Learning to invest is one of the best ways to allow your money to work for you and increase your net worth. Whether you’re a new or an experienced investor, understanding some basic investment terms can help you make more informed decisions.
Here are some of the most important investing terms you should know.
Common Investment Terms You Should Know
A
Alpha: How much return has an investment returned compared to what is expected based on its risk?
Annualized Return: The average rate of return for an investment over a one-year period. This takes the effects of compounding returns into account.
Arbitrage: This involves buying and selling an asset in different markets at the same time to capitalize on price discrepancies.
Asset Allocation: This involved distributing an investment portfolio across several different asset classes to provide diversification.
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B
Bear Market: A period when stock prices are declining significantly. Bear markets are typically defined as a 20% decline from recent highs.
Beta: Beta is a metric that measures how volatile an investment is compared to the overall market.
Bid vs Ask Price: A bid price is the highest price an investor is willing to pay for a stock and the ask price is the lowest price an investor is willing to sell a share they own.
Blue Chip Stocks: These are well-established companies that have strong fundamentals and are well respected. Blue cap stocks typically have a market cap of at least $10 billion.
Bond: Financial instrument representing a loan made by an investor to a corporation or government (the borrower).
Book Value: Represents a company’s net asset value, as reported on its balance sheet. It is calculated by subtracting total liabilities from total assets.
Broker: Acts as an intermediary between the investor and the financial markets. Brokers will typically facilitate the purchase or sale of an investment.
Bull Market: This period is when stock prices rise, and the stock market has a positive sentiment. Bull markets usually occur when an asset has increased 20% or more from its lows.
Buy the Dip: When a stock price has declined, but the fundamentals are still strong, and there is a high probability of gains, you can buy the dip.
C
Capital Gains: Represent the profit you realize after selling an investment for more than you originally purchased it for.
Capital Loss: This is the loss you realize after selling an investment for less than you originally purchased it for.
Compound Interest: When interest on an investment is calculated on the initial investment as well as the accumulated interest from previous periods.
Correction: When an investment or index declines by 10% or more from its recent highs.
Cryptocurrency: These virtual currencies utilize cryptographic techniques to secure transactions and control the creation of new units. They operate on decentralized networks, primarily using blockchain technology.
D
Day Trading: When an investor enters and exits a trading position within the same trading day. The goal is to profit from short-term price movements.
Depreciation: This is the gradual reduction in the value of an asset over its lifetime due to wear and tear.
Diversification: When you spread investments across multiple asset classes to reduce risk.
Dividend Yield: Indicates how much a company pays out each year in dividends compared to its current stock price. Ziggmas dividend tracker is a great way to track the dividend yield and income your portfolio generates.
Dollar-Cost Averaging (DCA): When an investor continually purchases an asset over a consistent interval. This allows you to continue to accumulate shares and reduce any potential impact from volatility.
E
Earnings Per Share (EPS): This measures a company’s profitability. It shows how much profit the company generates for every outstanding share of stock.
Exchange-traded fund (ETF): An ETF holds a collection of assets, such as stocks, bonds, or other assets. It trades on an exchange, similar to an individual stock.
Expense Ratio: The expense ratio is the percentage of a fund’s assets used to cover its operating expenses.
F
Fiduciary: A fiduciary acts on behalf of someone else and always has their best interest in mind. Many investment advisors act as fiduciaries. Instead of promoting specific products to their clients where they can gain financially, they promote whatever product will help boost client returns.
Financial Statement: Financial statements detail the financials and performance of a company.
G
Growth Stocks: Growth stocks are expected to grow faster than most other companies. They’re reinvesting a majority of their profits back into the company to support these growth efforts.
H
Hedge Fund: Hedge funds are similar to mutual funds. However, they invest in a wider range of funds, including long and short positions. Hedge funds also tend to be less regulated.
I
Index Fund: Index funds track specific stock indexes, aiming to match their overall returns. This helps diversify an investor’s portfolio.
Initial Public Offering (IPO): An IPO is the process by which a company becomes a public company.
Intrinsic Value: The perceived value of a company based on fundamental factors instead of its stated market price.
L
Leverage: Leverage is when you borrow money to increase potential returns. It allows investors to have a larger position, leading to more significant gains or losses.
Liquidity: Liquidity refers to how easy it is to convert an investment into cash without affecting its price. The more liquid an investment is, the easier it is to buy or sell it at the desired price.
M
Margin: Margin trading is when you borrow money to purchase more investments. This allows them to purchase more than they would be able to with their own money.
Market Capitalization: Also known as market cap, is the total value of a company’s outstanding shares of stock. It is calculated by multiplying the number of outstanding shares by the current stock price.
Market Order: A market order occurs when an investor tells a broker they want to execute a trade at the best possible price. Market orders tend to occur immediately unless the asset has little liquidity.
Mutual Fund: Mutual Funds are managed portfolios of different assets that provide a wider exposure than owning stock in a single company. This helps spread out the risk and increases potential returns.
N
Net Asset Value (NAV): This is the value of an investment fund (mutual fund, hedge fund, etc.) determined by subtracting total liabilities from total assets. NAV is used to determine the price when a fund is bought or sold at the end of the trading day.
O
Options: These are financial contracts that give investors the right to buy or sell specific investments at a predetermined price. Investors frequently use options to protect an investment from losses. This is done by purchasing put options.
Over-The-Counter (OTC): This is a decentralized market where investments are bought and sold between two brokers and not through a regulated exchange. Securities could include unlisted stocks, bonds, foreign currencies, and derivatives.
P
Portfolio: An investment portfolio is a group of investments owned by an individual or company. It can include stocks, bonds, mutual funds, and ETFs. Ziggma’s easy-to-use portfolio tracker allows you to monitor your portfolio in one dashboard.
Preferred Stock: Preferred stocks have characteristics of common shares and bonds. While the price of preferred shares can fluctuate, it tends to be less volatile than common shares. They also pay regular income to the investor as a dividend.
Price-to-earnings ratio (P/E Ratio): This ratio compares a company’s current share price to its earnings per share to determine its financial health.
R
Recession: A recession is an extended period of economic contraction that occurs when a company’s gross domestic product (GDP) falls for two consecutive quarters. In addition to declining GDPs, recessions can include high unemployment, declining industrial production, and reduced consumer spending.
Return on Investment (ROI): ROI compares an investment’s return to its cost. ROI helps assess an investment’s profitability. To calculate ROI, you would divide net profit by the cost of your investment and then multiply by 100.
Risk Tolerance: Risk tolerance is the potential loss an investor is willing to assume. Understanding your risk tolerance can help investors decide what types of investments they should add to their portfolios. Investors with a lower risk tolerance will tend to include safer investments.
S
Short Selling: Short selling allows an investor to profit when a security declines in price. To become a short seller, you must borrow shares from a broker and sell them on the open market. Then, later, you will repurchase them, hopefully at a lower price.
Stock Split: Stock splits occur when a company increases the number of outstanding shares, reducing its share price. For example, if a company performs a 2-for-1 stock split, the number of outstanding shares would double, and the share price would be cut in half. Reverse stocks splits work in the opposite direction. The number of shares outstanding would be reduced and the stock price would increase.
U
Unrealized Gains: When you have investments that have increased in price but you haven’t sold, it’s an unrealized gain.
V
Value Stocks: Value stocks are thought to be trading below their intrinsic value. Value stocks typically have a low P/E ratio and a low book-to-value ratio.
Volatility: Volatility refers to the amount of fluctuation a stock price has over a period of time. Higher volatility can create riskier situations for investors.
Y
Yield: Yield refers to the cash flow potential for an investment based on its price. Yield can be in several different forms. There are several types of yield, including dividend, bond, and real estate.