10 Terms Every Investor Should Know

If you’re new to investing, you may encounter some unfamiliar jargon. Understanding the following terms may help you become a more confident investor.

 

Portfolio

An investment portfolio is a collection of investments owned by an individual or an institution. Typically, a portfolio comprises a mix of asset classes such as stocks, bonds, and cash.

 

Stock

A stock is a security that represents ownership (or equity) in a corporation. An investor who purchases shares of stock owns a piece of the company and has a claim on a portion of the assets and earnings. Shareholders are subject to the potential benefits and risks of that position, which means they can make money if the company does well or lose money if the company does poorly.

 

Bond

A bond is a fixed-income security issued by a government entity or corporation to raise money needed for ongoing operations or to finance new projects. Investors who buy bonds are essentially lending money to the issuing organization and become a creditor. Bondholders typically receive interest payments at regular, predetermined intervals. These payments are based on a fixed annual interest rate, also known as the bond’s coupon rate. Bondholders can expect to be paid the bond’s full-face amount at its stated maturity date, barring default by the issuer.

 

Mutual Fund

A mutual fund is a collection of stocks, bonds, and/or other securities purchased and managed by an investment company with funds from a group of investors. Shares are typically bought from and sold back to the investment company at the end of the trading day, with the price determined by the Net Asset Value (NAV) of the underlying securities. Mutual funds offer investors the advantages of diversification and professional management.

 

Yield

Generally, the yield is the amount of current income provided by an investment. For stocks, the yield is calculated by dividing the total of the annual dividends by the current price. For bonds, the yield is calculated by dividing the annual interest by the current price. The yield is distinguished from the return, which includes price appreciation or depreciation. Investments seeking to achieve higher yields also involve a higher degree of risk.

 

Index

An index is a statistical composite used to track changes in economic conditions (such as inflation) or financial markets over time. Investors use some indexes as benchmarks against which the performance of certain investments can be measured. For example, the S&P 500 Index is considered to be representative of the U.S. stock market in general, but there are hundreds of other indexes based on a wide variety of asset classes (stocks/bonds), market segments (large/small cap), and styles (growth/value).

 

Bear/Bull Market

A bear market is generally defined as a period in which the prices of securities are falling, resulting in a downturn of 20 percent or more in several broad market indexes over a period of several months or longer. A bull market is a sustained period in which the market is rising, and investor optimism is high, usually occurring over several months or years. Either of these market trends can influence the attitudes and behaviors of investors.

 

Source: Broadridge Investor Communication Solutions, Inc.

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