If you’re new to investing, some of the information on the Internet can be downright confusing. While investing itself is fairly straightforward, many people find themselves shying away from the entire process because they simply don’t understand the terminology, which can be somewhat overwhelming.
So here is a rundown of common investing terms that every investor should become familiar with.
Investing Basics: Common Investing Definitions
While stocks can seem mysterious, a stock is simply a portion of business ownership. Purchasing a company’s stock allows you to vote at shareholder meetings while also being eligible to share in any profits that the business may generate. It’s important to remember that stock value fluctuates on a daily basis and that not all stocks will make money – some may stay at the value they were at when you purchased them, while others may drop in value, making stock purchasing a trickier option for those that are particularly risk-averse. It’s a good idea to keep your initial stock purchase at a minimum until you become comfortable with market performance. It’s also a good idea not to invest more than you are willing to lose.
Purchasing a bond is a way of lending money to a particular company or the government. In return for your loan, the entity that receives the money agrees to pay you interest on the money, and eventually repay the loan. Bonds are a relatively safe investment, meaning that your return on investment is much less than the return from other securities, but they do provide peace of mind to those with little appetite for risk.
Mutual funds are a combination of stocks and bonds. When you purchase a mutual fund, you are pooling your money with other investors. All mutual funds have a very specific investment strategy and can include stocks, government bonds, stocks in specific industries, such as technology or healthcare, or even stocks from specific countries. All mutual funds are managed by a professional that choses the securities included in the mutual fund.
Once you begin to invest, you will have a portfolio. A portfolio represents all of the investments that have been made on your behalf. Most investors will have a variety of investments in their portfolios, including individual stocks, bonds, and securities. Your portfolio can also include real property such as real estate, valuable art or jewelry, or any valuable item. Your portfolio is always tied to your investment goals that should be determined before you begin to invest.
While some experts caution new investors against diversifying stock purchases, it’s always best to have a diversified portfolio that includes a variety of investments, which helps balance out risk. While cautious investors may invest in more bonds or government treasuries, with limited stock purchases, other portfolios may include more stock investments. Diversification also includes varying the type of stocks or real investments you make. Instead of concentrating on one particular industry, purchasing stocks in two or three industries can help protect your investment should one particular industry suffer an unexpected market loss.