Use this glossary to better understand some of the basic terms used in investments.
When it comes to investing, you don't have to be an expert. But you can feel more confident in your investments, and in meetings with your advisor, by understanding a few common investing terms.
Ask or Price Offer: In the over-the-counter market, the lowest price a seller is willing to accept for a specific number of shares of a security (for example, a stock).
Asset Allocation: The division of investments among several asset classes.
Asset Class: A category of investments that have similar characteristics. There are three main asset classes: stocks, bonds, and cash equivalents.
Bear Market: Market conditions when the price of securities is falling and investor confidence is low; the opposite of a bull market.
Bonds (Fixed Income): A debt instrument in which an investor loans money to either the federal government, a state, a city, a corporation, or other institution (the “issuer”) for a set period of time and at specified rate of interest. In exchange, the issuer promises to pay the interest during the life of the bond and to repay the principal when it “matures” or comes due.
Bull Market: Market conditions when the price of securities is rising and investor confidence is high; the opposite of a bear market.
Capital: Wealth in the form of money or assets.
Compound Interest: Interest paid on principal and on accumulated interest.
Diversification: An investment method intended to minimize risk by spreading money among a variety of investments.
Dividend: A share of a company's profits paid to its shareholders, in the form of cash, stock shares, or other property.
Earnings: The amount of profit (after-tax net income) that a company produces.
Exchange-Traded Fund (ETF): A type of exchange-traded investment product that must register with the SEC as either an open-end investment company (generally known as “funds”) or a unit investment trust. ETFs offer investors a way to pool their money in a fund that makes investments in stocks, bonds, or other assets and, in return, to receive an interest in that investment pool. ETF shares are traded on a national stock exchange.
Index: A measurement of the value of a section of the stock market based on a selection of stocks representative of that particular section. Forming a pretend portfolio, an index serves as a benchmark to investment funds. The Dow Jones Industrial Average is one such index.
Index Fund: A type of mutual fund whose investment objective typically is to achieve approximately the same return as a particular market index, such as the Standard & Poor's 500 Index, the Russell 2000 Index, or the Wilshire 5000 Total Market Index
Investing: Engaging in any activity in which money is put at risk for the purpose of making a profit.
Mutual Fund: The common name for an open-end investment company. Like other types of investment companies, mutual funds pool money from many investors and invest the money in stocks, bonds, short-term money-market instruments, or other securities. Mutual funds issue redeemable shares that investors buy directly from the fund or through a broker for the fund instead of from other investors.
Portfolio: Your collection as an investor of investment holdings (stocks, bonds, mutual fund shares, etc.).
Rebalancing: Restoring a portfolio back to its original or intended asset allocation percentage mix. Over time, some investments will grow faster than others, and holdings may become out of alignment with investment goals. When this happens, an investor may choose to rebalance.
Stocks (Equities): An instrument that signifies an ownership position (called equity) in a corporation, and a claim on its proportional share in the corporation's assets and profits. Most stocks also provide voting rights, which give shareholders a proportional vote in certain corporate decisions, such as the election of corporate directors.
