundredth of a percentage point (0.01%). Interest rates and yields are usually discussed in basis points: a move from 4.50% to 4.75% is a 25-basis-point increase.
Bear market: A decline of 20% or more from a recent high in a broad market index. The term is also used loosely for any prolonged period of falling prices and gloomy sentiment.
Bond: A loan made by an investor to a government or company, which promises to pay interest (the coupon) and return the principal on a set maturity date. Bond prices move in the opposite direction to interest rates.
Breakeven inflation rate: The difference between the yield on a regular Treasury security and an inflation-protected one (TIPS) of the same maturity. It serves as a market-based estimate of expected inflation over that period.
Bull market: A sustained rise in market prices, commonly defined as a gain of 20% or more from a recent low. Bull markets tend to last much longer than bear markets.
Capital gain: The profit from selling an asset for more than you paid for it. In the United States, gains on assets held longer than a year are generally taxed at lower rates than ordinary income.
Compound interest: Interest earned on both the original amount and on interest already earned. Over long periods, compounding is the main engine of investment growth — and of debt that is left unpaid.
Consumer Price Index (CPI): A monthly measure of the average change in prices paid by urban consumers for a basket of goods and services, published by the Bureau of Labor Statistics. Its 12-month change is the most widely quoted U.S. inflation rate.
Core inflation: Inflation excluding food and energy prices, which tend to be volatile. Core measures give a clearer read on underlying price trends.
Correction: A decline of 10% or more — but less than 20% — from a recent high in a stock index or other asset. Corrections are a routine feature of markets, occurring on average every year or two.
Coupon: The fixed interest payment a bond makes, usually stated as an annual percentage of its face value. A $1,000 bond with a 5% coupon pays $50 a year.
Credit spread: The extra yield a corporate or other risky bond pays over a comparable Treasury security. Spreads widen when investors grow more worried about defaults.
Diversification: Spreading investments across many holdings, sectors, or asset classes so that no single loss does outsized damage. It reduces risk without necessarily reducing expected return.
Dividend: A cash payment a company makes to its shareholders, typically out of profits. Many large companies pay dividends quarterly.
Dividend yield: A stock's annual dividends per share divided by its price. A $100 stock paying $3 a year has a 3% dividend yield.
Dollar-cost averaging: Investing a fixed amount at regular intervals regardless of price, which automatically buys more shares when prices are low and fewer when they are high. Contributions from each paycheck to a retirement plan work this way.
Duration: A measure of how sensitive a bond's price is to changes in interest rates. A bond with a duration of 7 would lose roughly 7% of its value if rates rose by one percentage point.
Earnings per share (EPS): A company's net profit divided by its number of outstanding shares. It is the 'E' in the price-to-earnings ratio.
Emergency fund: Cash set aside to cover unexpected expenses or a loss of income, commonly sized at three to six months of essential spending and kept somewhere safe and easy to reach.
Exchange-traded fund (ETF): A fund that holds a basket of securities and trades on an exchange like a stock. Many ETFs track an index at very low cost.
Expense ratio: The annual fee a mutual fund or ETF charges, expressed as a percentage of assets. A 0.50% expense ratio costs $5 a year for every $1,000 invested.
Federal funds rate: The interest rate at which banks lend reserves to one another overnight. The Federal Reserve sets a target range for it, and changes ripple through to nearly every other interest rate in the economy.
Federal Open Market Committee (FOMC): The Federal Reserve's monetary-policy committee. Its 12 voting members meet eight times a year to set the target range for the federal funds rate.
Forward guidance: Communication by a central bank about the likely future path of interest rates. Because markets price in expectations, guidance can move borrowing costs even before any rate change.
Futures contract: An agreement to buy or sell an asset at a set price on a future date. Futures are widely used to price and trade commodities such as oil and gold, as well as stock indexes and bonds.
Gross domestic product (GDP): The total value of goods and services produced in an economy over a period. In the United States, it is reported quarterly and usually expressed as an annualized growth rate after adjusting for inflation.
Hedge: An investment made to offset potential losses in another. Buying put options on a stock you own is a classic hedge.
High-yield bond: A bond rated below investment grade, which pays higher interest to compensate for a greater risk of default. Also called a junk bond.
Index fund: A mutual fund or ETF that aims to match the performance of a market index, such as the S&P 500, rather than beat it. Index funds typically have much lower fees than actively managed funds.
Inflation: A broad rise in the prices of goods and services over time, which reduces the purchasing power of money. It is usually measured as the 12-month change in a price index.
Initial jobless claims: The number of people filing a first claim for unemployment insurance in a given week. Because it is released weekly, it is one of the most timely signals of layoff trends.
Inverted yield curve: A situation in which short-term interest rates are higher than long-term rates. Inversions have historically preceded U.S. recessions, though with long and variable lead times.
Investment grade: A credit rating of BBB− (or Baa3) or higher, indicating a relatively low risk of default. Many institutional investors are limited to holding investment-grade bonds.
Liquidity: How quickly and cheaply an asset can be bought or sold without moving its price. Cash is the most liquid asset; real estate is among the least.
Market capitalization: The total market value of a company's outstanding shares: share price multiplied by the number of shares. Indexes such as the S&P 500 weight companies by market cap.
Moving average: The average of a series over a rolling window, such as the past 50 or 200 trading days. Traders watch whether prices are above or below these averages as a gauge of trend.
Mutual fund: A pooled investment vehicle that buys a portfolio of securities on behalf of its shareholders. Unlike ETFs, mutual fund shares are bought and sold once a day at the fund's closing net asset value.
Net worth: The value of everything you own minus everything you owe. Tracking it over time is one of the simplest ways to measure financial progress.
Nonfarm payrolls: The number of paid U.S. workers, excluding farm workers, private household employees, and a few other groups, from the monthly jobs report. The monthly change is the report's headline figure.
Option: A contract giving the holder the right, but not the obligation, to buy (a call) or sell (a put) an asset at a set price before a certain date.
PCE price index: A measure of inflation based on personal consumption expenditures, published by the Bureau of Economic Analysis. It is the Federal Reserve's preferred inflation gauge and covers a broader range of spending than CPI.
Price-to-earnings ratio (P/E): A stock's price divided by its earnings per share. It shows how much investors are paying for each dollar of profit and is the most common yardstick of valuation.
Quantitative easing (QE): Large-scale purchases of bonds by a central bank to push down long-term interest rates and support the economy when short-term rates are already near zero.
Quantitative tightening (QT): The reverse of quantitative easing: a central bank shrinks its balance sheet by letting bonds mature without reinvesting the proceeds, or by selling them.
Real interest rate: An interest rate adjusted for inflation. If a savings account pays 4% and inflation runs at 3%, the real rate is roughly 1%.
Rebalancing: Periodically buying and selling holdings to bring a portfolio back to its target mix. It enforces the discipline of trimming what has risen and adding to what has fallen.
Recession: A significant, broad-based decline in economic activity lasting more than a few months. In the United States, recessions are dated by a committee of the National Bureau of Economic Research.
Risk premium: The extra return investors expect for holding a risky asset instead of a safe one. The equity risk premium is the expected return on stocks above Treasury yields.
Roth IRA: A U.S. individual retirement account funded with after-tax money. Qualified withdrawals in retirement, including investment gains, are tax-free.
Rule of 72: A shortcut for estimating how long an investment takes to double: divide 72 by the annual rate of return. At 6% a year, money doubles in about 12 years.
S&P 500: An index of 500 of the largest U.S. publicly traded companies, weighted by market value. It is the most widely used benchmark for the U.S. stock market.
Sahm rule: A recession indicator developed by economist Claudia Sahm. It is triggered when the three-month average unemployment rate rises 0.5 percentage point above its lowest point of the prior 12 months.
SOFR: The Secured Overnight Financing Rate, a benchmark interest rate based on overnight loans backed by Treasury securities. It replaced LIBOR as the main reference rate for U.S. dollar loans and derivatives.
Spot price: The price for immediate delivery of a commodity or currency, as opposed to a futures price for delivery at a later date.
Stagflation: An unusual and painful combination of stagnant economic growth, high unemployment, and high inflation, most closely associated with the 1970s.
Treasury bill: A short-term U.S. government debt security maturing in one year or less. T-bills are sold at a discount and pay face value at maturity; the difference is the investor's interest.
Treasury Inflation-Protected Securities (TIPS): U.S. Treasury bonds whose principal rises with the Consumer Price Index. Their yields are a direct market measure of real, inflation-adjusted interest rates.
Volatility: How much and how quickly an asset's price moves. It is usually measured as the annualized standard deviation of returns.
VIX: The Cboe Volatility Index, which uses S&P 500 option prices to estimate how much the index is expected to move over the next 30 days. It is often called Wall Street's fear gauge.
Yield: The income an investment produces, expressed as a percentage of its price. For bonds, yield usually refers to yield to maturity: the total annual return if the bond is held until it matures.
Yield curve: A chart of interest rates on bonds of the same credit quality across different maturities. Its shape — upward-sloping, flat, or inverted — reflects expectations about growth, inflation, and central-bank policy.