Many people are intimidated by investing, and rightfully so when there’s a whole library of terms you need to wrap your head around. Why didn’t they teach us money stuff in school again?! As far as we’re concerned, the first step to achieving anything is starting with a solid foundation. We've put together a list of 10 fundamental investment terms you need to know – plus a little extra to help you keep up with your investment savvy friends.
Let’s start from the beginning. When you buy a ‘stock’, you are buying a stake in a company. Stocks can be traded freely and the price can vary widely depending on the maturity of the company. Stock prices fluctuate based on a company's performance, and also with the economy at large. The name of the game is to sell the stock at a higher price than the one you bought it for and make money on it. If the reverse happens, you can lose money on trading stocks.
Public companies list and share their shares on exchanges. There are several exchanges in the U.S. and around the globe. Some companies issue shares but are private—meaning they do not trade on an exchange. The Australian Stock Exchange (ASX) is Australia's system for trading stocks, bonds and other securities in the country's financial market. The Australian Stock Exchange acts as a full-service exchange and has two trading sessions per day.
Both stocks and bonds are two different ways for a company to raise capital. Access to this capital can relieve growing pains and create opportunities to invest into new ventures or development of products. When a company sells stocks, it is selling a portion of its company in exchange for cash. When a company issues a bond, it is issuing a type of a debt with the promise to repay the investor with interest at some point in the future. In the simplest terms, bonds are an I.O.U. between a company (the issuer of the bond, i.e. the borrower) and an investor (the purchaser of the bond i.e. the lender).
Securities is a broad term for securities that document that you own a share of something or have something for good. When you invest, you are buying securities. The most well-known types of securities are stocks and bonds, but a security can also be an investment certificate from an investment fund or investment fund.
A portfolio refers to a group of stocks, bonds and other securities that someone owns. So when someone talks about their ‘portfolio’ they simply mean ‘all of their investments’.
Should you invest in companies you like? We answer that question here.
You may hear this one come up a lot. ‘ETF’ stands for Exchange-Traded Fund. It’s a type of security that can include many types of investments such as stocks, bonds, commodities or a mixture in one basket. They can contain hundreds of different stocks from the same or varying industries and include stocks from one exchange (i.e. ASX listed companies only) or a mixture of international companies. For instance, a mining focused ETF would include mining companies from around the globe, however they can contain companies from any number of varying industries.
7) Bull Market
This refers to a market that is trending higher and likely to gain instead of lose. If you think that the market is going to go up, you are considered a “bull.” If you are “bullish” on a specific stock or company, it means that you think the stock price will most likely increase.
One cannot invest without a little bit of risk. There is usually a connection between how much risk you take and how much potential return you can get. When you start investing, you need to decide how big your risk appetite is, and determine how much high or low risk you are comfortable with in your investments.
9) Time Horizon
Your time horizon describes how long you plan to hold on to your investment before you want to sell it again. For example, if you invest to save up for a conversion in five years, your time horizon will be five years. The time horizon is very important in terms of what type of investment you should choose. As a rule of thumb, the longer your time horizon is, the more risk you can take.
Diversification means that you distribute your money on several different types of investments. For example, you may be investing in several different stocks and bonds, perhaps even in several different countries. Most experts recommend a certain level of diversification as it reduces the risk of the overall portfolio.
Heard this futuristic term before? According to many in the industry, one of the major trends in future investments will be “robo-advisors”. A robo-advisor is an online investment solution based on automated computer algorithms that handle investing.