📘 STEP 6ce — COMMON TERMS (Stocks, Bonds, Indexes, Options & More)
The Language of Wealth: Understand the Terms Before You Build the Portfolio
You don’t lose money in markets because they’re hard.
You lose money because you don’t understand the language.
⭐ INTRODUCTION — Why This Glossary Matters
Every wealth-building vehicle has its own language.
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Stocks
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Bonds
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ETFs
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Indexes
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Options
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Real estate
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Businesses
If you don’t understand the terms, you:
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Can’t compare investments
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Can’t evaluate risk
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Can’t calculate returns
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Can’t spot bad advice
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Can’t protect yourself from fees and taxes
This glossary is your translator.
You don’t need to memorize everything.
You just need to know where to look when a term appears.
📊 SECTION 1 — Core Return & Performance Terms
Return
The percentage gain or loss on an investment over a period of time.
Annualized Return
The average yearly return of an investment over multiple years.
Required Return
The minimum annual return you need to reach a financial goal by a specific date.
Desired Return
The return you want to earn to accelerate wealth or create margin.
After-Tax Return
Your real return after taxes are deducted.
Nominal Return
Return before adjusting for inflation.
Real Return
Return after adjusting for inflation (what actually grows purchasing power).
Compound Return
Returns earned on both your original money and prior gains.
CAGR (Compound Annual Growth Rate)
A smoothed annual growth rate over time.
Total Return
Price appreciation + dividends + interest.
🏦 SECTION 2 — Stocks & Equity Terms
Stock (Equity)
Ownership in a company.
Share
One unit of ownership in a company.
Market Capitalization (Market Cap)
Company size = share price × shares outstanding.
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Small-cap
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Mid-cap
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Large-cap
Dividend
A portion of company profits paid to shareholders.
Dividend Yield
Dividend ÷ share price.
Earnings Per Share (EPS)
Company profit divided by shares outstanding.
P/E Ratio (Price-to-Earnings)
Price ÷ earnings per share.
Shows how much investors are paying for $1 of earnings.
Intrinsic Value
What a stock is actually worth based on fundamentals.
Growth Stock
Company focused on expansion, not dividends.
Value Stock
Company trading below perceived intrinsic value.
Blue-Chip Stock
Large, stable, well-established company.
Volatility
How much a stock’s price fluctuates.
📈 SECTION 3 — Indexes, ETFs & Fund Terms
Index
A benchmark that tracks a group of investments (ex: S&P 500).
Index Fund
A fund that tracks an index.
ETF (Exchange-Traded Fund)
A basket of investments traded like a stock.
Mutual Fund
A pooled investment vehicle traded once per day.
Expense Ratio
Annual fee charged by a fund.
Tracking Error
How closely a fund follows its index.
Assets Under Management (AUM)
Total value managed by a fund.
Turnover
How often a fund buys and sells holdings.
Liquidity
How easily an asset can be bought or sold.
Bid-Ask Spread
Difference between buying and selling price.
🧮 SECTION 4 — Risk & Portfolio Terms
Risk
The chance of losing money or underperforming expectations.
Risk Tolerance
How much volatility you can emotionally handle.
Risk Capacity
How much risk your finances can realistically support.
Diversification
Spreading investments to reduce risk.
Asset Allocation
How your portfolio is divided among asset classes.
Rebalancing
Adjusting portfolio weights back to targets.
Correlation
How investments move relative to each other.
Beta
Volatility relative to the market (S&P 500 = 1.0).
Drawdown
Peak-to-trough decline in value.
Sharpe Ratio
Return per unit of risk.
🪙 SECTION 5 — Bonds & Fixed Income Terms
Bond
A loan you give to a company or government.
Yield
Income generated by a bond.
Coupon Rate
Interest rate paid by the bond.
Maturity
When the bond principal is repaid.
Face Value (Par Value)
Amount repaid at maturity.
Interest Rate Risk
Risk bonds lose value when rates rise.
Credit Risk
Risk the issuer defaults.
Treasuries
U.S. government bonds.
Corporate Bonds
Bonds issued by companies.
Municipal Bonds
Bonds issued by states or cities (often tax-free).
🧠 SECTION 6 — Options & Advanced Strategy Terms
Option
A contract giving the right (not obligation) to buy or sell an asset.
Call Option
Right to buy an asset at a set price.
Put Option
Right to sell an asset at a set price.
Strike Price
Price at which an option can be exercised.
Expiration Date
Date the option expires.
Premium
Cost of the option.
In-the-Money (ITM)
Option has intrinsic value.
Out-of-the-Money (OTM)
Option has no intrinsic value.
Theta
Time decay of an option.
Delta
Sensitivity of option price to stock movement.
🧾 SECTION 7 — Tax & Account Terms
Taxable Account
Investment account subject to taxes.
Tax-Deferred Account
Taxes paid later (401(k), Traditional IRA).
Tax-Free Account
No taxes on gains (Roth IRA, HSA).
Capital Gains
Profit from selling an investment.
Short-Term Capital Gains
Held less than 1 year (taxed as income).
Long-Term Capital Gains
Held more than 1 year (lower tax rate).
Tax Drag
Returns lost to taxes over time.
Depreciation
Non-cash expense reducing taxable income (real estate).
Write-Off / Deduction
Expense that reduces taxable income.
🏗 SECTION 8 — Strategy & Planning Terms
Wealth Gap
Difference between current wealth and desired wealth.
Time Horizon
How long money will be invested.
Dollar-Cost Averaging
Investing fixed amounts over time.
Lump-Sum Investing
Investing all at once.
Cashflow
Income generated by an investment.
Leverage
Using borrowed money to invest.
Margin of Safety
Buffer between value and price.
Opportunity Cost
What you give up by choosing one option over another.
Sequence of Returns Risk
Risk of poor returns early in retirement.
Liquidity Risk
Risk of needing money you can’t access.
🟢 SECTION 9 — How to Use This Glossary in Life’s Wealth Quest
Use this section when you:
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Use the Required Return Calculator
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Compare ETFs or mutual funds
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Build a portfolio (Step 6ce)
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Analyze index funds (Step 6cba)
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Compare ETFs (Step 6cbb)
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Plan taxes (Step 4bg)
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Evaluate real estate or business investments
This glossary is your reference manual, not a test.
🔚 FINAL THOUGHT
Wealth is not complex.
It’s just written in a language most people never learn.
Now you speak the language.