25 Investment Terms You Need To Know

Thursday, 3 February 2011

So you like the idea of investing huh?

Think it is a great way for a kid to make some extra cash? Well... it is, but before you dive into the world of investing I think you should learn these basic investing terms. Once you learn these terms you'll be all set to tackle any beginner investing book I throw at you. Alright, enough anticipation here is the list...

Actively Managed Fund 
- An investment run by a manager who buys and sells investments at will in an attempt to beat the market. A percentage of your investment capital goes to pay the manager, other advisors and brokerage commissions.

Asset
 - Any item that is likely to rise in price (appreciate) and can be easily sold for cash (liquidated).

Bear Market 
- Referring to a market or market sector when stock prices fall for a significant period of time.

Blue-chip 
- A large national/international companies stock, with a history of consistent growth.

Bond 
- Issued to investors in order to raise capital for businesses and government. By lending money to these groups you recieve interest over a fixed period of time, once a bond matures you receive the money you originally invested in the group. Bonds are the first security to be paid if a company is liquidated.

Broker 
- A person or business who acts as a "middleman" between buyers and sellers of stock. Brokers charge a fee (commission) for every purchase or sell of a stock (transaction).

Bull Market 
- The opposite of a bear market. Referring to a market or market sector when stock prices rise for a significant period of time.

Capital 
- Money used to generate a income, start up costs for businesses are paid for with capital. Money used to by securities is also capital.

Diversification 
- Splitting up capital into several different asset classes, such as small cap, large cap, international etc. and even between different investments like commodities, real estate, options, bonds, forex etc.(don't worry if you don't know all of these yet, I'll discuss them at a later date)

Dividend 
- Payed out by companies to its share holders, most commonly in the form of cash. Companies are not required to pay out dividends.

Index Fund 
- A passively managed fund, that tracks a specific index such as, DJIA, or S&P 500. More earnings are paid out than a normal mutual fund because less transactions occur.

Inflation 
- The rise in price of all items and services, resulting in the decrease of the purchasing power of the dollar

Load Fund 
- A fund that charges an additional fee to the purchase or sale.

Mutual Fund 
- A fund offered by a company who will use the money from sales of the fund shares to buy investments. Mutual funds have a minimum investment.

No-Load Fund 
- Opposite of a load, a fund that charges no additional fee to the purchase or sale

Passively Managed Fund 
- See Index Fund.

Portfolio 
- A collection of investments owned by a person, business or any other institution.

Preferred Stock 
- Similar to common stock (which is generally what people are talking about when they say "Stock") since it is also partial ownership in a company. Preferred stock owners do not have voting rights that common stock owners do, but if a company is liquidated preferred stock owners are paid after bond owners but before common stock owners. Preferred stocks pay out fixed dividends.

Profit 
- Price you sold a stock for minus the cost to buy.

Security 
- Evidence of ownership in an investment vehicle, generally used in reference to the investment itself all though technically incorrect.

Speculation 
- Buying extremely risky and volatile investments with above average growth potential.

Split 
- Increasing the total number of shares of stock at a certain ratio, prices are cut at same ratio. If you own 10 shares if Sony and they split 2:1 you will own 20 shares each with half the price.

Stock 
- Partial ownership of a company, by buying stock you own a piece of that company.

Ticker Symbol 
- A group of letters that stand for a certain stock. Ticker symbols are shorter and also more convenient.

Volatility 
- A measure of how a stock moves compared to a bench mark. The higher the volatility the more risky an investment is.

(Dividend) Yield 
- The percentage of dividends paid compared to the price of a security. Found by adding all four quarter's dividends and dividing by the price.

This isn't everything you need to know, but it is certainly enough to get you started. I suggest knowing these words by heart even if that means putting them on flash cards.

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