Investing can be overwhelming especially for newbies. With no previous experience or formal education, there’s a lot to learn and tons of options to choose from. Among other things, millennials aren’t investing because they lack the financial know-how. But can you blame us? The stakes are high – we can win or lose. It’s understandable why many of us don’t want to bear the risk without knowing what we’re getting into first. So let’s take a step back and start with the basics. Let’s build our knowledge base by understanding some of the most common investment terms first.
Having a good handle on these terms will help you feel more confident when you start investing. Also, if you happen to watch the news or hear these investment terms in conversation, you’ll be in the know.
Common Investment Terms & Definitions
#1 Stock market
The stock market is where companies raise capital (funds) in exchange for ownership.
In the stock market, stocks and bonds fund new product launches, support research initiatives, improve infrastructure and more. Stocks and bonds are bought and sold in the stock market. Think of it as a network of transactions instead of a physical place.
Stocks are stakes of ownership in a company.
When you buy a stock, you become a “stakeholder”. Essentially, you have a say at how the company conducts business. Don’t worry, the CEO won’t bother you with a ton of questions about the next strategic initiative. Most investors don’t own enough stock get involved in day-to-day operations.
Bonds are fixed-income debt instruments.
What’s a fixed-income debt instrument?
Instead of taking out a loan from a bank, companies, municipalities and the federal government issue bonds. Bonds are a promissory note or an IOU – a promise to repay. If you own a bond you are a lender. If you issue a bond, you’re an issuer.
Bonds fund a variety of projects including building bridges and product launches.
Generally, bonds are low-risk investments. They aren’t risk-free.
How Bonds Work
Bonds have a set maturity date (end date). They also earn interest periodically usually annually or semi-annually. This is why a bond is fixed-income. As a lender, you know exactly how much interest you’re going to get – either once or twice a year.
By the maturity date, the issuer (ie. federal government) repays the lender (you) the entire amount owed. This why a bond is a debt instrument.
Securities refer to many kinds of investments including stocks, bonds, and mutual funds. Securities are intangible assets – not physical. Metals are not securities. However, if you buy precious metal stock, that’s a security.
Commodities are physical goods like coffee, gold, oil, metals (gold and silver) or cotton.
A portfolio is all the investments owned by an investor. In a portfolio, you can have an infinite number of investments (stocks, bonds, and commodities).
This is another one of those important investment terms!
Essentially, don’t put all of your eggs in one basket.
Diversification is when you create a portfolio that includes different types of investments to mitigate risk. In an event that one investment suffers a serious blow, your portfolio won’t take too much of a hit.
Equity is the difference between the value of all the assets (what you own) and the value of the all the liabilities (what you owe). Equity indicates ownership.
So let’s say you own a home that is worth $100,000 (asset) but you owe $50,000 on a mortgage (liability), you have $50,000 equity.
Equity= Assets – Liabilities
How The Stock Market Works
There are two main markets or sections in the stock market.
In the primary stock market, companies issue stocks to the public through an initial public offering (IPO). The company gets to keep all the money raised through this first sale.
In the secondary stock market, investors continue to trade (buy and sell) these stocks. Through trades, investors experience gains and losses.
Unlike the primary stock market, in the secondary market, the company doesn’t get money from any of these transactions.
Remember, for each transaction, there’s a buyer and seller.
If the stock increased in value during a sale, that’s a “gain”.
If the stock decreased in value during a sale, that’s a “loss”.
Goal For Investors
The goal is to buy a stock and sell it for more later.
Why Stock Prices Fluctuate
Stock prices rise and fall every day, often many times a day.
If a company performs well, the value of the stock increases. However, if a company does poorly, the stock’s value decreases.
Perception also plays a big role in price fluctuations. If investors perceive that the company isn’t doing well, the stock’s value decreases.
An exchange is a marketplace or platform where securities and commodities are traded. An example of an exchange is ETX Capital, a global trading platform that gives customers access to competitive pricing for over 6,000 markets. They also offer an educational program with free webinars and seminars to help beginners improve their trading.
#12 Dow Jones
“Dow Jones Industrial Average” (DJIA) or “The Dow” is a commonly used stock market index that tracks 30 different U.S. companies. These companies are major players in their fields. This includes companies like General Electric, Apple, Nike, Walt Disney and Coca-Cola.
Think of this as an average of how 30 major companies are performing in the market.
#13 Broker/Brokerage firm
A broker buys and sells stocks on your behalf in the stock market. They charge a fee for this service.
Fees are important because they reduce your earnings. There are all sorts of fees associated with investing including transaction fees, management fees, and custodian fees. As an investor, the goal is to minimize fees and maximize performance.
Some companies distribute dividends, a portion of their earnings to stakeholders. Dividends are usually paid out on a quarterly or annual basis. Not all companies offer dividends.
What other investment terms would you add to the list?
This is a collaborative post with ETX Capital, all opinions are my own.
Danielle is a travel finance strategist, author, speaker and podcaster. She paid off $63,000 of student loan debt in 4 years, bought a house at 27 and has traveled to 26 countries. She refuses to let her financial responsibilities hold her back from living life on her own terms.