Quick Hit

5 Investment Terms to Have in Your Financial Toolkit

You’re already juggling more roles than a Broadway understudy – chef, chauffeur, crisis negotiator (a.k.a. tantrum tamer). The last thing you need is a bunch of financial jargon making investing feel more intimidating than it actually is.

Luckily, you don’t need a finance degree to understand the basics. Knowing just a handful of key investment terms can make a world of difference when it comes to building long-term wealth. 

Compound Interest

Your Money’s Best Friend

What it is: Interest that earns more interest. Your money grows faster over time because you earn interest not just on what you initially put in, but also on the interest that’s already been added. It’s like a snowball rolling downhill, getting bigger, and bigger, the longer it rolls.

For example, let’s say you invest $1,000 and earn 7% interest annually. In year one, you earn $70. In year two, you earn interest not just on your original $1,000, but also on that $70 – so now you’re earning interest on $1,070. And so on. After 10 years, even if you never put another dollar in, you would have nearly doubled your money.

Why it matters: The earlier you start investing, even if small amounts, the more time compound interest has to work its magic. It’s the ultimate “set it and forget it” wealth-builder. It’s like planting a money tree in your earlier years so it’s in full bloom by the time you’re dreaming of beachside retirement.

Mom speak: Think of compound interest like kid’s toys – even if you don’t buy more, the pile still seems to grow (birthdays, holidays, grandparents, etc.). 

Efficient Market Theory

Why Time in the Market > Timing the Market

What it is: The idea that all publicly available information is already baked into stock prices, and you can’t predict the future. So, unless you have a crystal ball, beating the market consistently, if at all, is really hard.

Why it matters: Rather than trying to pick individual stocks you hope will do well, you can passively invest through index funds. It saves time, money, and stress, and usually performs just as well, if not better, over time.

Mom speak: Trying to outsmart the stock market is like trying to guess what your picky toddler might decide to eat today. You could have a lucky guess once in a blue moon, but it being a regular occurrence is highly unlikely. Better to have a reliable system (e.g. berries and cheese, or in this case, index funds).

Capital Gains

What Can I Say Except “You’re Welcome”?

What it is: The profit you make when you sell an investment for more than you paid for it. Perhaps you bought a stock for $50, then sell it later for $100. That $50 difference is your capital gain.

Why it matters: Capital gains are how long-term investors make money. But capital gains are also taxable, so it’s important to know the difference between short-term (held less than a year, taxed at higher rates) and long-term capital gains (held over a year, taxed a lower rates).
Note: You don’t pay tax until you sell investments.

Mom speak: It’s like flipping a gently used stroller you bought on Facebook Marketplace. If you bought it for $50 and sold it for $100, you made a $50 profit. Same idea, just with stocks.

Dividends

Your Investment’s Way of Saying “Thanks”

What it is: A portion of a company’s profits paid out to shareholders. Not all companies pay them, but most well-established ones reward their investors regularly just for holding their stock.

Why it matters: Dividends can be a steady stream of income, and when reinvested, they can supercharge your compound interest.

Mom speak: Think of it as a thank-you note from the company, but with actual cash. Cha ching!

Asset Allocation

How Not to Put All Your Eggs in One Basket

What it is: How you split your investments across different types of assets like stocks, bonds, and cash. 

Why it matters: A diversified mix of assets helps grow your money while reducing risk. If one part of your portfolio stumbles, another might carry the team. When you’re younger, your mix should lean more heavily toward stock (more growth potential over time). When you’re older, your mix might shift toward bonds for stability in retirement. 

Mom speak: Liken it to your childcare strategy. You wouldn’t rely solely on one babysitter, right? You’ve got grandma, your neighbor’s teenager, Ms. Rachel for backup. Same idea with your investments – spread things out for peace of mind. 

Mom Brain Recap

These five terms are more than just finance lingo—they’re keys to understanding how your money can work for you. Whether you’re investing $50 a month or $5,000, knowing the basics helps you make confident, informed decisions that support your family’s future.

And the best part? Once you understand these concepts, you’re already ahead of most people. No stock-picking stress required—just smart, steady progress toward financial clarity.

Curious what even more financial buzzwords actually mean? Check out the SheWealth Top 100 Financial Terms to Know in the Resource Garden—because Googling every other word during a money convo gets old fast (and moms don’t have time for that).