Investing Terms- Foundation
There are a lot of financial terms, and it is important to understand what they mean. Sure, you can google anything, but it can be confusing. While investing itself is straightforward, many people find themselves shying away from the entire process because they simply do not understand the meanings of different terms, which can be somewhat overwhelming and demoralizing.
So here is a rundown of common investing terms that every investor should become familiar with:
A stock is simply a portion of business ownership. Purchasing a company’s stock allows you to vote at shareholder meeting while also being eligible to share in any profits that the business may generate. It is important to remember that stock values fluctuate daily basis, and that not all stocks will make money. Some may stay at the value they were when your bough them, while others may drop in value. This makes stock purchasing a trickier option for those that are particularly risk adverse. It is a good idea to keep your initial stock purchase at a minimum until you become comfortable with market performance. It is also a good idea not to invest more than you are willing to lose.
Bonds are simply loans. They are a way of lending money to a company or the government. In return for your loan, the company/government will agree to pay you interest on the money, and eventually repay the principle of 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 (growth, income, tax awareness) and can include stocks, government bonds. All mutual funds are managed by a professional that choses the securities included in the mutual fund.
Exchange Traded Fund (ETF)
Exchange traded funds are similar to a mutual fund. They are a basket of stocks or bonds focused on a strategy. ETFs can be both managed or passive meaning their could be a fund manager making trades or it could be following an index like the S&P 500. Unlike a mutual fund ETFs are treated more like a stock when an investor is buying or selling.
Once you begin to invest, you will have a portfolio. A portfolio represents all the investments that have been made on your behalf. Most investors will have a variety of investments in their portfolio, 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 is 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, other portfolios may include more stock investments. Diversification also includes varying the type of stocks or investments you make. Instead of concentrating on one industry, purchasing stocks in two or three industries can help protect your investment should one particular industry suffer an unexpected market loss.
Remember to talk to a financial professional with any questions or concerns you may have regarding the investment options available to you.
*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax, legal, or investment advice and may not be relied on for purposes of avoiding any federal tax penalties. Individuals are encouraged to seek advice from their accountant, financial planner, and counsel. Neither the information presented, nor any opinion expressed constitutes a representation by WM Wealth Planning as a specific recommendation to the purchase or sale of any securities/investment. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets. This material was developed and produced by WM Wealth Planning for educational purposes.*