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Investment Terminology
Words You Need to Know to Understand Investing
If you want to start dabbling in financial investments, it may feel overwhelming as you come across various investment terms and phrases. The good news is that you don’t have to know everything about investing to simply get started. All you really need is a grasp of the basics and from there, your investment knowledge and experience will only grow.
Investment Types
Since there are several different ways to invest money, understanding what each option is will help you make the most informed investment decisions. Let’s go over each type.
Bonds
A bond is essentially a loan where you agree to lend money to the government or a company with the promise that it will be repaid in the future with interest.
Common Stock
This is ownership in a legally formed corporation.
Preferred Stock
Preferred stock is a different class of ownership that gives shareholders of a company a larger dividend, oftentimes guaranteed.
Investment Structures
Like investment types, there are also varying structures in the investment world. An investment strategy determines the varying classes of assets.
Mutual Funds
This is a pooled portfolio where you buy shares or units, and that money is turned over to a professional portfolio manager to invest.
Exchange-Traded Funds
These funds are comparable to mutual funds with the exception that they are traded throughout the day on stock exchanges.
Index Funds
An index fund is a form of a mutual fund that allows you to invest in an index (i.e., S&P 500). These funds give investors returns that align with the index.
Hedge Funds
A hedge fund is an investment partnership where partners put their money together from investors and diversify through a wide range of investing activities.
Asset Allocation
Asset allocation is a strategy for managing capital that encompasses set parameters in different asset classes.
Stockbrokers and Stock Trades
Stockbrokers can be one individual or an institution that performs buy-or-sell orders for a customer. Customers can then submit stock trades to their stockbroker.
Short Selling
This is when an investor borrows shares that they do not own and then sells and pockets the money with a guarantee that they will return the property in the future, hoping that the stock price declines and can be purchased at a low cost.
Margin
Stockbrokers will sometimes lend customers money against the value of stocks or bonds within their own custody accounts. The client then pledges the entire account balance as collateral along with a personal guarantee.
Investment Terminology
How are you doing so far? Do you feel like you’re drowning or getting the hang of it? Remember, you don’t need to know everything about investing; some basic terms will simply benefit you. Here is more investment terminology, familiar to the investment world:
Stock Exchange
A stock exchange is an association, organization, or institution that creates a platform for buyers and sellers to conduct business with one another.
Price-to-Earnings Ratio
This information tells you just how many years it would take for a company to pay back its purchase price per share from after-tax profits, alone, at current profits with no growth.
Price-to-Earnings Growth
This is simply a variant of the PE ratio that takes growth into consideration.
Dividend-Adjusted PEG Ratio
This is another modified ratio that factors dividends into the metric.
Dividend Yield
A dividend yield is the current yield of common stock at the present dividend rate.
Volatility
This refers to the degree to which a traded security fluctuates in price.
Derivative
This is an asset that derives its value from another source
Conclusion
Investing doesn’t have to be overly complicated. If investment terminology has your head spinning, though, Rainy Day Center can help! Be sure to reach out if you have further questions.
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