The investing field has its own language that includes hundreds of specialized terms. Additional ones are being invented all the time to describe product innovations and new concepts. The study of investment terms is one that can last for as long as an investor is involved in the activity. The 21 key investment terms covered below will get a beginning investor off to a good start. Consider working with a financial advisor who can explain investment terms and ideas and help you develop a plan to reach your goals.
21 Key Investment Terms Everyone Should Know
New investors hear a lot of different types of investment terms that they need to quickly understand. Here are investment terms someone new to investing can use as a starting point to building a solid investment vocabulary:
An asset in investing is the same as in business or anywhere else, which is anything that has economic value. Cash is an asset, and so are securities such as stocks and bonds as well as real estate. If there is a demand to purchase an investment then it is considered an asset.
2. Asset Allocation
The blend of assets chosen for an investment portfolio is referred to as the total asset allocation of that portfolio. Asset allocation can mix cash, stocks, bonds and other alternative assets such as real estate. A proper asset allocation will take into account the financial goals of the individual investor.
Bonds are a major asset class made up of fixed-income securities that are issued by an investor to a government or business. Bonds pay interest to the investor, but the amount of money that is invested can be locked and inaccessible until the end of the bond period. The bond maturity period can be between one day to 100 years. Short-term bonds will mature within three years.
4. Capital Gain
A capital gain is a profit generated by selling an investment for more than you paid for it. A capital loss is generated if you sell something for less than you paid.
Cash refers to currency consisting of paper bills, coins and funds held in checking, savings and money market accounts. Cash is considered to be a liquid asset because it is easy to access.
6. Compound Interest
Compound interest, also known as compounding interest, is interest earned on a loan or deposit that is based on both the principal and the interest amounts. Compounding interest can be earned on the money you save and it can end up costing you more to borrow money with some loans.
An important investment strategy that spreads investment funds among different asset classes and assets within classes is called diversification. This approach helps to reduce risk while maximizing return.
A dividend is the portion of a company’s profit that it pays out to investors who own shares of the company’s stock. Many investments will pay a dividend yield, meaning you can expect a portion of the profits from your investment on a monthly, quarterly or yearly basis depending on the investment.
9. Exchange-Traded Fund (ETF)
An exchange-traded fund is a pool of money gathered from many investors and invested by a manager so that its performance tracks an index. ETF shares trade like stocks.
10. Financial Advisor
A financial advisor is an experienced professional who helps people manage their money. Financial advisors help their clients with creating financial plans, managing investments and asset allocation or through a variety of other financial consulting. Advisors can specialize in specific areas, such as tax planning, or they could be generalists that aim to help clients with a number of different financial activities.
11. Index Fund
An index measures the performance of a group of assets. Well-known indexes include the Dow Jones Industrial Average and S&P 500.
Interest typically refers to a fee a borrower pays to a lender in exchange for the use of money. However, interest isn’t just charged when you borrow money as it can go both ways. Investors receive interest when they put money in an interest-bearing account such as a savings account that the bank benefits from.
13. Mutual fund
A mutual fund is a pool of money gathered from many investors and invested in stocks, bonds and other assets by a professional manager. Each investor owns shares in the mutual fund. Many mutual funds are considered some of the safest investments in the market for retirement accounts to invest in because of the diversification in assets that many aim for.
The cash, stocks, bonds and other assets owned by an individual investor or fund are referred to as a portfolio. When experts are referring to asset allocation and diversification, they are typically referring to all of the investments in a portfolio as a whole investment strategy.
15. Real estate
Property that consists of land or buildings is known, collectively, as real estate. Real estate is a popular class of assets used in many investment portfolios for diversification either through direct investment or through the investment of a real estate investment trust (REIT).
The return is either the profit or loss of an investment over a specific period of time. You can analyze returns for investments you’re considering over long periods of time to determine if it is a historically safe investments or not.
17. Retirement Account
A retirement account is typically a tax-advantaged account in which an investor places assets that will be used to fund a financially secure retirement. Individual Retirement Accounts and 401(k) plans are popular retirement accounts.
18. Risk Tolerance
The level of risk an individual investor is willing to take when investing is referred to as their risk tolerance. Every investor will have a different risk tolerance based on their individual financial goals and their appetite for the speed at which they would like to grow their investment account. This is one of the main reasons that portfolio managers tend to craft investment strategies for each individual client.
A stock, bond or other investment instrument that can be traded is known as a security. Sales of securities, as a whole, are regulated by the Securities and Exchange Commission (SEC).
A stock is a security that represents a share of ownership in a company. Stocks are one of the major classes of assets and are regularly traded within many portfolios. Stocks may also be called shares or equities and are one of the most popular investments in the market today. Whenever a business files an IPO to go public, they are selling stocks, or shares, in their business.
21. Stock Market
The stock market is a system for the organized buying and selling of stocks on stock exchanges, over-the-counter markets and computerized trading networks. People refer to major indexes, collectively, as the stock market. These are the only places where stocks can be purchased from a publically-traded company so that all trades and sales can be regulated by the government.
Investment terms provide useful shorthand ways to express concepts that are of special importance to the world of investing. Many are unique to investing or have meanings that are different from their regular definitions. Learning the definitions of some of the most important terms will start a beginning investor on the road to becoming fluent in the language of investing.
Tips for Investing
- A financial advisor can help you interpret financial terms and explain key concepts that will help you make the most of your financial resources. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- SmartAsset’s free online Investment Calculator will show you how an investment grows over time. Beginning with the starting investment amount and the amount and timing of additional contributions, it uses the anticipated rate of return and the number of years you plan to let the investment grow to tell you how much your future nest egg will be worth.
©iStock.com/fizkes, ©iStock.com/standret, ©iStock.com/William_Potter