At first, learning and understanding investment terms can be confusing.
You would have probably received a confused look if you had asked me a few short years ago about any of the investment terms below.
You can learn what these terms mean by reading them and seeing them repeatedly.
When it comes to investment, you will be bombarded with a LOT of terms. As a novice in investing, you may feel overwhelmed.
You don’t need to be intimidated. You don’t need to be an expert in every investment term to get started.
Even though I have self-managed my investments for several years and am in the trenches, I still learn more financial terms every day.
You should familiarize yourself with these terms, whether you’re new to investing or need a refresher.
Table of Contents
Investing account terms
Investment terms and their types
Investment Structures Terms
Other Miscellaneous Investing Terms
Final Thoughts
Investing account terms
- Broker: A broker is an entity who helps you to buy and sell securities. You usually pay a fee to use this service. You can also find many online discount brokers where you pay a flat fee per trade.
- Brokerage Accounts: A brokerage account, created by a brokerage firm licensed to do so, allows the investor to deposit funds. The investor can then place orders for investments. The assets in the account belong to the investor, but he or she will have to declare any capital gains taxable income.
- Money Market Account: A money-market account pays a higher rate of interest than a savings account at the bank. I store a large portion of my savings here for a better return than my bank’s 0.001% monthly interest.
- 401k: Employers offer their employees a type of retirement plan that allows them to invest their money in index or mutual funds. Investors usually get a tax deduction when they fund the account. There are also annual limits and employers will often match the contributions. Taxes are not due until the money is withdrawn. Take advantage of any company-sponsored program.
- Traditional IRA: An individual retirement account which offers tax benefits to savers. Taxes are not paid upfront but will be due when you withdraw your money in retirement. Tax deductions are available for traditional IRAs up to $5.500 per year (or $6.500 for those over 50).
- Roth IRA: A retirement account that allows a person after-tax income to be set aside. The Traditional IRA is similar. You can contribute up to $5,500 in a Roth IRA (or $6,500 if 50 years old or older at the end of the calendar year). You are not taxed on your retirement income. There are restrictions based on your salary. Find out more about Roth IRAs.
- Rollover IRA: If an employee leaves their employer, they can choose to rollover the 401(k), depositing it into a Rollover IRA. This is basically the same as the Traditional IRA. I have one in Vanguard.
- Simple IRA – A type of IRA that is designed for small businesses with less than 100 employees. They want to provide retirement benefits to employees, but do not want to deal the larger challenges of a 401k.
- SEP-IRA : This IRA is available to small business owners and self-employed individuals under certain conditions. Contribution limits are higher than those of a Traditional IRA and Roth IRA.
- 403b: This is a retirement plan similar to a 401k, but only available for non-profits.
- The 529 plan allows you to set aside money for future educational costs. It can be used for K-12 tuition, or future college expenses. There are two different types of 529 Plans. Here is more information on 529B plans.
Related Post: My own four-year experience in stock investing.
Investing Terms
Investment terms and their types
- Bonds are fixed-income investments in which investors lend money to a company or government, which then borrows funds for a specified period at a variable interest rate or fixed rate. There are several types of bonds.
- Stocks are a form of securities that represent ownership of a corporation. They also refer to “shares” or “equity”. Stocks come in two types: common and preferred. If you’re interested, feel free to google them.
- Penny Stocks. Penny stocks were once those stocks that sold for less than $1 per share. Over time, this term has come to refer to stocks that are priced below $5. Many investors avoid penny stocks because they are volatile. Many people do well with penny stock investments, but there are not as many that fail.
- Real Estate: Property such as houses, land, buildings or garages can be rented out by the owner or leased to others. These properties can be sold for profit.
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Investment Structures Terms
- Mutual Funds: Mutual funds are a pooled investment portfolio. In the case that the fund is an equity fund, the stocks or bonds are held by the fund. Mutual funds can be a good way to gain exposure to a group of stocks or bonds. But, they are not without their risks. Some have high fees which can reduce your return.
- Index Funds: Index funds are mutual funds that allow an individual to invest in an index such as S&P 500. Index funds operate in a similar way to mutual funds, but they have lower fees. They are a better option. Vanguard is where I invest mainly in index funds.
- Hedge Funds: Hedge funds are a form of investment partnership. Partners pool their money and engage in various investing activities. It’s basically managing where the money of investors goes. Investors can take on a higher level of risk.
- ETFs are exchange-traded fund, which is similar to mutual funds. However, they trade continuously on stock exchanges throughout the day as if it were individual stocks. These ETFs may hold a variety of assets, such as stocks, commodities or bonds.
- Real estate investment trusts (REITs): Instead of buying and renting properties directly, you can invest in REITs. They are treated as stocks and trade like them. There are many different REITs that specialize in different types or real estate. REITs are traded on major exchanges just like stocks. They move along with the market. This is a small portion of my Roth IRA.
- Real Estate CrowdFunding is a relatively new way to invest in property. Individual investors can now invest in previously unreachable real estate markets, like commercial real estate. They are less liquid and do not follow the stock exchange, so you may not be able to get your money back instantly.
Top real estate crowdfunding websites:
Fundrise
DiversyFund
PeerStreet
Other Miscellaneous Investing Terms
- Bear Market: In a bear market, stock prices fall. Investor confidence is low in a bear-market, and investors begin to sell their stocks out of fear for further losses. This fuels the negative market. Bear markets are usually marked by a 20% or greater drop in stock prices within a certain time frame. Stocks are on sale, which can make it a good time to buy.
- Bull Market: When the market moves in a positive way and it is expected that this will continue. Investors are confident and optimistic, and expect that the strong results will continue for several months or even years.
- New York Stock Exchange : The New York Stock Exchange is a stock market located in New York City. It is the largest equities exchange in the entire world. There are 21 trading rooms.
- Dow Jones: The Dow Jones Industrial Average is a weighted average of 30 important stocks traded at the New York Stock Exchange and Nasdaq. Since 1896, it has existed!
- The NASDAQ is a marketplace where you can buy and sell securities. The Nasdaq stock exchange has thousands of stocks, including giants like Apple, Google and Microsoft.
- Balance Sheet: The balance sheet shows the assets and liabilities of a company. This is a financial statement which shows what the company owns, what it owes and how much money shareholders have invested.
- Blue Chip: An organization with a solid history of earnings, dividend increases, and a strong balance sheet.
- Dividends are a portion of profits paid to shareholders quarterly or annually. Dividends are not required by law, but many companies do pay them to their shareholders.
- Capital Gain or Loss: The difference between the price you paid for an investment and what it sold for. You make a gain when you purchase a stock at $30/share, and then sell it later for $50/share. Loss is the opposite.
- Market Cap: The market cap can be calculated by multiplying current share price by the number of outstanding shares (number owned by investors).
- Stock Brokers: A stockbroker can be an individual or institution that executes orders to buy or sell on behalf of customers. Stockbrokers settle trades.
- Volume: The volume is the total number of shares traded on the market in a certain period of time. Volume is calculated by adding up all transactions during trading hours.
- Dollar-Cost Average: This investment technique involves buying a certain dollar amount on a regular basis, regardless of share prices. This is something that I do and it helps me keep my investments on track.
- Volatility is the term used to describe large swings of either direction in the stock market, or for individual stocks. The stock market is considered volatile if it fluctuates more than 1% in a short period of time.
Are you looking for information about stock market hours and trading? You’ll find all the information you need about stock market opening hours and trading hours here.
Final Thoughts
Beginners to investing will need to be familiar with the following terms.
You will certainly need to learn more investment terminology, but this list should help you get started and begin to better understand the world.
Start with the basics and then gradually expand your knowledge of investing terms as you become more comfortable.
