Investing Definitions 101

A basic primer for all the personal finance terms you pretended to know in that client dinner.

From examining the definition of a mutual fund, to comparing it to a reverse ETF - brush up on your personal finance definitions.

Assets

What is an asset? Anything you own that has value—like cash, stocks, a house, or a car. In the past decade (2014–2024), appreciation on homes has exceeded its average of 3-5% (adjusted for inflation) due to low interest rates and high demand, approximately 6–8% per year in many regions. Houses are one of the best assets you can secure so consider real estate in your portfolio.

Liabilities

These are items that depreciate over time and are therefore a liability. Liabilities can include loans (often cars), credit card debt (where your late payments accrue incredible interest), or a mortgage on a property that is losing value over time.

Net Worth

Your net worth is your Assets minus Liabilities. This is your snapshot of your financial health. Add up all your cash, investments, real estate, and assets like gold bars. Subtract your student loans, credit card debt and payments outstanding on your car.

Budget

What is a budget? A plan for how you will spend and save your money each month. We love budget apps like CoPilot, Monarch and the YNAB app to ensure you’re not missing extra payments that are unaccounted for. Different apps will let you integrate your bank accounts and credit cards as one streamlined user experience to get an accurate picture of everything going in and out.

Interest

Interest is the cost of borrowing money (when you pay it) or the return on savings your investments (when you earn it). Your savings accounts earn savings because the bank borrows your money to invest. Make sure your money is in a High-yield savings account like Discover or OpenBank by Santander as traditional bank accounts are known for giving slim margins. In fact, some HYSAs are currently offering APYs of 5.00%, while the national average for savings accounts is around 0.42%.

Credit Score

A number that shows how reliable you are at paying back loans. Higher is better where a better credit score will help you secure attractive rates on home and car loans or money to start a business. The following are the typical ranges which discern good from bad credit scores.

• Excellent/Very Good: 740 and above. This is the ideal range for securing the best interest rates and loan terms on homes, cars and more.

  
  

• Good: 670-739. A solid score by most lenders which will allow you to access most credit cards. Depending on your age, you should be very satisfied with a “good” credit score - for instance if you are young and haven’t had time to build up your credit history yet.

  
  

• Fair is 580-669. While still within the range where you can get approved for some credit cards and loans, you will face higher interest rates or limited options as lenders see you as less trustworthy.

• Poor/Bad. Below 580. Scores in this range need significant improvement as you’re seen as a heavy risk to lenders. Often you’ll be denied credit cards or loans unless you have significant cash to offset any monies due.

Investment

An investment is the money you put into an asset such as stocks, a business or real estate with the expectation that it will grow in value.

Diversification

Diversification is a fancy word to ensure you’re investing in different areas to reduce risk. For instance if you love the stock market, it’s important to not go all in on one company or industry and instead to diversify to combat tough news or business cycles.

Stock

A stock is your share of ownership in a company. Companies can be privately or publicly held. Stocks can go up or down in value over time.

Bond

A bond is a loan you give to a company or the government. They safely pay you interest and return your money later.

ETF (Exchange-Traded Fund)

One of our favorite investing tools are ETF’s - a basket of stocks or bonds that you can buy like a single stock. ETF’s are great for diversification and also let you focus on specific sectors.

401(k)/IRA

If your company offers a 401k make sure you sign up… yesterday. Retirement accounts in the U.S. offer tax advantages for long-term investing and companies will match a percentage of your input.

Compound Interest

The beauty of investing, check out our favorite Compound Interest Calculator and review interest earned on both your original money and the interest your original investment an accrues over time.

Liquidity

Liquidity is how easily you can access your money. Cash is highly liquid; a house or business is not. If you’re in a pinch, you can typically borrow against the equity in your house or business but it comes with a cost.

Alpha and Beta

Alpha: A measure of an investment’s performance relative to a benchmark, representing excess return.

Beta: A measure of an asset's volatility relative to the overall market.

Arbitrage

Arbitrage is the definition of exploiting price differences of the same asset in different markets for a risk-free profit.

Capital Asset Pricing Model (CAPM)

A model that describes the relationship between systematic risk and expected return for assets, often used in pricing risky securities.

Discounted Cash Flow (DCF)

A valuation method that estimates the value of an investment based on its expected future cash flows, adjusted for time value of money.

Derivatives

Financial instruments whose value is derived from the value of the underlying asset (e.g., options, futures, swaps). A derivative measures how a function changes as its input changes.

Duration and Convexity

Measures of the sensitivity of the price of a bond to interest rate changes.

Quantitative Easing (QE)

A monetary policy wherein a central bank purchases securities to increase the money supply and stimulate the economy.

Yield Curve

A graph that plots interest rates of bonds with equal credit quality but differing maturity dates, used to predict changes in economic output and growth.

Sharpe Ratio

A measure of risk-adjusted return, calculated as the excess return of an asset divided by its standard deviation.

Leveraged Buyout (LBO)

The acquisition of a company using a significant amount of borrowed money, often with the target company's assets as collateral.not.

Inflation

The rise in prices over time, which reduces the buying power of your money. Inflation is a serious reason to not let your cash just sit in a checking account as it will lose value over time against the cost of goods.

Capital Asset Pricing Model (CAPM)

A model that describes the relationship between systematic risk and expected return for assets, often used in pricing risky securities.

Discounted Cash Flow (DCF)

A valuation method that estimates the value of an investment based on its expected future cash flows, adjusted for time value of money.

Derivatives

Financial instruments whose value is derived from the value of an underlying asset (e.g., options, futures, swaps).

Duration and Convexity

Measures of the sensitivity of the price of a bond to interest rate changes.

Quantitative Easing (QE)

A monetary policy wherein a central bank purchases securities to increase the money supply and stimulate the economy.

Leveraged Buyout (LBO)

The acquisition of a company using a significant amount of borrowed money, often with the target company's assets as collateral.

Which terms were new to you? Let us know at @Wealth_Elf on Instagram.