If you are new to investing you might have stumbled across a few (or more) investment terms that seemed confusing or maybe even like a foreign language.
Financial jargon may make you feel scared to take that leap into the investment world. But educating yourself is the first step to building confidence.
No one expects you to know everything from the start. Remember that everyone starts out with zero knowledge about the stock market. Learning about investing is a process.
If you want to get started or are new to investing, you should constantly be developing your understanding of how it all works.
You may feel as if you are stepping out of your comfort zone at first but with time, investing will become second nature.
And seeing the power of investing and how it can help you to reach your financial goals will definitely give you the motivation that you need to keep learning.
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Investing Terms 101
Say goodbye to all of the confusing investment vocabulary.
Below you will find 60 Key Investment Terms to know. All in simple, straightforward, and uncomplicated language to make it easier to understand.
Never be intimidated by what you don’t know. Use this cheatsheet as an opportunity to grow both your mind and wallet.
Annualized rate of return: The average amount of money earned by an investment over a given period of time.
Asset: Something you own that can reasonably be expected to produce income for you. Assets can include bonds, commodities, stocks, real estate, and other investments.
Asset allocation: Dividing an investment portfolio into different asset classes, such as stocks, bonds, cash, and real estate usually creating a diversified portfolio. How you divide your assets is a personal choice that is usually based on time and risk tolerance.
Asset class: A group of investment vehicles with similar features. The most common asset classes are stocks, bonds, real estate, and cash equivalents.
Balance sheet: A company’s financial statement that includes assets, liabilities, and the shareholder’s equity at a specific point in time. A balance sheet gives an interested party a snapshot of a company’s financial position.
Bear market: This is a market that is falling and has a sustained downward trend. The benchmark is typically a decline of 20% from a recent high.
Blue chip: Blue chips are reputable, well established, and stable companies that have a long history of good earnings and a good balance sheet. These are solid companies that are likely to provide reasonable returns and operate profitably even in adverse economic conditions.
Bond: A loan, typically to the government or a company, that pays back a fixed rate of return.
Bull market: This is a market with a sustained upward trend. A market condition in which prices continue to rise.
Capital: Financial assets needed to produce goods or services.
Capital gain: The profit made from a sale of an asset. Can be broken down into Short Term Capital Gains (profit made from assets that were held for one year or less) and Long Term Capital Gains (profit made from assets held for more than one year).
Capital loss: When an asset is sold at a price less than the purchase price. Can also be broken down into Short Term (held less than one year) and Long Term (held for more than one year).
Capitalization weighted index: An index with individually weighted components based on their total market capitalization. The companies with higher market capitalization have a higher weighted percentage in the given index.
Cut-off time: The specific time of day when a transaction is no longer accepted for that trading day.
Dividend: A profit on investments that is paid out of company earnings to the shareholders. This allotment of money can then either be reinvested or cashed out. A dividend is paid out on a certain schedule as determined by the company.
Dollar cost averaging (DCA): An investment strategy that involves investing equal amounts of money at regular intervals over an extended period of time, regardless of the share price, until the planned capital is exhausted. The intention of DCA is to minimize volatility risk by lowering the overall average investment cost.
Dow Jones Industrial Average (DJIA) / The Dow: A stock market index that follows 30 Blue Chip companies trading on the NASDAQ and the New York Stock Exchange (NYSE).
Earnings per share (EPS): A financial measurement that is an indication of a company’s profitability. Often looked at to see if a company is a safe bet when determining whether to invest or not.
EPS is calculated by taking a company’s net income and dividing that by the number of it’s outstanding stock shares.
Emerging markets: Markets that have experienced economic growth and have some but not all of the characteristics of a developed market. They include countries such as Brazil, China, Greece, and Chile, amongst others.
Exchange Traded Funds (ETF): A basket of assets, with a unique ticker, that are sold as one and invested in like a stock.
Expense ratio: An annual fee charged to the investor which may be used for fund management, advertising/marketing, and any other fees associated with the fund. It is viewed as a percentage of the money that you have invested in that particular fund.
For example: If a fund has an expense ratio of 0.5% it would cost you $5 for every $1000 you invest annually.
Forward P/E ratio: A measure of a company’s health, using the predicted earnings of the next 12 months. Forward PE ratio is often used as a factor in deciding whether to invest in a stock or not, along with other findings.
Formula: Stock Price / Next Year’s Estimated Earnings Per Share (EPS) = Forward P/E Ratio
Fundamentally weighted index: A type of index based on a set of particular metrics such as earnings, cash flow, dividend rates, revenue, and book value. Not influenced by stock price.
Growth stock: The stock of a company that grows at a faster rate than the average stock and has sustainable cash flow. It is therefore able to rapidly generate earnings.
Hedge fund: An actively managed fund using pooled money from investors. The investments usually involve securities and other high risk options. The fees for investing are usually higher due to the potential of a higher return.
Index: A tool used to statistically measure the performance and movements in price of a stock or bond.
Examples of well known Indices include The Dow Jones and the S&P 500.
An Index can be used to provide a basis for portfolio performance.
Index fund: A type of mutual fund or ETF whose goal is to match the performance of an Index.
Index Funds provide diversification, are great for taking a more passive investing approach, and typically have lower costs associated with it (lower expense ratios).
Examples of Index Funds include: VTSAX (Vanguard Total Stock Market Index Fund) and FXAIX (Fidelity 500 Index Fund), amongst many others.
Individual Retirement Account (IRA): A tax advantaged account that helps you save for retirement.
The different types of IRAs include: Traditional, Roth, SEP, and SIMPLE.
Junk bond: A high yielding bond issued by a lender who has been rated below investment grade – typically “Ba” or lower by Moody’s and “BB” or lower by Standard and Poor’s.
Junk bonds may have a higher yield but they also come with increased risk that the company will default on the loan/bond.
Large-cap: A company with a market capitalization of $10 billion dollars or more.
Liquidity: The amount of money that is readily available to be spent or invested.
Long-term investment strategy: “Buy and hold.” A strategy that looks past the day to day changes and fluctuations in the market. Instead of watching the market and selling for an immediate profit, you keep your investments where they are (generally for 1-5+ years) and (hopefully) watch it grow over time.
Management fee: A fee paid to a professional to manage investments on behalf of a client. The fee can include management of the portfolio, administration costs, and advisory fees.
Market price/Share price: The price that a stock sells for or is traded for in the current market.
Market timing: An investment strategy in which you buy and sell stocks based on predictions of future market prices. In this strategy, investors attempt to buy low and sell high, using predictive methods.
Market timing is seen as a more risky strategy and is the exact opposite of a Long Term Investment Strategy.
Mid-cap: A company with a market capitalization between $2 and $10 billion.
Morningstar ratings: A rating system for mutual funds and ETFs. The rating is based on a fund’s past performance in comparison to its peers.
Companies are rated between 1-5 stars (5 being best). It is a good first step in fund evaluation and comparison.
Mutual fund: A professionally managed fund that is made up of money pooled from individual investors and companies. The portfolio manager is able to use this pool of funds to invest in various assets.
Each fund varies and carries different assets and investments, depending on the goal.
NASDAQ: Which stands for “National Association of Securities Dealers Automated Quotations.” It is a U.S. based, electronic, securities exchange, in which investors are able to buy and sell stocks through the market.
P/E ratio: “Price To Earnings Ratio.” This ratio is used to determine the value of a company and whether the market is undervaluing or overvaluing a stock.
How is the P/E Ratio determined? Divide the current stock price by the earnings per share.
Penny stocks: Stocks that trade for less than $5 per share. Most penny stocks are not listed on major stock exchanges.
Prospectus: A formal legal document, required by the U.S. Securities and Exchange Commission (SEC), that provides detailed information on a company’s current financial situation. It may include background information on the company, type of security (bond, stock, etc), the number of shares that are being issued, and information regarding dividends.
A prospectus will give a potential investor a better picture of a company’s finances in order to make a more informed decision prior to investing.
Recession: A recession is when a country sees a sustained, negative decline in economic activity lasting more than a few months.
The government looks at factors such as a drop in gross domestic product (GDP), and a decline in employment, retail sales, manufacturing, and income.
REIT: “Real Estate Investment Trust.” Companies that own or finance income producing real estate such as warehouses, apartment buildings, malls, hotels, etc.
Robo advisor: A digital platform for investing that has little human interaction and services. They are typically low cost and have low to no account minimum.
S&P 500: Which stands for “The Standard & Poor’s 500.” It is a stock market index that tracks the value of 500 large companies in the United States.
In order to be included in the S&P companies must meet certain criteria:
- Market cap of at least $8.2 billion
- At least 50% of share must be offered for public trading
- Be U.S. based
- Have positive recorded earnings in the most recent quarter as well as positive earnings for the sum of the previous 4 quarters
Securities and Exchange Commission (SEC): A federal agency that was created at the height of the Great Depression. They are a regulatory entity whose main mission is to protect investors and maintain fair and orderly markets. Their objective is to enforce transparency between companies.
Share: A single unit of ownership of a company.
Short-term investment: A liquid asset that can easily be transferred to cash as needed. Some examples include CDs, a money market account, treasuries, and savings accounts.
Small-cap: A company with a market capitalization between $300 million and $2 billion.
Stockbroker: A licensed professional who works on behalf of his clients, to buy and sell orders for stocks and securities. They are regulated by the SEC.
Taxable accounts: An investment account that you use for trading stocks, bonds, mutual funds, etc., that is offered by a brokerage. In this type of account you will be taxed on your investment income.
Tax-advantaged accounts: A type of investment account that has tax advantages, tax deferrals, or offers tax benefits. Examples include IRAs and 401ks.
Valuation: A determination of the present value or worth of a company.
Value stock: Stock of a company that appears to be undervalued and seen as a bargain purchase. They typically have higher yields and lower P/E Ratio.
Volatility: The amount and frequency with which an investment’s value fluctuates. The up and down price changes of a security over time.
YTD total return: The year-to-date return on an investment.
Yield: The earnings generated on an investment over a period of time.
52 week high: A security’s trading high point over the last 52-week (1 year) period.
52 week low: A security’s trading low point over the last 52-week (1 year) period.
Final thoughts on learning new investment terms and improving your financial literacy
We hope that you found this list of key investing terms to be helpful.
Staring out in the investing world can be intimidating. But once you start, and if you continue to educate yourself, you will have a whole new set of skills to help you on your financial journey.
Like anything in life, we are sometimes scared to try something new. But I promise you this: putting yourself out there and taking a hold of your finances, through investing, will open your eyes to new financial opportunities
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