If you are like me you may not be the most investing savvy. Majority of people that have knowledge of how stocks work tend to work in the industry. I however don’t believe that should be the reality. I believe that this information should be taught to everyone. If it is good enough for Bill Gates to know then dammit it’s good enough for everyone else.
Now I’m in no way saying I’m an expert in investing, at least not yet I’m not. This is meant to get your engine going with investing concepts/terms to increase your knowledge. That way when you start investing the words won’t look like reading a different language. I also would recommend start reading up!
If you learn anything from this post take this lesson with you today. I recently purchased my first stock ever in my life and it went under by a $1 in a day (thanks to Hilary’s stupid emails). I learned my most valuable lesson, which is to not wait. Prior I’ve been watching the stock go down and then move up but kept putting it off for fear that I’m not an expert in investing. Take my mistake and don’t be afraid to jump into new territory, we all have to start from somewhere.
Nonetheless I’m getting over that type of “can’t do” thinking. I’m a future CFP in training so I will be spreading the knowledge for those who wish to learn. I found 11 investing terms every beginner should learn down pack. I break down into basic terms.
- Stock – A stock is simply a share of a company. When you purchase a stock you become a shareholder and are entitled to a share of company’s earnings. Vice versa if the company goes under your stock goes under as well.
- Trading vs. Investing – If you think the two are the same then you are the majority of the people so don’t worry. But there is a distinct difference from the two. An investor will invest in the company for the long haul and possibly buy more stock along the way. On the other hand a trader will buy shares of a company and only hold them for a few minutes, hours, days and in rare occasions months. It’s important to decide which one you are.
- Asset Allocation – This is fancy talk for tactics you implement to invest your money. You have three categories to choose from: cash, bonds and stocks. Cash would be considered less risky, bonds somewhat risky and stocks risky.
- Bear Market – When the economy is doing bad and people don’t have much faith in the stocks. This is also a sign of a possible recession. AKA a bear slashes down when attacking. During a bear market it is suggested to move funds into bonds because they are safer than stocks.
- Bull Market – When the economy is doing well and people aren’t holding onto their wallets. AKA a bull thrusts its horns up in the air when attacking. During a bull market it is suggested to let the money ride. Keep investing in stocks, emerging markets and sectors like energy, consumer’s discretionary and basic materials.
- Bonds – A bond is also formally known as fixed-income securities. That is fancy name for when you lend the company money. You are essentially the bank that lends the company money and receive at a fixed interest rate. In addition, if a company goes bankrupt the bondholders will be paid back before stock shareholders.
- Mutual Fund – This fund is an investment strategy that allows you to pool your money with other investors to purchase collection of stocks, bonds and other securities. The fund is managed by “money mangers” whose main job is to beat the market, which will result in a profit. Fees can however be associated with participating in mutual funds.
- Exchange-Traded Fund (ETF) – An ETF is somewhat new to the market with it’s emergence in 1993. It has since then picked up steam and become popular in trading. To dumb it down an ETF is a stock that mirrors a batch of stocks in different sectors. If the sectors do well then the ETF stock will increase in price. Vice versa if the sectors do bad the ETF stock price will decrease. For more information check out the other post just on ETFs.
- Diversification –Learning this is imperative for those who plan on becoming investors for the long haul. To diversify a portfolio is to lessen the risk of your investments. For example: If you have $2,000 in stocks that can be very risky. To diversify your money you decide to put $500 in bonds, $700 in mutual funds and the $800 in stocks. It protects your money in case stocks, bonds or mutual funds go down. It’s never wise to have all your eggs in one basket.
- Price to Earnings (P/E) Ratio – This ratio is popular for using to determine if your stocks are being overvalued or undervalued. A general rule is, a low P/E between 0 and 10 means the company isn’t doing well. If the ratio is high, over 25, that means the company shows signs of growth in it’s future.
- Due Diligence – You may already know what this means and yes it’s not really an investing term. But it must be said here. When you begin to invest do your homework! Review your options. Research what the company does; how it has done in the past, it’s future goals and the economy that surrounds it. Learn to balance the time for research and taking advantage of the market.
Whether you are in the process of investing or just thinking about entering the market, knowing these terms will help you make a sound decision. I hope that these terms taught you something new today.
Here are 11 other finance tips that everyone should know as well. Learning is knowledge people!
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