When it comes to investing, you want to make sure that you're as informed as possible about any investments you're making. You also want to make sure that you fully understand what you're investing in. Understanding how investing works begins with learning the basic and most commonly used investment terms.
Maybe you've heard investment terminology like the New York Stock Exchange (NYSE), portfolio manager, or asset class and you want to know more. Good thing you're here - you're about to learn the most common investing words in this article!
Top 28 investment terms you need to know
Investor terminology can seem very complicated, but once you know some of the basic investment terms, it can feel a lot easier. The more you learn about investment terminology, the more your confidence will increase, leading to great financial decisions.
1. Brokerage firm
A brokerage firm is a financial institution that manages or facilitates the buying and selling of securities between buyers and sellers. These securities include different kinds of investments like stocks, bonds, funds, etc.
They typically charge commission fees on trades. They can provide you with up-to-date research, market analysis, and pricing information on various securities. Examples of brokerage firms in the US include Vanguard, Fidelity, Charles Schwab, etc.
This is basic investor terminology; being a stockholder means you have part ownership of a company. Yup, even if you only own one stock, you are a part-owner of the company! Stocks are also called shares or equities and the more you own the bigger your ownership stake is in a company.
In simple investment terms, a bond is when you loan money to a company or the government who in turn pay you back in full with interest at the maturity date. For example, the government may sell bonds to raise money for a specific initiative.
You can then purchase the bond and the government will pay you back over a fixed period of time with interest.
4. Mutual Fund
A mutual fund is one of the well-known investing words. It's a pool of funds from a group of investors set up for the purpose of buying securities like stock, bonds, etc.
Mutual funds are typically managed by a fund manager or a money manager associated with a brokerage firm. Their job is to make investment decisions for the fund and set the fund's objectives.
5. Index Fund
An index fund is another common investment term you probably hear about all the time. In plain English, an index fund can be set up to buy all the same stocks within a specific index like the S&P 500. This means you will be invested in every single one of the 500 companies that make up the S&P 500.
Or you can purchase a total market index fund that invests your money in equal ratios across the entire stock market. This index fund is based on a total market index that measures the investment return of the overall stock market.
Here at Clever Girl Finance, we are fans of index fund investing!
Wondering about ETFs?
They are similar to index funds however they can actively be traded throughout the day at the current market price. This is unlike mutual funds and index funds that are traded at the end of the day, and at the market's closing price. You will however pay commission fees as a result.
Other key differences revolve around brokerage fees and tax efficiencies with ETFs and Index funds. They are typically more tax-efficient than mutual funds. (An investment advisor can help you break down your best option).
6. Asset Allocation
Asset allocation basically allows you to balance risk by allocating your assets in stocks, bonds, and cash according to your goals, risk tolerance, and investment timeline. It's pretty much your personalized investment plan based on your financial goals.
7. Capital Gains
This is the increase in the value of your investment that makes it higher than your original purchase price. The gains are not realized until the asset is sold though. Once assets are sold, capital gain tax (tax on your profits) comes into play.
8. Expense Ratio
These are the annual fees that funds e.g. mutual funds charge their shareholders. These fees include fund management fees, administrative fees, and other fees related to operating the fund on your behalf.
9. Price to Earnings Ratio (P/E)
This could sound like complicated investment terminology, but it's quite simple. This is a company's market value per share and a way by which companies are valued. It's calculated by taking the current stock price and dividing it by the company's earnings per share.
Dummies.com further breaks it down as "The price-to-earnings ratio or P/E indicates how much investors are willing to pay for each dollar of profit they stand to earn per year.
For example, if an investor buys a stock with a P/E of 15, he’s willing to pay $15 for each dollar of profit, or 15 times the earnings for one share of stock. Another way to look at it is that it will take 15 years to earn back your investment in company profits".
In simple investment terms, this is not putting all your eggs in one basket. It's putting your money in a mix of investments to minimize your overall risk.
This could mean you invest in a range of stocks such as large-cap, mid and small-cap. Investing in different market cap (or market capitalization) investments can be a good choice, as well as other investments.
A prospectus is a legal document filed with the SEC (Securities and Exchange Commission). It provides details of an investment that is publicly made available for sale. You can review details in a prospectus to see how a company is performing or to learn more about its operations.
12. Bull market
You've probably heard investing words like the bull market on TV or in books. A bull market is a rising stock market. There is general optimism about the economy and business. Overall the stock market is on a rising trend with a bull market.
The U.S. Securities and Exchange Commission defines a bull market as a period of time when there is a market rise of 20% or more in broad-based market index funds for at least two months.
13. Bear market
A bear market is the opposite of a bull market. Instead of a rising stock market, the market falls to dramatic lows. There is a lot of pessimism about the economy and less confidence in the market.
The U.S. Securities and Exchange Commission defines a bear market as a period of time when there is a market drop of at least 20% over a two-month period.
14. Top down investing
Top-down investing looks at choosing investments on a larger scale and then narrowing things down. For example, you could start by looking at global or national trends, then research specific industries and sectors that are performing well, and finally, pick your investments based on those factors.
15. Bottom-up investing
Bottom-up investing is the opposite of top-down investing. You first look at investments by performance in specific sectors and industries before you consider their performance on a national or global scale. Learn more about top down vs bottom up investing.
16. Glide path
In investment terms, a glide path is a formula used to rebalance your mix of assets for a target-date fund. For instance, the closer you get to reaching retirement the more conservative your investment portfolio mix will be. Glide paths are determined by your risk tolerance and your target date for retirement.
This phrase of investor terminology is used often. The Nasdaq is based in New York City and offers a way to sell and buy securities electronically. What does Nasdaq stand for? National Association of Securities Dealers Automated Quotations.
Yield is how much you make during a certain period of time with your investment. This is how much your investment makes, not including the principal amount.
Some investing opportunities are volatile and others are somewhat steady. Volatility is how much an investment changes value, moving between more and less value.
Generally higher volatility means that you're taking on more risk than if you picked something more steady. With a well-diversified portfolio, you can afford to do this in some cases.
A benchmark can help you decide what the value of an investment is. It's a standard to measure whether an investment is performing well or not. Dow Jones industrial average is a popular benchmark for well-known, large companies.
22. Individual retirement account
IRAs are one of the most important investment terms. An individual retirement account is often called an IRA. It's a way to invest for the future. The characteristics of the traditional IRA and the Roth IRA differ slightly.
A traditional is not taxed when you place the money into it, and a Roth is taxed when you add money to it. However, the traditional will be taxed later when you take the money out, while a Roth will not. There are also SEP and SIMPLE IRAs.
23. Certificate of Deposit (CDs)
A certificate of deposit is a lower risk way to save money. It is considered an investment but a CD is basically a savings account with a guaranteed fixed interest rate. The good thing is you know exactly how much you'll make in interest, but it's also not a great way to make a huge return on your money.
This is key investor terminology. A dividend is a profit given to the shareholders of a company. Some people invest in a very savvy way and are able to live off the dividends of their investments.
25. Real Estate Investment Trusts (REITs)
REITs are a type of investment that allows you to make an investment in real estate. But you don't have to be a landlord or put up with any of the hassles of owning a property. You aren't directly investing in a property but a company that owns that property.
26. Preferred stock
Preferred stock gives the investor preference with dividends. They get paid before those who own common stock. While it isn't guaranteed, it is a higher chance of payment.
27. Common stock
Common stock are shares in a company and the shareholders also have voting power typically. You may get paid dividends but these can vary in amount and aren't a guarantee.
28. Margin investing
Some people borrow money from a broker and use that to invest. Then they put up collateral to prove they'll pay what they owe. The margin is what you make from the investment minus the total value of the loan. It can be quite risky.
How to begin investing
Now you know some basic investment terms to help you get ready to invest. But how do you start? Begin by thinking about your risk tolerance, age, and the age you want to retire. Then look at different options to see what would be a good fit for you.
Make sure you set up retirement accounts like an IRA or a 401(k) if your company offers that. Beyond this, you may choose to invest further on your own, or speak with a professional to help you build your portfolio. Continue to learn investment terminology and gain knowledge.
Learn these investment terms to build your investment knowledge!
Investing in the stock market might seem and sound complex but it doesn't have to be. It's important not to leave all the knowledge to financial advisors, and instead make active management of your portfolio part of your money strategy.
If you make the effort to learn these core investing words and how they work, you'll be surprised at how quickly it all starts to make sense!
To learn more about exactly how investing works, check out our free investing courses!