The Basics of Investing
If you’re new to investing, some of the information on the Internet can be downright confusing. While investing itself is relatively straightforward, many people are shying away from the entire process because they don’t understand the terminology, which can be somewhat overwhelming. If you feel overwhelmed, you are not alone. But you should be familiar with the basic concepts of investing to make more intelligent choices.
So here is a rundown of five common and must know investing terms that every investor should become familiar with:
While stocks can seem mysterious, a stock is simply a portion of business ownership. Purchasing a company’s stock allows you to vote at the shareholder meetings while also being eligible to share in any profits generated by the business. It’s important to remember that stock value fluctuates daily and that not all stocks will make money – some may stay at the value they were at when you purchased them. In contrast, others may drop in value, making stock purchasing a trickier option for those that are particularly risk-averse. Therefore, it’s a good idea to keep your initial stock purchase at a minimum until you become comfortable with market performance. It’s also a good idea not to invest more than you are willing to lose.
Purchasing a bond is lending money to a particular company or the government. In return for your loan, the entity that receives the money agrees to pay you interest on the money and eventually repay the loan. Bonds are a relatively safe investment, meaning that your return on investment is much less than the return from other securities, but they do provide peace of mind to those with little appetite for risk.
Mutual funds are a combination of stocks and bonds. When you purchase a mutual fund, you pool your money with other investors. All mutual funds have a specific investment strategy and can include stocks, government bonds, stocks in particular industries, such as technology or healthcare, or even stocks from particular countries. All mutual funds are managed by a professional that chooses the securities included in the mutual fund.
Once you begin to invest, you will have a portfolio. A portfolio represents all of the investments that have been made on your behalf. Most investors will have a variety of investments in their portfolios, including individual stocks, bonds, and securities. Your portfolio can also include real property such as real estate, valuable art or jewelry, or any valuable item. Your portfolio is always tied to your investment goals that should be determined before you begin to invest.
While some experts caution new investors against diversifying stock purchases, it’s always best to have a diversified portfolio that includes a variety of investments, which helps balance out the risk. While cautious investors may invest in more bonds or government treasuries with limited stock purchases, other portfolios may include more stock investments. Diversification also includes varying the type of stocks or real investments you make. Instead of concentrating on one particular industry, purchasing stocks in two or three industries can help protect your investment should one industry suffer an unexpected market loss. Of all the terms in investing, diversification is the most important and often overlooked.
Remember to talk to a financial professional with any questions or concerns regarding the investment options available to you. Investing may feel overwhelming to you, but it gets much better as you spend more time educating yourself on how it all works.
*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on to avoid any Federal tax penalties. Individuals are encouraged to seek advice from their tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets.