To the unfamiliar eye, investment terms and financial lingo can be confusing.
A word with a common meaning takes an entirely new shape in a financial context.
With the rise of “finfluencers” exploding across social media, especially TikTok, the lines can get even blurrier.
Unfortunately, conflicting and incorrect advice cycles through our feeds every day.
If you are brand new to the investment world or are simply curious about it, here are basic investment terms to add to your vocabulary.
Some of these may seem self-explanatory but the core meaning is easily convoluted or lost in translation.
Investment terms 101
1. Stock
A stock represents a share of ownership in a company. It is a security, also known as equity, that is purchasable. Upon buying stock, you are entitled to a piece of the company’s assets and earnings.
Therefore, your profits are calculated by how much stock you own. Units of stocks are called shares.
Predominantly, stocks are purchased and sold on stock exchanges, such as the New York Stock Exchange and Nasdaq. Stocks are the building blocks of most individual’s investment portfolios.
To prevent fraud, government laws and regulations are held against buying and trading stocks. Depending on the success of a company, you can lose or gain money as a shareholder.
2. Fixed-income security
A fixed-income security is a type of investment that provides a return through fixed periodic interest payments.
A return is the amount an investment accumulates or loses over a period of time.
Governments, corporations or other entities use fixed-income securities to fund and expand operations from a creditor.
Creditors are paid back the invested amount when the security’s terms arrive at maturity. At this stage, the security owner is repaid its par/face value (Investopedia).
The return on a fixed-income security is previously established and known. In comparison, the return on variable-income securities can fluctuate.
3. Bond
Government institutions and corporations use bonds to raise funds for new projects and finance ongoing operations.
Bonds are a type of fixed-income securities. An individual essentially lends money to an entity or company for a set amount of time at a specific interest rate.
Bond owners are debtholders or creditors of the entities issuing the bonds.
The organization receiving funds pays bondholders back through interest on top of the bond’s original value.
Most often, bondholders receive regular interest payments at agreed-upon intervals.
Maturity dates establish when the principal of the loan needs to be paid back.
4. Cash
This seems straightforward but has nuance. Cash is another investment type that refers to currency — paper bills and coins — and cash alternatives.
Cash alternatives include bonds, high-yield savings accounts, certificates of deposit (CDs), and US Treasury bills (T-bills).
Money market funds, banker’s acceptances and commercial papers are also cash alternatives. Click here for a detailed overview.
5. Asset
An asset is a resource that holds economic value and is expected to provide future benefits. Individuals, companies and/or governing bodies own assets.
They can be immediate sources of income, such as stocks and bonds, or appreciate in value with time, like precious metals and fine art.
In terms of business, mechanical equipment and software can be assets.
Assets are most commonly categorized as current, fixed, financial or intangible.
Holding assets can be beneficial in individual, corporate and governmental capacities. They can boost sales, cut down expenses, and accelerate cash flow.
Click here for more beginner investment terms and here for more articles like this.
