Words and terms you should know before you begin investing!
- hayleyhackslife
- Aug 20, 2021
- 3 min read
The world of personal finance can be quite intimidating and confusing for beginners especially given just how many unusual words and jargon are used! I'll break down some of the most common ones used!
Dollar cost averaging - This is one of the most known investment strategies and is where an investor regularly puts a set amount of money into a given stock, regardless of the price per share at the time. For example, you may put $100 into the S&P500 every 1st of the month. It spreads your risk and is much more passive as you're not having to try to time the market. This can also be transferred to 'pound cost averaging' or whatever currency you use.
Stock & shares - Quite often these terms are used inter changeably. I think it's easier to keep this simple so beginners can have confidence. A stock is ownership in a company like 'I own stock in Microsoft' and shares refers to the exact ownership so 'I own 6 shares in Microsoft'. So... the main difference between a stock and a share is that stock is a broader concept to represents ownership in a company, while shares are the individual units of ownership.
Dividends - A dividend is an amount of money paid out by a company from it's profits to its investors (anyone who has invested in the company) - almost like a payment reward where the company is saying "thanks for investing in us, we've been performing well so here's a little cash reward!" These dividends are paid out regularly sometimes monthly, sometimes annually. Not every investment pays out these dividends!
Mutual funds - Mutual funds are a collection of individual stocks all bundled together in one package. This means you are buying one thing but actually investing in many different things which is good in terms of diversification of your investments. Mutual funds however are actively managed by professionals which sounds good and it can be as they can pick the stocks you invest in but this costs.
Index funds are mutual funds that track a specific part of the stock market, known as a market index. They provide investors with broad diversification for low fees as there isn't an investing portfolio manager like with mutual funds.
S&P 500 - S&P 500 stands for 'Standard and Poor 500 index' which contains 500 of the largest publicly traded companies in the US. If you decide to invest in the S&P 500 index, you would be investing in 500 companies which includes the likes of Apple, Microsoft, Amazon and Facebook.
ETFs - ETF stands for 'Exchange Traded Funds'. These are very similar to index funds except ETFs are traded throughout the day meaning the price of buying and selling ETFs will fluctuate constantly whereas index and mutual funds are traded only once a day when the market closes.
The stock market - The stock market is a place where shares of public traded companies are traded. So basically a place you can go to buy and sell stocks/shares.
Compounding / Compound Interest - When you reinvest your earnings, they can earn more money. The process of continually reinvesting earnings is compounding. Compounding investments can grow much faster than if you withdraw your earnings.
Diversification - Making sure your investing portfolio is spread across a range of countries and industries. This reduces the risk of losing money because if you only investing in one company or one index from one country if that company or country performs poorly your money will decrease.
Comments