Ready to start investing? Consider this blog post your cheat sheet when it comes to the terms you absolutely need to know. Knowing these 10 terms will help make the process of investing less confusing and give you the background you need to get started.
Probably the most common investment terms, stocks represent a small portion of a company. Owning a stock means you own a portion of a company.
Bonds are a great low-risk investment, which makes them good for beginner investors. Bonds are loans provided to corporations, governments, and municipalities that pay interest to the investor. Bond prices vary inversely with interest rates, which means they rise in value when rates are falling.
3. Mutual Funds
A mutual fund is an investment vehicle consisting of a portfolio of stocks, bonds or other securities. A company will pool money from several investors and invest that money in a portfolio. You don’t have to pick and choose what you invest in, making it easier if you’re just getting started.
4. Exchange Traded Funds (ETFs)
Exchange Traded Funds (EFTs) are a type of pooled investment that operates like a mutual fund. They track a specific industry, commodity or index and can be purchased or sold on a stock exchange just like a regular stock. EFTs make it easy to invest in an expensive commodity, like oil while remaining low risk.
5. Bear Market
A bear market is used to describe stock market conditions and refers to a period where stock prices are falling. Investing is risky during a bear market, but has the potential to be rewarding when and if there is a bull market (see following term).
6. Bull Market
A bull market is the opposite of a bear market and refers to a period where stock prices are rising. Investments aren’t as risky, but they also don’t have the same reward potential.
Dividends are distributions of payments to a company’s shareholders. They are typically paid quarterly in the form of cash or additional stock options. Think of them like a bonus for investing money in the company.
A 401K is a type of retirement plan set up by an employer. You contribute money each pay period and your employer typically will match up to a certain amount. You can access this money penalty-free beginning at age 59 ½.
Similar to a 401K, an Individual Retirement Account (IRA) is a retirement plan where you contribute money on a regular basis. It’s set up by an individual (you!) rather than an employer. There are a number of types of IRAs, but two of the most common are a Roth IRA, which is an IRA where you contribute money post-tax, and a Rollover IRA, which allows you to roll funds from a previous employer-sponsored plan to an IRA without paying any penalties or losing the tax deferred status of the plan.
10. Capital Gains/Losses
These terms refer to the money you gain or lose through investing. When you sell an asset for more than you paid for it, that’s a capital gain. You must pay capital gain taxes on capital gains. If you sell an asset for less than you paid for it, that’s a capital loss.