A Beginner’s Guide to Investment Terminology

 Most retail investors are befuddled when it comes to investing jargon. There are seemingly a million acronyms and complex words to understand to be a savvy investor. Here at ETFmatic we strive to make investing simple and efficient. To further aid in our client’s understanding, we decided to make a no-nonsense guide to some of the most commonly used investment terms.

Active Management:

Using a manager or team of managers to run a portfolio and actively pick investments to outperform some benchmark, like a market index.

Alpha:

The excess return of an investment comparative to the return of a benchmark index or investor’s required return. 

Asset Allocation:  

The implementation of an investment strategy that attempts to balance risk versus reward by adjusting the percentage of each asset in an investment portfolio according to the investor’s risk tolerance, goals and investment time frame

Basis Point (BPS):

A common unit of measure for interest rates and other percentages in finance. One basis point is equal to 1/100th of 1%, or 0.01%, or 0.0001, and is used to denote the percentage change in a financial instrument.

Benchmark:

A standard against which the performance of a security, mutual fund or investment manager can be measured.

Beta:

The measurement of the asset’s volatility in comparison to the market.The market’s Beta is 1.0, a stock more volatile than the market has a beta higher than 1.0.

Blue Chips / Blue-chip companies:

Mature companies in the stock market that represent the stalwarts of industry—safe, stable, profitable, and long-lasting companies that represent relatively safe, low volatility investments.

Bull/Bear Market: 

A bull market is a market that is on the rise and is economically sound, while a bear market is a market that is receding, where most stocks are declining in value. 

Dividend:  

A payment made by a corporation to its shareholders, usually as a distribution of profits. When a corporation earns a profit, the corporation is able to pay a proportion of the profit as a dividend to shareholders.

Dividend yield: 

The amount of money a company pays shareholders (over the course of a year) for owning a share of its stock divided by its current stock price—displayed as a percentage. The dividend yield is the estimated one-year return of an investment in a stock-based only on the dividend payment.

Index:   

In financial markets indices consist of a hypothetical portfolio of securities representing a particular market or a segment of it.

Liquidity:

Liquidity describes the degree to which an asset or security can be quickly bought or sold in the market at a price reflecting its intrinsic value. Also commonly described as the ease of converting assets to cash.

Market capitalization or Market Cap:

The total value of all a company’s shares of stock. It is calculated by multiplying the price of a stock by its total number of outstanding shares  Classifications:   Large Cap: $10 billion and greater. Mid Cap: $2 billion to $10 billion. Small Cap: $300 million to $2 billion.

Passive Management:

An investment strategy that tracks an index or portfolio. Usually mimics a market index like the S&P 500. 

Volume:

The number of shares or contracts traded in a security or an entire market during a given period of time. For every buyer, there is a seller, and each transaction contributes to the count of total volume.

Volatility: 

The statistical measure of returns for a given security or market index. In most cases, the higher the volatility, the riskier the security. Volatility is often measured as either the standard deviation or variance between returns from that same security or market index.

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