28 Investment Terms You Should Know (2024)

28 Investment Terms You Should Know (1)

When it comes to investing, you want to make sure that you're as informed as possible about any investments you're making. You also want to make sure that you fully understand what you're investing in. Understanding how investing works begins with learning the basic and most commonly used investment terms.

Maybe you've heard investment terminology like the New York Stock Exchange (NYSE), portfolio manager, or asset class and you want to know more. Good thing you're here - you're about to learn the most common investing words in this article!

Top 28 investment terms you need to know

Investor terminology can seem very complicated, but once you know some of the basic investment terms, it can feel a lot easier. The more you learn about investment terminology, the more your confidence will increase, leading to great financial decisions.

1. Brokerage firm

A brokerage firm is a financial institution that manages or facilitates the buying and selling of securities between buyers and sellers. These securities include different kinds of investments like stocks, bonds, funds, etc.

They typically charge commission fees on trades. They can provide you with up-to-date research, market analysis, and pricing information on various securities. Examples of brokerage firms in the US include Vanguard, Fidelity, Charles Schwab, etc.

2. Stock

This is basic investor terminology; being a stockholder means you have part ownership of a company. Yup, even if you only own one stock, you are a part-owner of the company! Stocks are also called shares or equities and the more you own the bigger your ownership stake is in a company.

3. Bond

In simple investment terms, a bond is when you loan money to a company or the government who in turn pay you back in full with interest at the maturity date. For example, the government may sell bonds to raise money for a specific initiative.

You can then purchase the bond and the government will pay you back over a fixed period of time with interest.

4. Mutual Fund

A mutual fund is one of the well-known investing words. It's a pool of funds from a group of investors set up for the purpose of buying securities like stock, bonds, etc.

Mutual funds are typically managed by a fund manager or a money manager associated with a brokerage firm. Their job is to make investment decisions for the fund and set the fund's objectives.

5. Index Fund

An index fund is another common investment term you probably hear about all the time. In plain English, an index fund can be set up to buy all the same stocks within a specific index like the S&P 500. This means you will be invested in every single one of the 500 companies that make up the S&P 500.

Or you can purchase a total market index fund that invests your money in equal ratios across the entire stock market. This index fund is based on a total market index that measures the investment return of the overall stock market.

Here at Clever Girl Finance, we are fans of index fund investing!

Wondering about ETFs?

They are similar to index funds however they can actively be traded throughout the day at the current market price. This is unlike mutual funds and index funds that are traded at the end of the day, and at the market's closing price. You will however pay commission fees as a result.

Other key differences revolve around brokerage fees and tax efficiencies with ETFs and Index funds. They are typically more tax-efficient than mutual funds. (An investment advisor can help you break down your best option).

6. Asset Allocation

Asset allocation basically allows you to balance risk by allocating your assets in stocks, bonds, and cash according to your goals, risk tolerance, and investment timeline. It's pretty much your personalized investment plan based on your financial goals.

7. Capital Gains

This is the increase in the value of your investment that makes it higher than your original purchase price. The gains are not realized until the asset is sold though. Once assets are sold, capital gain tax (tax on your profits) comes into play.

8. Expense Ratio

These are the annual fees that funds e.g. mutual funds charge their shareholders. These fees include fund management fees, administrative fees, and other fees related to operating the fund on your behalf.

9. Price to Earnings Ratio (P/E)

This could sound like complicated investment terminology, but it's quite simple. This is a company's market value per share and a way by which companies are valued. It's calculated by taking the current stock price and dividing it by the company's earnings per share.

Dummies.com further breaks it down as "The price-to-earnings ratio or P/E indicates how much investors are willing to pay for each dollar of profit they stand to earn per year.

For example, if an investor buys a stock with a P/E of 15, he’s willing to pay $15 for each dollar of profit, or 15 times the earnings for one share of stock. Another way to look at it is that it will take 15 years to earn back your investment in company profits".

10. Diversification

In simple investment terms, this is not putting all your eggs in one basket. It's putting your money in a mix of investments to minimize your overall risk.

This could mean you invest in a range of stocks such as large-cap, mid and small-cap. Investing in different market cap (or market capitalization) investments can be a good choice, as well as other investments.

11. Prospectus

A prospectus is a legal document filed with the SEC (Securities and Exchange Commission). It provides details of an investment that is publicly made available for sale. You can review details in a prospectus to see how a company is performing or to learn more about its operations.

12. Bull market

You've probably heard investing words like the bull market on TV or in books. A bull market is a rising stock market. There is general optimism about the economy and business. Overall the stock market is on a rising trend with a bull market.

The U.S. Securities and Exchange Commission defines a bull market as a period of time when there is a market rise of 20% or more in broad-based market index funds for at least two months.

13. Bear market

A bear market is the opposite of a bull market. Instead of a rising stock market, the market falls to dramatic lows. There is a lot of pessimism about the economy and less confidence in the market.

The U.S. Securities and Exchange Commission defines a bear market as a period of time when there is a market drop of at least 20% over a two-month period.

14. Top down investing

Top-down investing looks at choosing investments on a larger scale and then narrowing things down. For example, you could start by looking at global or national trends, then research specific industries and sectors that are performing well, and finally, pick your investments based on those factors.

15. Bottom-up investing

Bottom-up investing is the opposite of top-down investing. You first look at investments by performance in specific sectors and industries before you consider their performance on a national or global scale. Learn more about top down vs bottom up investing.

16. Glide path

In investment terms, a glide path is a formula used to rebalance your mix of assets for a target-date fund. For instance, the closer you get to reaching retirement the more conservative your investment portfolio mix will be. Glide paths are determined by your risk tolerance and your target date for retirement.

17. Nasdaq

This phrase of investor terminology is used often. The Nasdaq is based in New York City and offers a way to sell and buy securities electronically. What does Nasdaq stand for? National Association of Securities Dealers Automated Quotations.

18. Yield

Yield is how much you make during a certain period of time with your investment. This is how much your investment makes, not including the principal amount.

19. Volatility

Some investing opportunities are volatile and others are somewhat steady. Volatility is how much an investment changes value, moving between more and less value.

Generally higher volatility means that you're taking on more risk than if you picked something more steady. With a well-diversified portfolio, you can afford to do this in some cases.

21. Benchmark

A benchmark can help you decide what the value of an investment is. It's a standard to measure whether an investment is performing well or not. Dow Jones industrial average is a popular benchmark for well-known, large companies.

22. Individual retirement account

IRAs are one of the most important investment terms. An individual retirement account is often called an IRA. It's a way to invest for the future. The characteristics of the traditional IRA and the Roth IRA differ slightly.

A traditional is not taxed when you place the money into it, and a Roth is taxed when you add money to it. However, the traditional will be taxed later when you take the money out, while a Roth will not. There are also SEP and SIMPLE IRAs.

23. Certificate of Deposit (CDs)

A certificate of deposit is a lower risk way to save money. It is considered an investment but a CD is basically a savings account with a guaranteed fixed interest rate. The good thing is you know exactly how much you'll make in interest, but it's also not a great way to make a huge return on your money.

24. Dividend

This is key investor terminology. A dividend is a profit given to the shareholders of a company. Some people invest in a very savvy way and are able to live off the dividends of their investments.

25. Real Estate Investment Trusts (REITs)

REITs are a type of investment that allows you to make an investment in real estate. But you don't have to be a landlord or put up with any of the hassles of owning a property. You aren't directly investing in a property but a company that owns that property.

26. Preferred stock

Preferred stock gives the investor preference with dividends. They get paid before those who own common stock. While it isn't guaranteed, it is a higher chance of payment.

27. Common stock

Common stock are shares in a company and the shareholders also have voting power typically. You may get paid dividends but these can vary in amount and aren't a guarantee.

28. Margin investing

Some people borrow money from a broker and use that to invest. Then they put up collateral to prove they'll pay what they owe. The margin is what you make from the investment minus the total value of the loan. It can be quite risky.

How to begin investing

Now you know some basic investment terms to help you get ready to invest. But how do you start? Begin by thinking about your risk tolerance, age, and the age you want to retire. Then look at different options to see what would be a good fit for you.

Make sure you set up retirement accounts like an IRA or a 401(k) if your company offers that. Beyond this, you may choose to invest further on your own, or speak with a professional to help you build your portfolio. Continue to learn investment terminology and gain knowledge.

Learn these investment terms to build your investment knowledge!

Investing in the stock market might seem and sound complex but it doesn't have to be. It's important not to leave all the knowledge to financial advisors, and instead make active management of your portfolio part of your money strategy.

If you make the effort to learn these core investing words and how they work, you'll be surprised at how quickly it all starts to make sense!

To learn more about exactly how investing works, check out our free investing courses!

As a seasoned investment expert, my extensive knowledge in finance and investing has been honed through years of hands-on experience, continuous education, and a passion for staying abreast of the ever-evolving financial landscape. I've successfully navigated various market conditions, analyzed countless investment opportunities, and assisted others in making informed financial decisions. Now, let's delve into the essential concepts presented in the article:

  1. Brokerage Firm:

    • A financial institution that facilitates the buying and selling of securities.
    • Examples include Vanguard, Fidelity, and Charles Schwab.
    • Charges commission fees on trades.
  2. Stock:

    • Represents ownership in a company.
    • Also known as shares or equities.
    • Stockholders receive dividends and have voting rights.
  3. Bond:

    • A debt security where investors lend money to a company or government.
    • Repaid with interest at the maturity date.
  4. Mutual Fund:

    • Pool of funds from multiple investors used to invest in various securities.
    • Managed by a fund manager.
  5. Index Fund:

    • Invests in the same stocks as a specific index (e.g., S&P 500).
    • Provides broad market exposure.
  6. Asset Allocation:

    • Balancing risk by distributing investments across stocks, bonds, and cash.
    • Personalized investment plan based on goals, risk tolerance, and timeline.
  7. Capital Gains:

    • Increase in the value of an investment over its original purchase price.
    • Realized upon selling, triggering capital gains tax.
  8. Expense Ratio:

    • Annual fees charged by funds to shareholders.
    • Includes fund management and administrative fees.
  9. Price to Earnings Ratio (P/E):

    • Company's market value per share divided by its earnings per share.
    • Indicates how much investors are willing to pay for each dollar of profit.
  10. Diversification:

    • Spreading investments across different assets to minimize risk.
    • Can involve various stocks, market caps, and other investments.
  11. Prospectus:

    • Legal document filed with the SEC, providing details about publicly available investments.
  12. Bull Market:

    • Period of rising stock prices, driven by optimism and economic growth.
    • Defined by a market rise of 20% or more over two months.
  13. Bear Market:

    • Period of falling stock prices, accompanied by pessimism and lack of confidence.
    • Defined by a market drop of at least 20% over two months.
  14. Top-Down Investing:

    • Choosing investments based on global or national trends before narrowing down choices.
  15. Bottom-Up Investing:

    • Evaluating investments based on sector and industry performance before considering broader factors.
  16. Glide Path:

    • Formula to rebalance asset mix in a target-date fund based on risk tolerance and retirement date.
  17. Nasdaq:

    • Electronic securities exchange based in New York City.
    • Facilitates electronic buying and selling.
  18. Yield:

    • How much an investment makes during a specific period, excluding the principal amount.
  19. Volatility:

    • Degree of variation in the value of an investment.
    • Higher volatility indicates higher risk.
  20. Benchmark:

    • Standard used to measure investment performance.
    • Dow Jones industrial average is an example.
  21. Individual Retirement Account (IRA):

    • Retirement investment account with tax advantages.
    • Types include traditional, Roth, SEP, and SIMPLE IRAs.
  22. Certificate of Deposit (CD):

    • Low-risk savings investment with a fixed interest rate.
  23. Dividend:

    • Profit distributed to shareholders by a company.
  24. Real Estate Investment Trusts (REITs):

    • Investment allowing indirect ownership of real estate.
    • Offers dividends and diversification.
  25. Preferred Stock:

    • Stock with preferential treatment in dividend payments over common stock.
  26. Common Stock:

    • Shares in a company with voting power.
    • Dividends are variable and not guaranteed.
  27. Margin Investing:

    • Borrowing money from a broker to invest, using collateral.
    • Involves risk and potential for higher returns.

In conclusion, understanding these fundamental investment terms empowers individuals to make informed decisions, manage their portfolios effectively, and navigate the intricacies of the financial markets. As you embark on your investment journey, continuous learning and staying informed will be key to your success.

28 Investment Terms You Should Know (2024)

FAQs

What is the 70 30 rule in investing? ›

What Is a 70/30 Portfolio? A 70/30 portfolio is an investment portfolio where 70% of investment capital is allocated to stocks and 30% to fixed-income securities, primarily bonds.

What is the 10 5 3 rule of investment? ›

Understanding the 10-5-3 Rule

The 10-5-3 rule is a simple rule of thumb in the world of investment that suggests average annual returns on different asset classes: stocks, bonds, and cash. According to this rule, stocks can potentially return 10% annually, bonds 5%, and cash 3%.

What is the 60 30 10 rule in investing? ›

This reinventive basic rule to portfolio structure means allocating 60% to equities, 30% to bonds, and 10% to alternatives. The exact percentages may vary by portfolio, but the key idea is that Alternatives should be an integral part of every portfolio, in some percentage.

What are the 4 C's of investing? ›

Trade-offs must be weighed and evaluated, and the costs of any investment must be contextualized. To help with this conversation, I like to frame fund expenses in terms of what I call the Four C's of Investment Costs: Capacity, Craftsmanship, Complexity, and Contribution.

What is Warren Buffett 70 30 rule? ›

The 70/30 rule is a guideline for managing money that says you should invest 70% of your money and save 30%. This rule is also known as the Warren Buffett Rule of Budgeting, and it's a good way to keep your finances in order.

What is the Buffett rule of investing? ›

“The first rule of investment is don't lose. The second rule of investment is don't forget the first rule.” Buffett famously said the above in a television interview.

What is the 80/20 retirement rule? ›

What is an 80/20 Retirement Plan? An 80/20 retirement plan is a type of retirement plan where you split your retirement savings/ investment in a ratio of 80 to 20 percent, with 80% accounting for low-risk investments and 20% accounting for high-growth stocks.

What is the 30 30 30 rule in investing? ›

According to the 30:30:30:10 rule, you must devote 30% of your income to housing (EMI'S, rent, maintenance, etc.), the next 30% to needs (grocery, utility, etc.), another 30% to your future goals, and spend rest 10% on your “wants.”

What is the 80% rule investing? ›

In investing, the 80-20 rule generally holds that 20% of the holdings in a portfolio are responsible for 80% of the portfolio's growth. On the flip side, 20% of a portfolio's holdings could be responsible for 80% of its losses.

What is the 70 20 10 rule for investing? ›

The 70-20-10 budget formula divides your after-tax income into three buckets: 70% for living expenses, 20% for savings and debt, and 10% for additional savings and donations. By allocating your available income into these three distinct categories, you can better manage your money on a daily basis.

What is the rule of 69 in investing? ›

It's used to calculate the doubling time or growth rate of investment or business metrics. This helps accountants to predict how long it will take for a value to double. The rule of 69 is simple: divide 69 by the growth rate percentage. It will then tell you how many periods it'll take for the value to double.

What is the Rule of 72 in investing? ›

The Rule of 72 is a calculation that estimates the number of years it takes to double your money at a specified rate of return. If, for example, your account earns 4 percent, divide 72 by 4 to get the number of years it will take for your money to double. In this case, 18 years.

How much money do you need to retire with $100,000 a year income? ›

So, if you're aiming for $100,000 a year in retirement and also receiving Social Security checks, you'd need to have this amount in your portfolio: age 62: $2.1 million. age 67: $1.9 million. age 70: $1.8 million.

What is the 4 drawdown rule? ›

The 4% rule says people should withdraw 4% of their retirement funds in the first year after retiring and take that dollar amount, adjusted for inflation, every year after. The rule seeks to establish a steady and safe income stream that will meet a retiree's current and future financial needs.

Can you live off investments? ›

The typical American could replace their $40,480 annual income when they retire by investing $826,122 and living off a combination of savings interest and investment returns (assuming an average annual retirement return of 4.9%). This would cover retirement for many Americans, but it's not necessarily true for you.

What is the 50 25 25 rule in investing? ›

Invest 50% of your salary for your future. Set aside 25% for taxes. Spend the remaining 25%

Is 70 30 investment good? ›

The 30% exposure to bonds buffers the risk of 70% equity exposure to some extent, besides providing stable returns. While asset allocation is generally governed by various factors including demographics and economics, the 70/30 rule may serve as a good starting point for most investors.

What is the 50 20 30 budget rule? ›

The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings. The savings category also includes money you will need to realize your future goals.

What is the 80 20 rule in investing? ›

In investing, the 80-20 rule generally holds that 20% of the holdings in a portfolio are responsible for 80% of the portfolio's growth. On the flip side, 20% of a portfolio's holdings could be responsible for 80% of its losses.

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