If you are new to investing, it can be intimidating to know exactly where to begin investing your money. You will likely encounter investment terms that you do not understand from financial advisors and veteran investors. It may seem overwhelming at first, but once you become familiar with them, you will realize there is no reason to be intimidated.
Let’s look at five of the more common investment types and terms you may run into. This isn’t a comprehensive list by any means, but understanding these terms may make you feel more confident about investing.
What Is Investing?
Investing, broadly, is putting money to work for a period of time in some sort of project or undertaking in order to generate positive returns (i.e., profits that exceed the amount of the initial investment). It is the act of allocating resources, usually capital (i.e., money), with the expectation of generating an income, profit, or gains.
Investment Types
Bond
A bond is essentially a loan that you are giving to a governmental entity or a company in exchange for a pre-set interest rate. Typically, the bond pays periodic interest (coupon payments) during its term, and it matures on a specific date. Most bonds are denominated in $1,000 face-value increments, though they can sell above or below that price, particularly in the secondary market. Upon maturity, the bondholder will receive the face value of the bond, no matter what price he/she paid for it. Depending on what price you paid, you may experience a gain or loss on the price of the bond itself.
Stock
A type of investment that gives you partial ownership of a publicly-traded company. Such ownership entitles you to any dividends that may be paid and you may experience gains or losses on your holdings over time.
Mutual fund
An investment vehicle that allows you to invest your money in a professionally-managed portfolio of assets that, depending on the specific fund, could contain a variety of stocks, bonds, or other investments.
Exchange-traded fund (ETF)
These are sometimes referred to as baskets or portfolios of securities that trade like stocks on an exchange. When you purchase an ETF, you are purchasing shares of the overall fund rather than actual shares of the individual underlying investments.
Real Estate
Real estate represents tangible property, such as land or buildings, that the owner can use or allow others to use in exchange for payment. When you own a house, you own real estate. When you own a plot of land, you own real estate.
RELATED: Should You Consider Investing in Real Estate Crowdfunding Sites
Five Investment Terms
Once you have a better understanding of the investment choices available, you may come across specialized terms that explain how money can be invested:
Asset Allocation
This is just a fancy phrase for your investment strategy. There are three general categories where you’re going to put your money: cash, bonds and stocks. Cash is the least risky and provides the least amount of return. Bonds are generally riskier than cash but less risky than stocks.
Mutual Fund
This is a pile of money that comes from a lot of investors like you and is then invested in assets like stocks and bonds. A mutual fund may hold hundreds of stocks, with the purpose of spreading the risk. In most cases, money managers make buy and sell decisions for mutual funds, which brings us to our next definition.
Expense Ratio
This is the percentage of your money that goes to the managers of the mutual fund you’re investing in. The bigger the expense ratio, the less money you’re going to make. The expense ratio also covers other fund expenses, such as administrative fees, record-keeping fees and even print or TV ads promoting the mutual fund.
Dividend
Some companies pay out a portion of their income to shareholders, which is called a dividend. Depending on the company, dividends may be a one-time payment, may be sent periodically (i.e., every month, quarter, half-year, or year), or may not be paid out at all.
Shares
Also known as stocks or shares of stock, are a portion of ownership of a company’s equity. The value of a share is based on how the company divided its equity into units. Shares entitle the share owner to a portion of the company’s profits (or gain in stock price). This also applies to a drop in the stock price, as the value of the share will go down with it.
Are You Ready to Invest?
Investing can be a great strategy to grow your wealth over time. It’s often a core part of big-picture financial planning, especially where retirement is concerned. If you have an employer-sponsored 401(k) you are already participating. But before you start funneling more income toward investing, be sure you have a strong financial plan. Which includes:
- Having aworking budgetthat easily covers all monthly expenses
- Having an adequateemergency fundto see you through unexpected financial mishaps (experts recommend saving three to six months’ worth of expenses)
- Eliminatinghigh-interest debt. Carrying debt can be so costly that the accumulated interest exceeds realistic investment returns.
Closing
Now that you have a better understanding of investment terminology, you’re more prepared to make decisions about where to put your money. This knowledge will also help you get a better handle on managing your investments.
Are there any other investing terms you are familiar with? Let me know in the comments.
