Investing is one of the best ways to accumulate wealth and yet most young people are terrified of investing.
While there are many possible reasons to explain why people aren’t investing their money, intimidation is surely one of them.
People are intimidated to invest because investing sounds complicated. When you speak to a financial advisor and you can’t understand half of the terms that come out of their mouth, it doesn’t make you feel very smart or confident in your investing abilities.
But, it doesn’t have to be so scary and complicated.
With this list of 42 commonly used investing terms and definitions, you can start to master the investing jargon and begin to participate in important financial conversations.
Beginner investing terms
- Alpha. This is a term used to describe how much better a portfolio manager, or an investment strategy, performed above the market average. In other words, how much has your investment returned in comparison to the market index.
- Beta. Beta measures how sensitive a stock is to the overall movement of the market. In other words, it measures how volatile or risky a stock is compared to the market average.
- Appreciation. This is when you see the value of an asset increase over time. For instance, you can say that your home is an appreciating asset if you buy it for $200,000 and then five years later it is worth $250,000.
- Depreciation. On the other hand, an asset is depreciating if it loses value over time. For instance, a regular car is a depreciating asset. You buy it for $30,000 brand new and then five years later it is only worth $12,000. Yikes!
- Balance sheet. This is a summary of the financial balances of a company. It covers a company’s assets, liabilities, and equity at a particular point in time. Basically, it’s a snapshot of what a company is worth at that time.
- Bear market. You know when someone says “Man you’re acting like a bear,” or, “You’re a real bear today.” Well, this isn’t a compliment. It means that you’re not being great. This is the same when it comes to the market. When there’s a bear market it means the stock market is trending downwards and it’s not great.
- Bull market. When I think of a bull, I conjure images of a bull charging at me, like in the Pamplona running of the bulls. So, when you put it into the context of the stock market, you can think of a market charging forwards. In other words, a bull market is when things are charging/trending upwards.
- Capital. Capital includes cash and other financial assets owned by a person or a company that has value and can give you a future benefit. Examples of capital include cash, stocks, or equipment.
- Diversification. This is the process of spreading out your money across a number of different investments. Diversification is a way to manage risk. Rather than investing all of your money in one stock or one company, you can manage your risk by investing across different industries, different sizes of companies (small and large), and even in different countries (emerging markets and developed markets).
- Dividend. This is a sum of money that is paid out on a regular basis to shareholders based on the company’s earnings. In other words, when the company makes a profit it shares it with all of its shareholders in the form of a dividend. Dividends can be paid out in the form of additional stocks, or in cash.
- Emerging market. You see emerging markets in countries where the stock market isn’t as developed as the stock market in more developed countries, like the US. An emerging market is found in a country that is transitioning from developing to developed.
- Exchange. This is where you go to do your trading. This is where investments are bought and sold. For example, the New York Stock Exchange.
- Fiduciary. You might be thinking, what the F is a fiduciary? Great question, let me tell you. When you invest with a financial advisor or a brokerage firm that claims to have a fiduciary responsibility this means they legally must put their clients’ best interest ahead of their own. As a fiduciary, they can not mislead you in any way and they must disclose any conflicts of interest. A non-fiduciary advisor or brokerage has to invest in a way that is appropriate for their client, but they don’t necessarily have to do what is best for their client.
- Inflation. You’ve probably heard of inflation, or even used it in a sentence, “When I was a kid a soda only cost a dollar, thanks a lot inflation!” Inflation is when there is an increase in the price of goods and, as a result, your purchasing power decreases.
- P/E ratio. The price to earnings ratio is a way of measuring the value of a company by comparing the price of its stock to its earnings. A P/E ratio can be used by investors to determine if a company’s stock is overvalued or undervalued. The P/E ratio tells investors what the market is willing to pay for a specific company today based on it’s past or future earnings.
- Recession. If you were a young adult during the 2007 to 2009 time period then you probably remember the last recession. According to the National Bureau of Economic Research, a recession occurs when there is a significant decline in the economy that is spread across the economy and lasts for a span of more than a few months.
- Security. A security is a financial asset such as a stock, bond, or option, that can be traded on the stock market.
- Shares. Shares are units of ownership in a public company. Shares are bought and sold on the stock market. When you purchase a share in a company you become a shareholder.
- Shareholder. When you are a shareholder it means you own one or more shares in a company. When you are a shareholder you are essentially a part-owner of the company. As a shareholder, you have certain rights including the right to trade your shares on the stock market and the right to share in profitability.
- Stock market. The stock market is the place where shares of publicly held companies can be bought and sold. There are many different stock markets around the world, examples include the New York Stock Exchange and the London Stock Exchange. The stock market can also be referred to as a stock exchange.
- Volatility. Have you ever met a volatile person? Someone who has insane mood swings. One minute they’re laughing and happy, and then next minute they are red with anger or on the floor crying. Well, a volatile stock market reacts in a similar way. Volatility refers to the up and down fluctuations in the market. The more frequently the market swings up and down, the more volatile it is said to be.
- Asset allocation. Asset allocation attempts to balance risk and reward by adjusting the percentage of assets you have invested across different assets (stocks, bonds, cash).
- Buy and hold investing. This is an investment strategy where an investor will buy stocks and then hold them for a long period of time ignoring the ups and downs of the market. This is the investment strategy touted by one of the world’s most famous investors, Warren Buffet.
- Dollar-cost averaging. This is an investment strategy where you invest the same amount of money at regular intervals for an extended period of time. The goal is to reduce the risk of investing a large sum of money at a “bad time.” For instance, if you were to invest your inheritance in the market the day before there was a market crash. Also, dollar-cost averaging can be better for people emotionally. It can be super stressful to invest a huge amount of money – but breaking it up over time it might make it feel more manageable and less scary.
- Lump-sum investing. Lump-sum investing is where you take a lump sum of money and invest it all at once.
- Micro investing. This is an investing method that allows you to invest very small amounts of money. Like spare change small. Micro investing is growing in popularity because it’s super simple to do. Micro investing also makes investing more accessible because you don’t need a huge minimum investment to get started. If you’re interested in micro-investing you can check out the Acorns App. They have a tool called “Round Up” which lets you invest all of your spare change from everyday purchases. Maybe you buy a late for $4.50 – the Acorns app will then automatically round up to $5 and invest the $0.50 for you. It makes investing super easy.
Different ways to invest
- Stock broker. This is someone who acts as an intermediary between buyers and sellers of securities (stocks, bonds, etc.). They don’t do any investment analysis for you, instead, their job is to execute a buy or sell decision that you’ve made and then charge you a commission to do so.
- Full-service brokerage. This is an institution or firm that assumes the role of intermediary between buyers and sellers of securities. They charge a commission for their services which include financial consulting, money management, and estate planning.
- Discount brokerage. This is an online trading platform that charges lower fees than a traditional brokerage. Discount brokerages are able to charge lower fees because they don’t offer many of the services provided by a traditional brokerage like investment advice or financial planning. Some examples of popular discount brokerages include E*TRADE and TD Ameritarde. E*TRADE offers a great digital experience with an award-winning app that makes it simple for you to invest from anywhere at any time. They also offer a ton of great content and guidance for new investors to check out. TD Ameritrade is another great option. They offer zero commissions when trading stocks and ETFs, as well as no minimum deposits.
- Robo-advisor. A robo-advisor provides investment advice and management using a digital platform. With a robo-advisor, there is little human to human interaction, though if you have a question you can still speak with a real-live person, not a robot. Rather than having a human investment advisor to do your investing, a robo-advisor uses specialized software and complex algorithms to invest on your behalf. Wealthfront is a popular US robo-advisor that offers a number of different investment services from retirement investing, and education investing, to investing for any other reason. They offer low fees and can work with you to plan for the future you really want.
Types of investments
- Bond. A bond is essentially a loan given to a company or government by investors. Companies and governments borrow money from investors and then pay interest to the investors.
- Stock. Often referred to as equity or shares, a stock is a type of investment that represents partial ownership in a company.
- Blue-chip investment. You can think of Blue-chip investments as posh investments. They’re like the old money of investments. Blue-chip investments refer to the companies that have been around forever, have a long history of good earnings, and a solid balance sheet. They might come off a bit old and boring compared to a new flashy tech company but they’re pretty consistent and you can expect good performance from them.
- Commodity. A commodity is a raw material that can be bought and sold. Examples of commodities include agricultural (wheat), metals (gold, silver), and energy (oil).
- Cryptocurrencies. In the simplest terms, a cryptocurrency is a digital currency that uses cryptography to provide security. Cryptocurrencies are like any other form of currency in that you can use it to make purchases. If you’re interested in investing in Cryptocurrencies you can check out Robinhood. Robinhood Crypto is specifically targeted to investors who are interested in buying and selling cryptocurrencies.
Types of investment funds
- ETF. ETF stands for exchange-traded fund. An ETF allows you to purchase a large number of securities – stocks, bonds, or commodities – all at once. You can think of an ETF like a grocery basket but instead of filling your basket with eggs and milk, you fill it with stocks or bonds. And, instead of purchasing each item individually, you purchase the entire basket all in one go! ETFs are traded on an exchange throughout the day and there are tons of ETFs to choose from.
- Hedge fund. When you hear the term hedge fund, do you think of rich people? I do. A hedge fund is a pool of money used by investors and institutions who can absorb a loss from a risky trade. Hedge funds are not as regulated as other funds (like a mutual fund) and they also tend to have higher fees. Hedge funds and rich people are often thought of together because it typically requires a large minimum investment to get into a hedge fund.
- Index fund. An index fund is a hypothetical portfolio that represents a segment of the financial market. An index fund can be an index mutual fund or an index exchange-traded fund. An example of an index fund is the S&P 500 (a fund that tracks the 500 largest U.S publicly traded companies). There are all kinds of index funds, ones for metals, ones for the tech sector, ones for bonds, you can find an index fund for almost anything.
- Mutual fund. A mutual fund is a professionally managed investment fund that pools money from investors to purchase different investments (stocks, bonds, etc). By pooling your investments with others, you’re able to invest in a much wider mix of investments than you would likely be able to afford on your own. Mutual funds are managed by a fund manager who decides when to buy and sell investments depending on the type of fund.
Retirement investing terms
- Traditional IRA. A traditional IRA is an individual retirement account that offers tax advantages when you save for your retirement. A traditional IRA is tax-deductible. This means that the contributions you make to your traditional IRA will help to lower your taxable income. With a traditional IRA, you pay taxes when you start to withdraw your money.
- 401(k). This is a common retirement savings account offered by many employers. With a 401(k) you can contribute a specified amount and this amount will be deducted from your taxable income. So, if you make $100,000 per year and contribute $10,000 to your 401(k), then you will only be taxed on $90,000 income.
- Roth IRA. A Roth IRA is an individual retirement account that offers tax advantages including tax-free growth on your investments and tax-free withdrawals in retirement. A Roth IRA is funded with post-tax money, meaning money you’ve already paid your taxes on. For help with retirement investing you can check out Betterment, offering personalized advice that can help you make the most from your Roth IRA (or Traditional or SEP IRA). If you have no clue as to which type of IRA to open, you can start by using Betterment’s easy-to-use guidance that can walk you through which account is right for your future retirement needs. Betterment will also help you create an entire retirement plan that you can access from your account, where you map out your goals and how much you’d like to save. And Betterment automatically rebalances your portfolio to align with your goals.
Investing doesn’t have to be complicated. Unfortunately, the world of investing is laden with jargon that can make it sound like people are speaking a different language.
To become fluent in the vocabulary of investing it will take time and effort. However, if you can master these 42 terms and definitions, then you’re off to a great start.
Don’t let intimidation keep you from investing. Today, there are so many resources available to help you learn how to invest. There are also a ton of options for how you can invest your money, from robo-advisors to discount brokerages, and even full brokerages if you want some additional help.