Learn common investor terms as you start your financial journey.
*sits backwards in a chair*
So you want to be an investor, huh? Good for you. Investing can be an integral part of a person’s financial journey. Take millennials. Investing for millennials is higher than other generations, as 45% of them are involved in some kind of investing. Compare that to 36% of Zoomers (aka Gen Z) that are investing. Gen Z interest in stock markets seems high, however, as almost half of current teenagers have expressed some interest in trading stocks or making investments.
A lot of people are investing, making trades, and following the markets. But everyone’s gotta start somewhere. If you’re just starting out in the investment world, the financial sector may seem totally alien. There are all kinds of weird concepts and strange terms that you have to memorize, or at least, recognize. So today, we wanted to take out some of the mystery and talk about some investing terminology for beginners.
- Investment Terms 101
- What do I do with these common investment terms?
Investment terms 101
S&P stands for Standard & Poor’s, which isn’t as bad as it sounds. The name is actually in reference to the two founding companies that merged in 1941: Standard Statistics Bureau (later company) and Poor’s Publishing. The latter company was named after its founder, Henry Varnum Poor.
Today, the S&P 500 is a stock exchange that tracks the market capitalization of 500 of the largest public companies in the US. Market capitalization means the total value of all shares of stock that a company has issued. Overall, S&P is a credit risk researcher that covers numerous industries, assets, and benchmarks.
The Nasdaq or NASDAQ is originally an acronym for the National Association of Securities Dealers Automated Quotation (just rolls off the tongue, huh?). Founded in 1971, it is now the second-largest stock exchange on the planet, with a collective market capitalization of over $19 trillion. And it oversees a lot of trades. There are over 2 billion shares traded on its electronic exchange daily!
They also hold the distinction of being the first electronic stock exchange. Prior to Nasdaq, there were physical stock exchanges where traders would buy and sell securities. Now, all-electronic trading has become the norm.
Bull v Bear markets
These are really two terms “Bull” and “Bear”, but they’re related. Overall, economic markets are influenced by customer confidence. When consumers are confident, they tend to spend more, which can drive economic growth. When consumers are less confident, they don’t spend as much, limiting growth.
So then, what is a bull market? Well, it's a market where share prices are rising, encouraging a lot of buying. When investors buy a lot, this is called a buyers market. Conversely, a bear market is where share prices are falling, usually by 20% or more for a sustained period, so investors are quick to sell, creating a seller’s market. Both bull and bear markets can last for weeks, even years. There were a series of bull markets from 2009 to 2019, which COVID-19 seriously affected.
A mutual fund is a company that pools money from a number of investors. They invest the money in securities such as stocks, bonds, and other short-term debts. Why would people want to do this? Well, mutual funds have professionals manage your investment(s) for you, researching companies and monitoring your investment’s performance. Plus, with a number of investments being made, this lessens your risk should one company fail. There are a number of mutual fund types, including money market funds, bond funds, and stock funds.
These are investment funds that follow a benchmark index, such as the S&P 500 or Nasdaq 100. When you put money into an index fund, you’re investing in all the companies that make up that particular index. So you get to diversify your money more than by just purchasing individual stocks. A more diverse portfolio means lower risk should a single company fail.
ETF (Exchange-traded fund)
Exchange-traded Funds are pooled investment funds, similar to mutual funds. They allow an investor to have a portfolio of managed and diversified investments. Unlike mutual funds though, ETFs generally have lower fees and can be traded like stocks on stock exchanges. They can also be sold throughout the trading day at fluctuating prices.
A stock split is what happens when a company’s board of directors distributes more shares of a stock to its current shareholders without diluting the share’s value. Why would you do this? If a company is concerned that their share prices are too high, a stock split can help lower those same prices. Or a reverse stock split can boost its share price to preserve the listing on a major stock exchange.
So an IRA stands for Individual Retirement Account. What makes a Roth IRA different? It’s taxes. Traditional IRAs give you a tax break before you retire, but Roth IRAs give you tax-free withdrawals after your retirement. People tend to go with Roth IRAs if they believe they’ll be in a higher tax bracket later in life and want to avoid paying those increased taxes then.
A 401(k) is a retirement savings and investment plan that is offered by some employers. The plan gives employees a tax break on money that they contribute. Why is it called that? It comes from the section of the tax code, i.e., subsection 401(k), that established the type of plan. Catchy, right?
Employees often sign up for 401(k)s by having automatic deductions from their paycheck that go into the account. Your type of tax break depends on when you contribute the money and when you withdraw it during your retirement.
Next steps in investing
What do I do with all these common investment terms?
Now that you have some basic investment terms down, you have to ask yourself a couple of questions. Namely: how much time do you want to invest (ha!) into investing? Do you want to be a passive or active investor? What kind of investment budget do you want or how much do you have? When it comes to investment, there’s always a certain amount of risk, even the “safer” options.
Knowing investing terminology can only take you so far. You’ll also have to know where to look to start your journey. As mentioned above, regular people can’t just hop into a stock exchange. You’ll have to go through an online broker. Luckily, online brokers like Charles Schwab or Fidelity have a lot of resources and direction for beginners. They can help you get your sea legs and let you figure out what kind of investor you want to be. There’s lots of information out there, but every journey begins with just a few steps. So happy investing and be smart out there.
Disclaimer: The opinions we expressed in this post are for general informational purposes only and are not intended to provide specific advice or recommendations.