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Investing is an art.
Understanding the basics is crucial to make good investment decisions.
Here are 20 investing terms you should know.
1. Asset
What: Something valuable you own, like money, a house, or investments, that can increase in value over time.
Example: A house is an asset because you own it, and its value might increase over time.
2. Capital Gain
What: The money you make when you sell something, like a stock or a house, for more than what you paid.
Example: If you buy a stock for $50 and sell it for $70, you make $20, which is your capital gain.
3. Bond
What: A loan you give to a company or government, and they pay you back with extra money called interest.
Example: If you buy a government bond, youâre lending money to the government, and they pay you interest over time.
4. Index Fund
What: A fund that lets you invest in many companies at once by following a group of companies from a stock market index, like the S&P 500.
Example: When you invest in an index fund, you own a little part of all the companies in that group.
5. Exchange-Traded Fund (ETF)
What: An ETF holds many different investments, like stocks or bonds, and you can buy and sell it like a regular stock.
Example: An ETF lets you invest in many different things at once, and you can easily trade it like a stock.
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6. Mutual Fund
What: A group of investments like stocks or bonds managed by professionals and funded by money from many people.
Example: When you invest in a mutual fund, your money is combined with other peopleâs money to buy a bunch of investments.
7. Market Capitalization (Market Cap)
What: The total value of a companyâs stock. You calculate it by multiplying the stock price by the number of shares.
Example: A big company like Apple has a market cap of over a trillion dollars, meaning itâs worth a lot.
8. Risk
What: In investing, risk is the permanent loss of capital.
Example: When you invest $1,000 in stock and sell it for $400, youâve lost $600.
9. Return on Investment (ROI)
What: A way to measure how much money you make from an investment, shown as a percentage of your original investment.
Example: If you invest $1,000 and make $200 in profit, your ROI is 20%.
10. Compound Interest
What: Interest that builds on both the original money and the interest that has already been earned, making your money grow faster.
Example: With compound interest, the longer you keep your money invested, the faster it can grow.
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11. Liquidity
What: How quickly and easily you can buy and sell something, like a stock or a house.
Example: Stocks have high liquidity because they can be sold quickly, while houses take longer to sell.
12. Bull Market
What: When the prices of stocks or other assets keep going up (> 20%) because people feel good about the economy.
Example: In a bull market, investors are eager to buy stocks because they think prices will keep rising.
13. Bear Market
What: When the prices of stocks or other assets keep going down (> 20%), usually because of economic problems.
Example: In a bear market, many people sell their stocks because theyâre worried prices will drop even more. You should do exactly the opposite.
14. Blue-Chip Stock
What: Shares in big, trusted companies that have been around a long time and are known for being reliable.
Example: Coca-Cola is a blue-chip stock because itâs a big company that has been steady for multiple decades.
15. Initial Public Offering (IPO)
What: The first time a company sells its stock to the public, giving people a chance to buy shares.
Example: When Facebook (Meta Platforms) had its IPO in 2021, it sold shares to the public for the first time at $38. Today, the stock price equals $524.
16. Dividend Yield
What: The amount of money a company pays shareholders as a percentage of the stock price, showing how much income it gives.
Example: If a stock costs $50 and pays a $2 dividend, its dividend yield is 4%.
17. Asset Allocation
What: A way to divide your money among different types of investments to balance risk and growth.
Example: A common asset allocation might be 60% stocks and 40% bonds to reduce risk while still aiming for growth.
18. Hedge Fund
What: A special type of investment that invests in risky things, hoping to make more money than traditional investments.
Example: The Medallion Fund from James Simons returned more than 30% per year after fees.
19. Short Selling
What: A strategy where you borrow stock, sell it, and hope to buy it back later at a lower price to make a profit.
Example: If you short-sell a stock for $100 and then buy it back at $80, you make $20 in profit.
20. Inflation
What: Inflation causes prices of goods and services to go up over time, meaning money loses some of its buying power.
Example: If inflation is 5%, something that costs $100 this year will cost $105 next year.
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Used sources
Interactive Brokers: Portfolio data and executing all transactions
Finchat: Financial data