If you are new to investing, you may hear or read a lot of investing terms you are not familiar with.
Understanding what they mean and the role that they may play on your financial life is crucial.
I selected only 10 investing terms, but there are many more. Here is the list of the most common investment terms you may come across.
1. Stock Market
The Stock Market may refer to financial markets in general. It’s usually mentioned as the “place” where stocks or shares of companies are traded. The New York Stock Exchange or NYSE is a well-known example.
Stocks are an investment vehicle. They are associated with companies that are publicly listed in a Stock Exchange.
Stocks are a way to raise money for companies and are usually available as shares. They allow individuals as you and me, to invest in companies that we like or are a customer of.
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Equities mean the same as stocks. When someone says is buying equities, it means acquiring shares of companies. The Equity market can be a synonym for the Stock Market.
Bonds are issued by governments or companies when they need to raise money. They work as a simple loan. Individual investors act the bank and lend their money based on an interest rate and a time horizon.
Unlike stocks, you have no ownership rights. You are only entitled to your money plus the interest.
Interest is usually associated with the money charged when we need to borrow and it’s often calculated as a percentage of a capital.
When discussing investing, you may hear about compound interest. It refers to the money earned on the starting capital plus on the interest paid.
Capital is the money invested initially or the cash you have set aside for a loan. It really depends on the context.
Capital does not have to be associated with cash only. It may refer to other assets, such as, funds or physical assets of a business.
Funds are an investment product. The money invested in a fund is managed by a investment manager, who oversees the assets the fund invests in. Funds are a collective investment, on which you own a percentage based on your investment.
An Index often refers to a benchmark in the Stock Market. A common index is the Standard & Poor’s 500 Index or S&P 500. It measures the stock performance of the largest 500 companies listed in the United States.
9. ETF (Exchange Traded Fund)
An ETF is a basket of securities that tracks a stock market index or other mix of assets. Not so long ago, I wrote a post on how you can easily invest in the Stock Market via ETFs. Read here.
Some companies share part of the profits with their shareholders through dividends. This is money that is paid on a periodic basis but is not guaranteed. However there are companies which have consistently paid dividends for more than 20 years.