A friend of mine reached out to me recently because he was interested in investing some of his funds in preparation for his retirement.
I told him how that was a good thought on his part, and we continued the conversation until I began mentioning some investing terms he was unfamiliar with. He paused and asked how long it would take him to understand these terms and whether it was worth knowing.
I assured him there was no need to fear whether he would be able to comprehend these terms or not. Being new in investment and personal finance can be intimidating and challenging, especially with the various terms used in this terrain.
Nevertheless, you can quickly understand most investing terms, provided you are interested in learning them. Interestingly, the more you understand them, the better your confidence will be.
Follow along as I show you the terms every investor should know so that you can also be confident to speak about investments wherever you are.
An investment portfolio is a collection of investments owned by an individual or an institution. It includes stocks, bonds, and cash an investor has that will determine his investment goals and risk tolerance.
A stock is a security that represents ownership (or equity) in a corporation. It means if you purchase shares of stock of a reputable company, you own a piece of the company and have a claim on a portion of the assets and earnings.
As a shareholder, you’re subject to the potential benefits and risks of that position, which means you can make money if the company does well or lose money if the company does poorly.
Bonds are fixed-income security issued by a government entity or corporation to raise money needed for ongoing operations or to finance new projects. Investors who buy bonds are, in a way, lending money to the issuing organization and become a creditor. However, keep in mind that bondholders typically receive interest payments at regular, predetermined intervals.
Cash is another investment type or asset class. It includes currency and cash alternatives that offer low risk and high liquidity. Common cash alternatives include savings accounts, certificates of deposit (CDs), and U.S. Treasury bills.
The FDIC insures CDs and bank savings accounts, which generally provide a fixed rate of return, up to $250,000 per depositor, per insured institution. U.S. Treasury securities are backed by the full faith and credit of the U.S. government as to the timely payment of principal and interest.
5. Mutual Fund
A mutual fund is a collection of all other underlying assets purchased and managed by an investment company with funds from a group of investors. Shares are typically bought from and sold back to the investment company at the end of the trading day, with the price determined by the underlying securities’ net asset value (NAV).
6. Exchange-Traded Fund
An exchange-traded fund (ETF) is a portfolio of securities assembled by an investment company. But unlike mutual funds, ETF shares can be traded throughout the day on stock exchanges, like individual stocks, and the price may be higher or lower than the NAV because of supply and demand.
ETFs typically have lower expense ratios than mutual funds. Still, you must pay a brokerage commission whenever you buy or sell ETFs, so your overall costs could be higher, especially if you trade frequently. However, keep in mind that the return and principal value of mutual funds and ETFs fluctuate with changes in market conditions.
Dividends are the distributions of a company’s earnings to shareholders, generally paid in cash or additional shares of the company’s stock on a quarterly basis. In this case, the company’s board of directors decides the dividend amount per share. Although dividends are a long-term investment, investors often view dividend payments as indicators of the company’s financial strength and prospects. Investing in dividends is a long-term commitment.
Generally, the yield is the current income an investment provides. For stocks, the yield is calculated by dividing the total of the annual dividends by the current price. For bonds, the yield is calculated by dividing the annual interest by the current price. The yield is distinguished from the return, which includes price appreciation or depreciation.
An index is a statistical composite used to track changes in economic conditions (such as inflation) or financial markets over time. Investors use some indexes as benchmarks against which the performance of certain investments can be measured.
For example, the S&P 500 Index is considered representative of the U.S. stock market in general. Still, there are hundreds of other indexes based on a wide variety of asset classes (stocks/bonds), market segments (large/small cap), and styles (growth/value).
10. Bear/Bull Market
A bear market is generally defined as a period in which the prices of securities fall, resulting in a downturn of 20% or more in several broad market indexes for several months or longer. A bull market is a sustained period in which the market is rising, and investor optimism is high, usually occurring over several months or years. Either of these market trends can influence the attitudes and behaviors of investors.
Knowing investing terms will help boost your confidence as a new investor and help you make an informed decision in any investment of your choice.
Please connect with us and let us help you plan for your dream retirement. We would be delighted to go on the journey with you.