Terms Explained — Investing & Stock Market Glossary

Average Cost Basis

The weighted-average price you paid per share across all your purchases of a given stock, calculated as total dollars spent divided by total shares bought. It's the standard reference point for calculating capital gain or loss when you eventually sell, and it changes every time you buy more shares at a different price.

Break-Even Price

The exact sell price at which a trade's profit or loss equals zero, after accounting for any buy-side and sell-side fees. It's typically slightly above your buy price, not equal to it, since fees on both ends of the trade need to be covered before you're truly "even."

CAGR (Compound Annual Growth Rate)

The single, steady annual rate that would turn a starting value into an ending value over a given number of years, if growth had compounded evenly instead of following its actual bumpy path. CAGR is the correct way to annualize a multi-year return — a simple average of yearly returns can be misleading because it doesn't account for compounding.

Cost Basis Method (FIFO, LIFO, Average Cost)

The rule used to determine which shares you're considered to be selling when you own multiple lots bought at different prices and times. FIFO (first-in, first-out) sells your oldest shares first. LIFO (last-in, first-out) sells your newest shares first. Average cost blends every lot into one weighted-average price. Your broker's default method — or the one you elect — can change your taxable gain on a partial sale.

Dividend Yield

A stock's annual dividend per share divided by its share price, expressed as a percentage. It measures how much cash income a stock pays relative to what you'd pay to own it today. Dividend yield rises when the price falls (with the dividend held constant) and falls when the price rises — a spiking yield can be a warning sign of an expected dividend cut, not a bargain.

Dollar-Cost Averaging (DCA)

The practice of investing a fixed amount of money into the same stock or fund at regular intervals — usually monthly — regardless of price. DCA naturally buys more shares when prices are low and fewer when prices are high, smoothing your average purchase price over time and removing the guesswork of trying to time individual purchases.

Inflation-Adjusted (Real) Return

An investment's return after removing the effect of inflation — what your money's growth actually buys, rather than its nominal dollar growth. Calculated using the Fisher equation: real rate = (1 + nominal rate) / (1 + inflation rate) − 1. A nominal return that looks strong can still represent a loss of real purchasing power if inflation runs hot enough.

Portfolio Allocation

Also called asset allocation — how your total investments are divided across asset classes like stocks, bonds, cash, and alternatives, expressed as a percentage of your total portfolio value. Allocation is widely considered one of the biggest drivers of a portfolio's long-term risk and return, more so than which individual securities you pick within each class.

Position Sizing

Deciding how many shares to buy based on how much of your account you're willing to risk on a single trade, rather than on how much you simply want to own. The standard "fixed-fractional" approach: pick a risk percentage (commonly 1-2% of your account), divide that dollar amount by the per-share difference between your entry and stop-loss price, and round down to a whole share.

Return on Investment (ROI)

The total gain or loss on an investment, expressed as a percentage of the amount originally invested: (ending value − initial investment) / initial investment × 100. Unlike CAGR, plain ROI doesn't account for how long the investment was held, which is why a 50% ROI over 1 year and a 50% ROI over 10 years represent very different performance.

Rule of 72

A mental-math shortcut for estimating how many years it takes an investment to double at a given compound annual rate: divide 72 by the rate. At 8% annual growth, money doubles in roughly 72 ÷ 8 = 9 years. It's an approximation of the true compound-interest math, most accurate for annual rates between roughly 6% and 10%.

Stock Split

A change in a company's share count and price per share that leaves total position value unchanged — a "forward" split (like 4-for-1) multiplies shares and divides price, while a "reverse" split (like 1-for-10) does the opposite. Splits are cosmetic: they don't change the company's underlying value or your ownership stake.

Stop-Loss Order

A predetermined price at which you plan to exit a losing position to limit further loss. Setting a stop-loss before entering a trade — rather than deciding in the moment — is what makes disciplined position sizing possible, since the distance between your entry price and your stop determines how many shares you can buy for a given dollar risk.

Total Return

An investment's complete return, combining both price appreciation (or loss) and any income received along the way, such as dividends. A high-yield stock that's losing value in price can still produce a worse total return than a low-yield stock that's steadily appreciating — looking at yield or price change alone can be misleading.