investing terms for beginners

13 Investing Terms For Beginners

Most of us are scared of investing just because we think we don’t know enough, or don’t have enough money to get started.

The truth is, with the technologies currently available, you can get started with investing for as low as $50 a month ( or even less than that).

 

The goal of this post is to share a list of the most used investing terms to help you get clear on what different things mean so next time you hear someone talk about bonds or NASDAQ, you know exactly what that person is referring to.

This was also how I first got started. Getting clear on these investing terms really helped me get on the right path on my investing journey.

 

1. Investing

 

The general definition of investing is that you are putting in money to buy an asset or an item with the expectation of increased income in the future.

Some of the investing examples could be buying stocks of a publicly-traded company, buying bonds, or buying real estate with the goal of increasing the value of this investment over time.

 

Since investment is focused on future income or revenue, which could be unpredictable, there is an inherent risk associated with any kind of investment. But the difference between investment and saving is that, with savings, you are accumulating money that you would need in the future whereas with investments, you are making that money work for you, in order to make more money.

 

2. Brokerage Account

 

A brokerage account is an investment account you open with a brokerage firm. You need a brokerage account in order to invest in the stock market. You can transfer money to your brokerage account from your bank account, you can then use this money to buy investments. The money in your brokerage account and the stocks you buy, are owned by you, and you can sell these stocks at any time.

There are several brokerage firms you can choose from, some of the well-known ones are Charles Schwab, Merrill Edge, Robinhood and Fidelity.

I personally use and recommend Charles and Schwab, because they have an amazing mobile app, no account minimum, and they offer commission-free trades.

 

3. Stocks

 

Stocks are a way for you to invest in a publicly-traded company and earn a part of the profits.

For companies, stocks are a way to raise capital.

Shares are a collection of stocks you own in one company.

You can buy a stock of a company through a financial institution known as a stock exchange. The price of stocks fluctuates, and you can earn a profit when you sell a stock at a price higher than your buying price.

 

For example, if you bought 5 Tesla shares for $200, spending a total of $1000 – after 2 years if the price of Tesla stock has gone up to $750, you can sell those 5 shares(multiple stocks in one company)  for $750 each, making a profit of $550 on each stock sold.

 

4. Blue chip stocks

 

Blue chip stocks are stocks of established and reputable companies that have been doing well on the stock market. These companies have seen sustained, consistent growth and hence investing in these stocks feels less like gambling.

 

5. Bonds

 

A bond can be seen as a loan taken by a company from an investor, where companies traditionally pay a fixed interest rate on the money borrowed. Companies borrow money from investors in order to fund their projects and operations. 

The bond includes the terms of the loan, the interest payments to be made, as well as the date of the maturity of the bond – the date when the principal amount ( the original amount of money borrowed) must be paid back.

 

The difference between stocks and bonds is that stocks represent an ownership in the company whereas bonds are a debt instrument in which the borrower promises to repay the money sometime in the future.

 

Many investors consider bonds to be safer than stocks, since the bond investors are likely to receive their initial investment back when the bond matures.

 

6. Stock Market

 

The stock market is a collection of markets and exchanges where investors can trade shares/ stocks of publicly-traded companies. The stock market consists of multiple stock exchanges – like the NY Stock Exchange, NASDAQ etc., which are financial institutions operating based on a defined set of regulations.

Though it is called the stock market, financial securities other than stocks – like ETFs, bonds, commodities etc. are also traded on the stock market.

 

7. NASDAQ

The NASDAQ stock exchange, also called NASDAQ for short, is an American stock exchange based in New York city. NASDAQ was created in 1971 as an alternative to in-person transactions and provided a way for investors to trade stocks online, in an automated and transparent manner. It currently consists of about 3200 publicly traded companies, and is mostly known for its high-tech stocks.

 

8. New York Stock Exchange

 

The New York Stock exchange (NYSE) is another stock exchange based out of Manhattan, New York.

It is the world’s largest stock exchange by market capitalization of its listed companies.

A stock listed on NYSE is denoted as:

NYSE: UBER

 

9. Bear Market

 

The terms “bear market” and “bull market” are used to define market trends; how stock markets are doing, that is, whether they are rising or falling in value.

They are also an insight into the investors’ attitude, positive or negative, towards market trends.

A bear market means that the market is depreciating in value. Prices are going down and investors feel that this trend is going to continue. This also means, that the economy is slowing down – like it is happening now – during the Coronavirus outbreak, which might also result in higher unemployment rates.

 

10. Bull Market

 

A bull market means that the market is appreciating in value, and investors believe that the economy is doing well and stock prices will continue to increase.

Investors believe that since prices are only going to go up, it is good to invest in such a market.

 

11. IRA

 

An IRA account is a retirement savings account in which you can invest for tax-free growth or on a tax-deferred basis.

There are mainly 3 types of IRA accounts: The traditional IRA, the Roth IRA and the Rollover IRA.

An IRA account, called the SEP IRA also exists for self-employed people, freelancers or those with a small business. Like a traditional IRA, the money in a SEP IRA is not taxable until withdrawal.

 

12. Initial Public Offering

 

An initial public offering (IPO) is a process by which a privately held company gets listed on the stock market and becomes publicly traded. The company starts selling stocks to individual investors in order to raise capital. Once a company becomes publicly traded, you as an individual investor can start buying and selling that company’s stock through your brokerage account.

 

13. Volatility

 

Stock market volatility refers to how often the market rises and falls. The more volatile a stock, the more risky the investment because of unpredictability. You could either make a lot of money on a volatile stock, or lose a lot of money.

We will keep updating this list in the upcoming months.

If you have any questions, feel free to post them in the comments section, we would love to answer them.

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