21 Investment Terms You Need to Know

Learning how to invest often starts with understanding the language used to describe financial concepts, strategies and products. From long-standing terms to newly coined phrases, the vocabulary can grow quickly. These investment definitions for beginners provide a starting point for building confidence and clarity as you explore different investment options. For additional guidance, a financial advisor can help explain unfamiliar terms and work with you to develop a plan based on your financial goals.

1. Asset

An asset is anything that holds economic value and can be owned or controlled to produce a benefit. In investing, common assets include cash, stocks, bonds, mutual funds and real estate. If something can be bought, sold, or generates income, it is generally considered an asset.

2. Asset Allocation

Asset allocation refers to how an investor divides their portfolio among different asset categories such as stocks, bonds, cash and alternatives like real estate or commodities. It plays a key role in balancing risk and potential return based on an investor’s goals, time horizon and risk tolerance.

3. Bond

A bond is a type of loan made by an investor to a government, municipality, or corporation. In return, the issuer agrees to pay interest over time and repay the principal at maturity. Bonds are generally considered lower-risk investments than stocks and come in short-, medium- and long-term durations.

4. Capital Gain

A capital gain occurs when you sell an investment for more than you originally paid. Capital gains may be taxed and the rate depends on how long you held the asset—short-term gains are taxed as ordinary income, while long-term gains usually receive favorable tax treatment.

5. Cash

Cash includes physical currency and funds in checking, savings and money market accounts. While it earns little interest, cash is often used for liquidity, emergencies or to reduce volatility in a portfolio. It can also serve as “dry powder” for future investments.

6. Compound Interest

Compound interest is interest calculated on both the principal and the accumulated interest from previous periods. It can significantly boost long-term returns on savings and investments. On the flip side, borrowers can also face compound interest charges on certain types of debt.

7. Diversification

Diversification means spreading investments across different assets and sectors to reduce exposure to any single risk. By holding a mix of investments that don’t move in sync, investors can potentially reduce portfolio volatility and improve long-term performance.

8. Dividend

A dividend is a payment made by a company to its shareholders, usually in cash or additional shares, as a share of profits. Not all stocks pay dividends, but those that do often appeal to income-focused investors. Dividends are typically paid monthly, quarterly, or annually.

9. Exchange-Traded Fund (ETF)

An exchange-traded fund (ETF) is a pooled investment that tracks an index, sector, commodity or strategy. ETFs trade on stock exchanges like individual stocks and offer a way to gain broad diversification with relatively low fees and tax efficiency.

10. Financial Advisor

A financial advisor is a professional who helps individuals manage their money, investments and long-term planning. Advisors may provide services like retirement planning, tax strategies and portfolio management. Some focus on specific areas, while others offer general financial guidance.

11. Index Fund

An index fund is a type of mutual fund or ETF that aims to match the performance of a specific market index, such as the S&P 500. Because they are passively managed, index funds tend to have low fees and are often used in long-term investment strategies.

12. Interest

Interest is the cost of borrowing money or the return earned on deposits. When you borrow money, you pay interest to the lender. When you save money in an interest-bearing account, you earn interest. Rates vary based on creditworthiness, market conditions and loan type.

13. Mutual Fund

A mutual fund collects contributions from many investors and invests the combined capital in a range of assets, including stocks, bonds, or other securities. The fund is managed by a professional who selects and adjusts the holdings based on the fund’s objectives. Because they offer built-in diversification and are simple to buy into, mutual funds are a popular choice for long-term investing, especially in retirement accounts.

14. Portfolio

A portfolio is the collection of financial assets owned by an individual or institution. This includes stocks, bonds, cash, real estate and more. A well-balanced portfolio reflects an investor’s goals, risk tolerance and time horizon.

15. Real Estate

Real estate includes physical property such as land and buildings. Investors may hold real estate directly or indirectly through vehicles like real estate investment trusts (REITs), which offer exposure to the real estate market without owning property outright.

16. Return

Return is the gain or loss on an investment over a given period. It can be expressed as a percentage and includes income (like dividends or interest) and capital appreciation. Comparing historical returns helps assess how an investment has performed over time.

17. Retirement Account

A retirement account is typically a tax-advantaged account that helps individuals save for retirement. Individual retirement accounts (IRAs) and 401(k) plans are popular retirement accounts. These accounts often offer tax deferral or tax-free growth, depending on the account type.

18. Risk Tolerance

The level of risk an individual investor is willing to take when investing is referred to as their risk tolerance. Every investor will have a different risk tolerance based on their individual financial goals and their appetite for the speed at which they would like to grow their investment account. This is one of the main reasons that portfolio managers tend to craft investment strategies for each individual client.

19. Security

A security is a tradable financial instrument that represents ownership (stocks), a creditor relationship (bonds) or other rights. Securities are regulated by the SEC and are the building blocks of most investment portfolios.

20. Stock

A stock is a security that represents a share of ownership in a company. Stocks are one of the major classes of assets and are regularly traded within many portfolios. Stocks may also be called shares or equities and are one of the most popular investments in the market today. Whenever a business files an IPO to go public, they are selling stocks, or shares, in their business.

21. Stock Market

The stock market is a system for the organized buying and selling of stocks on stock exchanges, over-the-counter markets and computerized trading networks. It includes major exchanges like the NYSE and Nasdaq. Investors track indexes such as the S&P 500 or Dow Jones to measure market performance.

Bottom Line

Investment terms provide useful shorthand ways to express concepts that are of special importance to the world of investing. Many are unique to investing or have meanings that are different from their regular definitions. Learning the definitions of some of the most important terms will start a beginning investor on the road to becoming fluent in the language of investing.

Investing Tips

A financial advisor can help you interpret financial terms and explain key concepts that will help you make the most of your financial resources. SmartAsset’s free tool matches you with financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
SmartAsset’s free online Investment Calculator will show you how an investment grows over time. Beginning with the starting investment amount and the amount and timing of additional contributions, it uses the anticipated rate of return and the number of years you plan to let the investment grow to tell you how much your future nest egg will be worth.