The Essential List of 30 Investing Terms - Defined
New to or experienced with investing, these are words you need to know to make sure you are on top of your investing game
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Something a Little Different
This article looks a little bit different than most of my articles. Why? Because this article is a straight up list. Nay, this article is your encyclopedia for the most important words in the investing space. Yes, I am that confident.
Whether you are brand new to investing or have been involved in the stock market for a while, I guarantee this list includes words that will only enhance your understanding of the jargon.
The goal for the end of this article is for you to feel confident talking about finances in conversations with your friends, family, coworkers, whomever. You will catch their attention if you use some expert lingo in casual conversation.
Investing Terms 101
Stock Market
The most basic word to know. No better place to begin than with the stock market. The stock market (also known as the “stock exchange”) is the place where public companies can be bought and sold.
Stock
A stock is presented as a share or equity in a company. When you purchase a stock, you are purchasing partial ownership in a company.
Bond
A bond is a bit different than a stock but operates the same way; we can buy it. The difference is that a company can take out a loan given by investors. That money is then paid back to the investors (with interest) who initially produced the loan.
Cryptocurrency
These are digital currencies like any other type of currency. What makes these different than other currencies, is they use complex cryptography along the blockchain to help provide security towards the assets. These can be used in similar ways as for example the U.S dollar.
Source: https://medium.com/geekculture/10-most-important-cryptocurrencies-other-than-bitcoin-6cd174841105
Commodity
Commodities are raw materials. Some examples are gold, silver, meat, oil, wheat, etc. You can also buy and trade these items like stocks, bonds, and cryptocurrency.
Bull Market
This is one of the fun words that gets used a lot. The way I like to think of a Bull Market, is when the market is on a great run, producing months of growth. They use the bull as the term because when you picture this kind of intense growth forward, you think of a bull charging forward. It is a metaphor for the market charging forward.
Bear Market
This is the opposite of a Bull Market, as you guessed. People call the market a Bear Market when things are either stagnant or trending downwards. A bear is the perfect animal for this description of the market because you can think of bears as going into hibernation, but still being a mighty animal waiting to come out of its cave. It is saying stocks might be going down or staying still, but there is still a lot of value that could be unlocked any given month. A fitting example of a Bear Market is the cryptocurrency markets of the past few months.
Capital
Most people think of capital as just physical money. But it is a lot more than that! Capital is any owned financial asset that has value.
Security
A security is basically capital by defined to a smaller group of assets. Securities are assets that can be traded on the stock market. This includes, stocks, bonds, crypto, options, etc.
Shares
A share is the unit item you purchase when you buy a stock on the stock exchange. Think of it as your receipt of purchase. A share makes up the price you bought it at, the value, and the time in which you bought it.
Source: https://www.thestreet.com/investing/stocks-vs-shares
Shareholder
Anybody who owns share of a company is referred to as a shareholder. This means you are a part owner in that company. Even if it is by the smallest fraction. You bought Amazon stock last week? Guess what? You can call yourself a shareholder!
Volatility
This word will become your most used word in investing throughout the years. Why? Because this term refers to the instability in the market. And let me tell you, there is never a truly stable time in the market – which you may have already figured out. The more difficulties, the more volatile the market it is. Also, the more irritable your friends will be when you talk about the stock market.
Exchange
This is the actual arena, platform, or place where you do your trading. You can see people on Wall Street trading on the New York Stock Exchange for a good visual example.
Diversification
Anyone who is good at investing their money will tell you that this is the number one most important thing you must do. Diversification refers to spreading your money across multiple different asset types. That way you are managing risk in a volatile market or if a recession hits. For example, you could have a portfolio stretched out into stocks, bonds, cryptocurrencies and that would be considered a diversified portfolio.
Balance Sheet
This is the sheet that summarizes a company’s financial position. This is especially important to review before you want to buy a company’s stock. You want to know what you are buying before you buy it.
Source: https://www.thebalance.com/investing-lesson-3-analyzing-a-balance-sheet-357264
Appreciation
This is a blanket statement referring to an asset growing in value over time. A stock that goes from $100 to $200 in a year is an appreciating asset, for example.
Depreciation
This is the opposite of the previous term. As you guessed it, this refers to an asset losing value over time. Let’s switch up the example, however. The most typical depreciating asset is any vehicle. Right when you buy that new car off the lot, it usually loses more than half of its value instantly. We call that a depreciating asset.
Dividend
Dividends are cool because this is when a company pays its shareholders on a quarterly basis for owning the stock. The dividend amount changes depending on the company’s earnings. Also, not every company pays a dividend, so remember that! Dividends are great, but let me burst your bubble, you will not get rich off dividends unless you own a lot of shares – and I mean a lot of shares. Dividends are usually around a few cents to a few dollars depending on the company.
ETF
This acronym refers to exchange-traded fund. An ETF is like a stock but what makes it different is when you buy an ETF, you are buying a large grouping of stocks all being tracked together. For example, you can buy ETF’s that are made up of the entire tech company space if that is what you are looking for.
Index Fund
An index fund takes an ETF to the next level. These types of funds make up an entire segment of financial markets. The most famous example that you have heard of is the S&P 500. This index fund tracks the largest companies in the US, specifically the largest 500.
Mutual Fund
These funds are a little different as these are managed by fund managers. These funds make up a large pool of money from many investors who give the fund the ability to then buy a wide range of investments. You do not have as much control over what happens with the investments in the funds as the managers decide when to buy/sell different investments within the fund. This one is a little trickier than the others, so do your research.
401(k)
This is a type of retirement fund many companies offer. Some even offer matching programs where you can invest a certain amount and your company will invest the same amount. A summary of how this account works is that the amount you contribute will then be deducted from your taxable income.
Source: https://www.commercebank.com/personal/ideas-and-tips/2022/what-is-a-401k-plan-and-how-does-it-work
Roth IRA
This is a different type of retirement fund where the money you invest has already been taxed. That means when you take the money out at retirement, it offers tax advantages being that it has already been taxed.
Traditional IRA
This is a little different than a Roth. The main difference occurs when you pay taxes on this money. This account is tax-deductible, meaning this will help lower your taxable income like a 401k. You will in turn pay taxes on the money once you start withdrawing it at retirement.
Asset Allocation
This term refers to the percentage you have spread your money across your portfolio. Like diversification, this is how you can manage and hedge against risk in the market.
Inflation
This word seems confusing but can be broken down very simply. Inflation is the increase in the price of items, which then in turn lowers purchasing power for everyone. We are currently living in a time of huge inflation. This is the explanation for why gas, groceries, and everyday goods are so expensive right now.
Recession
We have faced two recessions in the last 20 years or so. The 2008 housing crash, and then the 2020 Covid recession. A recession, in short, refers to a period that spreads over a few months in which the economy has declined over many industries. There are many different versions of recessions that have happened throughout history, and while they all have common denominators, there is never only one root cause.
P/E Ratio
This acronym is defined as: price to earnings ratio. This is a data point investors use to help value a company at any given time. This number tells the investors whether a company is valued properly based on past or future earnings or if people are willing to purchase the stock at a slightly overvalued cost. This is only one of the data points you should use when researching a stock. Think of it as a good starting point.
Lump-Sum Investing
This is the most common investing strategy where you simply invest all your money in large sums all at once. This strategy is used because it gives you more purchasing power. With the new investing platforms, however, it has never been easier to buy frequently and buy fractional shares to ensure your money spends more time in the market. People use this strategy, however, to maximize their money instead of spreading it out daily or weekly. This comes with more risk as your money was put in all at one price.
Source: https://time.com/nextadvisor/investing/retirement/lump-sum-vs-dollar-cost-averaging/
Dollar-Cost Averaging
This is the second most popular investing strategy, and the one I use most often. This is when you invest the same amount of money in defined intervals throughout a period. Think of it like investing $10 a week on Monday's kind of thing. This helps your money spend more time in the market at different prices to help reduce risk. I tend to use both strategies depending on my financial situation.
That is a Wrap
And there you have it! You now have a list of all the words you need to know in the investing world if you are just starting out or need a refresher. Print this out, put it on your refrigerator, so you can remember it daily. This is just the beginning as there are so many words out there in the investing space.
We will revisit this topic again soon, so consider this article a “part one.”
Now go show your friends all the new lingo you learned!
Cheers!
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