You are currently viewing 40 INVESTING TERMS YOU SHOULD KNOW

40 INVESTING TERMS YOU SHOULD KNOW

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For a beginner, investing can be pretty intimidating. First is the fear of losing money in the stock market, and second is all the investing terms (aka financial jargon) that makes understanding investing quite tricky. When it comes to investing your hard-earned money, it is best to understand as much as possible.

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And while you don’t have to know everything to start, understanding the basic and most commonly used investing terms will help you feel more confident about investing.

Here are some important investing terms and definitions:

Types of Investments

1. Common Stock

A type of security that represents ownership of a company. Units of a company’s stock are called shares and are generally traded on a stock exchange. Owning a company’s shares allows you to vote in shareholder meetings, share in a company’s profits (dividends), and sell your position when you wish.

2. Preferred Stock

A type of security that represents ownership of a company but does not come with voting rights. Preferred shareholders have priority over a company’s income and are paid dividends before common shareholders.

3. Penny Stock

Stocks issued by a small company and typically trade for less than $5 per share. They have a higher level of volatility and thus a higher potential for reward as well as loss. While some penny stocks are traded in stock exchanges, most are traded over-the-counter, often making them illiquid. Potential investors should be aware of these characteristics that make penny stocks highly risky.

4. Bonds

A type of security that acts as a loan or an IOU that is issued by a corporation or government for a set period of time. The issuer promises to repay the loan on a specific date in exchange for regular interest payments. Bonds are often described as fixed-income instruments as your investment earns fixed payments over the life of the bond.

5. Commodity

Commodities are unprocessed goods such as food, metal, crude oil, or other fixed physical product. Investors can buy or sell commodities directly in the cash market or through derivatives such as options and futures.

6. Real Estate

Generally, real estate refers to the physical surface of land and anything attached to it, whether natural or man-made. You may invest in real estate directly by buying physical property or indirectly through a Real Estate Investment Trust (REIT).

Types of Investment Funds (Investing Terms)

7. Mutual Funds

An investment company that pools money from many different investors and invests in securities such as stocks, bonds, money market instruments, etc. Professional portfolio managers operate it intending to produce gains for their investors. A share of a mutual fund represents an investment in many different securities instead of holding just one.

8. Index Funds

An index fund (also an index tracker) is a type of mutual fund or exchange-traded fund that mimics a particular market index. They provide an indirect way to invest in a market index as you cannot invest directly in a market index. Index fund managers passively manage them as they aim to track the market index (rather than outperform it).

9. ETFs

An Exchange Traded Fund (ETF) is an investment fund, much like a mutual fund, that allows you to buy a large basket of securities such as stocks and bonds in one purchase. However, unlike a mutual fund, you can buy and sell an ETF on the stock market throughout a trading day. Most ETFs are mutual funds as they aim to mirror a specific market index.

10. Hedge Funds

A hedge fund is a pooled investment fund (similar to a mutual fund) that can use more complex trading, risk management, and portfolio structures to improve performance. Hedge fund investors need to meet specific net worth requirements, typically a net worth exceeding $1 million or an annual income of over $200,000 over the last two years. Unlike mutual funds which, invest in stocks and bonds, a hedge fund can invest in anything such as derivatives, currencies, real estate, etc.

11. REITs

A Real Estate Investment Trust (REIT) is an investment fund or security that invests in income-producing real estate properties across various property sectors. REITs buy and sell real estate properties with the primary aim to operate them as part of their portfolio. A REIT investor earns a portion of the income generated by the REIT.

Retirement Investing Terms (Canada)

12. RRSP

A Registered Retirement Savings Plan (RRSP) is a retirement savings vehicle for employees and self-employed people in Canada. The Canada Revenue Agency (CRA) registers an RRSP and sets rules regarding contribution limits, contribution timing and the type of assets allowed. It has two main advantages: you can deduct RRSP contributions against your income, thus reducing your taxes, and investments can grow tax-free.

13. TFSA

A Tax-Free Savings Account (TFSA) is a registered investment and savings account in Canada. The Canada Revenue Agency (CRA) registers a TFSA, which sets rules regarding contribution limits, contribution timing, and the type of assets allowed. You cannot deduct your contributions to a TFSA against your income, but all income gained within the account is generally tax-free.

14. LIRA

A Locked-In Retirement Account (LIRA) is a pension savings account that holds funds you cannot withdraw until retirement in Canada. If you change jobs and thus leave your employer’s pension plan, a LIRA will hold your pension savings. Unlike funds in a pension plan which your employer or a financial institution manages, you are in control of your LIRA.

Retirement Investing Terms (USA)

15. 401(K)

A 401(K) is an investment vehicle in the USA that allows employees to divert a portion of their paycheque directly into long-term investments. It is employer-sponsored, and the employer will often match your contributions. A 401(K) is eligible for special tax benefits under IRS guidelines.

16. Roth 401(K)

Roth 401(K) is a variation of 401(K) which requires employees to pay taxes on contributions. Upon retirement, withdrawals are exempt from taxation, and the employer cannot match Roth 401(K) contributions.

17. Traditional IRA

A traditional IRA is an individual retirement account in which individuals can contribute pre-tax dollars, and the investments grow tax-deferred. Upon retirement, withdrawals are subject to taxes, and contribution limits exist.

18. Roth IRA

A Roth IRA is a special type of individual retirement account in which you pay taxes on money going into the account. All future withdrawals from a Roth IRA are exempt from taxes. It is best suited for individuals who believe that their tax rate will be higher in retirement than it is now.

19. 403(B)

A 403(B) plan is a retirement plan offered by public schools and specific tax-exempt organizations rather than private-sector companies. Features and benefits of a 403(B) are primarily similar to those of a 401(K). However, 403(B) provides a faster vesting period of funds and the ability to make additional catch-up contributions.

Types of Investing Strategies (Investing Terms)

20. Dollar Cost Averaging

It is an investment strategy in which you regularly invest a fixed dollar amount in the same fund or stock, such as weekly, monthly, or annually. Dollar Cost Averaging decreases the risk that you may pay too much for an investment before a market drop. It takes away the fear of buying at the wrong time and can encourage new investors to participate in the stock market.

21. Lump Sum Investing

Lump-sum investing is the opposite of dollar-cost averaging. With this strategy, you take a lump sum of money and invest it into the stock market all at once.

22. Buy and Hold Investing

Buy and hold is an investment strategy where investors buy securities and keep them over a long time regardless of short-term fluctuations. Investors that use this strategy prioritize owning shares of companies with strong fundamentals. The counterpart to this strategy is active investing, in which investors try to time the market by buying when prices are low and selling when prices are high.

23. Asset Allocation (Portfolio Rebalancing)

Asset Allocation is an investment strategy in which investors minimize investment risks by diversifying their investment portfolios between asset classes. The main asset classes include Equities (stocks), Fixed-Income (bonds), and Cash. Other investments outside these three classes, such as real estate or commodities, are considered alternative investments.

Other Investing Terms

24. Bear Market

It is a condition of the financial market in which prices are falling or expected to fall over a prolonged period. A drop of 20% or more typically marks a bear market.

25. Bull Market

A financial market condition in which prices are rising or expected to rise over a prolonged period. An investor is bullish if they believe the value of a security or market will increase.

26. Blue Chip Company

It is a large, industry-leading, and financially sound company that has operated for many years and offers a stable record of dividend payments. The term Blue Chip is borrowed from poker, where the blue chips are the most valuable.

27. Broker/Brokerage Firm

It is an individual or firm that arranges transactions between an investor and a securities exchange. The broker/brokerage firm receives a commission upon a deal execution.

28. Brokerage Account

It is a financial account that allows you to buy and sell securities such as stocks, bonds, mutual funds, and ETFs. You can open a brokerage account with an investment firm or brokerage.

29. Capital Gain (Loss)

A capital gain or loss is the difference between the selling price and the cost of an investment. You realize it when you sell an asset. An increase or decrease in an asset’s value that you still hold is an unrealized gain or loss (also referred to as paper gain or loss).

30. Dividend

It is a distribution of profits by a corporation to shareholders, the people who own the company’s stock, on a quarterly or annual basis.

31. Dividend Yield

It refers to the measure of the return on an investment received from the payment of a dividend. The yield is determined by dividing the annual dividend amount by the price paid for the stock.

32. Expense Ratio

An expense ratio is an annual fee that a mutual fund or ETF charges to manage your invested money. It is typically calculated as a percentage of your investment and includes various fund operational costs. High expense ratios will eat into your investment’s returns.

33. Index

An index is a method to track the performance of a group of assets in a standardized way. For example, the S&P 500 Index measures the performance of the 500 largest publicly-traded companies in the US.

34. Inflation

Inflation refers to the persistent rise in the average price of most goods and services, decreasing the purchasing power of a given currency over time.

35. Initial Public Offering (IPO)

An IPO is the first sale or offering of a company’s stock to the public. Instead of being owned by private or inside investors.

36. Price-to-Earnings (PE) Ratio

P/E ratio is the relationship between a company’s share price and its earnings per share.  A high P/E ratio indicates an overvalued stock or expectations for future growth, and a low P/E ratio indicates an undervalued stock and, thus, is a great bargain.  

37. Market CAP

Market capitalization (or market cap) is the market value of a company’s outstanding shares. You can calculate the market cap by multiplying the share price by the total number of outstanding shares. The market cap allows investors to understand the relative size of a company versus another.

38. Stock Exchange

It is a marketplace where investors trade financial instruments. It may be a physical location, but the majority of trading today is electronic. Some of the most widely-known stock exchanges include New York Stock Exchange (NYSE), Nasdaq, and London Stock Exchange (LSE).

39. Stock Ticker Symbol

It is a one-character to four-character alphabetic root symbol representing a publicly-traded company on a stock exchange. For example, Microsoft’s stock ticker symbol is MSFT, and Facebook’s is FB.

40. Volatility

It refers to how fast a stock or stock market as a whole moves up and down.

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TAKE CONTROL OF YOUR PERSONAL FINANCES

download-750x952

Ever feel like money just seems to slip through your fingers month after month? Our Monthly Budget Tracker will guide you to start making the most of every dollar. It’s a game changer—get it free for a limited time!

Nikki Kirimi

Nikki Kirimi is a finance professional (MBA, CPA, CMA) and the creator of Money World Basics. She is passionate about acquiring and teaching personal finance knowledge to help women achieve their financial goals.