Beginner Investor Hub
Plain-English definitions of the terms you'll meet in the Knowledge Vault and the simulator.
An employer-sponsored retirement savings plan that allows employees to contribute pre-tax dollars, reducing taxable income.
Example: Contributing $500/month pre-tax to your 401(k) reduces your taxable income by $6,000/year.
Related: Roth IRA
The excess return of an investment relative to its benchmark index. Positive alpha = outperformance.
Formula: Alpha = Portfolio Return − (Risk-Free Rate + Beta × (Market Return − Risk-Free Rate))
Related: Beta, Sharpe Ratio
The strategy of dividing a portfolio among different asset classes like stocks, bonds, and cash.
Example: A 60/40 portfolio: 60% stocks, 40% bonds. More aggressive = more stocks.
Related: Diversification, Rebalancing
A measure of an asset's volatility relative to the overall market. Beta of 1 = moves with market. >1 = amplified moves.
Example: A stock with beta 1.5 is expected to rise 15% when the market rises 10%.
Formula: Beta = Covariance(asset, market) ÷ Variance(market)
Related: Volatility, Alpha
A fixed-income debt instrument where an investor loans money to a borrower (government or corporation) in exchange for periodic interest payments and return of principal.
Example: Buying a $1,000 10-year Treasury bond at 4% earns $40/year for 10 years, then $1,000 back.
An option contract giving the buyer the right to purchase an asset at the strike price before expiration.
Example: A call option on AAPL at $150 strike lets you buy 100 shares at $150 even if the price rises to $200.
Related: Option
Interest calculated on both the initial principal and the accumulated interest from previous periods.
Often called the "eighth wonder of the world," compound interest is what makes long-term investing so powerful. The longer your money is invested, the more dramatic the compounding effect becomes.
Example: $1,000 at 7% for 30 years grows to ~$7,612 — without adding another dollar.
Formula: A = P(1 + r/n)^(nt)
Related: Time Value of Money, Rule of 72
Spreading investments across different assets, sectors, and geographies to reduce risk.
Example: Owning stocks in 10 industries means one bad sector does not sink your whole portfolio.
Related:
A portion of a company's earnings distributed to shareholders, typically paid quarterly.
Example: A stock paying a $2 annual dividend on a $40 share price has a 5% dividend yield.
Related: Dividend Yield, Earnings Per Share (EPS)
Annual dividend payment expressed as a percentage of the stock's current price.
Formula: Dividend Yield = Annual Dividend ÷ Stock Price × 100
Related: Dividend
Investing a fixed dollar amount at regular intervals regardless of market price, reducing impact of volatility.
Example: Investing $200 every month into an index fund regardless of whether markets are up or down.
A company's net profit divided by the number of outstanding shares — a measure of profitability.
Formula: EPS = Net Income ÷ Shares Outstanding
Related: Price-to-Earnings Ratio (P/E), Dividend
A portfolio construction method that uses machine learning clustering to allocate risk more evenly across assets than traditional approaches.
Related: Sharpe Ratio
The rate at which the general level of prices for goods and services rises, eroding purchasing power.
Example: If inflation is 3%, a $100 grocery bill today costs $103 next year.
Related:
How quickly and easily an asset can be converted to cash without significantly affecting its price.
Example: Cash is perfectly liquid. Real estate is illiquid — selling takes months.
The psychological tendency to feel the pain of losses more intensely than the pleasure of equivalent gains.
Example: Losing $100 feels roughly twice as bad as gaining $100 feels good.
Related: Recency Bias
The total market value of a company's outstanding shares. Calculated by multiplying share price by total shares.
Example: A company with 1M shares at $50 each has a $50M market cap.
Formula: Market Cap = Share Price × Shares Outstanding
The largest peak-to-trough decline in a portfolio's value over a specific period.
Example: A portfolio that goes from $100K to $60K then recovers has a 40% max drawdown.
Related: Value at Risk (VaR), Volatility
A calculation that smooths price data by creating a constantly updated average price over a set number of periods.
Example: 50-day moving average smooths out daily noise to show the medium-term trend.
Related:
A contract giving the buyer the right, but not the obligation, to buy or sell an asset at a set price before a specific date.
Related: Call Option
A valuation metric comparing a company's stock price to its earnings per share.
Example: A stock at $50 with EPS of $5 has a P/E of 10. S&P 500 historical avg is ~15–20.
Formula: P/E = Stock Price ÷ Earnings Per Share
Related: Earnings Per Share (EPS)
Restoring a portfolio to its target asset allocation by buying or selling assets after market movements shift the weights.
Example: Your 60/40 portfolio drifts to 70/30 after a stock rally. Selling stocks to restore 60/40 is rebalancing.
Related: Asset Allocation
The tendency to overweight recent events when making predictions about the future.
Example: Selling all stocks after a crash because you expect the decline to continue.
Related: Loss Aversion
A momentum oscillator measuring speed and magnitude of price changes, scaled 0–100. Above 70 = overbought, below 30 = oversold.
Related: Moving Average
An individual retirement account funded with after-tax dollars. Qualified withdrawals in retirement are completely tax-free.
Example: Contributing $6,500/year from age 25 to a Roth IRA growing at 7% gives ~$1.5M tax-free at 65.
Related: 401(k)
A quick formula to estimate how long it takes for an investment to double: divide 72 by the annual return rate.
Example: At 8% annual return: 72 ÷ 8 = 9 years to double your money.
Formula: Years to double = 72 ÷ Annual Return Rate (%)
Borrowing shares to sell them now, hoping to repurchase them cheaper later and return them for a profit.
Example: You borrow and sell a stock at $100. It falls to $70. You buy back at $70 and pocket $30 profit.
The concept that money available today is worth more than the same amount in the future due to its earning potential.
Example: $100 today invested at 5% is worth $105 in one year — so $100 today > $100 next year.
Related: Compound Interest
The maximum expected loss over a given time period at a specified confidence level.
Example: 95% 1-day VaR of $1,000 means there is a 5% chance of losing more than $1,000 in one day.
Related: Volatility, Maximum Drawdown
The degree of variation in an asset's price over time, measured by standard deviation. Higher volatility = more price swings.
Related: Beta, Value at Risk (VaR)
The income return on an investment, typically expressed as an annual percentage of cost or current market value.
Related: Bond
Want the full story behind these terms? Explore the Knowledge Vault.