As a beginner stepping into the world of investing, it is crucial to first understand the common financial investment terminology. Learning these fundamental investing terms and concepts helps build a solid foundation of knowledge to make sense of the stock market, evaluate potential opportunities, and communicate effectively. This article will explain key financial investment words every new investor should know, ranging from types of securities like stocks and bonds, market indexes, investment strategies, analyst recommendations to risk metrics. With the proliferation of online trading apps, investing has become more accessible than ever. However, without a grasp of the basic dictionary, it is easy to get overwhelmed by the complex jargon. Mastering the investing glossary empowers beginners to leverage informed decisions and eventually achieve their financial goals.
Common financial securities – Stocks, bonds, funds and more
Stocks and bonds represent two major types of financial securities that companies or governments issue to raise capital. Stocks offer part ownership in a company while bonds are like loans that pay interest. Mutual funds and ETFs allow investors to own a basket of stocks and bonds.
Stock – A share of ownership in a company. Stocks appreciate or depreciate based on company performance and market demand. Owning stocks makes you a part-owner.
Bond – A fixed income instrument representing a loan made to an issuer like corporation or government. The issuer pays periodic interest payments over the bond term and repays the principal upon maturity.
Mutual Fund – An investment vehicle made up of a pool of funds collected from investors to invest in stocks, bonds, and other securities. Professionally managed mutual funds offer instant diversification.
ETF (Exchange Traded Fund) – A basket of securities like stocks, bonds, or commodities that tracks an underlying index but trades on exchanges like regular stocks. ETFs offer diversification at lower costs than mutual funds.
In addition to the above traditional securities, there are also more complex instruments like derivatives, options, futures, and swaps that large institutional investors utilize to hedge risks or speculate.
Key market indexes for gauging performance
Market indexes are used to measure the overall performance of a securities market or a market segment. For stocks, the S&P 500, Dow Jones Industrial Average, and Nasdaq Composite are frequently cited benchmarks.
S&P 500 – Regarded as the best single gauge of large-cap U.S. equities, this index covers 500 leading companies listed on stock exchanges in the United States.
Dow Jones Industrial Average – The oldest and most-quoted stock market index, the Dow 30 tracks 30 large blue chip U.S. companies trading on the New York Stock Exchange and Nasdaq.
Nasdaq Composite – Includes over 3,000 stocks listed on the Nasdaq exchange. Because it has more technology stocks, it often performs better during bull markets.
For bonds, popular benchmarks are the Bloomberg Barclays U.S. Aggregate Bond Index and ICE BofA US High Yield Index. Understanding index performances allows for better evaluation of portfolio returns.
Common investment strategies
Investment strategies guide an investor’s portfolio allocation to different asset classes and markets. Here are some popular investing approaches:
Passive investing – Follows a buy-and-hold approach based on index investing. Passive investors build diversified portfolios tracking market indexes at low costs.
Active investing – Involves actively researching, picking, and trading specific securities to try beating the market. Active management charges higher fees but may generate excess returns.
Growth investing – Focuses on stocks showing strong earnings and revenue growth. Growth investors believe fast-growing companies offer greater return potential.
Value investing – Targets stocks trading below their intrinsic values. Value investors aim to buy undervalued stocks and profit when the market corrects the mismatch.
Dividend investing – Focuses on stocks with consistent dividend payment history and the potential for growth. Dividend stocks provide steady income and grow in value over time.
Common stock analyst recommendations
Stock analysts research companies and issue recommendations to guide investor actions. Here are 5 common tiers of analyst recommendations:
Strong Buy – The stock is expected to outperform the market considerably. Indicates a compelling opportunity.
Buy – Analyst believes the stock will outperform the market average. Represents a favorable upside.
Hold – The stock is expected to perform in line with the market benchmark. No significant upside or downside foreseen.
Sell – Analyst projects the stock will underperform the market. Better opportunities likely exist elsewhere.
Strong Sell – Stock will significantly underperform the market according to analyst. Expect a sharp downside.
Key investment risk metrics
Risk statistics help investors evaluate the volatility of asset returns. Common risk metrics include:
Standard deviation – Measures how dispersed returns are from the average. Higher standard deviation indicates wider price swings and greater volatility risk.
Beta – Compares volatility of a stock against the market benchmark. Beta above 1 is more volatile than the market while below 1 is less volatile.
Sharpe ratio – Evaluates return earned per unit of risk taken. Higher Sharpe ratio is better as it means greater return for the same risk.
R-squared – Indicates how closely the price movement of a stock correlates with the index. R-squared of 100% means it moves perfectly in sync with the benchmark.
Learning the investing dictionary is crucial for beginners to gain financial literacy. Mastering the terminology allows novice investors to research opportunities confidently, evaluate risks judiciously, and communicate investment ideas clearly. With the profusion of financial information today, developing fluency in the investing language is more important than ever to cut through the noise and make smart decisions.