Investing money can be intimidating for a new investor. Taking a risk and not knowing whether you will get your money back in full can create a sense of anxiety. The investment terminology, on the other hand, is arguably even more intimidating. Financial advisors and seasoned investors use a lot of buzzwords that average investors should be aware of, such as bear market and asset allocation. As a result, when you first begin investing, it’s critical to learn the basic financial terms to boost your confidence and ensure you’re making well-informed decisions. The following are 11 investment terms that every investor should know.
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Shares
Shares, also known as stocks, represent a portion of a company’s equity. The value of a share is measured by how the company divides its equity into units. When a person buys stock in a company, they purchase a ‘share’ of that company. Having equity in a company refers to having a portion of ownership in that company. If the company’s value rises, shareholders may benefit from capital gains.
Common and preferred shares are the two types of shares that make up a company’s equity stock.
Dividend
A dividend is a payment from a corporation to its stockholders. Companies pay dividends in a variety of ways, including cash, stocks, or other assets. The board of directors decides on a company’s premium, which the shareholders must approve. However, a company is not obligated to pay a dividend. A dividend is a portion of a company’s profit that it distributes to its shareholders.
Bear market
A bear market occurs when the market’s price declines for an extended period. It usually refers to a situation where stock prices have fallen 20% or more from recent highs due to widespread pessimism and negative investor sentiment. This can happen during a recession or a public crisis and can last for weeks or even years. You are referred to as a “bear” if you believe the market will fall. This term is also used to describe individual stocks that you think will fall in value, in which case you would be “bearish” on that stock.
Bull market
The term “bull market” refers to a market that is rising or trending higher. You are referred to as a “bull” if you believe the market will increase. You would be “bullish” on a stock if you think it will rise in value.
Bull markets are usually associated with the stock market, but they can also occur in other asset classes such as real estate, commodities, or foreign currencies.
Capital gain or loss
The profit earned from selling an asset such as stocks, bonds, or real estate is a capital gain. When an asset’s selling price is higher than its purchase price, it results in a capital gain. It is the difference between the asset’s selling (higher) and cost (lower) prices.
When the cost price is higher than the selling price, a capital loss occurs. A profit or return on investment is referred to as a capital gain. For instance, if you purchased a stock for $500 and then sold it for $900, you would have made a $400 profit.
A capital loss works similarly: if you bought a stock for $500 and sold it for $200, your capital loss is $300.
Bond
A bond is similar to a loan, but there are some key distinctions. In the case of a bond, the purchaser is the lender, and the seller is the borrower. A government body or a corporation, in general, is the bond issuer or seller. The purchaser promises to pay back a principal amount, which is the amount they borrowed, on a maturity date in the future when they are issued with the bond. They will also pay interest to the bond buyer regularly based on a rate known as the coupon rate.
Prospectus
Is an individual or group looking for a one-stop source for all the details on a particular investment? Having a good financial advisor can provide you with a prospectus or look for one online. It’s a legal document that explains how to invest money, stocks, bonds, mutual funds, or anything else you want to invest in. If you want to know what your mutual fund’s expense ratio is or if you want a list of all the fund’s holdings, you’ll find it in the prospectus.
Mutual fund
In simpler words, a mutual fund is a sum of money collected from many investors, such as yourself. This money is invested in assets such as stocks and bonds. A mutual fund may be invested in hundreds of stocks to spread risk.
Professional money managers manage mutual funds, allocating assets and generating capital gains or income for the fund’s investors.
Target-date fund
Target-date funds are all-in-one portfolios that are tailored to a person’s anticipated retirement date. For instance, someone with about 30 years until retirement might consider investing in a 2045 target-date fund. The investments will initially be riskier and more heavily weighted toward stocks, but as the year 2045 approaches, they will become increasingly conservative and shift to include more bonds.
Hedge fund
Like a mutual fund, a hedge fund is an investment vehicle that generates returns by pooling money. Hedge fund portfolio managers work for a company (limited partnership or LLC) that raises money from investors, which they then manage and invest across various assets. Hedge funds, unlike mutual funds, are not open to everyone; to be considered, you must earn a minimum annual salary of $200,000 or more.
Short selling
Shorting a stock entails borrowing shares of stock and selling them at their current price with the promise of returning the claims to the lender later. The hope is that the stock price will drop, allowing you to repurchase the shares and return them to your lender, profiting on the difference between where you sold and where you bought them. Instead, you will lose money when you return the shares to the lender if the stock price rises.
