The recent emergence of apps like Robinhood and Acorns has provided millions of Americans the ability to invest anytime and anywhere. In fact, 2020 saw a jump in the number of individual investors over the previous year. According to Bloomberg Intelligence via The Wall Street Journal, individual investors accounted for nearly 20% of shares traded in the U.S stock market—a nearly 5% increase from 2019. Additionally, individual investments have nearly doubled since 2010.
Whether you are new to investing or a seasoned veteran, there are countless terms in this space you should recognize and understand. This article will discuss the various ways you can invest your money and the everyday jargon every investor should know before diving in headfirst.
What Are The Common Investment Types?
There are several avenues to build your investment portfolio. Some of the investment types are straightforward, while others may be more complex. Nevertheless, you should clearly understand each opportunity to make the best decision for your financial future.
Stocks
The most popular and one of the simplest investment types is stocks. This is when individuals or multiple parties purchase a share or equity stake in a company. Stocks can become available when a company decides to sell shares to raise money.
When investing with stocks, the hope is to see the price increase and sell it later for a profit. However, with most investments, there is some risk involved. If the price of the stock goes down, you can end up losing money. While there are no guarantees with the stock market, the average stock market return has hovered around 10% per year over the last century.
If you want to invest in the stock market, you should understand two main types of stocks.
- Common Stock: When discussing stocks, common stock is the one you’ll hear about the most and the type that is issued the most. Common stocks refer to partial ownership of a company and the dividends on a portion of the profits. This type of stock also carries voting rights to elect board members. Additionally, suppose the company fails and is forced to file for bankruptcy or liquidate its assets. In that case, common shareholders will not see any money until creditors, and preferred stockholders are paid.
- Preferred Stock: This type of stock comes with some ownership in the company but generally doesn’t offer the same voting rights as common shareholders. Preferred shareholders often have higher dividend payments, and they have a greater claim to assets if the company decides to liquidate. With preferred stock, the company has a right to purchase back shares at any time.
While common and preferred stock are the two main types of classifications, companies may list different designations as they see fit. Therefore, we recommend doing thorough research before buying stocks.
Bonds
A bond can almost be viewed the same way as a loan. When someone purchases a bond, they generally lend money to a company or government entity. The issuer receives the interest payment, and once the bond matures, you’ll get the principal back. Thus, bonds can be regarded as a low-risk, low-reward type of investment.
Mutual Funds
A mutual fund is an investment option that a professional portfolio manager controls. Money in this fund is pooled from multiple investors to purchase different investments such as stocks and bonds. Thus, mutual funds provide individual investors the opportunity to invest in a broader mix of investments than you would be able to afford by yourself. In addition, since the portfolio manager controls the fund, they can dictate when to buy or sell specific investments.
Exchange-Traded Funds
Exchange-Traded Funds (ETFs) are comparable to mutual funds because they are both a collection of investments. However, one differentiating factor is that ETFs are bought and sold on the stock market. As a result, the price of ETFs can fluctuate depending on the market value.
Cryptocurrency
One of the newest and most talked-about investment types is cryptocurrency. Crypto is a digital currency that doesn’t currently have the backing of the United States government. Furthermore, since crypto is new to the market, the value fluctuates constantly. Thus, making crypto one of the highest-risk investments available.
Everyday Investing Terms For Beginners
The following are common investing terms you most likely will encounter if you decide to start investing.
Alpha
This term refers to the amount of return expected from an investment compared to the market index.
Bear Market
You never want to hear that the market is “bear.” This means that the market is trending downward and has been for some time. A decline of 20% or more can signal a bear market.
Bull Market
A bull market is the opposite of a bear market. This refers to the upward trend of the market, and experts expect the trend to continue moving in a positive direction.
Blue Chip
A large and well-established company that has performed well in the market for a long time is considered blue chip. Not all blue chip companies pay dividends, but most do.
Capital
Capital refers to the funds invested in a company. That can include cash or other financial assets such as stocks.
Capital Gain and Loss
A capital gain or loss refers to the difference between what the investment was initially bought for and what you sold it for. A gain is when you see a return on your investment, and loss is when you sell at a lower price than what you bought it for.
Dividend
The amount of money paid out to common and preferred stockholders is based on the company’s profit.
Index
The investment index refers to tracking the performance of multiple investments and measuring the overall performance of a specific investment type.
P/E Ratio
The price to earnings ratio is one way to calculate the value of a company by dividing its stock price by its earnings per share. This is a good way for investors to determine if a company has overvalued its stock price.
Volatility
How much and how often an investment fluctuates in value. A volatile market can occur when the market goes up and down frequently.
Discover How To Best Invest Your Money
The world of investing can be overwhelming at times. Unfortunately, this space is littered with jargon that can be confusing. Taking some time to comprehend the thousands of terms can set you up for success.
If you are ready to start investing, the experienced financial professionals at Arizona Central Credit Union are willing to guide you through the process. Call us today at (602) 523-8408 or toll-free at (866) 264-6421, ext—8408 for a no-cost, no-obligation meeting.
