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When you know what you want but don’t know the right words to ask for it, achieving the desired result is difficult. However, searching through all 8,000 terms in the Nasdaq Glossary of Stock Market Terms could take a while. But don’t let the sheer number of investment terms and concepts overwhelm you. You only need to know a few key investment terms to get started on the right track.
Knowing just a handful of terms will jump-start your financial planning and also help you improve your overall financial literacy. To help get you up to speed, we’ve compiled a list of the terms you’re most likely to encounter while getting started as a new investor.
Whether you plan to invest in the stock market or just want to better understand your 401(k), this guide is for you. We chose the most common and frequently used words you will see throughout the lifetime of your financial strategy. By the end of this list, you’ll be more confident and ready to start working on achieving your financial goals.
1. Broker
Every investor is either buying or selling something. A broker is a company or individual that makes buying and selling (of stocks, ETFs, mutual funds, and other securities) possible for a fee. Think of a broker as the middleman who ensures smooth, seamless transactions.
Brokers are licensed professionals. They can assist when you want to invest, get a loan, or purchase illiquid assets like real estate. With the advent of the internet, brokers grew in numbers, and while most are genuine, some are not. If you’re just starting, read a broker’s policies and go through the customer reviews before doing business.
2. Stock
One of the most popular investment terms you would come across in your investment journey is “stock.” Stock represents a person’s ownership in a publicly traded company. When you buy a share, you’re buying a fraction of a company’s assets and earnings, which makes you a joint owner.
Stock prices fluctuate almost daily, depending on market trends, brand performances, economic climates, and many other indicators. While you can get high returns (especially in the long run), you can also lose money investing in stocks. It’s wise to consult a financial advisor before investing in the stock market.
3. Bond
Unlike in stocks, where you own a slice of a company when you acquire bonds, you loan a company or government your money in exchange for interest and the return of what you loaned (bonds) at face value after maturation. You do not share business risk with the bond issuer like you would investing in stocks, making bonds generally less risky.
So why should anyone invest in stocks instead of near-risk-aversive bonds? While bonds are generally considered less risky than stocks, they offer low, unattractive returns that put investors off. The S&P 500 index pegs stocks’ average annual returns at 10%, twice the profit percentage of what bond investors can expect on average.
4. Mutual Funds
Not to be confused with the exchange-traded fund (ETF), a mutual fund is a money pool collected from different investors to invest in a diversified portfolio collectively. The portfolio could include tens of securities, including stocks, bonds, derivatives, and trades.
Professional fund managers manage and actively trade pooled funds and make investment decisions on behalf of investors (including newbies). When properly managed, mutual fund investments can bring high returns, but there’s no guarantee they will.
5. Exchange-traded Fund (ETF)
An exchange-traded fund (ETF) is similar to a mutual fund in that it pools money together for collective investments. Like mutual funds, ETFs require the expert input of professional fund managers who invest in similar securities.
Unlike mutual funds, where managers can invest in active and index varieties, ETF managers mostly peg your investment against the performance of an index like the SPDR S&P 500 Trust ETF, BlackRock, and the NewGold ETF. While you can buy and sell ETFs at will, mutual funds can only be bought at the end of a trading day.
6. Real Estate
Popular billionaires like Donald Bren, Wang Jialin, and Michael Otto made their money from real estate. A lucrative investment option, you can make money in real estate by collecting rent, leasing apartments, selling properties, or being a property coach.
Short-term real estate investors may flip properties for quick turnovers. For long-term investors, it’s about biding their time until an asset accrues substantial value, sometimes thousands of percentages from the purchase price point.
7. Ask/Bid
The prices of assets you intend to invest in are not always fixed. This doesn’t mean the seller or issuer has no price in mind. Ask/bid describes the lowest price the seller is willing to sell a security and the highest price the buyer is offering to buy.
For example, if you’re buying a currency from a broker, you may have a price point you’re not willing to exceed to secure that asset. That’s your “bid.” The term ”ask” implies the minimum price the broker would be willing to sell the currency to you. A lack of consensus in ask/bid prices could result in a no-deal scenario.
8. Asset
Anything of economic value can be defined as an asset. When an asset, be it tangible or intangible, can be easily converted into cash, it is referred to as a liquid asset. Mutual funds, securities, and cash are examples of liquid assets. Some non-liquid assets, such as art and real estate, can also be converted to cash but may take longer to sell.
As a newbie investor, a comprehensive grasp of the value and composition of your asset class is important for financial planning. Your investment decisions would often be dependent on the asset class you own. Assets that can be easily liquidated may equip you to invest in opportunities as they come.
9. Liquidity
A measure of liquidity is the ease with which an investor can convert assets (stocks, ETFs, mutual funds, etc.) into cash without affecting their market price. Securities are generally easy to liquefy since you would buy or sell at the current price points at which you initiate a trade.
For assets like equipment, real estate, and many other tangible assets, it’s harder to find buyers at any given point. Sellers may have to provide a discount or sell below market prices to catalyze sales. Liquidity is worth consideration as a newbie investor since it affects the ease of buying and selling.
10. Cash
Cash is the most popular investment term. It’s also the most liquid of all asset classes. It’s money in print and on screen, like bills, coins, and what you’ve got in your savings and checking accounts.
Cash’s uniqueness is tied to its widespread acceptance as an exchange medium for goods and services. Cash trumps most other assets because it does not (in its physical form) require a transaction fee to be spent, nor does it request the sharing of personal data before it’s admissible.
11. Diversification
Diversification means investing in different asset classes to reduce risk. Risk is inherent to every form of investment, albeit to varying degrees. By diversifying, investors can shield themselves from losing everything when one investment goes awry.
One way to maximize diversification as an investment tool is to invest in mutually exclusive asset classes. For a mutually exclusive asset class, what affects one cannot affect the other. Diversification provides leverage for investors when one asset class is underperforming.
12. Portfolio
A portfolio is a term for a collection of investments. An individual or organization could own it, and it may contain similar or different asset classes.
A portfolio is your diversification wallet holding your assets. It makes managing your money and assets easy, spreading your risks over different securities to reduce the impact of market volatility and potential liquidation when some assets lose value.
13. Market Capitalization
Market capitalization, or market cap for short, is the number of outstanding shares of a company’s stock. You can calculate a company’s market capitalization by multiplying the number of outstanding shares by the current price of its stock.
Market capitalization is important because it helps investors identify a company’s perceived value. As a newbie investor, a company’s value can help you assess public perception and brand strength and determine whether it’s worth investing in.
14. Dividend
As an investor, the portion of profits your shares in a publicly traded company accrue is referred to as a dividend. Dividends are usually paid annually, but some publicly traded companies pay quarterly, depending on your contractual agreement at the time of investing.
A dividend doesn’t always come in cash. It may come in the form of additional shares, known as stock dividends.
15. Compounding
When you invest your profit as well as your initial investment to generate additional earnings over time, it’s referred to as compounding. Compounding allows your investment to grow exponentially, and it’s one of the smartest tools you should consider as a newbie investor.
Investments in certificates of deposit (CDs), bonds and bonds funds, dividends, and high-yield savings accounts are great for compounding because they carry low risk and guarantee consistent returns.
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