With obvious exceptions like brain surgery and rocket science, concepts we might think are incredibly complicated from a distance are relatively straightforward once you understand the basic vocabulary. While investing can get extraordinarily complex, the principles that underpin modern investing are much simpler than you realize once a few common words and phrases are explained in layperson’s terms.

Mutual Funds

Most people are familiar with stocks and bonds, and generally what they involve, but when even slightly more complex instruments are used, the average person might quickly lose interest. Unfortunately, mutual funds often fall into that category even though they are, by far, the most popular form of investing for the typical American.

Simply put, when you purchase a mutual fund, the money you invest – along with the money from all of the other investors within that particular fund – is placed into a reservoir where the fund manager scoops up all the money and invests it in several different positions. According to that fund’s prospectus, those positions can be stocks, bonds, commodities, or virtually anything else the fund manager is allowed to invest in.

In short, mutual funds are a convenient way for investors to achieve significantly more diversification without individually purchasing all those positions.

Exchange-Traded Funds (ETFs)

The newest investment instrument is the exchange-traded fund, or ETF. An ETF is a type of security that involves a collection of securities—such as stocks—that often tracks an underlying index. ETFs can invest in any number of industry sectors or use various strategies. They are similar to mutual funds in many ways; however, they are listed on exchanges, and ETF shares trade throughout the day just like ordinary stocks.

Beta

Beta is typically​​ associated with stocks and is simply a measurement of volatility. The greater a stock’s beta, the wilder its prices will swing, both up and down. Since volatility and long-term growth generally work in conjunction, stocks with higher betas will exhibit wider price swings and superior long-term growth. Furthermore, the stocks of smaller companies tend to have higher betas than large companies.

Market Cap

Short for market capitalization, market cap is the total amount of equity owned by a company’s stockholders. If the amount of outstanding stock stays fixed, a company’s market cap will rise when its stock price rises because each share is worth more. Likewise, a company’s market cap will fall when a stock price falls.

Capital Gains

Capital gains are most commonly associated with taxes, but they are often thought to be far more complex than they actually are. In summary, capital gains are the proceeds from the sale of an investment, less the purchase price.

Let’s say, for instance, you buy 10 shares of stock at $10 per share and sell them six months later at $15 per share. Your capital gain would be $5 per share, or $50 for the transaction. If you sold the stock at $5 per share rather than $15 per share, you would have a total capital loss of $50.

Capital gains and losses are often divided by short-term and long-term positions to add one slight wrinkle to the equation. Short-term positions are those you’ve owned for less than one year, whereas long-term positions are held for greater than one year.

Of course, the vocabulary behind investing is vast, and these examples have hardly scratched the surface. We will help define more terminology in the future, but this is an excellent first step in demystifying the investment vernacular.

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Note: This content was updated May 2025.