It’s easy to become lost in the terminology when you’re just starting out in the world of investing. However, many first-time investors are discouraged by this level of complexity and end up doing nothing. Most people would rather convince themselves that investing is outside their skill set and hence should be outsourced.
However, the fact remains that everyone may benefit from investing. Everyone has access to it, and it’s essential for those who hope to retire eventually.
PRO TIP: It’s not true that only financial specialists can invest. Investing may be a powerful tool for building wealth and achieving your objectives, but only if you have a firm grasp of the terminology involved.
We’ve compiled a list of some of the most common investing terminology to help you get a better grasp on the subject and feel less overwhelmed. These will guide you from your initial baby steps to the more complex investment techniques.
Benefits of investing in stocks
Putting money into the stock market may yield a number of positive results. The top seven are as follows:
The potential to earn higher returns
Most people put their money into stocks because they offer a higher return than other investment options like CDs, gold, and government bonds. Since 1926, the average yearly return on the stock market has been over 10%, whereas the average annual return on long-term government bonds has been between 5% and 6%.
The capacity to safeguard assets from inflation
The gains from the stock market often much exceed the rate of inflation. Inflation has averaged roughly 3.1% per year on a long-term basis since 1913. That’s like comparing it to a stock market return of double digits every year. Stocks have shown to be a reliable inflation hedge.
Ability to generate consistent passive income
Companies often distribute dividends to their shareholders. Most corporations pay dividends once every three months, however others pay them every month. An investor’s dividend income might act as a welcome complement to their regular salary or retirement fund.
A sense of ownership and pride
A piece of a company’s ownership pie represented by one share of stock. A little stake in a firm whose offerings excite you can be yours.
Liquidity
Most equities may be bought and sold openly on a major stock market. Because of this, stock investments are more liquid than others, such as real estate, which can’t be easily sold.
A diversified portfolio
With stocks, you may quickly and simply create a diversified portfolio that spans a wide range of markets. That can help you spread your investing risk across a wider range of assets and boost your returns by include other asset classes like real estate, bonds, and cryptocurrencies.
Investment terms you should know
Investor terminology might appear incredibly confusing, but once you grasp some of the essential investing phrases, it can seem a lot easier. Gaining a deeper understanding of investment jargon will help you feel more at ease while making sound financial decisions.
Various Investment Options
When considering how to put your money to work, you may come across various investment opportunities. Some of the most frequent are the following:
Bonds
Bonds are a type of debt security in which the issuer promises to repay the investor with interest. When compared to other bonds, municipal bonds are issued solely by a state or local government, while other bonds may be issued by a private corporation. Bonds are a wonderful place to start investing because of the little risk involved.
“ETFs” = “Exchange-Traded Funds” (ETFs)
You might have heard of ETFs, but what exactly is an ETF when it comes to financial investments? One example of an index that may be followed by an ETF is the SPDR S&P 500. (SPY). Exchange-traded funds (ETFs) are a terrific low-risk investment option for novices and an excellent way to gain exposure to volatile markets, such as those associated with oil and other pricey commodities.
Mutual Funds
When discussing financial investments, mutual funds are a key concept to understand. In a mutual fund, several investors’ funds are combined into one large pool, which is then used to purchase shares in a variety of different companies. It simplifies investment and record-keeping because you don’t have to choose and choose individual assets.
Real Estate
An excellent investment opportunity is real estate, which includes both residential and commercial buildings. House flipping is a common strategy for short-term real estate investors, whereas long-term investors often bank on property value increases. Remember that the initial outlay for investing in real estate is usually more than for other types of investments.
Stocks
Most people spend their money in stocks, but what exactly is a stock? By definition, a stockholder is a partial owner of the firm in which they have invested.
Stock Terms
There are a few key concepts to grasp before diving into the world of stock market investing:
Bear Market
One of the financial terminology for the current state of the stock market is a “bear market.” Specifically, in a bear market, stock values are decreasing and investment is hazardous but might yield high returns.
Bull Market
Investments are safer but provide less potential for high returns during a bull market, when stock values are increasing.
Common Stock
Most people’s first thought upon hearing the word “stock” is of common stock. Common shares do not come with any restrictions on how or when dividends may be distributed or the company can be liquidated, unlike preferred stocks. Common stocks are the most common type of stock for investors to purchase and trade.
Dividends
Stockholders of some firms are entitled to receive dividend payments. Before the ex-dividend date, stockholders are eligible to collect dividends. This is the payoff for putting money into a business.
Market Indexes
To follow the stock market, investors can utilize market indices, which are portfolios constructed by compiling and evaluating information on a selection of firms. The DJIA and the Nasdaq Composite Index are two popular market indices.
Preferred Stock
Preferred stock is essentially the same as common stock, but preferred stockholders are entitled to additional perks, such as greater dividend payments and claims on assets in the event of a firm liquidation. Less risky, but less lucrative, than other stock options.
Share
Whether it’s stock in a corporation or a piece of property, “share” refers to a fractional interest in the whole. When a firm or an asset appreciates in value, the shareholders get a cut of the profits in the form of dividends.
Short Selling
For investors, “shorting” a securities is taking a risk that its price will go down. To make their money back, short sellers borrow securities and then sell them on the open market, anticipating that their value will fall and allowing them to buy them at a lower price.
Stock Exchange
Trading in stocks, bonds, and other assets takes place on a stock market, where brokers and dealers may purchase and sell these securities. This variation in stock availability might be attributed to the varying listing criteria of individual stock markets.
Stock Market
The word “stock market” may be found towards the beginning of any financial encyclopedia. When discussing the stock market, it is possible to refer to both the physical locations where trading occurs and the overall state of stock values.
Retirement Investment Terms
Financial assets (such as shares of stock, bonds, exchange-traded funds (ETFs), mutual funds (MFs), and some alternative investments) are included in or held by retirement accounts for withdrawal after age 59 ½. Looking for advice on how to begin saving for old age? Please familiarize yourself with the following essential vocabulary items:
401K
When you work for a company that offers a 401(k) plan, you may save for your retirement by making regular contributions to a retirement account, which your company will usually match up to a specified limit. At age 59 ½, you’ll no longer incur any penalties for early withdrawal of this money.
Individual Retirement Account (IRA)
Individual Retirement Accounts (IRAs) are a key term that should be defined in any financial dictionary. Like a 401(k), but without the involvement of an employer, an individual retirement account (IRA) might be a good way to save for retirement. Simply put, you put money in on a monthly basis and let it grow tax-free until you want to use it.
Roth IRA
When you open an Individual Retirement Account (IRA) with after-tax dollars, known as a Roth IRA, you avoid paying taxes on withdrawals at the time they are made. With a Roth IRA, you can get started investing for retirement right immediately.
Rollover IRA
Funds from a prior employer-sponsored plan can be transferred to your IRA in the form of a rollover. By doing so, you may maintain your retirement plan’s tax-deferred status without incurring any penalties.
Retirement Planning
Planning for retirement include setting aside money and making other preparations for old age. Employer-sponsored plans, IRAs, and other investment vehicles make up a well-rounded retirement portfolio. It is recommended that you see a financial expert in order to choose the finest low-risk assets for your retirement.
Other Investing Terms
Investment has several facets, hence there is a wide range of jargon specific to the industry.
Ask/Bid
The phrases “ask” and “bid” are important to the world of finance. A security’s ask price is the lowest possible price a seller is ready to take, whereas a security’s bid price is the highest sum an investor is willing to pay for the security. As the difference between these two figures widens, the asset is seen as more liquid.
Assets
Any resource that can be converted into cash flow or that has the potential to increase in value over time is considered an asset. A few examples of typical investment assets are equities, retirement funds, and property. A thorough familiarity of one’s resources and the methods by which they might be used is crucial.
Allocation of Assets
Asset allocation is the process of allocating a portfolio among various asset classes such as stocks, cash, and bonds. Investing in this method is a good start, but you should also spread your money around across the three types listed above.
Capital Gains/Losses
To gain or lose capital means to gain or lose money as a result of investing. A capital gain occurs each time an asset is sold for more than it was first purchased for. A capital loss occurs when an asset is sold for less than it was originally purchased for. Gains on investments are subject to capital gains taxation.
Diversification
The term “diversification” is used to describe the practice of dispersing one’s investing capital over many markets. Diversifying your assets across many firms, industries, and investment vehicles (stocks, bonds, retirement accounts, etc.) may help you reduce your risk and ensure that your portfolio is resilient in the face of market fluctuations.
Investment Portfolio
Retirement accounts, equities, precious metals, commodities, and everything else you’ve invested in make up your investment portfolio. Keeping an eye on your portfolio can help you ensure that you are diversifying your holdings and maximizing your returns.
Financial Advisor
A financial adviser is someone who knows the ins and outs of the financial world and can help you make wise, low-risk investment decisions, especially if you are just starting out as an investor. Instead of trying to learn everything there is to know about investing on your own, hire a financial adviser to help you build a diversified portfolio and prepare for retirement.
Liquidity
How quickly and readily an asset may be turned into cash is measured by its liquidity. An asset’s liquidity indicates how quickly and easily it may be converted into cash. Mutual funds, cash and other currencies, bank accounts, and receivables are all examples of liquid assets.
Real Estate Investment Trusts
A real estate investment trust (REIT) is a type of mutual fund that specializes on real estate investments. Profitable real estate is purchased with funds from a number of investors and then managed by the trust. You may put your money in a real estate investment trust and let it manage itself.
Volatility
The volatility of an investment indicates how often it is to experience price fluctuations. Investments in volatile markets are riskier and more difficult to anticipate, whereas investments in stable markets are safer but less lucrative.
Acquiring an understanding of these words can help you become a more informed investor.
The stock market is a complex place, but investing doesn’t have to be. You should take some responsibility for your portfolio’s management rather than leaving all to your financial advisor.
If you put in the time to study these essential investing terms and how they are used, you will be astounded at how fast the whole thing begins to make sense.