Investing is often an integral part of a long-term financial plan. When done strategically, it can help shore up your nest egg and grow your wealth over the long haul. Still, 44% of Americans don't own stock, according to recent Gallup polls.
Many potential or existing investors may be embarrassed that they don't quite understand how it all works. Investing jargon can be a lot to digest, especially if you're just getting started. Familiarizing yourself with key concepts is a great place to begin building confidence. We've rounded up 16 common investing terms to help you do just that.
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16 Common Investing Terms to Know
- The stock market: This umbrella term refers to the way investors buy and sell shares of a company, or stocks, typically on one of the major stock indices. The S&P 500, the Dow Jones Industrial Average and the Nasdaq Composite are among the most widely followed. You can access the stock market through investment vehicles such as a 401(k), individual retirement account (IRA) or regular brokerage account.
- Stock: When you buy shares of stock in a public company, it grants you an ownership position within that organization. That's why stocks are also called equity securities. Companies sell stock as a way of generating capital to fund different business initiatives. For the investor, the idea is to sell your shares and net a return if prices go up in the future, though profits are never guaranteed.
- Bond: When you purchase a bond, you're essentially lending your money to the entity that issued it. You'll then be repaid at a later time, with interest. Bonds can be issued by governments, municipalities and corporations. They're generally seen as less risky than stocks, and as such, returns usually aren't as robust.
- Investment portfolio: This refers to the overall collection of assets you have at any given moment. This can include stocks, bonds and other securities (investments that can be bought or sold).
- Growth investing: Driven by expectations, this is an investment strategy that focuses on buying stocks that have perceived future potential. The logic is that they're poised to outperform the overall market because they've performed well in the past. Growth stocks are generally more expensive and seen as riskier investments.
- Value investing: Value investors devote a portion of their portfolio to stocks they see as being undervalued. The strategy is that the market will eventually recognize their true worth and their stock price will increase accordingly. There are no guarantees, but value stocks are usually less expensive than growth stocks.
- Asset allocation: This is a nod to the way your assets are allocated within your portfolio. Experts suggest having a healthy mix of different investments to best position yourself to meet your long-term financial goals and hedge your risk. Asset allocation also considers your risk tolerance and retirement timeline when building a well-balanced portfolio.
- Diversification: Investing is inherently risky, but diversifying your investment portfolio can help mitigate that risk. Without diversification, you may find yourself overly invested in one sector, industry or geographic location. If anything happens that affects the value of those investments, it could be enough to tank your entire portfolio. Diversifying essentially spreads out your investments to hopefully prevent this from happening.
- Bear market: This happens when stock prices decline 20% or more for a prolonged time. It's more common during periods where there's a spike in unemployment or economic uncertainty, which can spook investors and lead them to sell their stocks.
- Bull market: Consider this the opposite of a bear market. Bull markets are characterized by rising stock prices that continue trending upward for a sustained period of time. They tend to follow bear markets and last for several years.
- Capital gain: Capital assets refer to stocks, bonds, cryptocurrencies and other investments. If you sell an asset for more than you paid for it, you'll likely have to pay a capital gains tax on the appreciation. Short-term capital gains, which apply to assets you've held for less than a year, are taxed as ordinary income. Long-term capital gains are usually taxed at a lower rate. Capital losses can also be used to offset gains.
- Mutual fund: This is a professionally managed collection of investments that can include a mix of stocks, bonds and other securities. When you have a mutual fund, you own small shares of different assets. This can allow for built-in diversification. Retirement vehicles such as 401(k)s and IRAs typically are largely made up of mutual funds.
- Exchange-traded fund (ETF): ETFs also provide diversification because they consist of groups of securities, but they're different from mutual funds in that they're traded like stocks. That means prices can rise and fall with supply and demand.
- Index fund: This is a kind of ETF or mutual fund that mirrors one of the popular stock indices mentioned earlier, such as the S&P 500. Index funds hope to match or outperform those investment returns and are generally less expensive to manage (and thus cost the investor less).
- ESG investing: This is an investment strategy that focuses on companies dedicated to the environment, social issues and corporate governance. Investors can earn potential returns while also supporting organizations that share their values.
- Dividend: Some companies dole out dividends as a way of sharing their profits with stockholders. It translates to a recurring payment, which can be a nice bonus for investors. They're most common among mature companies that are on solid financial ground. You can also choose to reinvest your dividends if you feel the stock will continue to perform well over time.
Are You Ready to Invest?
Thanks to compound interest, investing can be a strategic way to grow your wealth over time. It's often a core part of big-picture financial planning, especially where retirement is concerned. Those who have an employer-sponsored 401(k) are already participating. But before you start funneling more income toward investing, be sure you have a strong financial foundation. This includes:
- Having a working budget that easily covers all monthly expenses
- Having an adequate emergency fund to see you through unexpected financial mishaps (experts recommend saving three to six months' worth of expenses)
- Eliminating high-interest debt. Carrying debt can be so costly that the accumulated interest exceeds realistic investment returns.
The Bottom Line
Investing can be a fundamental part of your long-term financial plan. The same can be said for managing your day-to-day spending and keeping track of your credit. In the spirit of financial wellness, Experian allows you to check your credit score and credit report for free.