In the world of investments, there are some essential investing terms to know. But that’s easier said than done sometimes. Ever go to a dinner party and end up talking to people in a completely different line of work than you? They start talking in industry jargon and you’re standing there, eyes glazing over, with no clue what they’re referring to. It’s almost worse than trying to understand Shakespearean English before you’ve had your morning coffee. Don’t get me wrong; I love Shakespeare, but alas, ’tis not a line written nor word spoken that thou hast the merest hope of comprehension before thy brain has awoken fully.
Investing can feel like that. There are some important investing terms to know can help new investors understand the landscape better. Familiarity allows investors to operate proactively, taking steps to protect their investments while building wealth in the process. Plus, it will undoubtedly help you understand a lot of what we write about here!
Today we are going through a list of some of the most common investing terms to know. These can particularly influence the lives of new investors. Refer to this list for greater understanding and success with your investment decisions.
Investing terms to know for greater financial stability
Ask: The ask is the lowest possible price that an asset can be bought for.
Asset: An asset if a financial instrument that can make an investor money. There are a variety of assets that an investor can buy. Some of the major assets include stocks, bonds, commodities, funds, and real estate, among other types of investments.
Balance Sheet: A balance sheet is a necessary document to consider before investing in a company. The balance sheet shows a financial snapshot of a company, providing insight into the company’s assets, liabilities (including debt), and the equity from shareholders. This financial document can help investors understand the company better while gaining insight into its financial structure and potential growth and gains.
Bear Market: A bear market describes the stock market when prices decline for an extended period. Bear markets are often the result of a weak or slow-growing economy.
Bull Market: A bull market is the opposite of a bear market. It is when prices of stocks are on the rise or have a strong expectation of rising, leading investors to buy.
Blue Chip: This term refers to a type of stock that is considered to be among the market’s most robust. Blue-chip stocks often come from large companies with a history of success and growth. These well-established companies are usually household names with strong reputations. Blue chip stocks are rarely cheap, but they are often worth their price. Many blue-chip stocks pay dividends to shareholders.
Capital Gain: A capital gain occurs when you buy an asset at one price and sell it at a higher price. The positive difference between the two prices is considered a capital gain, while a negative difference between the two prices is classified as a capital loss.
Diversification: This is the process of holding different types of assets within a portfolio to establish stability. Diversification is often achieved by holding different classes of assets from different sectors, industries, and locations.
Dividend: This is an important investing term to know, as dividends are beneficial and sought after by investors. A dividend is paid to shareholders when a company reports a profit. Although some companies will offer more shares instead of a cash dividend, many dividends involve a cash payment. Dividends cannot be faked and therefore are a sign of investment quality.
ETF: This acronym stands for “exchange traded fund.” An ETF is an investment fund that trades like a stock on an exchange. ETFs are known for passive management, which leads to lower management expenses.
IRA: This acronym stands for “individual retirement account.” These retirement accounts have tax advantages that many investors seek out.
Mutual Fund: This is another important investing term to know, as mutual funds come up a lot in 401ks. A mutual fund is a portfolio of assets managed by a professional. Mutual funds typically hold an array of stocks or funds. These funds are actively managed, often leading to higher prices than passively managed investments like ETFs.
P/E Ratio: Also known as the price-to-earnings ratio, the P/E depicts how much an investor pays for every dollar a company earns.
Penny Stocks: These are some of the cheapest stocks in the market. Originally they were stocks that traded under $1, but now the term includes stocks trading for $5 or less. Penny stocks are incredibly volatile and often come from companies without a history of success. The upside of penny stocks is that they offer an investor the opportunity to get involved with a company at the ground level.
REIT: This acronym stands for “real estate investment trust.” REITs provide an opportunity for investors to get involved with real estate investing without having to own rental property. There are a variety of REIT types, including ones tied to commercial or residential properties. REITs have tax advantages that many investors desire.
Stock Broker: A stock broker is a person or company that helps an investor buy or sell stock.
Of the many investing terms to know, these are some of the ones you’ll most often come across. And since knowledge is power, hopefully this will give you some investing power!
Are there other investing terms to know that you don’t understand? We may be able to help.