If you want to take your money to the next level, you might want to think of investing your money. When you’re just starting out though, investing can be confusing to say the least. What do all those terms mean?
Not understanding investing terms may make it difficult to get started and leave you in a place of confusion. But don’t worry, we’ve got you covered. Here’s your guide to basic investing terms.
One of the most popular investing terms you’ve likely heard is “stock.” If you think of a company as a pie, buying a stock from a company is essentially buying a piece of the pie. A stock is a portion of the company that is available for purchase to the general public. What you buy is called “shares” which buys you a piece of ownership in the company. Buying shares of a company’s stock means that you can have access to its profits as well through dividends. Stocks are often a large part of a person’s investing portfolio.
Bond might be another term you’re familiar with but not really sure what it means. Bonds are a type of investment where you serve as the creditor and loan your money to a government or company. Instead of opting for loans, the company or government entity will issue bonds to investors. These bonds have a specific interest rate and will be paid over a certain amount of time. Bonds typically make up a portion of an investing portfolio and are often considered “safer” than stocks.
3. Index Funds
Index funds are essentially a collection of stocks that are held on an index. An index can be any assortment of investments. A popular one is the S & P 500, which is a list of the 500 largest companies that have shares available to the public. So instead of picking one stock, you can choose an index fund that diversifies your investment. Diversification simply means not having too much of one thing. Index funds can be a low-cost way to get started with investing. It’s also the preferred investment vehicle for billionaire Warren Buffett.
4. Mutual Funds
Mutual funds are a type of investment where money is pooled together from various investors in order to purchase specific assets. Mutual funds are managed by a professional that works to get returns for the investors. This type of investment vehicle can be a good way to diversify your portfolio so you don’t end up with all your money in one place. Not only that, but mutual funds can be affordable because you often don’t need to make that big of an investment to get started.
5. Exchange-Traded Funds
Exchange-Traded Funds, also known as ETFs, are similar to index funds as they track a combination of assets on an index. Though ETFs are the cousins of index funds, they are typically considered more flexible. It’s easy to purchase and get started trading with ETFs and you can earn money through interest or dividends.
6. Expense ratio
The point of investing is to make money right? But investing your money can cost sometimes cost money. If you have mutual funds or exchange-traded funds you will have an expense ratio which is essentially the cost of covering the management, administration, etc. related to your investments. Expense ratios are typically a percentage of your assets. It’s important to do your research on expense ratios before buying mutual funds or ETFs as they can take a bite out of your money. The brokerage, Vanguard, has a low expense ratio that may help you save money.
7. S & P 500
You may have heard about the “S & P 500” in news headlines or on TV but what is it? The S & P 500, also known as Standard and Poor’s 500 index is an index of the top 500 publicly traded companies in the U.S. This index is popular among investors because of its variety and diversification.
When I first started investing I wasn’t even sure where to start investing. That’s when I learned about brokerages. A brokerage is a place where investors can place transactions and start investing. For example, Fidelity and Vanguard are brokerages where you can begin investing. You can think of a brokerage as your friend that helps you facilitate buying and selling your investments.
There’s no doubt that investing can be confusing but don’t let the terms scare you into doing nothing. Getting started now is the best way to build wealth. You can open a brokerage account or talk to a financial advisor on how to get started. Investing comes down to risk tolerance, which depends on your age, income, and a variety of other factors. Some of these investment vehicles may be better than others for your particular situation. Little by little you can understand the terms and start learning how to invest.
Melanie Lockert is a personal finance expert, the blogger behind DearDebt.com and author of the book “Dear Debt: A story about breaking up with debt.” Melanie paid off $81,000 of debt and is now on a mission to help others do the same.
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