The best way to get your money working for you is by investing it. With the potential for compound interest, you can make more money the earlier you start.
A Gallup survey from 2022 shows that stock ownership in America is steadily increasing, as 58% of Americans invest their money on the stock exchange. Investing is not always easy. Especially if the terminology used to describe different investment options leaves you confused.
Don’t be discouraged. This guide contains 30 terms that you should know about investing. The definitions are a great way to learn about investing and help you understand the basics.
Investment Types
When deciding how to invest your money, you will come across several different types of investment. Here are some common types of investments:
1. Bonds
Bonds, also known as interest-bearing loans to government and companies, are essentially loans that the investors make to these entities. Municipal bonds or savings bonds are issued by the local and state governments, while other bonds may be offered by private companies. The bonds are low risk investments and good for new investors.
2. Exchange traded funds
What is an ETF? ETFs track a particular industry, index or commodity, like the SPDR S&P 500. They are also an excellent way for new investors to get into commodities like oil. Cash App can be used to trade ETFs and build a portfolio without paying commission fees.
3. Mutual Funds
When it comes to investing terminology, mutual funds play a major role. A mutual fund is a pool of money that a company invests in portfolios. You don’t need to choose what to invest in. This makes investing and tracking your investments easier.
4. Real estate
Residential and commercial real estate can provide one of the best investment options. Real estate investments can be profitable for both short-term and long-term. Short-term investors might flip homes, whereas the latter rely more on real estate appreciation. Real estate is usually more costly upfront. Take out a refinance cash-out loan to pay some of the upfront costs.
5. Stocks
What is exactly a stock, and why are they so popular? Stocks represent a tiny portion of an organization, and therefore owning one is like owning part of the company. Stocks are riskier than other investments because the market fluctuates with the economy.
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Stock Terms
Let’s start with the most popular investment: stocks. To help you navigate through the stock investing process, it’s important to know some key terms.
6. Bear Market
Bear market is a term used to describe the current state of stock markets. A bear market, more specifically, is when stock prices fall. Investing in a falling market can be risky, but also very profitable. Bear markets are more common during economic recessions.
7. Bull market
A bull market, on the other hand, is one in which stock prices rise, and investments don’t carry the same risk, but also do not offer the same potential for large rewards. Bull markets can last for months, or years.
8. Common Stock
Most people associate stocks with common stock. Stockholders of public companies can own common stock, which is a portion of their business, and take part in decisions.
Common stockholders do not have any special rights in regards to dividends and liquidation. You’ll likely be investing in common stocks if you want to invest.
9. Dividends
Dividends, or payments to shareholders by certain companies, are made as a form of compensation. To receive dividends, investors must hold stock prior to the date of ex-dividend. It is basically a return on investment.
10. Market indexes
Market indexes are a way to monitor the market’s performance by analysing data from subsets or companies. Dow Jones Industrial Average and Nasdaq Composite Index are examples of market indices.
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11. Stocks of preferred stock
The preferred stock has many similarities to the common stock. However, it offers special advantages to shareholders such as increased dividends and entitlements to company assets in case of liquidation. Involuntary liquidation or voluntary can occur when the company declares bankruptcy, or decides not to operate. This is converting assets to cash. The stocks in question are more stable, but also less profitable.
12. Share
Shares are a form of ownership. They can be in the form of a stock or asset. The shareholders have certain rights, such as capital gains when a company’s value increases or dividends when it is profitable.
Remember that the value of your shares will increase as the market and economy improve. It is also true that when stock prices fall, their value increases. This is why it is important to assess your level of risk before investing.
13. Short Selling
Short selling can be described as a simple investment strategy that involves betting against a stock’s price to fall. Short sellers sell a borrowed security on the market in hopes that the price will drop so they can buy it at a lower cost in the future.
14. Stock exchange
Stock exchanges are places where investors, stockbrokers, and traders buy and sell stocks and bonds. Stock exchanges offer stocks that are different because they have different requirements for listing.
15. Stock market
Stock market is a term that appears in every investment dictionary. Stock market is the collective term for all exchanges that facilitate buying and selling. It can also be used to describe the general state of the stock price.
Terms for Retirement Investment
Retirement accounts are investments that include stocks, bonds, ETFs and mutual funds. Are you trying to decide how to invest for your retirement? You’ll want to know the following terms:
16. 401(k)
A 401(k), or a defined contribution plan, is offered by your employer. You contribute each time you get paid and the company matches your contributions up to a specified amount. This money can be withdrawn penalty free at the age of 59 1/2. Calculate your retirement savings using our 401(k).
17. Retirement arrangements for individuals
Each investment glossary must include the term Individual Retirement Arrangements or IRAs. A 401(k) is similar to an IRA, except that it does not involve your employer. Regularly contributing money will allow you to accumulate the money until it is time for withdrawals without penalty.
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18. Roth IRA
Roth IRAs are a special type of IRA that allows you to contribute funds which have already been taxed. This means the money will not be taxed when it’s withdrawn, unlike a traditional IRA. A Roth IRA can be a great way to begin investing right away for your retirement.
19. Rollover IRA
You can transfer funds to an IRA from a former employer sponsored plan. You can avoid penalties and still keep your tax-deferred retirement plan.
20. Retirement planning
Planning for retirement is creating a plan to invest in yourself and your future. Good retirement plans include a mix of employee-sponsored accounts, personal retirement accounts and investments. To find the low-risk investment options that are best for you, it’s best to consult an advisor.
Additional Investing Terms
The world of investing is complex, and there are many terms that describe it. They could come up when you and your advisor are discussing the performance of your portfolio.
21. Ask/bid
The terms “ask” (the amount a seller is willing to accept for a security) and “bid” (the amount an investor will pay for it) are essential investment terminology. Ask is what a seller will accept in exchange for a particular security. Bid is how much an investor wants to pay. The more spread there is between the two figures, the liquider an asset will be.
22. Assets
Assets are items that can generate additional income, or increase in value with time. Stocks, retirement funds and real estate can all be considered assets. Understanding your assets is crucial.
23. Asset Allocation
Asset allocation is the process of dividing your portfolio up into categories. Some will be stocks, others cash, and still more bonds. Diversifying your portfolio is important, but it’s also possible to do so within these categories.
24. Gains/losses on capital
The capital gains or losses are the amount of money that you make, and lose by investing. Capital gains are made when you sell an item for more money than what you originally paid. If you sold an asset at a price lower than you paid for it, you would have suffered a capital gain. Capital gains are taxed on a long-term basis.
25. Diversification
The way in which you diversify your portfolio is called diversification. We recommend diversifying your investments across several companies, industries, and types — such as stocks, bonds, retirement funds, etc.
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26. Investment portfolio
The investment portfolio is made up of all your assets, such as retirement funds, stocks, precious materials, commodities, and much more. Keep an eye on the investment portfolio you have to make sure that your money is being invested wisely and diversified.
27. Financial Advisor
When you are just starting out with investments, you may want to consult a financial advisor who can guide you through the process and help you select low-risk, smart investments. You can work with a financial adviser to create a portfolio that is diverse and help plan your retirement. This way, you won’t need to learn all about investing.
28. Liquidity
Liquidity is the ability of an asset to be converted into cash. Liquidity is a measure of how easily an asset can be converted into cash. Examples of liquid assets are mutual funds, currency or cash, bank accounts, and receivables.
29. Real estate investment trusts
A real estate investment (REIT), which is similar to a mutual-fund but focuses on investing in real estate instead, offers an alternative solution. Real estate trusts pool money from multiple investors and invest it in property. They also manage the properties to generate income. You only need to invest some money, and the REIT takes care of everything else.
30. Volatility
The volatility of an investment is the likelihood that it will remain steady. Investments that are volatile are more difficult to predict, and carry a greater risk. Stable investments have a lower risk but less potential for profits.
After the HTML0- What comes next? Making informed investment decisions
You’re better prepared now to decide where you want to invest your money, as you understand the terms used in investing. This will help you manage your investment portfolio better. You should also consult a financial advisor before investing a large amount into any product.
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