43 Important Investment Terms You Should Know - Debbie Sassen (2024)

Plenty of people tell me they’d liketo start investing but they feel a little intimidated by all the different products and investment terms investors need to know about.

If this sounds familiar, then you’re not alone. According to a recent survey, over two-thirds of people report that investing in the stock market feels scary or intimidating.

But, how do you get over the feelings of fear and anxiety in investing so you can begin working towards your financial freedom?

You can make it happen in three steps:

1. Get over any negative emotions or assumptions that may be holding you back
2. Be clear about your wealth-building goals
3. Make a commitment – even the smallest of commitments – to starting the journey

If you’re new to investing then familiarizing yourself with some basic investment vocabulary can really help. Here are some basic and important investing terms that you should know.

To help you get there, I’ll introduce you to the most common and important investment terms that you’ll come across along your wealth-building journey. Let’s break the list down into the following four categories:

• Popular Types of Investments
• Types of Retirement Accounts
• Portfolio Management
• Basic Investment Vocabulary

Popular Types of Investments

Bonds

A bond is basically a loan. The investor loans money to a specific corporate or government entity which borrows the funds for a defined period of time at a fixed or variable interest rate. The borrower then has the money it needs to cover projects or operational expenses, while the investor receives regular interest payments.

Exchanged Traded Funds

An exchange-traded fund, or ETF, is a portfolio of a specific group of stocks and/or bonds. Most ETFs operate like an index mutual fund in that they are passively managed. This means little trading activity occurs within these funds. Instead, their makeup and performance will closely follow a particular index, such as the Dow Jones Industrial Average or the S&P 500.

Index Funds

An index fund is typically a mutual fund consisting of a portfolio of stocks designed to mirror the performance of a particular index, like the Dow Jones Industrial Average, or the S&P 500. Since the goal of these funds is to merely copy and not beat the performance of a given index, there is very little trading activity that goes on within them. For this reason index funds are a cost-effective investment option for passive investors.

Mutual Funds

Like an ETF, a mutual fund is a portfolio of a specific group of stocks and/or bonds. But, mutual funds are more actively managed than ETFs and will provide you with taxable income whether or not you sell any shares.

REITs

A real estate investment trust, or REIT, is a type of company that enables investors to pool their money and invest it in a portfolio of real estate assets. The shareholders of a REIT earn a portion of the income generated by these real estate assets while avoiding the hassle and risk of having to buy, finance, or manage a property.

Stocks

Stocks, also known as equity or shares, are issued by companies in order to raisethe capitalneeded to grow or expand operations. For some investors, the biggest benefit to being a shareholder is that they are entitled to dividends – a portion of the company’s profits – which are usually paid out at the end of every business quarter. Many stocks, however, do not pay outdividends, choosing instead to reinvest the profits back into the company. In this case, the retained earnings are reflected in the rising value of the stock.

Commodities

Commodities are basic goods used in trade and commerce. Some commodities are extracted from the earth, like oil, copper, and gold. Others, like soybeans, cotton, and wheat grow from the earth. And finally, commodities like cattle get their sustenance from the earth. Commodities of similar quality and standards trade on large exchanges just like stocks do.

Trust Funds

A trust fund is a special account that enables people to hold assets that they will eventually give over to another individual. So, for example, a grandparent could create a trust fund for a grandchild that would be available to the child when he or she turns 18. Trust funds can hold a variety of assets, such as stocks, bonds, mutual funds, and real estate- often with tremendous asset protection and tax benefits.

Types of Retirement Accounts

In the US, the federal government has created a number of tax-advantaged retirement accounts that are there to help you save enough money for retirement. The two most popular choices are the 401(k) and the individual retirement account, or IRA. Below, I’ll include a brief description of each plan. You can find out more detailed information about these investing tools on the IRS.gov website.

401(k)

This type of retirement plan is offered by employers to their employees, and it comes with a number of benefits. First, contributions are made with pre-tax dollars. No taxes are owed on the funds held within a 401(k) until the investor begins withdrawing the money. This means investors can lower their tax obligation any year that money is deposited into the account. Additionally, most 401(k) plans allow investors to put their money to work for them in a range of investments, including mutual funds, index funds, ETFs and the like in order to provide the most stability with the greatest possible return. Insome cases, employers will also match a percentage of the contributions their employees make to their 401(k) plans.

IRA

An IRA allows individuals to useinvest funds for retirement with tax-free growth or in a tax-deferred environment. Like the 401(k), IRAs can consist of a range of investments, such as stocks, bondsor mutual funds. There are several types of IRAs designed to suit different circ*mstances:

• Traditional IRA– With a traditional IRA, investors can put money towards their retirement and potentially deduct these contributions on their tax return. Plus, any investment earnings may be able to grow tax-deferred until the investor withdraws them in retirement.
• Roth IRA– A Roth-IRA allows investors to make contributions towards their retirement with after-tax money. The biggest benefit of the Roth-IRA is that funds may potentially grow tax-free. In some cases, withdrawals in retirement may also be tax-free.
• Rollover IRA– When employees leave their job, they have the option ofmoving theirretirementsavings from their employer-sponsored retirement plan into a traditional IRA. By doing so, they can keep their savings tax-deferred.
• SEP-IRA– The Simplified Employee Pension Individual Retirement Account, can be used by small business owners and the self-employed. Under certain conditions, the SEP-IRA offers investors higher contribution limits as compared to the traditional IRA.

Portfolio Management

• Asset Management Firm: The business that invests capital on behalf of clients, shareholders, or partners.
• Fund Manager: A fund manager works individually or as part of a team to manage trading activity, employ an investment fund’sinvesting strategy and fulfill investment goals.
• Robo-Advisor: Robo-advisors offer automated investment services based on sophisticated computer algorithms and Artificial Intelligence. Most of these platforms provide personalized financial advice and invest clients’ assets.
• Stock Broker: A stockbroker is a professional individual who buys and sells stocks and other securities on a stock exchange on behalf of clients in return for a fee or commission.

Basic Investment Vocabulary

• Ask Price: The lowest price a seller is willing to accept for the sale of a given stock.
• Asset: An item, tangible or intangible, that has value, such as physical cash, stocks, bonds, mutual funds, and real estate.
• Asset Allocation: The manner in which an investor divides up assets across different investment products, such as stocks, bonds, and cash.
• Bear Market: A time of declining stock prices and a general feeling of pessimism in the market.
• Bear Investor: An investor who believes the market as a whole or a particular stock will decline.
• Bid Price: The highest price a buyer is willing to accept for a stock purchase.
• Blue Chip: A blue-chip stock is from an established company with predictable revenue, a strong market position, and reliable dividend payments.
• Book Value: The value of a company when all of its liabilities are subtracted from total assets.
• Broker: An individual or entity that buys or sells an investment in exchange for a fee called commission.
• Bull Market: A time of optimism and rising stock prices; it’s the opposite of a bear market.
• Bull Investor: An investor who believes the market as a whole or a particular stock will rise.

• Capital Gain: A profit on an investment by, for example, selling a security for more than was paid for it.
• Capital Loss: When an investment is sold for less than the purchase price.
• Dividend: A portion of a company’s profits that is paid out to shareholders on a quarterly or annual basis.
• Dividend Yield: A financial ratio that represents how much a company pays out individends each year relative to its share price.
• Dow Jones Industrial Average: Also called “the Dow.” It’s an index that tracks the prices of 30 large Blue Chip companies. Investors use the Dow as an indicator of the direction of the stock market.
• Earnings/Profit: The amount of income left over after subtracting all expenses, such as overhead and taxes.
• Income: The amount a company generates for the goods or services they offer.
• Maturity Date: For interest-bearing investments, such as bonds and CDs, it’s the date when the principal is returned to investors and interest payments end.
• Price-Earnings Ratio: Also called P/E ratio, it is calculated by dividing a stock’s current price by its earnings per share. P/E ratios are used for stock valuation purposes.
• Re-balancing: The process of realigning a portfolio to its original desired asset allocation, investment objectives, and risk levels. It involves periodically buying and selling assets.
• Standard & Poor’s 500: Also known as the S&P 500, it’s an index tracking 500 of the largest companies in the U.S. weighted by market capitalization. Like the Dow, the performance of this index is considered an indicator of the direction and health of the market.
• Volatility: The degree to which a traded security fluctuates in price.

Now that you’re familiar with some basic and important investment terms, it’s time for action.

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