Investment Foundations key terms

The total market value of all investments a firm manages on behalf of clients. It measures the size and reach of an asset manager and drives fee revenue, since most management fees are charged as a percentage of this value.

An organization such as a pension fund, insurance company, endowment, or sovereign wealth fund that invests large sums, often on behalf of others. It typically trades in bigger sizes and negotiates lower fees than an individual retail investor.

An individual who invests personal savings rather than money pooled from an organization. Retail investors usually invest smaller amounts, pay published fees, and are often protected by specific disclosure and suitability rules.

Firms that own or manage money and decide what to purchase, including asset managers, pension funds, and insurers. They conduct research and place orders, in contrast to firms that sell services or make markets.

Firms such as broker-dealers and investment banks that create, sell, and trade securities and provide research and advisory services to investors. They earn commissions, spreads, and fees rather than investment returns for their own clients' portfolios.

A firm that invests money on behalf of clients, following a stated strategy such as active stock picking or passive index tracking. It charges a fee, usually a percentage of assets, for portfolio management and related services.

A firm that executes buy and sell orders for clients (broker) and may also trade securities for its own account (dealer). It must generally be registered and is subject to conduct and capital rules.

A recurring charge, usually stated as an annual percentage of assets, that a fund or advisor deducts for managing a portfolio. It is typically accrued daily and paid regardless of performance.

An incentive charge paid to a manager when returns exceed a stated benchmark or hurdle. It rewards outperformance but can encourage risk-taking, so it is often paired with a high-water mark.

A legal obligation to act in the client's best interest, placing the client's interests ahead of the firm's own. It typically requires loyalty, care, and full disclosure of conflicts.

The market where securities are first sold by an issuer to investors, raising new capital for the company or government. Proceeds go to the issuer rather than to a previous owner.

The market where investors trade securities they already own, such as on a stock exchange. The issuer receives no proceeds, but liquidity and price discovery benefit all holders.

The first sale of a company's shares to the public, moving it from private to listed ownership. It raises capital for the firm and creates a tradable market for existing shareholders.

The gap between the highest price a buyer will pay (bid) and the lowest price a seller will accept (ask). A narrower spread signals a more liquid, lower-cost market for traders.

A firm that continuously quotes buy and sell prices for a security, earning the spread while supplying liquidity. Market makers help ensure that other participants can trade quickly at fair prices.

The ease and speed with which an asset can be bought or sold without materially moving its price. Cash is the most liquid asset; property and private equity are far less liquid.

A statistical measure of how much an asset's price fluctuates over time. Higher volatility means wider swings and greater uncertainty, which investors usually demand extra return to accept.

The process by which buyers and sellers interact to establish a market price reflecting available information. Active trading and competition among participants make this process more efficient.

The theory that asset prices quickly reflect all available information, making consistent excess returns difficult. Its weak, semi-strong, and strong forms differ in what information is assumed to be priced in.

Ownership interest in a company, represented by shares that carry claims on residual profits and assets. Equity offers growth potential but ranks behind debt in a liquidation.

The most widely held class of equity, typically granting voting rights and a residual claim on earnings and assets. Holders are last in line to be paid if the company fails.

A distribution of company profits to shareholders, usually paid in cash on a regular schedule. The amount is set by the board and can be increased, reduced, or suspended.

Annual dividends per share divided by the share price, expressed as a percentage. It shows the income return from a stock and helps compare it with other income-producing assets.

A loan made by an investor to an issuer, such as a government or company, that pays interest and repays principal at maturity. Bondholders rank ahead of shareholders for repayment.

The interest payment a bond issuer promises to pay holders, usually a fixed percentage of face value paid periodically. The coupon is set at issuance and does not change with market prices.

The total annualized return an investor earns by buying a bond at its current price and holding it to maturity, assuming coupons are reinvested. It links price, coupon, and time remaining.

A measure of a bond's price sensitivity to changes in interest rates, expressed in years. A higher duration means the price will move more when yields rise or fall.

An independent agency's assessment of a borrower's ability to repay debt, expressed on a letter scale from high to low quality. Lower ratings imply higher default risk and usually require higher yields.

The extra yield a bond offers above a comparable risk-free government bond. It widens when investors perceive more default risk and narrows when confidence improves.

A pooled investment vehicle that collects money from many investors and invests it according to a stated mandate. Shares are typically bought and sold at the fund's end-of-day net asset value.

A pooled fund whose shares trade on an exchange throughout the day like a stock. Most track an index and generally carry low fees, though trading incurs brokerage costs and spreads.

A fund designed to replicate the performance of a market index rather than beat it. Low turnover and minimal research keep costs down, making it a common passive building block.

The value of a fund's assets minus its liabilities, divided by the number of shares outstanding. It is the per-share price investors pay or receive when trading with the fund.

A financial contract whose value depends on an underlying asset, rate, or index, such as a future, option, or swap. Derivatives can hedge risk or amplify exposure through leverage.

A contract giving the buyer the right, but not the obligation, to buy or sell an asset at a set price before a deadline. The buyer pays a premium; the seller bears the obligation.

A standardized agreement to buy or sell an asset at a fixed price on a future date, traded on an exchange. Both parties are obligated to perform, and daily margin settlements manage risk.

The possibility that an investment's actual return will differ from what was expected, including loss of capital. It comes in many forms, such as market, credit, liquidity, and inflation risk.

A statistical measure of how widely returns vary around their average. In finance it is a common gauge of total risk, with larger values indicating more dispersed outcomes.

Spreading money across assets whose returns do not move in perfect lockstep, so losses in one area may be offset elsewhere. It reduces risk without necessarily sacrificing expected return.

A measure from -1 to +1 of how closely two assets' returns move together. Combining assets with low or negative correlation improves diversification benefits.

The division of a portfolio among asset classes such as stocks, bonds, and cash. It is a primary driver of long-term risk and return and reflects an investor's goals and tolerance.

An investor's willingness and financial ability to accept losses or volatility in pursuit of returns. It is assessed through goals, time horizon, and capacity to absorb setbacks.

A reference index or standard used to judge an investment's performance and risk. A well-chosen benchmark matches the portfolio's mandate, asset class, and region.

An approach where a manager selects securities and times trades in an attempt to outperform a benchmark. It involves higher costs and research effort than passive investing.

The annual cost of running a fund, shown as a percentage of assets and deducted from returns. It covers management, administration, and other operating expenses.

The growth of an investment when earnings are reinvested and themselves earn returns over time. Small differences in annual return can produce large differences over long periods.

The overall gain from an investment, combining price appreciation with income such as dividends or interest. It gives a fuller picture than price change alone.

The requirement that an investment recommendation fit a client's objectives, financial situation, and risk tolerance. Advisors gather client information and document why a product is appropriate.

The process of collecting and verifying information about a client's identity, finances, goals, and risk profile. It supports suitable advice and helps prevent money laundering and fraud.

A written document setting out a client's objectives, constraints, target asset mix, and review process. It guides decisions and helps keep the portfolio aligned with long-term goals.

Adjusting a portfolio back to its target asset weights after market moves have shifted them. It controls risk and enforces a disciplined buy-low, sell-high behavior.

The period over which an investor plans to hold assets before needing the money. Longer horizons generally allow more growth-oriented, volatile holdings and more time to recover losses.

A situation where a firm's or advisor's own interests could improperly influence advice or actions affecting a client. It must be identified, disclosed, and managed, often by putting the client first.

Using borrowed money or derivatives to control a larger position than the capital invested. It magnifies both gains and losses and raises the risk of forced liquidation.

The risk that a bond or other fixed-income asset loses value when market interest rates rise. Longer maturities and lower coupons typically make prices more sensitive to rate changes.