Investing your money is one of the best ways to make it work for you. And with the possibility of compounding interest, the sooner you get started, the more money you could make.
According to a 2022 survey by Gallup, stock ownership is slowly rising, with 58% of Americans investing in the stock market. However, investing doesn’t always feel easy, especially if you find yourself confused by the terms used to describe investment opportunities.
But don’t let that discourage you. We’ve put together a guide with 30 common investing terms you need to know. Learning the definitions is a good introduction to investing basics and can help you navigate the process.
- Types of investments
- Stock terms
- Retirement investment terms
- Additional investing terms
- What’s next: Making informed investments
Types of investments
There are several types of investments you may come across when trying to figure out how to allocate your funds. These are some of the most common:
1. Bonds
Bonds are loans provided to governments and corporations that pay interest to the investor. Municipal bonds and savings bonds are bonds that the state or local government issues, while private companies may issue other types of bonds. Bonds are a low-risk investment and are good for beginners.
2. Exchange-traded funds
You may have heard about ETFs, but what is an ETF in investment terms? An ETF tracks a specific industry, commodity or index, such as the SPDR S&P 500 (SPY). ETFs are a good way to invest in expensive commodities such as oil, and they’re also a great low-risk investment for beginners. Using Cash App for your ETF trades can help you build your portfolio while avoiding commission fees.
3. Mutual funds
Mutual funds are important when it comes to investment terminology. With a mutual fund, a company pools money from several investors and invests that money in a portfolio. The benefit is that you don’t have to worry about picking and choosing what you invest in, which makes it easier to invest and track your investments.
4. Real estate
Real estate includes both residential and commercial properties and can be one of the most lucrative investment opportunities. Short-term real estate investors may flip houses, while long-term investors rely on appreciation to profit from real estate. Keep in mind that real estate investing is typically more expensive upfront. Consider taking out a cash-out refinance loan to help pay for some of those upfront costs.
5. Stocks
Stocks are one the most common investments you hear about, but what exactly is a stock? A stock represents a small portion of a company, so owning a stock means you essentially own a portion of a company. Keep in mind that stocks tend to be riskier investments since the stock market is constantly fluctuating with the economy.
Image: understanding-investment-termsStock terms
With the types of investments you can make in mind, let’s dive into the most common — stocks. When it comes to investing in stocks, there are some terms you’ll need to understand to navigate the process:
6. Bear market
A bear market is one of the investment terms to describe stock market conditions. More specifically, a bear market is a period where stock prices are falling, and investing is risky but potentially very rewarding. Bear markets tend to occur during an economic downturn.
7. Bull market
On the contrary, a bull market is one where stock prices are rising, so investments aren’t as risky but don’t provide the same opportunity for a large reward. Bull markets tend to last longer than bear markets — sometimes months or even years.
8. Common stock
Common stock is what most people think of when they think of stocks. Public companies offer portions of their company, known as common stocks, for stockholders to own a share of the company and participate in company decisions.
Unlike with preferred stocks, common stockholders don’t have special permissions regarding dividend payments and liquidation. If you plan on investing in stocks, you’ll probably be dealing with common stocks.
9. Dividends
Dividends are payments made to shareholders of certain companies. In order to receive these payments, an investor must own stock before the ex-dividend date. This is essentially a reward for investing money in a company.
10. Market indexes
A market index is a portfolio used to track the financial market by analyzing data from specific subsets of companies. Examples of market indexes include the Dow Jones Industrial Average (DJIA) and Nasdaq Composite Index.
Image: market-indexes11. Preferred stock
Preferred stock is similar to common stock, except shareholders get special benefits such as higher dividend payments and claims to assets if the company liquidates. Liquidation can be involuntary or voluntary — when a company files for bankruptcy or chooses to no longer operate. It’s essentially converting assets into cash. These stocks are less volatile but less profitable.
12. Share
A share is a unit of ownership, whether that’s a share in a company or an asset. Shareholders have a right to certain benefits, including capital gains when the company or asset increases in value and dividend payments when it makes money.
Keep in mind that share value depends on the economy and the stock market — as stock prices increase, their value increases and ultimately your savings increase. The same is true when the stock prices drop, which is why you should assess your risk tolerance before investing.
13. Short selling
In basic investment terms, short selling is betting on a security to drop. Short sellers borrow a security and sell it on the open market, hoping it’ll drop in price so they can purchase it for less in the future and repay the loan.
14. Stock exchange
A stock exchange is where stockbrokers and traders can buy and sell shares of stocks, bonds and other investments. Different stock exchanges have different listing requirements and thus offer different stocks.
15. Stock market
The term “stock market” is near the top of any investment dictionary. The stock market refers to all the exchanges where buying and selling take place, but it’s also useful to refer to the current condition of stock prices in general.
Retirement investment terms
Retirement accounts include or hold investments (stock, bonds, ETFs, mutual funds and some alternative investments) specifically for retirement savings. Trying to figure out how to go about investing in your retirement? Here are some basic terms you’ll need to understand:
16. 401(k)
A 401(k) is a retirement plan offered by employers where you contribute money each pay period, and your employer typically matches up to a certain amount of your contribution. You can withdraw this money penalty-free beginning at age 59 ½. Use our 401(k) calculator to estimate your retirement savings.
17. Individual retirement arrangement
Every investment glossary should include individual retirement arrangements or IRAs. An IRA is like a 401(k), except it doesn’t involve an employer. You simply contribute money on a regular basis and allow that money to build up until you can withdraw it without penalties.
Image: 401k-vs-ira18. Roth IRA
A Roth IRA is a type of IRA where you contribute money that’s already been taxed, which means your money isn’t taxed upon withdrawal like it is with a traditional IRA. If you want to start investing for retirement right away, a Roth IRA is a simple way to get started.
19. Rollover IRA
With a rollover IRA, you can roll funds from a previous employer-sponsored plan over to an IRA. This allows you to avoid paying any penalties while keeping the tax-deferred status of your retirement plan.
20. Retirement planning
Retirement planning is the process of creating a financial plan and investing in your retirement. A good retirement plan includes a combination of employer-sponsored retirement accounts, individual retirement accounts and other investments. It’s best to work with an investment adviser to figure out the best low-risk investments for your retirement.
Additional investing terms
There are many aspects to investing, which means it comes with specialized terminology. These could be terms that come up in conversation with your financial advisor when discussing your portfolio and how your investments are doing.
21. Ask/bid
“Ask” and “bid” are important investment terms. The ask is the amount a seller is willing to accept for a security, while the bid is the amount an investor is willing to pay for it. The greater the spread between these two numbers, the more liquid an asset is.
22. Assets
The term “asset” describes any item that helps produce additional income or that may appreciate in value over time. Things like stocks, retirement accounts and real estate are common examples of assets in the investment world. Having a solid understanding of your assets and how to use them to your advantage is important.
23. Asset allocation
The goal of asset allocation is to divide your investment portfolio into different categories, with some in stocks, some in cash and some in bonds. It’s important to diversify your investments in this way, but you can also diversify within each of these three categories.
24. Capital gains/losses
Capital gains and losses refer to the money you gain or lose through investing. Any time you sell an asset for more than you paid for it, that’s considered a capital gain. When you sell an asset for a lower amount than what you initially paid, that’s a capital loss. As an investor, you must pay long-term capital gains taxes on capital gains.
25. Diversification
Diversification refers to the way you spread your investment portfolio out. To ensure you’re not relying on a single investment, we recommend investing in several different companies and industries with multiple types of investments — stocks, bonds, retirement accounts, etc.
Image: diversifying-your-portfolio26. Investment portfolio
Your investment portfolio includes all of your investments, including retirement accounts, stocks, precious metals, commodities and more. It’s important to keep an eye on your investment portfolio to ensure you’re diversifying your investments and getting the most out of your money.
27. Financial adviser
If you’re just getting started with investing, it may be best to work with a financial adviser who understands all the investment terms and can help you choose smart, low-risk investments. Your financial advisor can help you create a diverse portfolio and plan for retirement, so you don’t have to worry about learning all the ins and outs of investing.
28. Liquidity
The liquidity of an asset refers to how easily that asset converts into cash. The higher the liquidity of an asset, the quicker and easier it is to turn that asset into cash. Some examples of liquid assets include mutual funds, cash or other forms of currency, bank accounts and accounts receivable.
29. Real estate investment trusts
If you like the idea of a mutual fund but would rather invest in real estate, a real estate investment trust (REIT) offers a similar solution focused on real estate. Real estate trusts use money from several investors to invest in real estate, which they also operate to ensure it generates income. All you have to do is invest a little money and a REIT will take care of the rest.
30. Volatility
Volatility refers to how likely it is for an investment to remain stable. Volatile investments are harder to predict and come with a higher risk, while stable investments aren’t as risky but don’t offer as much potential for profit.
What’s next: Making informed investments
Now that you have a better understanding of investing terms, you’re more prepared to make decisions about where to put your money. This knowledge will also help you better manage your investments. It’s also a good idea to talk to a financial adviser before you invest a significant amount of money into any financial product.
In addition to taking the time to learn more about the investments you’re interested in and getting advice when needed, you can also use Credit Karma to automate your savings. Consider a high-yield savings account with Credit Karma Money™ Save among your interest-earning tools.
Sourcing
- Investing early can maximize your earning potential. Making Smart Investments: A Beginner’s Guide (August 2021)
- Percentage of Americans that own shares of stock. What Percentage of Americans Own Stock? (May 2022)
- How ETFs work. Exchange-Traded Funds 101 for Economists (January 2018)
- Bear and bull market explained. What is a bear market? (June 2022)
- How common stock works. Common Stock Explained: How Common Stock Works (March 2022)
- Company liquidation. Liquidation Basis Accounting and Reporting (July 2019)
- Dividends explained. Investing Basics: What Are Dividends? (November 2021)
- Stock market and market index explained. What Is The Stock Market? How Does It Work? (October 2022)
- Stocks explained. Investing Basics: What Are Stocks? (September 2021)
- How short selling works. Short Selling Guide (December 2022)
- Bid and ask explained. Bid Definition (June 2022)
- Real estate investment trusts explained. Real Estate Investing With REITs (May 2022)
- Volatility explained. Stock Market Volatility and Return Analysis: A Systematic Literature Review (May 2020)