Finance is full of jargon. That’s one of the reasons why many are intimidated by investing— because they don’t understand the terms being used. When you lay them out individually, though, the terms aren’t quite as complex as they may sound. To show you what we mean, we’ve shared 25 common investment terms and their definitions.
1. Annual Percentage Yield (APY)
The annual percentage yield is the total amount of interest you will earn on an investment in one year, which also includes the effects of compound interest.
2. Appreciation
As your investment increases over time, that increase is referred to as appreciation.
3. Asset Allocation
Asset allocation refers to the way that you spread your money across different types of investments, such as stocks, bonds, mutual funds, etc.
4. Bear Market
You may hear the stock market referred to as a bear or bull market. A bear market means that stock values are generally in decline.
5. Blue Chip
A blue-chip investment is one that is often a large, well-established, and financially sound company.
6. Bottom-Up Investing
Bottom-up investment is an investing strategy in which you base your choices on the performance of individual companies rather than market trends.
7. Bull Market
Instead of a bear market (mentioned in number four), a bull market refers to an overall increase in value.
8. Capital Gain
When you have a capital gain, you receive the profit from selling an asset that has appreciated in value.
9. Capital Loss
Unlike a capital gain, a capital loss means that you have sold an asset for less than what you initially paid for it.
10. Cost Basis
A cost basis refers to the amount paid for a security, including any accompanying fees.
11. Defined Contribution Plan
A defined contribution plan refers to a tax-advantaged retirement account that an employee can contribute money to (e.g., 401(k)).
12. Diversification
Diversification is the act of diversifying your investment portfolio. This means that you spread your assets across different types of investments based on your risk tolerance.
13. Dividends
A dividend refers to companies’ payments to their shareholders that are usually taken out of their earnings.
14. Dollar-Cost Averaging
Dollar-cost averaging is a type of investment strategy in which you consistently invest a certain dollar amount at a regular time interval, regardless of the market’s fluctuations.
15. Expense Ratio
The expense ratio refers to the annual fees charged to the funds’ shareholders (e.g., mutual funds).
16. Exposure
Exposure refers to the inherent risk associated with an investment.
17. Index
The index refers to an indicator of market performance in a certain industry, usually measured by using a hypothetical portfolio of securities.
18. Index Fund
An index fund is a type of mutual fund that is designed to mimic a market index, such as the S&P 500.
19. Initial Public Offering (IPO)
An initial public offering is when a private company offers shares to the public for the first time.
20. Rebalancing
Rebalancing refers to the act of reviewing your investment portfolio and buying or selling assets to make sure that it still reflects your current risk tolerance.
21. Risk Tolerance
A person’s risk tolerance refers to how willing they are to see their investments fluctuate. The tolerance varies greatly depending on the person.
22. Target Date Fund
A target-date fund is a type of mutual fund that automatically takes you from more risk-tolerant investments to less risk-tolerant investments as you get closer to your chosen retirement date.
23. Top-Down Investing
Top-down investing, unlike bottom-up investing, refers to an investment strategy that focuses on overall market trends rather than individual companies.
24. Volatility
Volatility in the market refers to rapid and significant changes in a particular asset’s value or the overall market.
25. Yield
The yield of an investment refers to the earnings that the asset’s owner receives, which can be interest and dividends.
Ready to Build an Investment Portfolio?
You don’t have to invest alone. With an advisor on your side, you can rest easy knowing that we can help you make wise investment decisions that contribute to your overall financial strategy. Ready to get started? Contact Southwestern Investment Group today to schedule a consultation!
