The world of investing has its own vocabulary. If you’re new to investing, here are some key definitions to help you get started. Would you like to know more about any of these terms? Have a word or two that you think should be on this list? Let us know!
Asset Allocation – the process of deciding the right mix of asset classes for your investments. Appropriate asset allocation balances risk and how well you can tolerate it against your long– and short-term goals. Experts say about 91% of your investment portfolio’s performance is determined by how the assets are allocated.
Asset class or type – the three most common asset classes are equities [stocks], fixed-income securities [bonds] and cash. Others include commodities, real estate, etc. The assets in a specific asset class all exhibit similar characteristics, work the same way, and are subject to the same regulation.
Bear market – a general decline in the market over time.
Bond – a “loan” you make to a company or government agency for a period of one year or longer. Bonds raise capital for the issuer by borrowing money from investors and promising to pay back principal plus interest on a specific date called the maturity date.
Bull market – a general increase in the stock market over a period of time.
Diversification – deciding what assets to include from each asset class. Just as you would not want to have your entire portfolio invested in stocks without other investments to balance the risk, neither would you want to have the stock portion of your portfolio invested in one single stock. The more diversified your investments are, the less likely you can be hurt by poor performance of a single asset.
Index – a benchmark against which investment performance is measured, such as the S&P 500 stock index or the Dow Jones Industrial Index. Index funds are mutual funds whose investment selections consist of the stocks that make up a specific index.
Mutual Fund – a fund that invests money from a large number of individuals in a selection of various assets based on the stated objective of the fund e.g. growth, capital preservation, etc. The advantage is that you achieve some diversification in your portfolio.
Stock – an ownership or equity position in a corporation. Stock prices tend to fluctuate more sharply than other types of assets. But stocks have consistently outperformed every other type of investment over the long term.