Beginners looking to invest for the first time can often be overwhelmed to the point of indecision. So many terms are casually tossed about by investment professionals and the financial media that it can be easy to be insecure about taking your first steps.
But the truth is that investing, at its core, is a simple proposition. As long as you consistently contribute to investments with successful long-term track records, you’re likely to do well. But learning the lingo of the investment world also can give you the confidence you need to participate in the first place. With that in mind, here are 18 investing terms that you should really know before you jump in with both feet.
Asset Allocation: Asset allocation refers to the different types of investments you buy with your money. For example, if all you buy is 100 shares of Microsoft, your asset allocation is 100% stocks. But if you mix in some bonds, foreign currencies, Treasury bills and so on, your asset allocation is more diversified.
Diversification: Diversification refers to spreading out your asset allocation among different types and styles of investments to help reduce your overall risk. In other words, diversification is the opposite of “putting all your eggs in one basket.”
Bull Market: A bull market refers to a market that continues to trade higher, particularly over an extended period of time.
Bear Market: The opposite of a bull market, typically characterized by a drop of at least 20% in market prices.
Capital Gain/Loss: Capital gains or losses occur when you sell an investment above or below the price at which you purchased it. Long-term capital gains, or those held for longer than one year, benefit from more advantageous tax treatment.
Momentum Investing: Momentum investing refers to buying stocks or other assets that are rising rapidly in price, without regard to valuation or other fundamental indicators. The belief of momentum investors is that an asset in motion tends to stay in motion.
Bid/Ask Spread: The bid/ask spread refers to the price differential between the highest price a buyer is willing to pay for an asset and the lowest price at which another investor is willing to sell. Once those two prices match, a trade occurs.
Bond: A bond is essentially a loan. Bond issuers take investor money in exchange for the promise of regular interest payments and the return of principal at a specified date in the future, known as the maturity date.
Stock: A stock represents a fractional ownership share in a company. The value of this ownership share fluctuates minute to minute and sometimes second to second on the global stock exchanges.
Exchange-Traded Fund: An exchange-traded fund, or ETF, acts like a mutual fund that can be bought and sold like a stock on an exchange. Typically, ETFs track major indices such as the S&P 500.
Margin: Margin isn’t recommended for beginning investors, but it allows you to leverage your returns by borrowing against your holdings. For example, you can use margin to buy $1,000 of stock with just $500 invested. At this 50% margin level, your gains — or losses — are magnified by 50%. In this example, if your stocks gain in value from $1,000 to $2,000, your net profit is $1,500, not $1,000 ($2,000 sale price minus $500 invested equals $1,500 profit).
Short Selling: Short selling refers to borrowing stock that you then sell, intending to buy it back at a lower price and return it to the lender. Effectively, a short sale is a bet that a stock will go down in value. Short selling requires a margin account and could result in you putting up extra money if the stock goes up in value rather than down.
Real Return: Real return refers to the actual market return of an investment, also known as the nominal return, minus the rate of inflation. Some calculators also subtract other costs, such as taxes. Real return is meant to give investors a more accurate picture of how much additional buying power their investments are providing.
Investment Objectives: Your investment objectives describe what you are trying to achieve with our investments. Common investment objectives include growth, income or capital preservation. Your investment objectives help guide your asset allocation.
Risk Tolerance: Risk tolerance refers to the amount of volatility you are willing to accept in your investments, on a continuum that typically ranges from conservative to speculative. Risk tolerance is another important factor in creating your asset allocation, as it delineates which types of investments you may or may not be comfortable owning.
Rule of 72: The rule of 72 is an easy mathematical formula to estimate how long it will take to double your money with an investment. For example, if you anticipate earning an 8% return, your money will double in about 9 years. You can also reverse the formula, estimating the rate of return you’ll need to double your money in a specified time period.
Dollar Cost Averaging: Dollar cost averaging refers to investing the same amount of money at regularly scheduled intervals. For example, if you have $12,000 to invest, you can add $1,000 to your portfolio every month. This allows you to buy more of an investment if its price is low and a lesser amount when its price is high, thereby giving you a smoother long-term average cost.
Yield: Yield typically refers to the interest rate that a bond, stock or other investment pays as a percentage of its principal value. For example, a common stock might pay a 2% dividend, while a bond might pay a 5% rate of interest. This refers solely to the income component of your return.
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About the Author
After earning a B.A. in English with a Specialization in Business from UCLA, John Csiszar worked in the financial services industry as a registered representative for 18 years. Along the way, Csiszar earned both Certified Financial Planner and Registered Investment Adviser designations, in addition to being licensed as a life agent, while working for both a major Wall Street wirehouse and for his own investment advisory firm. During his time as an advisor, Csiszar managed over $100 million in client assets while providing individualized investment plans for hundreds of clients.
TORONTO – Canada’s main stock index was down more than 200 points in late-morning trading, weighed down by losses in the technology, base metal and energy sectors, while U.S. stock markets also fell.
The S&P/TSX composite index was down 239.24 points at 22,749.04.
In New York, the Dow Jones industrial average was down 312.36 points at 40,443.39. The S&P 500 index was down 80.94 points at 5,422.47, while the Nasdaq composite was down 380.17 points at 16,747.49.
The Canadian dollar traded for 73.80 cents US compared with 74.00 cents US on Thursday.
The October crude oil contract was down US$1.07 at US$68.08 per barrel and the October natural gas contract was up less than a penny at US$2.26 per mmBTU.
The December gold contract was down US$2.10 at US$2,541.00 an ounce and the December copper contract was down four cents at US$4.10 a pound.
This report by The Canadian Press was first published Sept. 6, 2024.
TORONTO – Canada’s main stock index was up more than 150 points in late-morning trading, helped by strength in technology, financial and energy stocks, while U.S. stock markets also pushed higher.
The S&P/TSX composite index was up 171.41 points at 23,298.39.
In New York, the Dow Jones industrial average was up 278.37 points at 41,369.79. The S&P 500 index was up 38.17 points at 5,630.35, while the Nasdaq composite was up 177.15 points at 17,733.18.
The Canadian dollar traded for 74.19 cents US compared with 74.23 cents US on Wednesday.
The October crude oil contract was up US$1.75 at US$76.27 per barrel and the October natural gas contract was up less than a penny at US$2.10 per mmBTU.
The December gold contract was up US$18.70 at US$2,556.50 an ounce and the December copper contract was down less than a penny at US$4.22 a pound.
This report by The Canadian Press was first published Aug. 29, 2024.
The crypto market has recently experienced a significant downturn, mirroring broader risk asset sell-offs. Over the past week, Bitcoin’s price dropped by 24%, reaching $53,000, while Ethereum plummeted nearly a third to $2,340. Major altcoins also suffered, with Cardano down 27.7%, Solana 36.2%, Dogecoin 34.6%, XRP 23.1%, Shiba Inu 30.1%, and BNB 25.7%.
The severe downturn in the crypto market appears to be part of a broader flight to safety, triggered by disappointing economic data. A worse-than-expected unemployment report on Friday marked the beginning of a technical recession, as defined by the Sahm Rule. This rule identifies a recession when the three-month average unemployment rate rises by at least half a percentage point from its lowest point in the past year.
Friday’s figures met this threshold, signaling an abrupt economic downshift. Consequently, investors sought safer assets, leading to declines in major stock indices: the S&P 500 dropped 2%, the Nasdaq 2.5%, and the Dow 1.5%. This trend continued into Monday with further sell-offs overseas.
The crypto market’s rapid decline raises questions about its role as either a speculative asset or a hedge against inflation and recession. Despite hopes that crypto could act as a risk hedge, the recent crash suggests it remains a speculative investment.
Since the downturn, the crypto market has seen its largest three-day sell-off in nearly a year, losing over $500 billion in market value. According to CoinGlass data, this bloodbath wiped out more than $1 billion in leveraged positions within the last 24 hours, including $365 million in Bitcoin and $348 million in Ether.
Khushboo Khullar of Lightning Ventures, speaking to Bloomberg, argued that the crypto sell-off is part of a broader liquidity panic as traders rush to cover margin calls. Khullar views this as a temporary sell-off, presenting a potential buying opportunity.
Josh Gilbert, an eToro market analyst, supports Khullar’s perspective, suggesting that the expected Federal Reserve rate cuts could benefit crypto assets. “Crypto assets have sold off, but many investors will see an opportunity. We see Federal Reserve rate cuts, which are now likely to come sharper than expected, as hugely positive for crypto assets,” Gilbert told Coindesk.
Despite the recent volatility, crypto continues to make strides toward mainstream acceptance. Notably, Morgan Stanley will allow its advisors to offer Bitcoin ETFs starting Wednesday. This follows more than half a year after the introduction of the first Bitcoin ETF. The investment bank will enable over 15,000 of its financial advisors to sell BlackRock’s IBIT and Fidelity’s FBTC. This move is seen as a significant step toward the “mainstreamization” of crypto, given the lengthy regulatory and company processes in major investment banks.
The recent crypto market downturn highlights its volatility and the broader economic concerns affecting all risk assets. While some analysts see the current situation as a temporary sell-off and a buying opportunity, others caution against the speculative nature of crypto. As the market evolves, its role as a mainstream alternative asset continues to grow, marked by increasing institutional acceptance and new investment opportunities.
