If you are a new investor, you’re probably trying to read up on the whole world of investing so that you can make informed investment decisions possible. You may be clicking on different articles or reading books, trying to gain all of the investing knowledge that you can. As you read and learn, you may find yourself coming across a lot of the same investing lingo, over and over again. But, just as it is difficult to learn a new language, investment vocabulary can get confusing sometimes. Some words that are used as synonyms in various articles may not mean the exact same things, and some different ways to categorize investments might sound pretty similar at first, when in reality they all have minor differences.
As you continue with your studying, we thought it might be nice to make you a little “cheat sheet” so that you can keep some of your new investing vocabulary straight. With that, here are 15 of the most important vocab terms to know as a new investor:
- Asset Class: a group of different securities that behave similarly in the marketplace and maintain similar legal regulations. Examples include: stocks, bonds, and commodities.
- Asset Allocation: the goal of distributing your investments between several different asset classes so as to minimize risk (a strategy that follows the phrase “don’t put all your eggs in one basket”).
- Diversification: goes hand in hand with asset allocation, but takes it one step further. This strategy includes choosing investments not only by different asset classes, but also choosing a variety of investments within those asset classes, so as to hold investments with many different characteristics.
- Portfolio: a range of all of the investments held by one person or entity.
- Security: refers to a broad range of financial assets such as stock shares, bonds, and options.
- Stock: a type of security that signifies ownership in a corporation.
- Equity: (used synonymously with the term “stock”) a security that represents an ownership interest in a company (includes ownership in private companies, where shares are not publically traded).
- Bond: an investment in which an investor loans money to an entity (usually a corporation or the government) and receives interest payments in return.
- Option: a type of security in which a company gives an investor the option to buy the company’s stock at a fixed price during a given period of time.
- Trade: refers to the buying and selling of securities.
- Mutual Fund: a fund made up of money from many investors, where money managers invest the money in a variety of securities like stocks, bonds, and other assets.
- ETF: stands for Exchange Traded Fund, or a mutual fund that is traded on a stock exchange.
- Volatility: the trait of an investment that fluctuates in value commonly and unpredictably.
- Return: the gain or loss of a security in a particular period of time (oftentimes shown in the form of a percentage).
- Risk: the probability of yielding losses on an investment; a measure of uncertainty in an investment’s ability to make its predicted gains.
While we have only just scratched the surface on the language of investing, we hope that this list gives you a little bit of clarity on your new vocab. Happy studying, new investors!