If you are new to investing, it can seem like it has its own language filled with terms and industry jargon. Making sense of it all can feel like a full time job, but knowledge of the basics can help you understand reporting about the subject and work with financial professionals to better align your investing strategy and financial goals.
We compiled a glossary of ten common investing industry terms or phrases and what they mean to help you get started:
1.) Stock: Essentially, a stock is an ownership share of a company. You can purchase these shares and sell them at a later time for either a profit or a loss. Companies issue stocks to raise funds for investments, and those who own stock share in the profit of the company. Owning stock is not a guarantee that you will make money - while stocks can go up in value over time, the value of a company’s stock may also drop and can result in losses.
2.) Securities: A security is an investment with monetary value that you can trade. Stocks are a common security, but you may also have securities that are bonds. For example, you can purchase a treasury bond that loans money to the government that you recuperate with interest when the bond matures. Similar to stocks, bonds can also be purchased and sold on an open market.
3.) Stock Market: On the stock market, buyers and sellers exchange investments. There is not one sole stock market but a few exchanges where these trades occur. Two popular exchanges are the New York Stock Exchange (NYSE) and the Nasdaq. The NYSE is the largest stock exchange, with Nasdaq coming in second (though it was the first electronic stock market in the world in the early 1970s). One difference between the two is how securities are bought and sold.
4.) Funds: There are funds that are collections of stocks or bonds. The reason someone might invest in one of these funds is to diversify investments in such a way to balance the risk of investment. There are a few common types of funds you may have heard of:
5.) Stock Indexes: Reports on the performance of the stock market usually follow two major indexes, or benchmarks: Dow Jones Industrial Average (often referred to as the Dow) and the Standards & Poor 500 (S&P 500). The indexes are measured differently, but represent a set of companies to indicate the overall health of the market.
6.) Short Selling: Done most often by institutional investors as opposed to retail or day traders, an investor shorts a stock by borrowing shares from a broker and selling it in the hopes that the stock price will fall. If that does occur as the investor expects, they can buy the stock back at a lower price and profit off of the price difference. Unlike owning a stock, the investor in this case must pay interest on the borrowed shares, put up collateral against the loan, and give the shares back, even on short notice, when the owner or broker asks. This is a high-risk investment strategy, where losses can be substantial if the security price continues to rise, and is akin to gambling.
7.) Buy-and-Hold: A buy-and-hold strategy is when a trader buys securities and holds them for a long period of time regardless of changes in the market. This is referred to as passive investment management, and a less risky investment option versus day trading.
INVESTING STRATEGY TIP - Time in Market or Timing the Market? This is an age-old investing question. Some prefer to make investments for long-term gain, depending on time in the market to help money grow. Others watch the market like a hawk to try to time buying and selling securities. What is the right strategy for you? While day trading can be entertaining, it is more often than not nearly impossible to perfect. Rather time in the market, or choosing a long-term investment strategy, is a more sound approach than timing the market because historically speaking, allowing your investments to grow over time offers a higher return on your investment. Money and wealth can be emotional, but reacting based solely on emotion can cause negative repercussions.
Volatile Stock Market? The Best Strategy Might Be Staying the Course
8.) Retail Trading: A retail trader is an non-professional investor who buys or sells securities for personal accounts, as opposed to an institutional trader which buys and sells securities for managed accounts for groups or institutions. A professional trader may use more complex strategies, like the short positions described above. There are a number of options for trying retail trading, especially with the proliferation of online trading and robo-advisors.
9.) Cryptocurrency: If you have heard of Bitcoin, you have heard of cryptocurrencies, which is a form of payment that uses blockchain technology to record transactions, said to increase security. There are many types of cryptocurrencies and the markets for them are worth billions. Because of the fast rise in value, it may seem like a great investment position but the market for cryptocurrency can be pretty volatile as trading these currencies can be high-risk and speculative. These transactions are also not as closely regulated as other exchanges, which can be an issue if you experience fraud or theft.
10.) U.S. Securities and Exchange Commission (SEC): As opposed to the college football conference, this SEC is the federal agency charged with protecting investors and our national banking system. Created in response to the market crash that preceded the Great Depression, the SEC oversees stock exchanges and regulates the market. It investigates securities crimes like insider trading (when someone uses non-public information to trade securities or stock) and works to prevent fraud.
Knowing these investing terms can help you gain confidence when discussing the news of the day or any investments that you may have. Working with a financial professional is a great way to take all the pieces of your financial picture, from savings to investments, and ensure they align with your long-term goals.
The Rockland Trust Learning Center offers many articles that break down key topics that may impact your financial health or goals, and offers expert advice for everything from finding a savings account and investing in your 401(k) to managing finances in retirement.
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