Investment Terms for Beginners: 24 (Must-Know) Investment Terms (2024)

Capital gain. Compound interest. Dividend. Asset allocation.

You search for the best investment options and are bombarded by words like this. That’s enough to lower your morale and give you a headache. We’ve all been there.

As a beginner, you wouldn’t be familiar with standard investment terms that come up repeatedly in online guides and advisor communication. Lucky for you, we’ve put together a short glossary to help you decipher these words.

Investment Terms for Beginners

Must-Know Investment Terms

JP Morgan has an extensive glossary of investment terms. But it’s a bit too much. We’ve listed some of the most common words you’ll hear and use.

Asset

In investments, an asset is anything with an economic value. It could be stocks, bonds, cash, commodities, or a real estate property. If there’s a market demand for an investment’s purchase, that investment is an asset.

Another word that arises from ”asset” is asset allocation. It simply means blending assets for a portfolio to diversify it. For example, asset allocation could mean mixing bonds and stocks to create a diverse portfolio.

Bear Market

A bear market is a period during which stock prices fall, often by 20% or higher.

Bull Market

It’s the opposite of a bear market. Stock prices rise during a bull market, often due to increased economic activities and investor confidence.

Bond

A bond is a financial instrument issued by the government or a corporation. When an investor purchases a bond, they are basically lending money to the issuer with an agreement that it will be repaid with interest.

Capital Gain/Capital Loss

The capital gain is the profit you make on an investment, while the capital gain is the money you lose. For capital gain, you make more money than what you paid for the investment, and in capital loss, you earn less than the actual amount you paid.

Compounding/Compound Interest

Compounding means reinvesting the money you earn from an investment. Suppose you earned $100 in profit from a stock investment. You put the $100 back into that stock. Compounding gives you more returns for every reinvestment.

Compound interest is a type of compounding — the interest that builds on itself. Let’s say you have $1,000 in a savings account with an interest rate of 3%. At the end of the year, you’ll have $1,030 ($1,000 + 3% interest).

Now, the 3% interest rate is applied to $1,030 and not just the original $1,000. So, you earn more at the end of every cycle.

Dividend

The dividend is the portion or percentage of a corporation’s profit its shareholders get. Not all companies pay a dividend.

Equities

An equity is a company share that represents the investor’s ownership in it. Investors buy and sell equities to make a profit.

Fund

A fund is a pool of money collected by a financial institution from many investors. Funds are managed by professionals who invest in stocks, bonds, and other securities to generate returns for the fund’s members.

There are two types of funds: collective and mutual. Bank trust departments offer collective funds, while investment firms offer mutual funds.

Green Bonds

A green bond is an investment option specifically to raise money for financing projects with a positive environmental impact.

Growth Investing

You’re said to have a growth investment strategy if you focus on stock funds or individual stocks of companies with a potential for growth.

Index

The investment index is the tracker that reflects the performance of a particular stock market or sector. An example of an index is the S&P 500, which tracks the performance of stocks from 500 large companies in the US.

Interest Rate

The interest rate is the amount of money that a financial institution charges for you to borrow money. It’s expressed as a percentage. The higher the interest rate, the more expensive it is for you to borrow money.

For example, if the interest rate is 5% and you borrow $20,000, you will have to pay back $21,000 over the loan’s lifetime.

Liquidity

Money is ”liquid” when it’s accessible. An example of liquid investments is mutual funds, as you can redeem their shares any day. Other investments, like real estate, are not liquid because your money is locked up in the property.

Market Risk

It refers to the possibility of an investment losing value when the market fluctuates.

Mutual Fund

A mutual fund is a pool of money an investment company collects from different investors. The company then invests this money in commodities, money market securities, options, bonds, stocks, and other investments.

Number of Holdings

It’s the total number of stocks, bonds, and other investments held by a portfolio or a mutual fund.

Portfolio

Your portfolio is the collection of your investments. Some other words that arise here are:

• Portfolio Holdings: These are the investments in your portfolio.
• Portfolio Allocation: It’s the assets you’ve designated for each investment type.
• Portfolio Manager: It refers to the person managing your portfolio.

Risk Tolerance

Your risk tolerance is the extent of volatility and risk you can afford in your investments.

Securities

A security is a tradable financial instrument. Examples include stocks, bonds, mutual funds, options contracts, futures contracts, and other derivatives.

Stocks

A stock is a type of security that gives you ownership in an organization. It’s also called equity.

Value Investing

Value investing is a strategy in which you purchase a security that’s selling below its actual value. You hold these investments for the long term and wait for them to appreciate in value. Then, you sell them to make a profit.

Volatility

It represents the fluctuation of a security’s price over a certain period. The higher the volatility, the riskier an investment is.

52 Week High/52 Week Low

When doing historical analysis, these two terms represent the highest and lowest price of a stock over the last 52 weeks.

Wrapping It Up

Of course, this is not an exhaustive list of investment terms. But it should have given you a better understanding of some basic concepts and definitions used in the world of investing.

Start with this and build your knowledge as you invest more and more.