While there are countless investment terms out there, we’ve compiled the most important ones that new investors need to know. So whether you’re working with a human broker or an app, you’ll soon be set to start trading.
Types of investment
Let’s begin with the different ways you can invest your money. There are a few and each has its own level of risk and reward.
Understanding your options will help you develop the best investment plan for your risk tolerance and financial goals.
- Common stock. A share in a legally formed corporation. Most companies have a single class of stock, but others will have multiple classes. In that scenario, one class of stock is generally given more voting rights than the other classes, but the value is the same.
- Preferred stock. Shareholders holding preferred stock get larger dividends than common-stock holders — and the preferred dividends are issued sooner. If the company ever goes bankrupt, preferred-stock holders are entitled to be paid from company assets before common shareholders. This type of stock does not confer voting rights.
- Bonds. At its core, a bond is a loan. Instead of going to a bank, a company or government will issue bonds, which investors can buy. The bond issuer will promise to repay the entire principal, along with interest, as of a set date. You can either buy bonds individually or invest in bond funds.
- Real estate. A very straightforward type of investment. When you own a house or a plot of land, you own real estate. But some people buy land or properties for the purpose of letting others use it in exchange for payment — that would be investing in real estate.
The most common investment terms
Even if you’re not investment-savvy, you’ve probably heard of some of the following terms. But do you know what they really mean?
Here are the definitions for the 10 most common investment terms:
- Ask. The price that someone looking to sell stock wants to fetch.
- Bid. The price that someone is willing to pay for stock.
- Buy. To acquire shares and thereby take a position in a company.
- Sell. To get rid of shares whether because you’ve reached your goal or to prevent losses.
- Bull market. Market conditions in which investors expect prices to rise.
- Bear market. Market conditions in which investors expect prices to fall.
- Dividend. A portion of a company’s earnings paid to shareholders.
- Blue chip stocks. Shares of large and well-recognized companies that have a long history of solid financial performance.
- Earning per share. A company’s net profit divided by the number of outstanding common shares.
- Mutual fund. A collection of investments — stocks, bonds, commodities, and more — bundled together and held in common by a group of investors.
Investment terms everyone should know
Beeyond the most common investment terms, there are a few other terms everyone should know.
- Asset. Something you own that could generate a return in the form of more assets.
- Asset allocation. Your investment strategy, essentially — the mix of assets you choose to put your money into, whether that be cash, bonds, stocks, commodities, real estate or something else.
- Broker. A person or firm — or robot that arranges transactions between buyers and sellers in exchange for a commission (that is, a fee).
- Capital gain (or capital loss). The money you make (or lose) on the sale of an asset.
- Diversity. Investing in a variety of sectors, such as health care, energy and IT as well as across different geographic locations.
- The Dow Jones Industrial Average. A price-weighted list of 30 blue-chip stocks. It’s often used to help get a sense of the overall health of the stock market, even though it only reflects a small portion of the players.
- Exchange-traded fund (ETF). A collection of investments that is traded like a stock.
- Index fund. A type of mutual fund or exchange-traded fund that allows you to invest in a portfolio that mimics a market index, which is basically a list that tracks the performance of a group of investments either for a specific sector or the overall market.
- Hedge fund. A type of investment partnership. Partners pool money from investors and try out a few different investing strategies. Generally, hedge funds will make riskier investments than your typical investor. They’ll also often use leverage (that is, borrowed money) or place bets against the market to get bigger returns. They make their money by charging their investors management fees based on a percentage of their profits.
- Expense ratio. The percentage-based fee that mutual fund managers charge you to manage your investments.
- Market price. How much it would cost right now to buy or sell an asset or service.
- Securities and Exchange Commission (SEC). An independent government body that was created to protect investors and the national banking system. The SEC enforces laws that maintain orderly, fair and efficient markets.
- Short selling. A tactic available to investors who predict a stock’s price is about to drop. An investor borrows a quantity of shares through a broker and then sells them, intending to repurchase them later, at a lower price, and return them to the lender.
- Stock exchange. A place buyers and sellers come together to buy, sell and trade stock during set business hours. The New York Stock Exchange (NYSE) is the most important stock exchange in the world, but there are a total of 16 exchanges around the world.
- Stock market. Refers in general to the collection of markets and exchanges where the buying, selling and trading of investment vehicles takes place.
- Price per share. A simple way of calculating a company’s market value at a given moment. To find the price per share, you take a company’s most recent share price and multiply it by its total number of outstanding shares.
- Prospectus. A legal document that contains in-depth information about anything you might be planning to invest in: stocks, bonds or mutual funds.
Company-related investment terms
Once you’re a little more familiar with investing, you’ll probably want to do some research on the companies you put your money into.
The following company-related investment terms will help you make sense of any information you find online:
- Balance sheet. A snapshot of a company’s assets, liabilities and shareholder equity. It provides a sense of a company’s overall health at a given moment.
- Book value. The number you’d get if you took all the assets and common stock equity of a company and subtracted all its liabilities.
- Board of directors. A group of people elected by stockholders to watch out for their interests. They’re responsible for the overall direction and strategy of the company, as well as the hiring and firing of executives, setting the official dividend payout policy and ruling on potential mergers.
- Enterprise value. Basically, the total cost of the company if an investor were to try to acquire it outright, including all stocks and debts. It’s a way to measure the actual market value of a business.
- Form 10-K. An annual report documenting financial performance. The SEC requires businesses to file 10-Ks.
- Income statement. A report showing a company’s revenues, expenses, taxes and net income. This is another helpful document for investors when deciding whether to invest in a company.
- Market capitalization. A company’s current outstanding shares multiplied by the current stock price.
Types of retirement accounts
Even if you’re not wading into the market with the intention of becoming a sophisticated stock trader, investing is an important component of a solid retirement plan.
There are a number of different retirement accounts, designed to meet the different needs of various investors:
- Roth IRA. A type of IRA (individual retirement account) that boasts special tax benefits. You are limited in how much you can contribute each year and by the types of investments that can be held within the account. When you contribute to this account, it will be with after-tax dollars, meaning you won’t receive a tax deduction for it. But you also won’t be taxed on any of the profits you make from the investments in your Roth IRA or when you withdraw those profits (as long as you follow the rules).
- Traditional IRA. The first IRA program in the U.S. Depending on your filing status and income, your contributions will be either fully or partially tax-deductible. Generally, the money you have in your Traditional IRA (including earnings and gains) won’t be taxed until you make a withdrawal sometime between the ages of 59.5 and 70.5.
- 401(k). A retirement plan offered by employers to their employees. With a 401(k), you’ll have a choice of a few investment options, typically mutual funds. You can directly invest a portion of your pre-tax salary, and you won’t be taxed for any earnings or gains until you withdraw the funds. There are annual limits to how much you can contribute, but they are higher than those of IRAs. Employers will often match an employee’s contributions to a certain point.
- 403(b). Similar to a 401(k), but it’s only intended for tax-sheltered or charitable entities like public schools, colleges, universities, churches and public hospitals.
- SIMPLE IRA. Stands for Savings Incentive Match Plan for Employees. It’s meant for small business owners who have fewer than 100 employees but still want to offer them retirement benefits. It’s less complex administratively than a 401(k).
- SEP IRA. Stands for Simplified Employee Pension. This plan is ideal for the self-employed because employers can make direct contributions to individual retirement accounts. You can contribute as much as 25% of your net earnings from self-employment.