Inflation
When prices rise over time, making your money worth less. The Fed targets 2% per year. At 3.5%, your $100 groceries cost $103.50 a year later.
Federal Funds Rate
The interest rate banks charge each other overnight. Set by the Fed. When this rises, your mortgage, car loan, and credit card rates all rise too.
GDP
Gross Domestic Product — the total value of everything a country produces in a year. The US GDP is ~$27 trillion. Two negative quarters in a row = recession.
ETF
Exchange-Traded Fund. A basket of stocks you can buy like one stock. SPY owns 500 companies at once. Diversification with low fees — the bedrock of index investing.
Bond Yield
The return you get for lending money to a government or company. The 10-year US Treasury yield is the most important number in global finance — it sets mortgage rates.
Quantitative Easing (QE)
When the Fed buys bonds to inject money into the economy and lower long-term rates. Used in 2008 and 2020 to prevent economic collapse. Can cause inflation.
Bear Market
A drop of 20% or more from recent highs. The S&P 500 has had 26 bear markets since 1928 — average drop 36%, average duration 9 months. They always recover.
Bull Market
A rise of 20%+ from recent lows. The longest bull market ran from 2009 to 2020 — 11 years, +400%. Bull markets last ~3x longer than bear markets on average.
Yield Curve
A chart of bond rates across maturities. When short-term rates exceed long-term (inverted), it has predicted every recession since 1950. Currently inverted.
CPI
Consumer Price Index. Measures inflation by tracking a basket of goods — groceries, gas, rent, healthcare. Released monthly. One of the most market-moving reports.
PCE
Personal Consumption Expenditures. The Fed's preferred inflation gauge. Broader than CPI, captures how consumers substitute products as prices change.
Recession
Technically two consecutive quarters of negative GDP growth. Usually brings job losses, lower consumer spending, and falling stock markets. Average lasts 10 months.
Stagflation
The worst of both worlds: high inflation + slow growth + high unemployment. Happened in the 1970s. Hard to fix because rate hikes that kill inflation also kill growth.
Market Cap
Share price × total shares outstanding. Apple's ~$2.7T market cap means investors collectively think it's worth that much. Bigger cap = more stable generally.
P/E Ratio
Price-to-Earnings. Stock price divided by annual earnings per share. A P/E of 25 means you pay $25 for every $1 of profit. Historical S&P 500 average is ~16-17.
Hedge Fund
Private investment fund using complex strategies — shorting, leverage, derivatives. Typically minimum $1M+ to invest. Not regulated like mutual funds. Very high fees.
Short Selling
Betting a stock will fall. You borrow shares, sell them, hope price drops, buy back cheaper, return shares, pocket the difference. Unlimited loss potential if wrong.
Derivative
A contract whose value comes from something else — stock, bond, commodity, index. Options and futures are derivatives. Used for hedging or speculation. Can amplify losses.
Dollar Index (DXY)
Measures the dollar vs 6 major currencies. A strong DXY makes US exports expensive abroad, hurts multinational company profits, and pressures commodities priced in dollars.
Quantitative Tightening (QT)
The opposite of QE — the Fed shrinks its balance sheet by letting bonds mature without reinvesting. Removes money from the system, raising long-term rates.
Soft Landing
When the Fed raises rates enough to kill inflation without causing a recession. Very rare — achieved only once clearly (1994-95). What everyone is hoping for now.
Credit Spread
The extra yield investors demand on corporate bonds vs safe Treasury bonds. Wide spreads = fear. Narrow spreads = confidence. A sudden widening signals financial stress.
401(k)
Tax-advantaged retirement account through your employer. Contributions reduce your taxable income today. 2026 limit: $23,500 ($31,000 if 50+). Always get the employer match first.
Roth IRA
Individual retirement account funded with after-tax money. Growth and withdrawals are tax-free. 2026 limit: $7,000 ($8,000 if 50+). Best if you expect higher taxes in retirement.
Index Fund
A fund that tracks a market index like the S&P 500 passively. No stock-picking. Low fees (~0.03%). Warren Buffett recommended them for most investors. VTI, VOO, SPY.
Compound Interest
Earning interest on your interest. $10,000 at 7% for 30 years = $76,122 — 7x your money without adding anything. Einstein allegedly called it the eighth wonder of the world.
Liquidity
How quickly you can convert an asset to cash without moving the price. Cash = perfectly liquid. Real estate = illiquid. Stocks = mostly liquid. Liquidity dries up in crises.
Leverage
Using borrowed money to amplify returns — and losses. 2x leverage on a 10% gain = 20% profit. 2x leverage on a 10% loss = 20% loss. Used by hedge funds and bad traders.
IPO
Initial Public Offering — when a private company first sells shares to the public. Average first-day pop is ~18%, but 3-year post-IPO underperformance vs market is common.
Fiscal Policy
Government spending and tax decisions. More spending = stimulus. Tax cuts = stimulus. Opposite of monetary policy (which is the Fed's job). Congress controls fiscal policy.
Monetary Policy
The Fed's toolkit: interest rates, QE/QT, reserve requirements. Controls money supply and credit conditions. The primary tool for managing inflation and unemployment.
Treasury Bill
Short-term US government debt maturing in 4, 8, 13, 26, or 52 weeks. Currently yielding ~5.3%. Safest investment in the world — backed by US government. Also called T-bills.
Basis Point
One hundredth of a percent (0.01%). The Fed raised rates by 75 basis points (0.75%) multiple times in 2022. Used to avoid confusion between "percent of a percent."
Spread
The difference between two rates or prices. Bid-ask spread is what a market maker profits on each trade. Credit spread is the premium for risk over a safe rate.
Volatility (VIX)
VIX measures expected market volatility — the "fear gauge." Below 20 = calm. 20-30 = uncertain. Above 30 = fearful. Spiked to 80 in 2020 COVID crash. Currently ~15.