Financial Glossary
Key financial and crypto terms explained simply.
A
Amortization
The process of spreading loan payments over time, with each payment covering both principal and interest.
APY (Annual Percentage Yield)
The effective annual rate of return taking into account the effect of compounding interest.
Airdrop
Free distribution of cryptocurrency tokens to wallet addresses, often used as a marketing strategy.
Asset Allocation
The strategy of dividing investments among different asset categories (stocks, bonds, real estate, cash) to balance risk and reward.
B
Bear Market
A market condition where prices are falling or expected to fall, typically defined as a 20%+ decline from recent highs.
Block Reward
The amount of cryptocurrency given to miners/validators for successfully adding a new block to the blockchain.
Blockchain
A distributed, immutable digital ledger that records transactions across many computers, making data tamper-proof.
Bull Market
A market condition where prices are rising or expected to rise significantly, typically 20%+ from recent lows.
C
Capital Gains
Profit from selling an asset for more than you paid. Can be short-term (<1yr) or long-term (>1yr), taxed at different rates.
Compound Interest
Interest calculated on both the initial principal and all accumulated interest from previous periods, creating exponential growth.
Covered Call
An options strategy where you sell call options on stocks you already own, generating premium income in exchange for capping upside.
D
DCA (Dollar-Cost Averaging)
Investing a fixed amount at regular intervals regardless of price, reducing the impact of volatility over time.
DeFi (Decentralized Finance)
Financial services built on blockchain technology that operate without traditional intermediaries like banks.
Dividend
A payment made by a corporation to its shareholders, usually from profits. Dividend Aristocrats have raised dividends 25+ consecutive years.
Down Payment
An upfront payment when buying a home, typically 3-20% of the purchase price. 20% avoids PMI.
DRIP
Dividend Reinvestment Plan. Automatically reinvests dividends to buy more shares, compounding returns over time.
E
ETF (Exchange-Traded Fund)
A basket of securities that trades on an exchange like a stock. Offers instant diversification at low cost.
Emergency Fund
Cash savings of 3-6 months of essential expenses, kept in a liquid account for unexpected financial emergencies.
F
FIRE
Financial Independence, Retire Early. A movement focused on aggressive saving (50-70%+ of income) to achieve financial independence before traditional retirement age.
H
Hashrate
The computational power used for mining cryptocurrency, measured in hashes per second (TH/s for Bitcoin).
HODL
Crypto slang for "Hold On for Dear Life" — a long-term buy-and-hold strategy regardless of price volatility.
HSA
Health Savings Account. Triple tax-advantaged: tax-deductible contributions, tax-free growth, and tax-free withdrawals for medical expenses.
I
Impermanent Loss
A DeFi risk where providing liquidity to a pool results in lower value than simply holding the tokens, caused by price divergence.
Index Fund
A fund designed to track a market index (like the S&P 500). Passive management results in low fees and consistent returns.
Inflation
The rate at which the general level of prices rises, eroding purchasing power. Historically averages about 3% per year in the US.
L
Liquidity Pool
A pool of tokens locked in a smart contract that enables decentralized trading on DEXs. Providers earn fees from trades.
P
PMI (Private Mortgage Insurance)
Insurance required when your down payment is less than 20%. Protects the lender if you default. Typically 0.5-1% of loan amount annually.
Principal
The original sum of money invested or lent, not including interest or earnings.
Proof of Stake (PoS)
A consensus mechanism where validators stake tokens as collateral to verify transactions. More energy-efficient than Proof of Work.
Proof of Work (PoW)
A consensus mechanism where miners solve complex puzzles to validate blocks. Used by Bitcoin. Secure but energy-intensive.
R
REIT (Real Estate Investment Trust)
A company that owns income-producing real estate. Must distribute 90% of taxable income as dividends. Yields typically 5-8%.
ROI (Return on Investment)
A measure of investment profitability: (gain - cost) / cost × 100%. Annualized ROI allows comparison between different time periods.
Roth IRA
A retirement account with after-tax contributions but tax-free growth and withdrawals. Annual limit: $7,000 (2025). Income limits apply.
S
Slashing
A penalty in proof-of-stake networks where validators lose a portion of staked tokens for misbehavior or downtime.
Smart Contract
Self-executing code on a blockchain that automatically enforces agreements when conditions are met. Powers DeFi and NFTs.
Staking
Locking up cryptocurrency to support blockchain operations and earn rewards, similar to earning interest on a savings account.
T
Tax-Loss Harvesting
Selling investments at a loss to offset capital gains and reduce tax liability. An effective strategy for minimizing taxes.
TIPS
Treasury Inflation-Protected Securities. US government bonds whose principal adjusts with the CPI, protecting against inflation.
Y
Yield
The income return on an investment, expressed as a percentage of the investment's value. Higher yield often means higher risk.
Yield Farming
Providing liquidity or staking tokens in DeFi protocols to earn rewards. APYs can range from 2% to over 100%, with corresponding risk levels.