What’s holding you back from investing?
If you’re like many folks, the terms used to describe investing are somewhat confusing. The jargon can take some getting used to when you’re a novice.
Before you start buying something in the market, invest in a little knowledge. Here are some of the investment terms you need to know:
1. Asset: Something with the possibility of providing you with a return. An asset can be reasonably expected to earn money on your behalf.
Assets include stocks, bonds, real estate, commodities, businesses, and other items that have potential to increase in value over time, or to provide you with a revenue stream.
2. Asset allocation: The way you divide the assets held in your portfolio. You create a portfolio using specific allocations of different types of assets. The theory is that certain types of assets perform opposite to each other, and you can use them to reduce some of your overall risk.
3. Asset class: The classification of individual investments into groups. Stocks, bonds, currencies, real estate, and commodities are examples of asset classes.
4. Balance sheet: The record of what a company owns. This statement includes the assets and liabilities of a company, as well as the outstanding shares a company owns.
5. Bear market: A market that is heading down.
6. Blue chip: A term used to describe companies with a long history of solid performance, including earnings, balance sheets, and sometimes increasing dividends.
Reporters often talk about “blue chips,” and they are referring to companies that have been around for awhile, might not be exciting, but provide a reasonable value and chance of return.
7. Bond: A debt. You lend money to a company or government, and they promise to return your principal over time, plus pay interest.
8. Book value: This isn’t a straight measure of market value or price. However, book value can be used to evaluate a company. You determine book value by adding up all the assets of a company and its common stock equity and then subtracting all the liabilities.
9. Broker: A broker buys and sells investments on your behalf. In the past, the broker was a person.
Today, automated brokerages can help you buy and sell without the need to pick up the phone. Depending on the type of broker you choose, you might pay a flat fee per trade, or you might pay a percentage of your account value.
10. Bull market: A market that is trending higher.
11. Capital gain (or loss): The difference between what you paid for an investment and what you sell that investment for. If you sell an investment for more than you pay, it’s a capital gain. If the investment brings in less than you paid, it’s a capital loss.
12. Commodity: This is one of the simplest investment terms — it’s something tangible, such as a raw material, natural resource, or agricultural product that can be bought and sold on an exchange.
13. Diversification: The act of including different types of assets in your portfolio. It also includes the decision to buy investments from different industries or geographic locations.
14. Dividend: A portion of the income from a company. It’s divided among shareholders, depending on how many shares each owns. Dividends are paid monthly, quarterly, semi-annually, or annually. They can also be made as a one-time payout, or paid irregularly.
15. Dow Jones Industrial Average (DIJA): A price-weighted list of the top 30 blue chip stocks trading publicly. Even though there are only 30 companies on the DIJA, many people use this as a guide to how well the stock market is doing.
16. Exchange: A place where investments are bought and sold. Traditionally, “trading floors” provided places for brokers to buy and sell, with prices rising and falling depending on perceived value and demand.
Today, most actual trading takes place electronically, even though some exchanges still have trading floors. Assets generally have to meet specific requirements to be listed on an exchange.
17. Exchange-traded fund (ETF): A type of fund that owns underlying assets, and divides those assets into shares that can then be traded like stocks on an exchange. It’s a way to diversify a portfolio quickly and easily. An exchange-traded fund can follow commodities, currencies, stocks, bonds, and other assets.
18. Index: Measures the progress of a group of investments that share specific characteristics. An all-market index statistically measures what happens with all of the publicly traded companies in the United States.
The Russell 2000 measures a group of small-cap stocks. There are indexes that measure clean energy companies as a group, and indexes that follow groups of bonds.
19. Index fund: A mutual fund that allows you to buy a share in each asset listed on a specific index. If you buy an S&P 500 index fund, you have ownership in each of the stocks on that index.
20. Investment: Item or asset bought in the hopes that it will increase in value or provide income.
21. IPO: Initial public offering. This represents the first time a company offers shares to the public.
22. Margin: Borrowed money used to make an investment. A broker offers you credit so you can buy more of the investment than you could otherwise afford. The hope is that your gains will be big enough to repay what you borrowed, plus provide a profit.
Margin can be used to boost your gains, but it can also increase your losses, since if you lose money you still have to repay what you borrowed.
23. Market capitalization: The current price of a share multiplied by the number of shares the company has in the public. Market capitalization is divided into small-cap, mid-cap, and large-cap companies.
The definition differs depending on brokers, but small caps generally have a market capitalization of between $300 million and $2 billion, mid-caps are between $2 billion and $5 billion, and large caps typically have a market capitalization of at least $5 billion.
24. Mutual fund: A group of investments that share characteristics, such as their expected growth or inclusion in a specific sector. An index fund is a type of mutual fund.
25. Registered investment advisor (RIA): An investment advisor who has been through specific training. RIAs agree to a fiduciary standard, which means recommendations and trades are made in your best interest.
26. Return: The amount you get back on your investment. This is often expressed as a percentage.
27. Share: An equal part of a company’s capital. When you own a share you are entitled to a proportion of the profit.
27. Stock: Representation of ownership in a company. When you buy stock, you are buying shares. The more shares you own, the greater your ownership — and the larger your proportion of the profits.
28. Tax-advantaged investment: An investment that offers some sort of tax advantage. Either you can claim a tax deduction when you make the investment (such as when you buy shares to hold in a 401k), or the money grows tax-free, as with a Roth account, 529 plan, or a Health Savings Account.
29. Yield: The yield is the ratio between the price of the stock and the dividend paid out on an annual basis.
These aren’t all the investment terms you will see as you start your journey, but they are some of the most common you will run into.
As you understand how investing works and gain a greater knowledge of investment terminology, you will increase your chances of success over the long term.
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