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What Prospect Theory Means (Plain English Version) Prospect Theory explains why people make decisions based on how choices are framed—especially when facing gains and losses. In short: - We hate losing more than we like winning. - We’re risk-averse with gains but weirdly risk-seeking with losses. - Our emotions often override the math.

Definition of Modern Portfolio Theory (MPT) Modern Portfolio Theory is the idea that you can improve your investment results not by picking perfect individual stocks, but by building a blend of different investments that work well together. The goal? Maximize your return while minimizing your risk. In other words: Don’t bet the farm on one horse. Build a team where each player brings something different to the field.

What Is Asset Allocation? Asset allocation is the strategy of dividing your investments across different “buckets” — typically stocks, bonds, and cash — based on your goals, your time horizon, and how much risk you can stomach without losing sleep or stress-eating Chips Ahoy at midnight. Think of it like building a balanced meal. Stocks = protein Bonds = veggies Cash = carbs

Definition of Buy and Hold Buy and Hold is a long-term investment strategy where an investor purchases assets—typically stocks, ETFs, or index funds—and holds them for an extended period, regardless of market fluctuations. The idea is simple: time in the market beats timing the market. Instead of jumping in and out based on daily trends or short-term news, the buy-and-hold investor focuses on the long-term growth of their investments.

Definition of Momentum Investing Momentum investing is an investment strategy where investors buy assets that have shown strong recent performance and sell those that have shown weak performance. It’s based on the idea that rising stocks often keep rising for a time, and falling stocks often keep falling, because of market psychology and herd behavior.

Definition of Income Investing Income investing is a strategy focused on generating steady, reliable income from your investments—usually through dividends, interest, or rental income. Instead of betting on stock prices shooting up over time, income investors look for assets that pay them regularly. The goal? To build a portfolio that produces consistent cash flow without needing to sell assets to make money.

Definition of Common Stock Common stock represents ownership in a company. When you buy common stock, you’re essentially buying a small slice of that business. As a shareholder, you’re entitled to a portion of the company’s profits (usually in the form of dividends if paid), and you have voting rights to help elect the board of directors or vote on major company decisions. Think of common stock as your seat at the table—albeit maybe at the back if you only own a few shares.

What is Preferred Stock? Preferred stock is a type of ownership in a company that has a higher claim on assets and earnings than common stock. That means if the company pays dividends, preferred shareholders get theirs first. If the company goes belly-up (let’s hope not), preferred shareholders also get paid before common stockholders—though still after bondholders.

Definition of Value Stock A value stock is a share of a company that appears to be trading for less than its intrinsic value. Think of it as a great company that’s momentarily on the clearance rack. Investors believe the stock is undervalued by the market and has solid fundamentals—like steady earnings, a strong balance sheet, and even dividends—but for whatever reason, Wall Street’s spotlight isn’t on it… yet.

Definition of Growth Stock A growth stock is a publicly traded company that is expected to grow at a rate significantly above the average for the overall market. These are the kinds of companies reinvesting their earnings back into the business instead of paying dividends, with the goal of expanding fast—think rocket fuel, not steady cruise.

Definition of Penny Stock A penny stock is typically a share of a small public company that trades for less than $5 per share. These stocks are often traded over-the-counter (OTC) through platforms like the OTC Bulletin Board or Pink Sheets, rather than on major exchanges like the NYSE or Nasdaq. Penny stocks are known for their low price, low trading volume, and high risk—but also the potential for high reward.

Definition of a Blue Chip Stock A blue chip stock refers to shares of a well-established, financially sound, and nationally recognized company with a history of reliable performance. Think of them as the all-star players in the stock market—companies that are leaders in their industries, pay regular dividends, and have a track record of weathering economic storms.

What is a Conglomerate? A conglomerate is a large corporation made up of several distinct and often unrelated businesses, all operating under one parent company. Unlike a company that sticks to one specific industry, a conglomerate spreads its interests across different sectors. Think of it as a financial “supergroup” — each division plays a different instrument, but they’re all under the same record label.

Definition of Holding Company A Holding Company is a business entity that exists primarily to own shares in other companies. It doesn’t usually make products or offer services itself—instead, it holds controlling interest in other businesses. Think of it like the parent who doesn’t run the lemonade stand but owns the stand… and the ice supplier… and the cup factory.

Definition of a Parent Company A parent company is a corporation that owns enough voting stock in another company to control its policies and management. The company it controls is called a subsidiary. Think of a parent company as the “boss” in the business family tree. While it may not run the day-to-day operations of its subsidiaries, it has the power to call the shots when it matters—like choosing leadership, approving budgets, or selling the business.

Definition of Subsidiary A subsidiary is a company that is controlled by another company, often referred to as the parent company. The parent usually owns more than 50% of the subsidiary’s voting stock, giving it control over business operations and decision-making. Put simply: a subsidiary is a business “child” owned by a business “parent.”

Definition of a Divestiture A divestiture is the sale, transfer, or disposal of a company asset, business unit, subsidiary, or investment. It’s the opposite of an acquisition. While companies often grow by acquiring more, a divestiture is about trimming the fat, refocusing, or raising cash. Think of it as a business shedding a layer it no longer needs—like a snake slipping out of old skin so it can grow.

Definition of Spin-off A spin-off is a type of corporate action where a company creates a new, independent business by separating part of its operations, assets, or divisions into a new entity. The shareholders of the parent company typically receive shares in the new company on a pro-rata basis.

In financial and business terms, an acquisition usually refers to one company buying another. When Company A acquires Company B, it means A now owns B — its assets, customers, operations, and all the headaches that come with it. But zoom out a bit: acquisitions aren’t just for Fortune 500 CEOs. Regular people like you and me can use this concept in powerful ways.

Definition: A merger is a financial and business transaction where two companies combine to form a single new entity. The goal? To grow bigger, faster, leaner—or all three. This isn’t one company “buying out” the other (though that sometimes is what’s really happening behind the scenes). In a true merger, it’s supposed to be a joining of equals—like a business marriage, minus the cake and awkward speeches.