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Investing Terms You Should Know: The Basics

Understanding these investing terms is essential to make informed decisions, manage risk, and navigate the complexities of the financial markets effectively.

This is everything you need to know to understand investing basics.

When you think of investing, you might think of Wall Street, charts and graphs, and a litany of investing terms. As a newbie investor, all of that might seem overwhelming and keep you from investing. Let’s start with helping you understand investing basics so you can successfully invest for independence or invest for retirement.

What is Investing?

Investing is the act of committing money to an endeavor with the expectation of earning additional income or profit. There are a number of ways you can invest such as with stocks, bonds, mutual funds, real estate, or your own business. And depending on your risk tolerance one may be a better fit for you.

There is a simple way to define investing. It’s buying anything that you expect will increase in value and be sold for a profit. You could also think of it as a deposit in an account that earns interest. There are two types of asset classes: liquid assets and fixed assets.

Liquid Assets

Liquid assets mean that you can easily access cash in an asset or convert the asset to cash by selling it off. This is also referred to as liquidity. If you have a savings account at your bank, then you already have a liquid asset investment. The money stored at the bank is easily accessible and may earn interest, albeit small, until you withdraw it.

Other types of liquid asset investments include the following:

  • stocks
  • mutual funds
  • ETFs
  • most types of bonds
  • shares of other securities such as money market funds and real estate investment trusts (REITs)

The degree of liquidity can vary with these assets, but you can sell most of them if needed.

Fixed Assets

These assets tend to be more tangible than liquid assets, and they aren’t as easy to withdraw from or sell for cash. Usually, investors buy into hard assets in hopes of holding onto them for longer.

The following are usually considered fixed asset investments:

  • Real estate
  • Precious metals
  • Commodity investments
  • private business assets such as equipment and vehicles

Usually, most beginners start investing in liquid assets such as stocks through brokerage firms.

Investing in the Stock Market

The stock market is the place where stocks and bonds are bought and sold.

When most people think of investing, the first thing that often comes to mind is the stock market. In a stock market, shares of public companies are issued and traded either through exchanges or over-the-counter markets.

Stocks

Stocks are a type of security or equity that gives stockholders a share of ownership in a company.  When a company needs to raise money for business operations or growth, it has two choices: 1) borrow money or 2) sell a piece of the company by issuing shares of stock.

Bonds

A bond is a debt security similar to an IOU. Borrowers issue bonds to raise money from investors willing to lend them money for a certain time. When you buy a bond, you are lending to the issuer, which may be a government, municipality, or corporation.

Mutual Funds

A mutual fund is a company that pools money from many investors and invests the money in securities such as stocks, bonds, and short-term debt. The combined holdings of the mutual fund are known as its portfolio. Investors buy shares in mutual funds. Each share represents an investor’s part ownership in the fund and the income it generates.

Index Funds

An index fund invests in a specific list of securities that seek to track the returns of a market index. The S&P 500 Index and the Russell 2000 Index are just two examples of market indexes that index funds may seek to track. In short, index funds are a type of mutual fund or exchange-traded fund that seeks to track the returns of a market index.

ETFs

Exchange-traded funds ETFs are baskets of assets traded like securities. They can be bought and sold on an open exchange, just like regular stocks, as opposed to mutual funds, which are only priced at the end of the day.

What Investment Accounts Are Available?

The two most common investment accounts are retirement accounts and taxable brokerage accounts. But there are a few others that can be used for specified purposes.

401k

401(k) plans are offered by employers who set policies on employees’ eligibility and choose the plan administrator. Plan administrators provide investment options and offer simple investment guidance. As a benefit, many employers may even make matching contributions to them.

Most employers offer traditional 401(k) plans where the money grows tax-deferred. However, many employers also offer a Roth 401(k) plan.

Individual Retirement Account (IRA)

An Individual Retirement Account, often called an IRA, is similar to a 401(k) in tax advantages and follows much of the same rules, such as being kept until you reach age 59 1/2. You can open it as a tax-deferred traditional IRA or a post-tax Roth IRA.

Taxable Brokerage Account

A brokerage firm offers two account options: a standard or a margin account.

With a standard account, you can open, fund, and make your investments to buy/sell stocks or funds.

A margin account gives you additional options, such as borrowing from other accounts to make moves, such as shorting stocks (a more complex investing strategy). Usually, margin accounts will have much stricter requirements and aren’t ideal for beginning investors.

You can invest, sell investments, and withdraw funds from a brokerage account at any time, but you will be subject to any and all taxes on capital gains you incur in this account each year.

Learn how to open a brokerage account.

Additional Investing Terms to Know

Investors should familiarize themselves with various investing terms, including:

  1. Asset Allocation: The process of dividing an investment portfolio among different asset classes such as stocks, bonds, and cash to manage risk and achieve specific investment objectives.
  2. Diversification: Spreading investments across different asset classes, sectors, or geographical regions to reduce risk and minimize the impact of market volatility on investment returns.
  3. Risk Tolerance: An investor’s ability and willingness to endure fluctuations in the value of their investments. Understanding risk tolerance helps investors determine an appropriate asset allocation and investment strategy.
  4. Return: The gain or loss on an investment, usually expressed as a percentage of the original investment amount. It reflects the performance of the investment over a specific period.
  5. Volatility: The degree of variation in the price of an investment over time. Higher volatility implies greater risk and potential for price fluctuations.
  6. Liquidity: The ease with which an investment can be bought or sold in the market without significantly affecting its price. Investments with high liquidity can be easily converted into cash, while those with low liquidity may be harder to sell quickly.
  7. Portfolio: A collection of investments owned by an individual or institution. A portfolio may consist of stocks, bonds, mutual funds, ETFs, real estate, and other asset classes.
  8. Dividend: A portion of a company’s earnings is distributed to its shareholders, usually on a quarterly basis. Dividends provide investors with a source of income and can contribute to total return.
  9. Capital Gains: The profit realized from selling an investment for more than its purchase price. Capital gains are subject to taxation and can be either short-term (held for less than one year) or long-term (held for more than one year).

Understanding these investing terms is essential for investors to make informed decisions, manage risk, and navigate the complexities of the financial markets effectively.

Jason Vitug

Jason Vitug is a bestselling author, entrepreneur, and founder of phroogal.com and thesmilelifestyle.com. His purpose to help others live their best lives through experiential and purposeful living. Jason is also a certified yoga teacher and breathwork specialist and has traveled to over 40 countries.

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2 Comments

  1. Great read! Your article is a full-fledged guide to beginners who are planning to start their journey in investments. You have explained the terms very well. Thanks for helping out. Waiting for your next article.

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