active investor
An investor who wishes to manage her own account by carefully studying the economy, market trends, and investment alternatives; regularly monitoring these factors; and buying and selling three to four times a year to rebalance her or his portfolio.
aggressive investment philosophy (risk seeker)
Investors with this philosophy primarily seek capital gains, often with a short time horizon.
asset allocation
Form of diversification in which investor decides on proportions of an investment portfolio that will be devoted to various categories of assets.
average share cost
Actual cost basis of the investment used for income tax purposes, calculated by dividing the total amount invested by the total shares purchased.
average share price
Calculated by dividing the share price total by the number of investment periods.
bear market
Market in which securities prices have declined in value by 20 percent or more from previous highs, often over the course of several weeks or months.
below-average costs
Average costs of an investment if more shares are purchased when the price is down and fewer shares when the price is high.
bond
A debt instrument issued by an organization that promises repayment at a specific time and the right to receive regular interest payments during the life of the bond; from investor's standpoint, a loan that the investor makes to a government or a corporat
bull market
Market in which securities prices have risen 20 percent or more over time.
buy and hold/buy to hold
Investment strategy in which investors buy a widely diversified mix of stocks and/or mutual funds, reinvest the dividends by buying more stocks and mutual funds, and hold on to those investments almost indefinitely.
capital gain
Net income received from sale of an asset above its purchase price.
capital loss
The net loss of income that results when the sale of an asset brings less income than the costs of purchasing and selling an asset.
commissions
Fees or percentages of the selling price paid to salespeople, agents, and companies for their services in buying or selling an investment.
conservative investment philosophy (risk aversion)
Investors with this philosophy accept very little risk and are generally rewarded with relatively low rates of return for seeking the twin goals of a moderate amount of current income and preservation of capital.
current income
Money received while you own an investment; usually received regularly as interest, rent, or dividends.
debts
Lending investments that typically offer both a fixed maturity and a fixed income.
diversification
Process of reducing risk by spreading investment money among several investment opportunities.
dollar-cost averaging/cost averaging
Systematic program of investing equal sums of money at regular intervals regardless of the price of the investment.
equities
Stocks and/or stock mutual funds.
financial risk
Possibility that an investment will fail to pay a return to the investor.
fixed income
Specific rate of return that borrower agrees to pay the investor for use of the principal (initial investment).
fixed maturity
Specific date on which borrower agrees to repay the principal to the investor.
interest
Charge for borrowing money; investors in bonds earn interest.
investing
Putting saved money to work so that it makes you even more money.
investment philosophy
Investor's general tolerance for risk in investments, whether it is conservative, moderate, or aggressive, given the investor's financial goals.
investment plan
An explanation of your investment philosophy and your logic on investing to reach specific goals.
investment risk
The possibility that the yield on an investment will deviate from its expected return.
leverage
Using borrowed funds to invest with the goal of earning a rate of return in excess of the after-tax costs of borrowing.
market efficiency
The speed at which new information is reflected in investment prices suggesting that security prices are reflective of their true value at all times because publicly available information has driven market prices to the correct level.
market risk/systematic risk/undiversifiable risk
Risk that the value of an investment may drop due to influences and events that affect all similar investments.
market timers
Long-term investors who pull out of stocks or bonds in anticipation of a market decline or hold back from investing until the market "settles down"�that is, when they expect prices to climb.
market timing
Investing, perhaps speculatively, in an effort to "time" the markets by buying or selling on the anticipated direction of the overall market, hope to capture most of the upside of rising stock prices while avoiding most of the downside.
market volatility
the likelihood of large price swings in securities due to a company's success (or lack of it) and various market conditions.
moderate investment philosophy (risk indifference)
Investors with this philosophy accept some risk as they seek capital gains through slow and steady growth in investment value along with current income.
modern portfolio theory (MPT)
Goal is to identify the investor's acceptable level of risk tolerance and then find an optimal portfolio of assets that will have the highest expected returns for that level of risk.
Monte Carlo analysis
Technique that performs a large number of trial runs of a particular portfolio mix of investments, called simulations, to find an optimal allocation for a particular investor's goals and risk tolerance.
passive investor
An investor who does not actively engage in trading securities or monitoring his or her investments; seeks to match the market return via mutual funds or other managed investments in the longer term.
portfolio
Collection of investments assembled to meet your investment goals.
portfolio diversification
Practice of selecting a collection of different asset classes of investments (such as stocks, bonds, mutual funds, real estate, and cash) that are chosen not only for their potential returns but also for their dissimilar risk-return characteristics.
random/unsystematic risk
Risk associated with owning only one investment of a particular type (such as stock in one company) that, by chance, may do very poorly in the future due to uncontrollable or random factors that do not affect the rest of the market.
rate of return/yield
Total return on an investment expressed as a percentage of its price.
real rate of return
Return on an investment after subtracting the effects of inflation and income taxes.
risk premium
Amount that risk-averse investors require for taking on a riskier investment rather than a risk-free investment like U.S. government securities. The riskier the investment, the greater the premium demanded.
risk tolerance
An investor's ability and willingness to weather changes in security prices, that is, to weather market risk.
securities
Assets suitable for investment, including stocks, bonds, and mutual funds.
securities markets
Places where stocks and bonds are traded (or in the case of electronic trading, the way in which securities are traded).
speculative risk
Involves the potential for either gain or loss; equity investments might do either.
stocks
Shares of ownership in the assets and earnings of a business corporation.
total return
Income an investment generates from current income and capital gains.