Active Management

Active managers use a number of different strategies such as picking specific stocks and moving money into and out of the market at certain times in an effort to outperform the market indexes. This is the opposite of passive management.

Asset Allocation

The combination of various asset classes in a portfolio to attempt to achieve a desired return and control for risk. Asset allocation is the primary driver of portfolio returns.

Asset Class

A group of certain securities that have similar characteristics. The two primary asset classes used in portfolio construction are stocks and bonds. However, there are many sub-asset classes, such as ‘large-cap’ stocks, ‘growth stocks,’ ’emerging market stocks,’ or ‘treasury bonds.’ Asset classes may even be very focused, such as ‘financial stocks,’ or ‘real estate investment trusts.’

Assets Under Management (AUM)

This is the market value of the funds being managed by an advisor or financial services company. Many companies charge their fees based on a percentage of AUM.

Bear Market

A period of continued decline in market prices.

Bid-Ask Spread

The difference between the highest purchase price and the lowest sale price of a security. It is payment to security dealers/market makers. Lower spreads denote higher liquidity and lower transaction costs.


A form of debt-financing. A loan.

Bull Market

A period of continued rise in market prices.

Compound Interest

When interest is added to the principal, so it can also earn further interest. Creates exponential growth. Almost all investing involves compound interest.

Efficient Market Hypothesis

The theory that market prices reflect all available information. The basis for the fact that the great majority of financial professionals cannot outperform the market over an extended period. Proposed by Eugene Fama in the 1960’s.

Efficient Frontier

The idea that for every level of risk there is a portfolio that will deliver the best returns. And for every return there is a portfolio with the lowest level of risk. These portfolios comprise the frontier. First proposed by Harry Markowitz.


See ‘Stock.’

Equity Premium

The idea that equities (stocks) should earn a higher rate of return than bonds because they entail more risk. There are three reasons for higher risk: there is greater chance of loss, it is harder to estimate future profits, and you get paid off last in the event of bankruptcy.

Exchange Traded Fund (ETF)

A fund that typically tracks an index. Unlike an index-based mutual fund, ETF’s trade like stocks on exchanges during the trading day.

Employee Retirement Plans

These include 401(k), 403(b), 457, and other types of retirement plans offered by employers. They most typically involve tax-deferred contributions and tax-free growth, as with a traditional IRA. However, the range of investment options will be determined by the employer. Some may offer excellent investment choices while others may not.

Growth Stock

A stock whose company earnings are expected to grow faster than the market. Companies that are more highly valued. Companies sporting new technologies and lower or no dividends are often growth stocks.

Hedge Fund

A fund that is allowed to use a wider array of investment strategies than typical fund. However, regulators limit who may invest in hedge funds. Fees are generally higher than with typical funds. A standard fee schedule includes 2% of assets under management plus 20% of profits.


An index is a way to measure of the value of a certain segment of a market or asset class. A commonly used index is the S&P 500. Indexes are created for all types of asset classes in countries around the world.

Individual Retirement Account (IRA)

A tax-advantaged retirement savings account in the United States. A traditional IRA uses tax-deferred contributions and taxable withdrawals, and a Roth IRA uses taxable contributions but tax-free withdrawals. Both accounts have tax-free growth. Their use has specific restrictions as stated in the tax code.

Market Capitalization (Market-cap)

The total value of all shares of a company. The share price multiplied by the number of shares. Market indexes are commonly weighted by market capitalization.

Mutual Fund

Managed by a professional analyst. Pools money from customers to invest in certain securities that the fund manager believes will have higher returns relative to the desired risk level.

Net-Asset Value

The value of the underlying assets in a fund, such as a mutual fund or exchange traded fund. May not equal the investible price of the fund due to supply and demand factors involved in trading the fund. Shows if the fund is trading at a premium or a discount.

Passive Management

Investing so as to capture the performance of a certain asset class. Using predetermined rules or strategy to invest, not forecasting. The most common form of passive management is having a fund attempt to track the performance of a certain market index, either by owning all of the components of the index or by using sampling. While index funds constitute passive management, passive management does not necessarily imply tracking an established index. Passively managed funds may use other rules that in effect create their own private index.

Real Estate Investment Trust (REIT)

A corporation that invests in income-producing real estate. Public REITs are traded as stocks. Often considered a separate asset class that can help improve the risk/return characteristics of a portfolio. By law they must distribute at least 90% of their income to investors, which typically comes as dividends. Not recommended for taxable portfolios.


The practice of selling some assets in your portfolio and buying more of others to bring your portfolio backed to the desired asset allocation. May become necessary as some assets perform better than others over periods of time. Has the potential to increase overall portfolio returns.

Standard & Poor’s 500 (S&P 500)

A market index of the top 500 publicly traded companies in the United States. The index is weighted based on market capitalization. In other words, a company’s affect on the index is proportional to its total value as measured by total market capitalization. A common index that funds will track and/or benchmark their performance to. Also considered a bellwether for the US economy.

Stock (Equity)

A form of equity financing. Purchasing equity shares gives the stockholder a claim to a share of future profits, and to some degree company assets, although bond holders are paid off first in the event of bankruptcy. Partial ownership in a company.

Value Stock

A stock that trades at a lower price relative to its fundamentals. A company that may be considered in poor favor by investors. Typically pay higher dividends and are more slowly growing companies. Value stocks have historically provided higher returns than growth stocks.


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