Top 5 Investing Terms to Help Beginner Investors Become Smarter Investors

Investing Terms for Beginners

Paper Asset Investing Series: Post #1

I’m going to be doing a little paper asset (stocks, bonds, etc) investing series so what better place to start than with the jargon (aka the terms)?! If you don’t know what the terms mean you won’t know what you’re investing in (or what to invest in), so let me share five of the most popular terms regarding investing. (Plus, give you cool statements to say to your investor friends to sound smart.)

1.Stock

What is a stock really? You hear people talking about stocks all the time, the price dropping or going up, I got a steal on stocks. A stock represents ownership in a company.

When companies decide to ‘go public,’ their stock is available to purchase on the stock market. This means the general public (us) can have part ownership of the company through owning the company’s stock. You can purchase shares of a company’s stock.

You can buy as many shares in a company as you like (as long as they are available) Monday through Friday from 9:30am to 4:00pm EST through an online brokerage account (or other ways). The price of the stock is shown in your brokerage account (of course you can Google the price beforehand).

Once you purchase the shares, you now have ownership in the company, which is a really cool concept if you think about it.

Purchasing shares of stock can be risky. There’s no guarantee the price will go up. It could drop at any moment, depending on what’s going on with the company or the market or even what is happening in the world.

When people talk about owning individual stocks it means they’ve purchased shares of a particular company’s stock. They didn’t buy a fund (which we’ll get into) which could include a variety of different companies stocks.

If you’re interested in starting to invest in stocks, check out my other post, 3 Super Simple Steps to Start Investing in Stocks.

2.Bond

A bond is a promissory note (IOU) issued by companies or government to its buyers (you).

You can purchase bonds for a specified amount held for a specified time period at a fixed or variable interest rate.

Bonds tend to be a lot less risky than stocks, but usually also have a lot lower return. You usually purchase the bond at a specific price with a specified rate of return.

Essentially you are loaning your money to a company (or the government) and they promise to pay you back in full with regular interest payments. There’s different types of bonds, which include: U.S. government securities, municipal bonds, corporate bonds, mortgage- and asset-backed securities, federal agency securities and foreign government bonds.

With municipal bonds the interest earned is tax-free. This could be beneficial depending on your tax bracket.

You’ll pay taxes on the interest earned for treasury bonds, but they will have a higher rate you can earn, so depending on your tax bracket again, treasury bonds could be a better option than municipal bonds. If you have treasury bonds you don’t need to usually worry about getting the other types of bonds.

3.Mutual Fund

A mutual fund is an actively managed fund that could include stocks, bonds and other securities.

Actively managed funds mean there’s a fund manager watching the fund and switching things around inside the fund. So if there’s a stock that isn’t performing as well, the fund manager would switch it out, essentially.

Taking that into account, we can expect to pay management fees when we purchase a mutual fund since the fund managers continue to actively diversify the fund. Watch for those fees.

4.Index Fund

An index fund is a type of mutual fund with a portfolio (what’s inside the fund) setup to match or track a market index, such as the S&P 500 index or a group of stocks, a group of bonds, or a group of other assets that could have similar characteristics (like a group of technology stocks).

It’s not actively managed since it’s just tracking a certain index so it will usually have a lower fee than a mutual fund.

Index funds are priced at the end of a trading day. You can’t trade it like a you can a stock.

An index mutual fund is said to offer a more diversified investing vehicle with lower operating expenses.

5.Target-Date Fund

A target-date fund is a mutual fund that will automatically rebalance your portfolio (the asset mix of stocks, bonds & cash equivalents) to become more conservative as you get closer to the target date.

These funds are very popular in 401ks or even IRAs because you don’t have to worry about rebalancing (switching up the amount of stocks versus bonds in your fund) as you get closer to when you want to start taking the money out. It will automatically rebalance for you which is great if you are hands off investor.

These are just 5 of the popular terms used in investing. Hopefully they gave you a little more insight into what you could invest in (or are already investing in) or just to understand more about investing.

Sound Smart

Here’s some simple phrases you might say now that you know some investing terms (and sound smart doing it).

“I bought some shares of Google yesterday through my online brokerage account. The price just dropped.”

“I decided to look at buying municipal bonds because the interest earned is tax free.”

“I’m not sure if I want to buy a mutual fund because the fees are usually higher than an index fund. You know, because mutual funds are actively managed.’

“I just don’t want to have to worry about rebalancing my 401k investments so I decided to go with a target-date fund.”

Try some of these phrases at your next party and let me know how it goes (of course, if they are actually true).

What other terms are you familiar with or have questions about? I’d love to hear in the comments below!

 

6 Comments

  • MR. WB

    Reply Reply November 2, 2017

    Nicely written article you’ve got here. Straight to the point and precise! Keep it up the good work!

    Cheers!

    • Tiffany Thomas

      Reply Reply November 8, 2017

      Thank you!

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