Learning and understanding investing terms can seem a bit confusing or daunting at first.
If you asked me about any of these investment words below just a few years ago, you’d probably get a very confused look from me.
Yet, just like anything else, reading and seeing these terms over and over quickly can lead to you knowing exactly what they mean.
And when it comes to investing, there is A LOT of terminologies that can be thrown your way. Plus, as a beginner to investing, it can certainly feel a bit overwhelming.
But, there is no need to feel intimidated. Nor should you feel like you need to know every investing term in order to even get started.
In fact, even though I self-manage my investments and have been in the trenches for a few years, I’m still understanding more about financial words all the time.
Whether you are new to investing or just need a reminder, these basic investing terms below are ones you should get to know first.
Feel free to jump to specific sections using the table of contents.
Investing account terms
Broker: This is the entity that lets you buy and sell investments for you. Usually, you pay a fee for this service. There are also plenty of online discount brokers, where you often pay a flat commission per trade.
Brokerage Account: A brokerage account is created by a licensed brokerage firm, that allows an investor to add funds and then the investor can place investment orders. The investor owns the assets contained in the brokerage account but will usually have to claim any taxable income from capital gains,
Money Market: A money market account is an interest-bearing account that will typically pay a higher interest rate than a bank savings account would. I actually store a significant portion of my savings in this for a much better monthly return, than the 0.001% interest of my bank.
401k: A type of retirement plan offered by employers to their employees, which usually allows investors to put their money to work in mutual funds or index funds. An investor usually gets a tax deduction at the time the account is funded, there are annual limits, employers often match contributions, and there are no taxes owed until you begin withdrawing the money. Basically, take advantage if your company offers one.
Traditional IRA: A traditional IRA is an individual retirement account that offers tax advantages to savers. You won’t pay taxes up front, but you will when you withdraw during retirement. Traditional IRAs offer tax deductions of up to $5,500 a year ($6,500 for those 50 and older).
Roth IRA: An individual retirement account allowing a person to set aside after-tax income. Similar to the Traditional IRA. you can contribute the maximum $5,500 to a Roth IRA ($6,500 if you are age 50 or older by the end of the year). The difference is you are not taxed when you take your retirement payments. However, there are limitations pending your salary. Learn more about Roth IRA’s here.
Rollover IRA: When an employee leaves his or her employer, he or she can opt to rollover the 401(k) balance and have it deposited into a Rollover IRA, which basically is exactly like the Traditional IRA. I have one of these in Vanguard.
Simple IRA: A type of IRA for small business owners with fewer than 100 employees who want to offer some sort of retirement benefits to their employees but don’t want to deal with larger challenges that come with a 401k company.
SEP-IRA: This form of IRA can be used by self-employed people and small business owners under certain circumstances. The contribution limits are much higher than a Traditional IRA or Roth IRA.
403b: A retirement plan that is pretty much like a 401(k) but is only offered for non-profit organizations.
529 Plan: This tax-advantage plan is designed to save for future education costs. This can be for K-12 tuition or for future college costs. There are two types of 529 plans. More info on 529B Plans can be found here.
Types of investments
Bond: A bond is a fixed income investment in which an investor loans money typically corporate or governmental which borrows the funds for a defined period of time at a variable or fixed interest rate. There are many types of bonds out there.
Stocks: A stock (also known as “shares” and “equity) is a type of security that signifies ownership in a corporation and represents a claim on part of the corporation’s assets and earnings. There are two main types of stock: common and preferred. Feel free to Google those if interested.
Penny Stocks: Penny stocks used to be those that traded for less than a dollar per share, but over time, the term now refers o stocks that trade below $5 per share. There are a number of risks associated with penny stocks that make many investors want to steer clear as they are extremely volatile (a word defined further down). There are people who do quite well with penny stocks but not nearly as many who fail.
Real Estate: Real estate is property, such as land, houses, buildings, or garages that the owner can use or allow others to use in exchange for payment in rent. These properties can also be flipped for profit as well.
Mutual Fund: A mutual fund is a pooled portfolio. The fund itself holds the individual stocks, in the case of equity funds, or bonds, in the case of bond funds. Mutual funds are a great way to get exposure to groups of stocks or bonds, but be careful. Many have high fees that can eat away at your returns.
Index Fund: An index fund is a mutual fund, that allows an individual to “invest” in an index, such as the S&P 500. Index funds are very similar to how mutual funds work, but typically have very low fees and are the better choice. I primarily invested in index funds with Vanguard.
Hedge Fund: A hedge fund is a type of investment partnership. It’s where partners will pool money from investors an engage in a wide range of investing activity. Basically, managing where investors money goes. It can be a bit riskier for investors.
ETF: Or exchange-traded funds are like mutual funds, except that they trade throughout the day on stock exchanges as if they were individual stocks. These ETFs can hold various assets like stocks, commodities, or bonds.
REITs: Instead of dealing with actual buying and renting of properties, you can invest through real estate investment trusts or REITs. They trade as if they were stocks and have special tax treatment. There are all different types of REITs specializing in all different types of real estate. REITs often trade on major exchanges like other stocks, so they move with the market. I have a very small percentage of this in my Roth IRA.
Real Estate CrowdFunding: Another way to invest in real estate and relatively newer is real estate crowdfunding. This gives individual investors the opportunity to invest in certain real estate markets that were previously off-limits, such as commercial real estate. These do not necessarily follow the stock market and are not as liquid, meaning you can’t always get your cash back instantly.
Top real estate crowdfunding websites:
Other miscellaneous investing terms
Bear Market: A bear market is a period where stock prices are falling. In a bear market, investor confidence is extremely low and many start to sell off their stocks during a bear market for fear of further losses, thus fueling the negative market more. Typically, bear markets are marked by a 20% downturn or more in stock prices over a given time period. It also can be a great buying time, as stocks go on sale.
Bull Market: A bull market when the market is moving in a positive direction and is expected to continue. Basically, optimism is high and investor confidence expects that strong results should continue, either for months or years.
New York Stock Exchange: The New York Stock Exchange (NYSE) is a stock exchange located in New York City that is considered the largest equities-based exchange in the world and is made up of 21 rooms that are used to facilitate trading.
Dow Jones: The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange (NYSE) and the Nasdaq. It has been around since 1896!
NASDAQ: This is the marketplace for buying and selling securities. There are thousands of stocks listed on the Nasdaq exchange that includes giant companies like Apple, Google, Microsoft, Oracle, Amazon, and Intel.
Balance Sheet: A balance sheet reports the company’s assets and liabilities. It’s just a complete financial statement that provides a snapshot of what a company owns and what they owe, as well as the amount invested by shareholders.
Blue Chip: A company that has a history of solid earnings, increasing dividends, and great balance sheet.
Dividends: A portion of a company’s profits that is paid out to shareholders on a quarterly or annual basis. It is not mandatory to for companies to pay dividends on stock, but many do to their shareholders.
Capital Gain (or Loss): This is the difference between what you bought an investment for and what you sell if for. A gain is when you buy a stock say at $30/share and later sell it for $50/share. A loss is the reverse.
Market CAP: The market cap is calculated by multiplying the current price per share with the number of shares outstanding (number of shares owned by investors).
Stock Broker: A stockbroker is an institution or individual that executes buy or sell orders on behalf of a customer. Stockbrokers help settle the trades.
Volume: Volume is the number of shares being traded in the entire market during a given period of time. Each transaction during stock trading hours contributes to the count of total volume.
Dollar-Cost Averaging: This is an investment technique of buying a fixed dollar amount of a particular investment on a regular schedule, regardless of the share price. This is something I practice and helps keep your investments on track.
Volatility: This is when there are big swings in either direction of the stock market or individual stocks. If the stock market rises and falls more than 1% over a consistent period of time, it would probably be considered a ‘volatile’ market.
The above is just a taste of all the common investing terms you may come across and one’s beginners to investing should know.
There are certainly a lot more investing terminology to understand, but these will start you off successfully and help you begin to understand the world of investments better.
I recommend you start off with the above, then slowly expand your investing term knowledge as you feel comfortable.