Investment types and terminology
Sixteen investment terms you need to know.
How and where you invest
your hard-earned money is an important decision. However, fully understanding
your investments can require a crash course in terminology. The following
definitions for a few key terms can help increase your understanding of the
investment process and enable you to make better decisions:
Investment
types
The most common terms
that are related to different types of investments:
§ Bond: A
debt instrument, a bond is essentially a loan that you are giving to the
government or an institution in exchange for a pre-set interest rate paid
regularly for a specified term. The bond pays interest (a coupon payment) while
it's active and expires on a specific date, at which point the total face value
of the bond is paid to the investor. If you buy the bond when it is first
issued, the face or par value you receive when the bond matures will be the
amount of money you paid for it when you made the purchase. In this case, the
return you receive from the bond is the coupon, or interest payment. If you
purchase or sell a bond between the time it is issued and the time it matures,
you may experience losses or gains on the price of the bond itself.
§ Stock: A
type of investment that gives you partial ownership of a publicly traded
company.
§ Mutual fund: An
investment vehicle that allows you to invest your money in a
professionally-managed portfolio of assets that, depending on the specific
fund, could contain a variety of stocks, bonds, market-related indexes, and
other investment opportunities.
§ Money market account: A type of savings account that offers a competitive rate
of interest (real rate) in exchange for larger-than-normal deposits.
§ Exchange-Traded Fund (ETF): ETFs are funds – sometimes referred to as baskets or
portfolios of securities – that trade like stocks on an exchange. When you
purchase an ETF, you are purchasing shares of the overall fund rather than
actual shares of the individual underlying investments.
Investment strategies
Once you have a better
understanding of the investment choices available, you may come across
specialized terms that explain how money can be invested:
§ Allocation of investments: Also known as asset allocation, this term refers to the
types of investments/asset categories you own and the percentage of each you
have in your investment portfolio.
§ Diversification: This
is a risk management technique that mixes a wide variety of investments to
potentially minimize your investment risk.
§ Dollar cost averaging: An investment strategy used whereby an investor purchases
fixed investment amounts at predetermined times, regardless of the price of the
investment.
“There
are a variety of terms that describe your gains, losses, and individual
investments. ”
Investment terminology
Once you start investing,
there are a variety of terms that describe your gains, losses, and individual
investments.
§ Capital asset: A
long-term asset such as land or a building that is not purchased or sold in the
normal course of business. In other words, anything you own and use for
personal or investment purposes. Examples include your home, your car, and
stocks or bonds held in a personal account.
§ Capital gain/loss: Profit or loss from the sale of an asset.
§ Capital appreciation/depreciation: The amount by which the value of an
asset increases or decreases compared to the amount you paid for it. You receive
the capital gain or loss when you sell the asset.
§ Dividends: A
distribution of a portion of a company’s earnings, decided by the board of
directors, to a class of its shareholders.
§ Index: A
portfolio of securities representing a particular market or industry or a
portion of it. Indices often serve as benchmarks for measuring investment
performance– for example, the Dow Jones Industrial Average or the S&P 500
Index. Although investors cannot directly purchase an index, they are able to
invest in mutual funds and exchange-traded funds that are based on the indexes.
These types of vehicles enable investors to invest in securities representing
broad market segments and/or the total market.
§ Margin account: An
account that allows you to borrow money from your brokerage account in order to
purchase securities. The loan is collateralized by the existing securities and
cash held in the account.
§ Prospectus: A
document filed with the SEC that describes an offering of securities for sale
to the public. The prospectus fully discloses the risks, policies, and fees of
the offering.
§ Yield: The
income return on an investment. This refers to the interest or dividend
received from a security based on the investments cost or face value.
By taking the time to
learn about the common types of investments and the language that accompanies
them, you can become a smarter and savvier investor.
Related topics:
§ Investing,
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This information is
provided for educational and illustrative purposes only and is not a
solicitation or an offer to buy any security or instrument to participate in
any trading strategy. Investing involves risk including the possible loss of
principal. Since each person's situation is different you should review your
specific investment objectives, risk tolerance and liquidity needs with your
financial professional before selecting a suitable savings or investment
strategy and to see how this information may apply to your specific situation.
Investments in
fixed-income securities are subject to market, interest rate, credit, and other
risks. Bond prices fluctuate inversely to changes in interest rates. Therefore,
a general rise in interest rates can result in the decline in the bond's price.
Credit risk is the risk that an issuer will default on payments of interest
and/or principal. This risk is heightened in lower-rated bonds. If sold prior
to maturity, fixed-income securities are subject to market risk. All
fixed-income investments may be worth less than their original cost upon
redemption or maturity.
Investing involves risk,
including the possible loss of principal. Stocks offer long-term growth
potential but may fluctuate more and provide less current income than other
investments. An investment in the stock market should be made with an
understanding of the risks associated with common stocks, including market
fluctuations.
Mutual
Fund investing involves risk. The investment return and the principal value of
your investment will fluctuate and your shares, when redeemed, may be worth
more or less than their original cost.
Money market accounts
seek to maintain fixed principal, but rate of return will fluctuate.
Exchange Traded Funds are subject to risks
similar to those of stocks. Investment returns may fluctuate and are subject to
market volatility, so that an investor's shares, when redeemed or sold, may be
worth more or less than their original cost.
Diversification does not
guarantee profit or protect against loss in declining markets. Asset allocation
does not assure or guarantee better performance and cannot eliminate the risk
of investment losses.
Diversification does not
guarantee profit or protect against loss in declining markets.
A periodic investment
plan such as dollar cost averaging does not assure a profit or protect against
a loss in declining markets.
Margin borrowing may not
be suitable for all investors. When you use margin, you are subject to a high
degree of risk.
Investing involves risk
including the possible loss of principal. Dividends are not guaranteed and are
subject to change or elimination.
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