Whether you are a newbie in the investment world or you have been investing for a long time, there are some common terms that you should know. For the benefit of the doubt and to bring to your acquaintance, I have compiled a list of investment terms for beginners, and even though I am doing this for beginners, experts can refresh their memories.
Some of the investment terms for beginners to take note of include:
- Brokerage account
- Dollar Cost Averaging
- Earnings Per Share
- Form 10-K
- Money Market
- Return on Invested Capital
- Payback Time
- Sticker Price
- The Stock Market
- The S&P 500
- Exchange-Traded Funds
- Index Funds
- Mutual Funds
- Traditional IRA
- Roth IRA
- Rollover IRA
- SIMPLE IRA
The investing world is made up of words that are specifically made to confuse the average person. It wasn’t until I began writing for Milvestor and learning about finance that I realized how confusing the world of finance could be.
Investment terms are the basic thing that everyone should start with. These are very important because these terms are considered as the building blocks of investment. In this article, I will be explaining over 20 investment terms for beginners and if you are ready to grow your knowledge, let’s go.
Investment Terms for Beginners [Explained]
Assets are anything of value that can be used in a trade. It refers to resources controlled by companies and individuals that can be used to generate potential economic benefits. Anything a business or person owns that has a dollar value is typically referred to as assets.
A bond is like a loan. Buying a bond is like loaning money to a company or the government. Usually, the body issuing the bond guarantees to pay back the principal amount at a later date known as the date of maturity and to pay the interest during the interim, based on the terms of the bond.
There are many kinds of bonds, such as those issued by the government, including Treasury bonds and tax-free municipal bonds. Other types of bonds include savings bonds such as the Series EE and the Series I savings bonds, the investment-grade bonds, which have AAA-rated bonds, junk bonds, etc.
If you do not want to buy any of the bond types listed above, you can purchase bond funds.
A broker is anyone or body that specializes in helping you buy and sell investments. Brokers charge a fee for their services, and you can get a discount when you meet some online brokers that charge a flat commission per trade.
A brokerage account is created by a licensed broker or brokerage firm that allows investors to add funds to place investment orders. The investor owns the funds in the brokerage account; however, they would have to claim taxable income from capital gains.
Dollar Cost Averaging
Dollar Cost Averaging refers to the act of purchasing several shares for the same amount for a specific stock regardless of the cost per share. It is a strategy adopted by investors that is believed to decrease the risk of investing a substantial amount of money in one stock in the wrong place at the wrong timing.
Earnings per Share
Earnings per share (also known as profit per share) refers to the total earnings a company records annually divided by the number of shares owned by the company. We use the EPS to ascertain the value and worth of a company. Therefore, it is important to ensure that the company’s cash flow looks as good as its earnings per share (EPS).
Public companies are required to file 10-k reports annually. A 10-k report is a financial report that provides a comprehensive insight into what a company is about. The report contains a statement of risks, assets, numbers, and anything beneficial to the general public.
A company’s CEO or CFO is expected to present a 10-k report. They must do it properly as any misleading or false information added to the report is potentially a crime that attracts jail time. As an investor, a 10-k report helps you know about a company and its benefits.
Penny stocks are shares of small public companies that are traded at less than $1 per share. They are usually illiquid stocks with low share prices and low market capitalization. Investing in penny stocks is a good investment strategy. However, they are very volatile and may not offer ROI.
You are likely going to hear the term Money Market almost as you begin your investment journey. The Money Market is, by all standards, a component of the economy providing short-term funds for individuals and corporate bodies. In addition, you can access short-term loans from the money market for a year or less.
Return on Invested Capital (ROIC)
One investment term you will hear repeatedly is the return on invested capital, often called ROIC. It refers to the percentage return you get from the cash you invested in your business. You can easily figure that out if you critically look at the term again.
The ROIC of a company is a testament to how a business uses the money it is investing in its operation. It is also a pointer to the possibility of getting returns when you invest in the company.
To calculate the ROIC of a business or venture, we subtract the business’ income from its starting capital. Then, divide the amount by total capital before multiplying by 100. For instance, if a business has a starting capital of $300 and in the first month makes $500. The ROIC of that business will be:
$500 – $300 = $200. Next, we divide the invested capital by $300, which is $300/$200 that gives us 0.66. To get the percentage ROIC, we multiply 0.66 by 100, which is 66 percent. Hence, the business made a percentage ROIC of 66 percent on its investment. This is a superficial figure.
It is easy to calculate the ROIC of a business. However, it is critical to note that anything below 10 percent ROIC and maintaining a constant upward trend is not good for a company.
When I was researching the list of investment terms for beginners, at first glance, I thought payback time meant the period before a loan is repaid. Although the concepts are the same, payback time has nothing to do with loans.
The payback time is the time taken for the business to get its return on invested capital (ROIC). When you invest in a business venture, the amount of time it takes to get your ROIC is what payback time is about.
Rule 1 Investing has a payback time calculator, which you can use to find out how much time a company will take to earn enough to cover the stock you paid for.
Sticker price refers to a company’s actual value regardless of its selling or market price. The intrinsic value of a company has nothing to do with the nature of current trends of the market it is domiciled in.
The Stock Market
The Stock Market is a collection of companies that have sold off chunks of their companies to the public. Also known as the share market or equity market, aggregating buyers and sellers of stocks form the stock market.
One general rule of investing in the stock market is to find a good business that has the potential of being around for 10 to 15 years.
The S&P 500
S&P 500 is an index that is a compilation of 500 of the best stocks in the market. It comprises an analytical breakdown of the stocks in the stock market that are worthy of investment. However, many investment experts and financial analysts tell persons looking to invest not to bother what the S&P 500 report holds.
Nonetheless, the S&P 500 is a resource you may need to consult to better understand before investing in the stock market.
To proceed in these investment terms for beginners, I will be discussing some investment structures.
Mutual funds are pooled funds by many individual investors aggregated for investment. It refers to shares bought by investors and handed to a portfolio manager who is a professional at investment.
An interesting fact about mutual funds is that it does not trade all through the day. Else people will take advantage of the underlying change in the fund’s net asset value.
Exchange-Traded Funds (ETFs)
Exchange-Traded Funds are similar to mutual funds but different in that they trade all through the day. As a result, you will find ETFs trading on the stock market as though they were actual stocks. A unique advantage of ETFs is that an investor can pay more or less than the value of the underlying holdings in the fund.
If you remember my definition of the S&P 500, you would see somewhat of similarity with the term index funds. However, you may have to track back a little to where I explained what the S&P 500 mean. In clear terms, index funds are mutual funds that allow investors to invest in an index such as the S&P 500.
Sometimes traded as ETFs, index funds attempt to match the performance of a particular index. Such that investing in the S&P 500 will offer the profits of the index.
The next range of investment terms for beginners that I would be explaining are types of retirement accounts that constitute an excellent investment opportunity for a comfortable retirement. Some of the retirement accounts you should consider investing in are:
IRA stands for Individual Retirement Account, and the traditional IRA is one of the oldest forms of the account type. Investors do not pay taxes on certain investment gains held within the account, and it stays so until they have to withdraw money from the account when they are 59.5 years old or compelled to withdraw it at 70.5 years.
The Roth Individual Retirement Account comes with certain tax benefits. However, it sure has a couple of restrictions. For instance, money contributed to your Roth IRA comes after-tax dollars, which means you do not get a tax deduction for it. But by following the rules to the latter, you may never pay taxes on any profit generated from your account.
With the Roth IRA, you can invest in stocks, bonds, real estate, and other assets.
401(k) is a term used to refer to a special type of retirement plan for employees. It got the name “401(k)” from the tax code section that created it. 401(k) is similar to the traditional IRA as it allows investors to enjoy tax deductions when the account is funded.
In addition, investors are allowed to invest their money in mutual funds and stable value funds. Details of these funds will come as we progress in this article covering investment terms for beginners.
The Rollover IRA functions like the traditional IRA. It is a provision that allows employees to deposit their 401(k) balance when they leave an employee. In essence, the Rollover IRA is designed to keep an employee’s earning once they leave their current employer.
The Savings Incentive Match Plan for Employees Individual Retirement Account (SIMPLE IRA) was designed for small business owners who would like to offer some retirement benefits for their employees. It is designed to save them from the stress and complexities of 401(k).
Moving on, as an investor, there are certain names you would come across which are important to your investment journey. I’d like to see them as the channels to general investments. They are actually a financial services company or, better still, stock exchanges.
NASDAQ (officially known as NASDAQ, Inc.) is an American multinational financial services corporation based in New York. It owns and operates three stock exchanges in the US and seven in Europe. The US stock exchanges controlled by NASDAQ include the Nasdaq stock exchange, the Philadelphia Stock Exchange, and the Boston Stock Exchange.
It is like a marketplace where shares are traded, and you will typically see abbreviations like NASDAQ: AMZN, which refers to shares from Amazon, NASDAQ: AAPL for shares from Apple, NASDAQ: TSLA for shares from Tesla, and much more.
You can buy shares from these companies and others listed on the NASDAQ stock exchange.
You are probably familiar with this one – the New York Stock Exchange. It is located in lower Manhattan, New York, and is unarguably the biggest stock exchange market. Shares are listed on the NYSE, and investors can jump on some of the biggest investments of this age.
Like on the NASDAQ stock exchange, you can buy shares from some of the world’s biggest companies.
I will be answering some of the frequently asked questions relating to investment terms for beginners.
1. What Are the 4 Types of Investments?
There are four (4) distinct types of investments for beginners. They include:
- Shares and
- Fixed Interest
Each of these four types of investments is an excellent opportunity to enjoy some financial leverage. Of course, they have their peculiarities, advantages, and disadvantages, but it does not negate that one can become financially independent by taking on any of these investment types.
2. How Much Money Should I Have to Start Investing?
An article published on CNN Money suggested that one needs to have $5 to $5000 to begin investing only after paying off their high-interest debts and saving up a good amount of cash to fall back to if things go haywire.
From the CNN Money article, Yvette Butler, president of Capital One Investing, was quoted thus “We really encourage people to have six months of savings first. Once you have a few thousand in savings, then you can start investing.”
3. How Do I Start Investing?
It is quintessential to ask yourself what you would like to achieve with investing to begin your investment journey. For example, you could be investing for a short while to pay your children’s tuition or cover the rent. But, on the other hand, you may be investing in the long-term, possibly to retire comfortably.
When you are sure of what you are investing for, you can easily find your way through the investment market. Even though it can be confusing, knowing what you are in it will add a sense of direction to your journey.
4. Which Shares Should I Invest in?
According to Warren Buffet, it is best to invest in index funds rather than individual stocks. The investing legend advises people to buy low-cost index funds like the ones on the S&P 500 and hold on to them for as long as they can.
There are so many risks attached to buying individual stocks. You would need to be resilient to combat them. However, investing in index funds helps investors take advantage of the success of corporations over time.
5. How Often Should I Check my Investment Portfolio?
You should check your investment portfolio at least once a year to see how well you are doing. When you check your investment profile, you should be looking out for areas where you are not doing great and identify the steps to improve.
Do not be in a hurry to check out. Investment is a long-term business, one that is for the bold, risk-takers. Except your investment is to meet a short-term goal, stay put and continue investing properly, and you could be the next Warren Buffet.
6. What are the Best Stocks to buy in 2022?
2021 is already winding up. According to Investors.com, these are some of the best stocks to buy before the year runs out (in alphabetical order):
- Goldman Sachs
- Google Stock
Other stocks to buy include Adobe Inc., Spotify Technology SA, The Walt Disney Co., Facebook Inc., Alibaba Group Holding Ltd., and Lowe’s Cos. Inc.
If you are not prepared to take risks and suffer losses, do not bother investing. Like I stated earlier, investment is a long-term business, and you would be putting yourself in a disadvantaged position trying to juggle from one investment opening to another.
In addition, comprehensive knowledge of the concept of an idea is key to excelling in that field of endeavor. This is the same case with investing. Ignorance of some of the ideas and concepts of investment and the financial market is equivalent to failure. You will make tons of bad decisions when you are not properly guided.
As a piece of advice, dig deep into resources, glean on the experiences of investment giants, and follow the advice of credible financial analysts.
It won’t be easy to excel in the financial market without understanding how the market works. Investing as a part of the financial market is quite a complex sector. However, starting the basics, which includes understanding basic terms as captured in this post on investment terms for beginners, will give you an edge in the market.