40 Financial Investment Terms You Should Know – A financial investment is an asset that you put money into with the hope that it will appreciate into a larger sum of money. The idea is that you can later sell it at a higher price or earn money on it while you own it.
Understanding the investment world comes with understanding a lot of different investment terms.
New investors are often faced with many terms that they may not know or understand. While this may seem intimidating, it’s important to learn common financial phrases and terms when you start investing to help raise your confidence and ensure you’re making informed decisions.
In this article, I’ve defined some of the most popular investment terms you should know.
These investment terms should help you to understand more about the investment world, so you can get involved.
1. CAPITAL GAIN or LOSS
A capital gain is a profit or return on an investment. For example, if you bought a share of a stock for $1000, and then sold it at $1800, you would have made a capital gain of $800. A capital loss works in a similar way – if you bought a share of stock for $1000 and sold it for $600, your capital loss would be $400.
Some companies pay out a portion of their income to shareholders, which is called a dividend. Depending on the company, dividends may be a one-time payment, may be sent periodically (i.e., every month, quarter, half-year, or year), or may not be paid out at all.
“Earnings Before Interest & Taxes” (EBIT) and “Earnings Before Interest, Taxes, Depreciation & Amortisation” (EBITDA) are two commonly-used metrics that represent a company’s profits excluding certain costs. The metrics are believed to represent the company’s core earnings.
4. EXCHANGE-TRADE FUNDS (ETFs)
As an investor, you can buy and sell shares of ETFs just as you do with stocks. But buying a share of an ETF gives you some ownership to a fund of different assets, while buying a share of stocks gives you some ownership to individual companies.
A bond is similar to a loan with some key differences. In the case of a bond, the buyer is the lender, and the seller is the borrower. Generally speaking, the bond issuer or seller is a government body or a corporation. When they issue the bond, they promise to repay a principal amount, which is the amount of money they are borrowing, in the future on a maturity date. Additionally, they will pay interest periodically to the bond buyer based on a rate called the coupon rate.
6. BULL MARKET
A bull market is one that is rising or trending higher. If you think the market is going to rise, you’d be considered a “bull.” If you believe an individual stock will go up, you’d be “bullish” on the stock.
7. HEDGE FUND
A hedge fund, like a mutual fund, is an investment vehicle that uses pooled funds to generate returns. The difference between mutual funds and hedge funds is that hedge fund portfolio managers are part of a firm (limited partnership or LLC) and raise money from investors, which they then manage and invest across different assets. Unlike mutual funds, not everyone can invest in hedge funds; to be considered, you generally need to earn a minimum annual paycheck of $200,000+.
An index measures the performance of a group of assets, such as stocks, bonds, and more. Some of the most well-known indexes include the Nasdaq-100, Nasdaq composite, S&P 500, and Dow Jones Industrial Average.
9. INDEX FUND
An index fund is a mutual fund that is made up of assets in a way that mirrors a certain index. For example, if you are invested in a Nasdaq-100 index fund, and the Nasdaq-100 goes up, so will the value of your index fund. Since these types of funds are passively managed, the fees will be lower than investing in a typical mutual fund.
10. INDIVIDUAL RETIREMENT ACCOUNT (IRA)
An IRA is a type of retirement account that comes in various formats and offers a tax advantage for retirement savings. You can open an IRA as soon as you turn 18, but you may not have access to every type of IRA immediately.
11. MARKET CAPITALIZATION
A company’s market cap is the cumulative value of all of its outstanding shares. The market cap can be calculated by multiplying the company’s current share price by the number of shares outstanding.
When you open a brokerage account to invest, you will have to choose whether you want a cash or margin account. Margin is basically using borrowed money to invest. The credit will come from the broker, and your entire account is considered collateral. The hope is that you will be able to make a higher return with the borrowed money than the interest rate charged by the broker for the margin loan, so the investor will earn a personal profit.
13. MUTUAL FUND
A mutual fund is a pooled portfolio managed by a professional portfolio manager. This manager uses the pooled fund to buy a diversified portfolio of securities. The pooled funds come from individual investors who purchase shares of the mutual fund. Mutual funds are actively managed, leading to higher fees than if you were to invest on your own.
14. PRICE-TO-EARNINGS (P/E) RATIO
A P/E ratio is a valuation metric that determines the value of a company relative to its earnings, often expressed on a per share basis. For example, if a company’s stock is trading at $100 per share, and is expected to earn $4 per share, its P/E ratio would be 25.
Shares, also known as stocks or shares of stock, are a portion of ownership of a company’s equity. The value of a share is based on how the company divided its equity into units. Shares entitle the share owner to a portion of the company’s profits (or gain in stock price). This also applies to a drop in the stock price, as the value of the share will go down with it.
16. SHORT SELLING
When you short a stock, you borrow shares of stock and sell them at their current price with the promise to return the shares to the lender in the future. The hope is that the stock price will drop, at which point you can buy the shares of stock to return to your lender, making a profit on the difference between where you sold and bought the shares. Instead, if the stock price goes up, you will lose money when returning the shares to the lender.
Volatility is the degree to which a traded asset varies or fluctuates in price over time.
18. ASSET ALLOCATION
An asset is any form of investment that has the potential of making a return, such as a stock, bond, ETF, mutual fund, real estate, and more. Asset allocation is the practice of balancing your investments to limit risk. This is done by diversifying your portfolio with different types of assets that maximise reward and minimise risk.
Asset prices are sometimes given in a “Bid/Ask” format. The “Bid” represents the highest price a buyer is willing to offer and pay for an asset. The “Ask” is the lowest price a seller is willing to accept for an asset.
20. BEAR MARKET
A bear market is one that is falling or trending lower. This can happen during times of recession or public crisis and can last anywhere from weeks to years. If you think the market is going to drop, you’d be considered a “bear.” This description can also be applied to individual stocks you believe will fall, in which case you’d be “bearish” on the stock.
How quickly an investment can be sold and converted into money without losing a substantial amount of value.
For example, cash in your savings account would be considered high liquidity, while property would be seen as low liquidity, because it’s not easy to sell and can lose value when you do so.
22. FIXED INCOME INVESTMENT
Any type of investment where the contract includes repayment of a loan along with interest payments. The amount of interest is fixed, so there is less reward than an equity investment such as stocks, but also less risk.
A bank account is an example of a fixed income investment, as are bonds, pensions and loans.
23. CREDIT RATING
A measure of how likely a borrower is to repay a debt. Companies who have the best credit rating get cheaper interest rates for loans, and vice versa. As an investor, loaning money to a company that is more likely to repay the money will mean a lower return, compared to a higher-risk company.
Credit ratings are set by specialist credit rating agencies, like Moody’s.
24. SOCIAL IMPACT BONDS
A loan taken out by a public company to fund a better outcome for the society of a particular area or demographic. Repayment only happens if the objective of the bond is achieved.
The first ever social impact bond was taken out by a prison, to fund a pilot project to reduce reoffending. Investors were repaid if reoffending rates were 7.5% or less than a similar ex-offender control group.
25. GREEN BONDS
A bond taken out by a company specifically to facilitate a climate or environmental project. Unlike a regular bond, these carry a commitment that the money raised will go to support a defined environmental purpose, tracking results in relation to this.
26. SUSTAINABILITY BONDS
A loan taken out to fund a social or green project, often (but not always) in alignment with the UN’s Sustainable Development Goals (SDG).
The cost of borrowing money to the borrower, normally paid to the lender as a percentage of the loan (or from the other perspective, the reward to the lender for lending money to the borrower).
The annual interest paid on a bond to the bondholder.
29. COUPON RATE
The interest paid to the investor who lends money to the lender, in the form of a bond. The frequency of these payments depends on the individual bond.
30. MATURITY DATE
The date a lender is paid back the money they’ve lent, often in the form of a bond.
31. CASH EQUIVALENTS
The third type of asset classes, characterised by being low risk, low return and offering high liquidity. Cash equivalents include certificates of deposit (savings accounts with a fixed interest rate and a fixed date you can withdraw the money) and corporate commercial paper. It’s a good idea for an organisation to hold a proportion of cash equivalents, as these can be used to quickly pay debt.
A natural resource or material that can be traded, like grain, cattle, or fossil fuel.
The market where commodities are traded much like stocks, where suppliers sell to purchasers based on an agreed future delivery date. They’re seldom bought by individual investors. Instead, they are primarily bought and sold by direct suppliers and large organisations.
34. PENNY STOCKS
Penny stocks used to be those that traded for less than a dollar per share, but over time, the term now refers to stocks that trade below $5 per share. There are a number of risks associated with penny stocks that make many investors want to steer clear as they are extremely volatile (a word defined further down). There are people who do quite well with penny stocks but not nearly as many who fail.
35. REAL ESTATE
Real estate is property, such as land, houses, buildings, or garages that the owner can use or allow others to use in exchange for payment in rent. These properties can also be flipped for profit as well.
36. REAL ESTATE CROWDFUNDING
Another way to invest in real estate and relatively newer is real estate crowdfunding. This gives individual investors the opportunity to invest in certain real estate markets that were previously off-limits, such as commercial real estate. These do not necessarily follow the stock market and are not as liquid, meaning you can’t always get your cashback instantly.
37. NEW YORK STOCK EXCHANGE
The New York Stock Exchange (NYSE) is a stock exchange located in New York City that is considered the largest equities-based exchange in the world and is made up of 21 rooms that are used to facilitate trading.
38. DOW JONES
The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange (NYSE) and the Nasdaq. It has been around since 1896!
This is the marketplace for buying and selling securities. There are thousands of stocks listed on the Nasdaq exchange that include giant companies like Apple, Google, Microsoft, Oracle, Amazon, and Intel.
40. DOLLAR-COST AVERAGING
This is an investment technique of buying a fixed dollar amount of a particular investment on a regular schedule, regardless of the share price. This is something I practise and helps keep your investments on track.
The above are all the common investing terms you should know. You have come across them. This is a beginner’s investment Terms You should know.
There are certainly a lot more investing terminology to understand, but these will start you off successfully and help you begin to understand the world of investments better.
Now that you have an understanding of basic investing terms, what’s next?