Knowing common investing terms can help you make smarter decisions and better understand the market.
Investing in the stock market can be overwhelming, especially with so many different terms out there. Learning the language of investing can help you make well-informed decisions and make a plan to reach your financial goals.
We’ve compiled a list of some of the key investing terms to help you build a solid investing vocabulary.
Ask/Bid
Shorthand for the price you can buy and sell stocks at. The ask is the higher of the two prices, or the price a seller will receive for selling a stock. The bid is the lower of the two prices and refers to what buyers are willing to pay for a stock. A spread is the difference between the ask (buy) price and the bid (sell) price of a security.
Asset allocation
The process of dividing your portfolio among different types of investments, such as stocks, bonds, cash, and other assets. Asset allocation is important to diversify risk and maximize returns.
Bear market
A market characterized by falling stock prices, typically 20% or more, usually over a period of time. Bear markets generally indicate investors are pessimistic about the direction of the economy and are selling off stocks in anticipation of further losses.
Bull market
The opposite of a bear market. A bull market is one characterized by rising stock prices and increased investor confidence. Bull markets are generally seen as a sign of economic growth and stability.
Capital gains
The amount of money an investor makes when they sell a stock for more than its original purchase price. Capital gains are taxed as income, either at the short-term or long-term capital gains rate, depending on how long the stock was held.
Capital markets
A financial marketplace where investors buy and sell stocks, bonds, and other securities. Capital markets help firms expand and raise capital, and offer investors the chance to grow their wealth.
Capital markets are typically divided into two segments: primary markets, which allow companies to raise funds by issuing new stock, and secondary markets, which facilitate the buying and selling of already-issued securities.
Compounding interest
The process of earning interest on both the principal amount (or the initial amount you invested) and any accumulated interest from previous periods. Compounding is a powerful growth tool, as it allows investors to earn more money in the long run, even with small contributions.
Diversification
An investing strategy that involves spreading risk across different asset classes in order to reduce overall exposure to market volatility and instability. Diversifying reduces the impact of individual stock or sector performance on the overall performance of your portfolio.
Dividend
A part of a company’s profit that it pays out to its shareholders. Dividends are usually paid out in cash, but may also be distributed in the form of stock or other property. Payments are typically made quarterly and come with tax advantages.
Exchange-traded funds
A type of investment that is traded on a stock exchange, similar to an individual stock. Exchange-traded funds are designed to track the performance of a particular market index or sector, offering investors the chance to diversify their portfolios without having to buy multiple stocks.
IPO
The process where a private company first offers its shares for sale to the public on a stock exchange. An IPO can provide investors with an opportunity to own a piece of a company, but comes with some inherent risk since there is no track record of performance.
Leveraging
When an investor borrows money in order to invest, with the expectation that the return on the investment will be greater than the cost of borrowing.
Leveraging can potentially amplify gains, but also increases risk, as investors are responsible for repaying the loan even if their investments do not perform as expected.
Long / Short
Taking a long position means buying a stock with the hope the stock’s value will appreciate. Taking a short position involves selling a stock with the expectation the price will decline and you can purchase it back at a lower price.
Taking a long or short position can also be done through derivatives such as options or futures contracts.
Market capitalization
The total value of all a company’s outstanding shares, calculated by multiplying the stock’s price per share by the number of shares outstanding. Market capitalization can be used to measure how large a company is.
Mutual funds
A pooled investment fund, managed by professionals, that allows investors to purchase shares in the fund and benefit from the diversification of its investments. Mutual funds invest in a wide variety of securities such as stocks, bonds, and money market instruments.
Options
A type of contract that gives holders the right to buy or sell a certain asset at a predetermined price on or before a set date. Options can be used as a hedging tool to protect against losses in volatile markets or as part of a speculative strategy.
Price-to-earnings ratio
A measurement is used to value a company and identify if they are overvalued and undervalued. The P/E ratio is calculated by dividing the current price of a stock by its earnings per share. It can also be used to compare different stocks or sectors.
Risk and Return
The relationship between the level of risk taken on by an investor and the potential return expected from their investments. Generally, the higher the risk, the higher the potential return. Conversely, lower levels of risk are associated with lower returns.
Risk Tolerance
An investor’s willingness to take on risk in order to reach potential returns. Risk tolerance ranges from conservative to aggressive, and can help determine the types of investments an investor may be willing to make.
Stock
A type of security that represents ownership in a company. Stockholders are entitled to voting rights, potential dividends, and capital gains resulting from increases in the stock’s value.
Stock Split
Stock splits occur when a company increases the number of its shares outstanding without changing its market capitalization. For example, if company $TSTR has 1 million shares at $100 and does a 2:1 split, then the company now has 2 million shares, each $50.
A stock split is used to reduce the share price so that it is more affordable to individual investors and easier to trade on the market.
Volatility
A measure of how much the price of a security fluctuates over time. High levels of volatility indicate that securities are more risky and may be prone to significant fluctuations in value. Low levels of volatility indicate that a security is less risky and more stable in price.
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