The investment world might seem overwhelming, but learning some basic investment terms can go a long way toward understanding how to build a successful portfolio. Whether you’re looking to invest in short-term investments, tax-advantaged investments or other types of investments, such as stocks or mutual funds, here’s a glossary of investment terms that you should know.
Most of this investment terminology is commonly used by traders, investors and the financial press. If you understand all of these common investment terms, you’ll be able to decipher basic investment speak and be better prepared to make your first investments.
1. Ask Price
When buying stocks, there is a spread between the bid price and the ask price. The ask price is the lowest price that a seller is willing to offer up his shares to a buyer.
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An item, tangible or intangible, that has value in an exchange is considered an asset. In the investment world, common assets are stocks, bonds, mutual funds, bank accounts or real estate.
3. Asset Allocation
One of the bedrock concepts of investing, asset allocation refers to the way that an investor divides up assets across different investment products, such as stocks, bonds and cash.
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4. Bear Market
A time of declining prices and pessimism in the market. In investment jargon, a bear market is when a broad market index, such as the S&P 500, falls by at least 20 percent over a two-month period.
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5. Bid Price
The counterpart to an ask price, a bid price represents the highest price that a buyer is willing to pay for a stock. The bid is important to sellers, as that is the price at which they can “hit the bid” and sell their shares.
6. Blue Chip
A blue chip stock is a well-established company with predictable revenue and a dominant market position. Blue chips are typically less volatile stocks that pay a reliable dividend.
A bond is a loan made to an issuer, such as a company or the U.S. government. In return, investors receive regular interest payments and the return of principal at maturity.
8. Bull Market
A bull market is characterized by optimism and rising prices. The opposite of a bear market, bull markets are defined by uptrends of at least 20 percent over a two-month period.
9. Capital Gain
A capital gain is a profit on an investment. For example, if you sell a stock for more than you paid for it, you generate a capital gain. Long-term capital gains carry special tax treatment.
10. Capital Loss
A capital loss is triggered by selling an investment for less than the purchase price. Capital losses can be used to offset capital gains for tax purposes.
A dividend is a payment to stock shareholders out of the profits of a company. Most dividends are paid at regular intervals, such as quarterly. Some dividends are taxed at a special rate.
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12. Dollar-Cost Averaging
Dollar-cost averaging is the process of investing the same dollar amount on a regular basis, irrespective to share price. Dollar-cost averaging results in buying more shares when prices are low, and less when prices are high.
13. Dow Jones Industrial Average
Created in 1896, the Dow Jones Industrial Average is a proxy for the market as a whole. It tracks the prices of 30 large, well-known American companies.
14. Exchange-Traded Fund
An exchange-traded fund, or ETF, is a Securities and Exchange Commission-registered investment company, similar to a mutual fund, that trades on a stock exchange. ETFs can be bought and sold whenever the market is open, like a stock.
Inflation is the rising price of the cost of goods, such as gasoline, clothing, food and automobiles, resulting in a currency losing its value. Economists typically use the Consumer Price Index, or CPI, to measure inflation.
Interest is the price you pay for borrowing money or the price you receive for lending money. If you buy bonds and are therefore a lender, interest is the income that issuers pay you.
17. Limit Order
An order to buy or sell a stock or bond at a specific price. The order will not execute until the price is reached.
18. Market Order
An order to buy or sell a stock at the best price currently available, which can only be placed while the market is open, from 9:30 a.m. to 4 p.m. EST.
19. Maturity Date
For bonds, CDs and other interest-bearing investments, the maturity date is when interest payments cease and the principal is returned to investors.
20. Mutual Fund
A mutual fund is an SEC-registered investment company that pools money from various investors and purchases stocks, bonds or other investments on behalf of shareholders.
21. Price-Earnings Ratio
The price-earnings ratio of a stock, or P/E ratio, is calculated by dividing a stock’s current price by its earnings per share. P/E ratios are used for stock valuation purposes.
The act of returning a portfolio to its original asset allocation. Rebalancing keeps a portfolio in line with its original investment objectives and risk levels.
23. Standard & Poor’s 500 Index
An index tracking 500 of the largest companies in the U.S. weighted by market capitalization. Considered to be a proxy for the stock market overall.
A share of stock represents ownership, or equity, in a company. It entitles a shareholder to a proportional share of a company’s assets and profits.
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25. Stop Order
A buy or sell order that becomes a market order once a specified price is reached. The order remains open until the price level is breached.
The percentage of income earned on an investment, derived from the total dividend or interest payments by the price of the underlying security.