The Investment Terms You Need to Know
Diving into the world of investing can seem intimidating, but you don’t need to be an expert to start growing your wealth. Learning a few of the top investment terms can help make you more comfortable in understanding where your money is going.
These terms will help you stay on top of your investments and feel a lot more at ease with financial lingo. (Looking for investment tips? We’ve got those too.)
In This Article:
An investment strategy consisting of actively buying and selling securities in an effort to outperform the market. Active investing tends to underperform a passive investing strategy.
A market cycle in which stocks decrease in value, encouraging investors to sell. Bear markets typically last a few months to one year, then are followed by a bull market.
A bond is a fixed-income financial asset. The investor lends money to a corporation or government for a fixed term. In exchange, they receive regular income paid monthly or quarterly, and full repayment of the initial investment amount at the bond maturity date.
The value of an asset or security as recorded in financial statements. For investors, this is the value of a security at the time of purchase and may differ from the current market value.
A brokerage account is an investment account that allows you to access the stock market. You need a brokerage account in order to buy and sell financial securities like stocks, bonds, and ETFs.
A market cycle in which stocks increase in value, encouraging investors to buy. Bull markets typically last 5 to 6 years, then are followed by a bear market.
The amount by which an investment has increased in value relative to the price for which it was purchased. For investors, a capital gain is the positive difference between the market value and the book value of a stock. Capital gains are subject to income taxes if the investment is not held in a registered account.
A brokerage firm that provides low or no commission trading of financial securities. Discount brokers typically do not offer any financial advising services.
A payout to shareholders as a form of profit-sharing from a company or investment fund. Dividends are typically paid quarterly but can also be paid monthly, bi-annually, or annually. Not all stocks pay dividends. Dividends are subject to income taxes if the investment is not held in a registered account.
Dollar-Cost Averaging (DCA)
An investment strategy that consists of purchasing a fixed amount of financial securities on a regular schedule. This reduces the impact of market volatility on the investment portfolio.
ETF stands for Exchange Traded Funds and is a collection of related securities that trade like a single stock on the stock market exchange. Many ETFs are designed to replicate a specific index. Investing in ETFs is an easy, low-cost way to diversify your investment portfolio.
A financial investment in an asset that may also have liabilities attached. Equity typically refers to the stock or shares of a company.
A collection of securities that represent an industry, geographic location, or type of investment. Index funds are a low-cost way to easily diversify your investment portfolio. ETFs and index mutual funds are some examples of index funds.
Inflation is the general increase in prices over time. It is important to consider the rate of inflation when projecting the value of your financial assets in the future, as each dollar will have progressively less purchasing power in the future.
Initial Public Offering (IPO)
When a company offers shares to investors on the public market for the first time. IPOs are ways for companies to raise money by selling stock to retail investors.
A collection of financial assets including but not limited to stocks, bonds, ETFs, and options.
Management Expense Ratio (MER)
The total cost of any management fees, taxes, and operating expenses for an index fund relative to the fund’s average value for that year. Index mutual funds and ETFs charge MERs, which typically range from 0.05% to 1%.
A fee you pay to a manager of a fund for the service of managing the investment portfolio. The management fee can be a fixed dollar amount or a percentage of the total portfolio value.
An investment account that allows an investor to borrow money directly from the broker to purchase financial securities. This allows investors to leverage debt in order to earn greater returns. Margin accounts typically allow you to borrow up to 50% of the cost of the securities you intend to buy.
The value of an asset or security on the market exchange. For investors, this is the value of a security on the stock market and may differ from the book value or price for which it was originally purchased.
An investment account that provides no tax-sheltering or tax-deferral status. All investment income earned within a non-registered account is subject to income taxes. Non-registered accounts typically do not have any contribution or withdrawal rules.
A class of financial derivatives that provides an investor with the right to buy or sell stock at a certain price. An option is a contract. Call options provide the right to buy at a set price, even if the market value of the stock is higher. Put options give the right to sell stock at a set price, even if the market value is lower.
An investment strategy consisting of limiting active trading of securities, and instead relying on automated tools such as robo-advisors or index funds. Passive investing tends to outperform an active investing strategy.
A tax-optimized investment account that is registered to an individual. All investment income earned within a registered account may be either tax-deferred or tax-sheltered. Registered accounts typically have strict contribution and withdrawal rules.
A stock, or a share, is a financial security that represents partial ownership of a corporation. Owning stock entitles the shareholder to profit sharing with the company, as well as voting rights.