In the first chapter of our investing series, we covered some of the basics that you need to know about investing, like why investing is important and how it can benefit you. But in this chapter, we’ll be going over important investing terms to know before you can actually get started on your investing journey. Knowing these terms will help make you feel more confident in your ability to invest.
Investing your money can be a great way to build your wealth, prepare for the future, and make passive income without having to work extra. And the sooner you get started investing, the more money you can make. However, it’s not always that easy, especially if you find yourself confused by the terms used to describe investment opportunities.
But don’t let that discourage you. We’ve put together a guide with 30 common investment terms you need to know. Learning the definitions is a good introduction to investing basics and can help you navigate the process a little easier. You can use the links below to go to a specific set of terms or keep reading to learn them all.
Types of Investments
There are several types of investments you may come across when trying to figure out how to allocate your funds. These are some of the most common:
Bonds are loans provided to governments and corporations that pay interest to the investor. Municipal bonds are the bonds that are issued specifically by the state or local government, while other bonds may be issued by a private company. Bonds are a low-risk investment and can be good for beginners.
Exchange-Traded Funds (ETFs)
You may have heard about ETFs, but what is an ETF in investment terms? An ETF tracks a specific industry, commodity, or index, such as the SPDR S&P 500 (SPY). ETFs are a good way to invest in expensive commodities such as oil, and they can also be a great low-risk investment for beginners.
Mutual funds are important when it comes to investment terminology. With a mutual fund, a company pools money from several investors and invests that money in a portfolio. The benefit is that you don’t have to worry about picking and choosing what you invest in, which makes it easier to invest and track your investments.
Real estate includes both residential and commercial properties and can be one of the most lucrative investment opportunities. Short-term real estate investors may flip houses, while long-term investors rely on appreciation to profit off of real estate. Keep in mind that real estate investing is typically more expensive upfront.
Stocks are the most common investments you hear about, but what is a stock? A stock represents a small portion of a company, so owning a stock means you essentially own a portion of a company. Investors oftentimes focus mainly on a company’s net income when deciding which stocks offer the best value.
When it comes to investing in stocks, there are some terms you’ll need to understand in order to navigate the process:
A bear market is one of the investment terms to describe stock market conditions. More specifically, a bear market is a period where stock prices are falling, and investing is risky but potentially very rewarding.
On the contrary, a bull market is one where stock prices are rising, so investments aren’t as risky but don’t provide the same opportunity for a large reward.
Common stock is what most people think of when they think of stocks. Unlike preferred stocks, common stocks don’t have special permissions regarding dividend payments and liquidation. If you’re planning on investing in stocks, you’ll probably be dealing with common stocks.
Dividends are payments made to shareholders of certain companies. In order to receive these payments, an investor must own stock before the ex-dividend date. This is essentially a reward for investing money in a company. Dividend yield is another important investing term that you should know. Dividend yield is a ratio that investors can use to anticipate how much a company will pay out to shareholders in dividends each year.
A market index is a portfolio used to track the financial market by analyzing data from specific subsets of companies. Examples of market indexes include the Dow Jones Industrial Average (DJIA) and Nasdaq Composite Index.
Preferred stock is similar to common stock, except shareholders get special benefits such as higher dividend payments and claims to assets if the company is liquidated. These stocks are less volatile but less profitable.
A share is a unit of ownership, whether that’s a share in a company or in an asset. Shareholders are entitled to certain benefits, including capital gains when the company or asset increases in value and dividend payments when it makes money.
In basic investment terms, short selling is betting on a security to drop. Short sellers borrow a security and sell it on the open market, with the hopes that it will drop in price so they can purchase it for less in the future and repay the loan.
A stock exchange is a place where stockbrokers and traders can buy and sell shares of stocks, bonds, and other investments. Different stock exchanges have different listing requirements and thus offer different stocks.
The term “stock market” is near the top of any investment dictionary. The stock market refers to all the exchanges where buying and selling take place, but may also be used to refer to the current condition of stock prices in general.
Retirement Investing Terms
Retirement accounts include or hold investments (stock, bonds, ETFs, mutual funds, and some alternative investments) specifically for the purpose of use at retirement, usually after age 59 ½. Trying to figure out how to go about investing in your retirement? Here are some of the basic terms you’ll need understand:
A 401k is a retirement plan offered by employers where you contribute money each pay period, and your employer may match up to a certain amount of your 401(k) contributions. You can withdraw this money penalty-free beginning at age 59 ½.
Individual Retirement Account (IRA)
Every investment glossary should include individual retirement accounts, or IRAs. An IRA is like a 401k but it doesn’t involve an employer. You simply contribute money on a regular basis, allowing that money to build up until you can withdraw it without penalties. There are also several types of IRAs that you should be familiar with.
A Roth IRA is a type of IRA where you contribute money that’s already been taxed, which means your money isn’t taxed upon withdrawal like it is with a traditional IRA. If you want to start investing for retirement right away, a Roth IRA is a simple way to get started.
With a rollover IRA, you can roll funds from a previous employer-sponsored plan over to an IRA. This allows you to avoid paying any penalties while keeping the tax-deferred status of your retirement plan.
Retirement planning is the process of creating a financial plan and investing in your retirement. A good retirement plan includes a combination of employer-sponsored retirement accounts, individual retirement accounts, and other investments. It’s best to work with an investment advisor to figure out the best low-risk investments for your retirement.
Other Investing Terms
There are a lot of different aspects to investing, which means there’s specialized terminology used, including:
“Ask” and “bid” are important investment terms. The ask is the amount a seller is willing to accept for a security, while the bid is the amount an investor is willing to pay for it. The greater the spread between these two numbers, the more liquid an asset is.
The term “asset” is used to describe any item that may be used to produce additional income or that may appreciate in value over time. Things like stocks, retirement accounts, and real estate are common examples of assets in the investment world. Having a solid understanding of your assets and how to use them to your advantage is important.
The goal with asset allocation is to divide your investment portfolio into different categories, with some in stocks, some in cash, and some in bonds. It’s important to diversify your investments in this way, but you also may want to diversify within each of these three categories.
Capital gains and losses refer to the money you gain or lose through investing. Any time you sell an asset for more than you paid for it, that’s considered a capital gain. When you sell an asset for a lower amount than what you initially paid, that’s a capital loss. As an investor, you must pay capital gains taxes on capital gains earned from most types of investments.
Diversification refers to the way you spread your investment portfolio out. It’s smart to invest in several different companies and industries, as well as making different types of investments (stocks, bonds, retirement accounts, etc.) to make sure you’re not relying on a single investment.
Your investment portfolio includes all the investments you’ve made, including retirement accounts, stocks, precious metals, commodities, and more. It’s important to keep an eye on your investment portfolio so you can make sure you’re diversifying your investments and getting the most out of your money.
If you’re just getting started with investing, it may be best to work with a financial advisor who understands all the investment terms and can help you choose smart, low-risk investments. Your financial advisor can help you create a diverse portfolio and plan for retirement, so you don’t have to worry about learning all the ins and outs of investing.
The liquidity of an asset refers to how easily that asset can be converted into cash. The higher the liquidity of an asset, the quicker and easier it is to turn that asset into cash. Some examples of liquid assets include mutual funds, cash or other forms of currency, bank accounts, and accounts receivable.
Real Estate Investment Trusts
If you like the idea of a mutual fund but would rather invest in real estate, a real estate investment trust (REIT) offers a similar solution focused on real estate. Real estate trusts use money from several investors to invest in real estate, which they also operate to ensure it generates income. All you have to do is invest a little money and a REIT will take care of the rest.
Volatility refers to how likely it is that an investment remains stable. Volatile investments are harder to predict and come with a higher risk, while stable investments aren’t as risky but don’t offer as much potential for profit.
Go Forward and Make Informed Investments
Now that you have a better understanding of investing terminology, you’re more prepared to make decisions about where to put your money. This knowledge will also help you get a better handle on managing your investments. In addition to taking the time to learn more about the investments you’re interested in and getting advice when needed, you can also use tools like Mint to track your investments, so you can ensure your money is working most effectively for you.
So now that we’ve covered basic investing terminology for beginners, you can confidently move onto the next chapter in the series, where we’ll be talking about how investing can benefit you. Continue reading our investing series to learn more about the benefits of investing, the different types of investments, and more.
This is for informational purposes only and should not be construed as legal, investment, credit repair, debt management, or tax advice. You should seek the assistance of a professional for tax and investment advice.
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Chapter 03: Benefits of Investing
Chapter 01: Investing 101