If you’ve just started investing or if you’re thinking about getting started you’ve probably been bombarded with tons of jargon and terminology- it’s enough to make you quit while you’re ahead! Luckily, starting to invest, especially in an intuitive environment like the Beanstox app, doesn’t have to be as hard as it may seem. To kick off your career as an investing mogul in the making, here’s a bite-size breakdown of four of the most-used investing terms.
A lot of people use the words “trading” and “investing” interchangeably, but there is a key difference you should be aware of. Once you decide whether you’re a trader or an investor, your job gets a whole lot easier! In nutshell, a trader is someone who engages is frequent buying and selling of shares to “beat the market.” Traders focus more on market movements than on the long-term value of individual companies in order to increase their short term profits. Since traders frequently enter and exit positions, it’s important to be as objective as possible and make every effort to remove emotion (such as fear or excitement) from trading decisions.
If you’re an investor, you typically have a long-term view of the market. Often times, people associate “investing” with a buy and hold strategy that seeks to build wealth over time. Investors are concerned with the financial strength of a company and buy shares of companies that they believe have strong future growth potential.
Passive Investing is a term that describes a certain type of investing that seeks to maximize returns by keeping buying and selling to a minimum. Passive investors aren’t trying to profit from short term price fluctuations. Instead, these investors often attempt to mirror stock market performance, which has given rise to index investing. You can read more about that here. Choosing to utilize a passive investing strategy doesn’t mean that you never have to look at your portfolio. Make sure you stay current on news related to companies you’re invested in and adjust your holdings accordingly.
If you only take one thing away from this post, let it be this: diversification is the most important rule when it comes to investing. Why? Because a diversified portfolio is the Lord Petyr Baelish of the investing world. Think about that for a second- by having a hand in what goes on with every major family in Westeros, he ensures he hedges his bets and continues to come out of major conflicts unscathed. If you’re a fan of Game of Thrones, you’re probably crossing your fingers that his tactics will soon fail him; but we can still apply his method of self-preservation to our investing strategies.
You may have already been told that your investments should span different industries, asset classes, and geographic locations. The reason for this is that, historically speaking, it’s unlikely for these subsections of the market to move in unison. Therefore, spreading your investments out over various subsections of the market, helps to manage risk and protect your portfolio from major volatility.
Volatility is the amount of uncertainty or risk related to a stock’s value. High volatility usually means dramatic price fluctuations over a short period of time while low volatility, on the other hand, often translates to steadier price changes over time. High volatility in the market can often cause investors to become emotional about their investing decisions. It’s important to keep a level head and not react solely to price movements in the market. More on that here.
Time to Get Started
Now that you have these four basic investing terms under your belt, it’s time to get started! As you start your investing strategy, remember the key takeaway here: think like Littlefinger and diversify to protect your portfolio from market volatility.