Annual Fee
Fees & CostsA yearly charge expressed as a percentage of your investment balance that goes to your broker or fund manager.
Example:
A 1% annual fee means you pay $100 per year for every $10,000 invested.
Financial Terms Glossary
Plain English explanations of investment and financial terms with real-world examples
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Financial Terms Definitions
Compound Interest
Compound InterestWhen your investment earnings generate additional earnings over time. Your money makes money, and that money makes more money.
Example:
If you earn 7% on $1,000, you have $1,070. Next year, you earn 7% on $1,070, giving you $1,144.90.
Direct Fees
Fees & CostsThe actual cash taken out of your investment account each year. This is money you never see again.
Example:
If you have $10,000 invested with a 1% fee, $100 is directly removed from your account each year.
Expense Ratio
Fees & CostsAnother name for annual fee. It's the percentage of your investment that goes to fund management costs.
Example:
An expense ratio of 0.5% means you pay $50 annually for every $10,000 invested.
Index Fund
Investing BasicsA type of investment that automatically follows a market index (like the S&P 500) and typically has very low fees.
Example:
An S&P 500 index fund buys shares of the 500 largest US companies automatically.
Investment Growth
Compound InterestThe additional money earned from your investments through market gains, dividends, and compound interest.
Example:
If you invested $10,000 and it's now worth $15,000, your investment growth is $5,000.
Opportunity Cost
Fees & CostsThe potential earnings you miss out on because fees reduce the amount of money working for you.
Example:
If fees cost you $1,000, you also lose the compound growth that $1,000 could have earned over time.
Principal
General TermsThe original amount of money you invest, before any returns or fees.
Example:
If you start with $10,000, that's your principal amount.
Return Rate
Investing BasicsThe percentage your investments earn each year, including both price increases and dividends.
Example:
A 7% return rate means your $1,000 investment grows to $1,070 in one year.
Total Balance Reduction
Fees & CostsThe complete amount less in your final balance due to fees, including both direct fees and opportunity cost.
Example:
If fees cost you $50,000 in direct fees and $100,000 in lost growth, your total balance reduction is $150,000.
Actively Managed Fund
Investing BasicsA fund where a manager tries to beat the market by picking specific investments, usually with higher fees.
Example:
A fund manager buying and selling stocks based on research, typically charging 1-2% annually.
Passive Investing
Investing BasicsA strategy that follows market indexes automatically, requiring minimal management and resulting in lower fees.
Example:
Buying an index fund that tracks the S&P 500 without trying to pick individual winners.
Diversification
Investing BasicsSpreading your money across different types of investments to reduce risk.
Example:
Instead of buying just one stock, you buy many stocks, bonds, and other assets.
Dollar-Cost Averaging
Investing BasicsInvesting the same amount regularly (like monthly) regardless of market conditions.
Example:
Investing $500 every month, buying more shares when prices are low and fewer when prices are high.
Time Horizon
General TermsHow long you plan to keep your money invested before needing it.
Example:
A 30-year time horizon for retirement savings means you have 30 years for compound interest to work.