Investing Lingo

The investing world can be difficult for beginners
because the lingo isn’t always self-explanatory and many terms overlap. Learning the lingo can help you communicate
with others in finance and take better control of your investments. In this video, we’ll briefly define a few
common terms related to the market, investment types, portfolios, and trading. Let’s start with terms associated with the
market. The word market can be confusing because it
can refer to investing in general or a specific index, like the S&P 500®. A market simply means a place where buyers
and sellers can get together to make transactions. This might be a physical place, such as the
New York Stock Exchange® or an electronic gathering spot, like NASDAQ®. People also refer to the market as being bullish
or bearish. This refers to the direction the market is
heading up or down. An easy way to remember the market direction
is to picture these animals in battle. A bull in battle drives his horns upward to
gorge the attacker. So a bull market means that stocks or
other investment prices are going up. While a bear in battle swats his paws downward. So, a bear market means that prices are trending
down. In addition to market terms, it’s important
to understand the different types of investments that can be made . There are four main types
of investments, or asset classes, someone can invest in. These asset classes are: equities, fixed income,
derivatives, and cash. Let’s define each. Equities typically refer to owning shares
in a company. Some common equities are stocks, mutual funds,
and exchange-traded funds. Stocks are shares of ownership in a company. This means you own a small piece of this company. Mutual funds are a pool of investment dollars
that can often be professionally managed and may be invested across several different assets. In contrast to a stock, if you own one share
in a mutual fund, you have a stake in many companies. Exchange-traded funds are commonly called
ETFs. An ETF has similar characteristics of a mutual
fund, but most can be bought and sold throughout the trading day similar to a stock and typically
have lower management fees. The next asset class is fixed income. This class includes assets like bonds, treasuries,
and certificates of deposit. The name, fixed income, tells you a lot about
the investment. Essentially, its payments are fixed, meaning
they are consistent and delivered in regular intervals. The next asset class is derivatives. This class includes options, futures, and
currencies. A derivative is a security with a price that
is dependent on another asset. The derivative itself is a contract between
at least two people. Derivatives commonly track other investments
like a stock index. The movement in the underlying security is
where the derivative derives its value. However, derivatives can be risky. They use leverage, which controls a large
asset with a small amount of money, to potentially create larger returns or to help mitigate
risk. But, if the asset moves in the wrong direction,
you could lose all of your investment. The final asset is cash. Cash refers to assets like savings and money
market accounts. They’re typically valued for two things:
their high liquidity and low risk. When an asset is highly liquid, it means you’re
able to access it easily, or liquidate it. And while they won’t grow as much as other
assets, it can be important to maintain a portion of your assets in cash for a rainy
day. When these asset classes are combined, they
form a portfolio. Simply put, a portfolio contains all your
investments so you can see them as a whole. Other terms associated with a portfolio are
allocation and diversification. They’re sometimes used interchangeably,
but they do have different meanings. Allocation refers to the percentage of your
portfolio in each asset class. For example, an investor might allocate 50%
of a portfolio to equities, 25% to fixed income, 10% to derivatives, and 15% to cash. The allocation may change over time based
on your risk tolerance level and as you approach retirement. Diversification refers to having varied types
of individual assets within an asset class. Let’s say for example you want to diversify
the equities portion of your portfolio. This means you may want to own many types
of stocks, mutual funds, and ETFs in various sectors, such as Health Care, Technology,
and Utilities. Allocation and diversification are important
because they prevent you from placing all your eggs in one basket, so to speak. And those are the basic terms related to investing. There are a lot of new terms to learn and
it can feel a bit overwhelming, but you’re headed in the right direction. With these terms as a foundation, you may
be able to participate more effectively in the market.

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