Investment Glossary
Plain-English definitions of the key terms you'll encounter when investing in stocks, ETFs, and more. Each definition includes a real-world example and a link to calculate it yourself.
CAGR (Compound Annual Growth Rate)
The smoothed annual rate at which an investment grows over a period, assuming profits are reinvested each year.
CAGR stands for Compound Annual Growth Rate. It answers the question: "At what steady yearly rate would my investment have grown to reach its final value?" Unlike a simple average, CAGR accounts for compounding — meaning gains on top of gains.
CAGR = (Ending Value / Beginning Value) ^ (1 / Years) - 1
Example: $10,000 invested in Apple (AAPL) in 2015 grew to roughly $85,000 by 2025. That's approximately a 24% CAGR — meaning, on average, the investment grew 24% per year.
Adjusted Close Price
A stock's closing price modified to account for corporate actions like stock splits, dividends, and rights offerings.
The Adjusted Close Price is the price you see after factoring in any corporate actions that changed the stock's value — such as stock splits (where one share becomes two), dividend payments, and rights offerings. Using adjusted prices gives a more accurate picture of true historical performance.
Adjusted Price = Raw Close Price × Adjustment Factor
Example: Apple executed a 4-for-1 stock split in August 2020. Without adjustment, it would look like the price dropped 75%. With the adjusted close, historical prices are recalculated so the chart shows a smooth, accurate history.
Total Return vs. Price Return
Price Return measures only stock price appreciation. Total Return includes dividends reinvested.
Price Return tracks how much a stock's price went up or down. Total Return adds dividend income on top of price changes — and assumes those dividends are reinvested to buy more shares. For dividend-heavy stocks like Coca-Cola (KO) or Johnson & Johnson (JNJ), Total Return can be significantly higher than Price Return over a 10+ year period.
Price Return = (End Price - Start Price) / Start Price Total Return = Price Return + Dividend Yield (compounded)
Example: The S&P 500 (SPY) 10-year Price Return might be 150%, but the Total Return (with dividends reinvested) could be 200% or higher — a meaningful difference that compounds dramatically over time.
Dollar-Cost Averaging (DCA)
An investing strategy where you invest a fixed dollar amount at regular intervals, regardless of the stock price.
Dollar-Cost Averaging (DCA) means investing the same amount of money at regular intervals — monthly, weekly, or per paycheck — rather than investing a lump sum all at once. When prices are low, your fixed dollar amount buys more shares. When prices are high, it buys fewer. Over time, this smooths out your average cost per share and reduces the emotional stress of trying to "time the market."
Average Cost per Share = Total Amount Invested / Total Shares Purchased
Example: Investing $500/month into NVDA over 5 years vs. putting in $30,000 as a lump sum in 2020 and then never buying again. DCA removes the pressure of picking the "perfect" entry point.
Market Capitalization
The total market value of a company's outstanding shares. Calculated as share price × total shares outstanding.
Market Capitalization (Market Cap) is the total dollar value of a company as determined by the stock market. A large-cap company (over $10B market cap) tends to be more stable and established. Mid-cap ($2B–$10B) companies offer a balance of growth and stability. Small-cap (under $2B) companies have higher growth potential but also higher risk.
Market Cap = Share Price × Total Shares Outstanding
Example: If Apple (AAPL) trades at $200 and has 15.4 billion shares outstanding, its market cap is $3.08 trillion — making it one of the most valuable companies in the world.
ETF vs. Index Fund
Both track a market index. ETFs trade like stocks throughout the day; index funds are priced once daily at market close.
An Exchange-Traded Fund (ETF) is a basket of securities that trades on a stock exchange just like a single stock. An Index Fund is a type of mutual fund that also tracks an index, but can only be bought or sold at the end of the trading day at the net asset value (NAV). Most ETFs have slightly lower expense ratios and offer intraday liquidity. For long-term, passive investors, the difference is often negligible — both are excellent vehicles for diversified, low-cost investing.
Example: SPY is an ETF that tracks the S&P 500 index. VFIAX is Vanguard's S&P 500 Index Fund. Both hold the same 500 companies, but SPY can be traded anytime during market hours while VFIAX settles once per day.
Historical Volatility
A measure of how much a stock's price has fluctuated over a given period. Higher volatility = wider price swings.
Historical Volatility (HV) measures the degree of variation in a stock's price over a specific past period, typically expressed as an annualized standard deviation of daily returns. High volatility means the stock's price swings wildly — it might soar 20% in a month or crash 30%. Low volatility means relatively steady, predictable price movement. Understanding volatility helps you assess the risk you're taking on alongside the potential reward.
HV = Standard Deviation of Daily Returns × √252
Example: Tesla (TSLA) is historically much more volatile than Johnson & Johnson (JNJ). TSLA might swing ±5% in a single day, while JNJ barely moves 1%. Both could have the same 5-year return, but TSLA is a far bumpier ride.
Ready to put these terms into practice?
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