Investing can seem daunting to beginners with all the terminology and jargon involved. Here is an overview of some of the most common investing terms for beginners to know when getting started in investing.
Key Investing Concepts
Investing terms for beginners should understand some key concepts that form the foundation for investing knowledge:
- Investing – Putting money into assets like stocks, bonds, mutual funds etc. with the goal of growing your money over time. Investing involves taking on some risk in exchange for a potential return.
- Saving – Setting money aside to be used in the future. Savings are usually held in safe, low-risk accounts like savings accounts. The focus is on preserving money rather than growing it.
- Asset – Anything of value that is owned. Common investing assets include stocks, bonds, mutual funds, real estate etc.
- Diversification – Investing in a variety of assets and markets to spread out risk. Diversification helps limit losses if one investment declines.
- Compound interest – Interest earned on both the original principal investment amount and previously earned interest. Compounding can dramatically boost investment returns over time.
- Risk tolerance – An investor’s ability to handle investment risk and volatility. Higher risk tolerance allows for more aggressive investing in search of higher returns.
Stocks and Equities
Stocks and equities represent ownership shares in a company. Here are some key stock market terms:
- Share/Stock – A unit of ownership in a company. Shareholders can earn returns through dividends and capital appreciation.
- Ticker symbol – Unique trading abbreviation for a stock, like AAPL for Apple or MSFT for Microsoft.
- Dividend – A cash payment made by a company to shareholders, usually paid quarterly. Dividends provide income for shareholders.
- Earnings per share (EPS) – A company’s net profit divided by number of outstanding shares. Higher EPS tends to boost a stock’s price.
- Price-to-earnings (P/E) ratio – Stock price divided by EPS. High P/E may indicate overvaluation. Low P/E may signal undervaluation.
- Initial public offering (IPO) – When a private company first sells shares to the public on a stock exchange.
- Short selling – Selling borrowed shares in hopes of buying them back later at a lower price for a profit.
Bonds and Fixed Income
Bonds and fixed income investments pay steady, regular interest payments. Bond terminology includes:
- Bond – A fixed income instrument that represents a loan from an investor to a corporation/government. Bond issuers make regular interest payments and repay the principal amount borrowed.
- Maturity – The length of time until a bond’s principal amount is due to be repaid. Treasury bond maturities range from 1 to 30 years.
- Coupon rate – Annual interest rate paid by a bond issuer. A 5% coupon rate means 5% interest annually.
- Yield – Annual return on a bond from coupons and price appreciation. Higher yields mean higher returns.
- Credit rating – Assessment of a borrower’s ability to repay its debt. Higher rating means lower risk of default.
- Bond funds – Mutual funds and ETFs that hold a portfolio of bonds to provide broad diversified exposure.
Mutual Funds and ETFs
Mutual funds and ETFs offer a convenient way to invest in a basket of stocks, bonds, or other assets:
- Mutual fund – An investment vehicle that pools money from many investors to buy a portfolio of assets like stocks and bonds. Mutual funds are priced once per day after market close.
- Exchange traded fund (ETF) – Investment funds that trade like stocks on exchanges. ETFs typically track market indexes or sectors and have lower expense ratios than mutual funds.
- Net asset value (NAV) – The total value of the assets held in a mutual fund or ETF. NAV determines the value of a single share or unit of the fund.
- Expense ratio – The annual fee charged to cover the operating costs of a mutual fund or ETF, stated as a percentage of assets under management.
- Diversified funds – Funds that invest across a broad group of assets and markets to limit risk, like total stock market index funds and target date funds.
Key accounts for investing include:
- Brokerage account – Used to buy and sell stocks, bonds, mutual funds, and other investments. Popular brokers include Fidelity, Charles Schwab, and TD Ameritrade.
- Retirement accounts – Tax-advantaged accounts for retirement savings like 401(k)s and IRAs. Contribution limits and tax treatment vary by account type.
- Health savings account (HSA) – Pre-tax account for healthcare expenses that can also be invested for added growth. Unused HSA balances carry over year to year.
- Custodial accounts – Brokerage accounts opened by parents/guardians to invest for minor children. The assets transfer to the child’s control once they reach adulthood.
- Trust funds – Accounts managed by appointed trustees for beneficiaries according to rules outlined in a trust document. Trusts have more complex rules and tax treatment.
- Robo-advisors – Automated, algorithm-driven investment platforms that offer pre-built portfolios tailored to an investor’s goals and risk tolerance.
Key Investing Strategies
Here are some popular investing approaches:
- Passive investing – Buying and holding investments like index funds and ETFs that track market performance rather than trying to beat the market. Requires less effort from investors.
- Active investing – Actively picking individual stocks or funds in an effort to outperform the broader market. Typically higher risk and requires more time and research.
- Value investing – Seeking to buy undervalued stocks trading below their true worth and selling when share prices rise closer to fair value.
- Growth investing – Focusing on stocks expected to have above-average earnings growth. Growth stocks tend to have higher valuations.
- Dollar-cost averaging – Investing equal dollar amounts at regular intervals over time to smooth out market volatility. Popular for retirement investing.
- Rebalancing – Adjusting portfolio asset allocation back to original target levels as market movements shift the proportions over time. Rebalancing forces selling high and buying low.
Key Metrics and Performance
Investors use metrics like these to evaluate investments:
- Return – The gain or loss on an investment over a period of time, typically expressed as an annual percentage rate.
- Total return – Return from capital gains and dividends or interest earned. Measures the full profitability of holding an investment.
- Sharpe ratio – Measurement of return per unit of risk. Higher Sharpe ratios indicate better risk-adjusted returns.
- Standard deviation – Statistical measure of volatility. Higher standard deviation indicates wider swings in prices and more risk.
- Alpha – Excess return above a benchmark. Positive alpha means outperformance versus a market index.
- Beta – Measure of volatility compared to a benchmark. Beta above 1 indicates wider price swings than the overall market.
This overview covers some of the most essential investing terms for beginners to understand. As you learn more, you can expand on these core concepts and principles. The key is building up your investing knowledge over time.
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