40 Investing Terms You Need to Know

  • Index Fund: An index fund is a type of mutual fund that allows an individual to buy investments that mimic the trends of an index. These are generally more passive investments with lower fees than mutual funds.
  • Simple Interest: simple interest is interest calculated on the original amount of money and does not include interests on any interest already earned. For example, 10% annual simple interest on 1000$ (10% x 1000) is 100$ for the first year and will remains $100 for the second year and so on. As such, the 100$ interest earned in the first year is not taken into consideration when calculating the simple interest for the second year and so on.
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  • Compound Interest: compounded interest is calculated not only on the initial amount (principal) but also on the accumulated interest earned to this date. As ab example, you have a 1000$ investment that earns a 10% returns each year. For the first year, the interest, simple interest, is 100$ (10% of 1000$). In this case we assume that all returns/interest are re-invested in the same investment. The second year, the return/interest earned will be 110$ (10% of 1100$). Now, your investment rate of growth is much higher than with simple interest (see above). Both Warren Buffet (financial) and Albert Einstein (universal) say that compound interest is a powerful force. It has the potential to significantly multiply your investments over time. But be wary because it works the same way with debt. Compound interest is an very powerful investment force and is one of the main strategies serious and smart investor uses to build wealth.
  • IRA: This stands for individual retirement account. It is a tax-advantaged account. There are several types of IRAs. Anyone over 18 with a job can open an IRA for themselves. However, not everyone will have access to every type of IRA.
  • Master Limited Partnerships: Master limited partnerships (MLPs) are limited partnerships that trade similarly to stocks. Given the unique tax treatment and complex rules surrounding them, inexperienced investors should generally avoid investing in MLPs, particularly in retirement accounts where the tax consequences can be unpleasant if not masterfully managed.
  • Margin: This is essentially borrowed money used to make an investment. You can get credit from a broker to buy more than you have actually money for. The hope is that you will make enough money that you will be able to repay the borrowed amount from your earnings.
  • Market capitalization: The market cap of a company is figured by multiplying its current share price by the number of shares outstanding. The largest companies have market caps in the billions.
  • Money Market Fund: A money market fund is a kind of mutual fund that invests only in highly liquid near-term instruments such as cash, cash equivalent securities, and high credit rating debt-based securities with a short-term, maturity—less than 13 months, such as U.S. Treasuries. As a result, these funds offer high liquidity with a very low level of risk.
  • Mutual Fund: A mutual fund is managed by a professional portfolio manager that purchases securities with money pooled from individual investors. The fund can hold individual stocks or bonds. Such funds typically come with higher fees than other investments, since the account is actively managed.
  • NASDAQ: This is a U.S. exchange for buying and selling securities. It is based in New York City. Nasdaq is also an index of the stocks bought and sold on the Nasdaq exchange. (In case you’re curious, the initials stand for the National Association of Securities Dealers Automated Quotations.
  • New York Stock Exchange: One of the most famous stock exchanges is the NYSE, which trades stocks in companies all over the United States, and even includes stocks of some international companies.
Stock Exchange, Trading Floor, New York
  • Personal Investment Strategy: This is exactly what it sounds like: your personal approach and strategy to investments. There’s no single right way to invest. Learn about how investing works. Then define and execute your personal strategy.
  • P/E ratio: This measure reflects how much you pay for each dollar that the company earns. A company often reports profits on a per-share basis. So a company might say that it has earned $5 per share. If that same stock is selling for $75 a share on the market, you divide $75 by $5 to come up with a P/E ratio of 15. The higher a P/E ratio is, the more there is expectations for higher earnings.
  • Real Estate Investment Trusts: Some investors prefer to buy real estate through real estate investment trusts (REITs). They trade as if they are stocks and have special tax treatment. There are different types of REITs that specialize in various types of real estate. For example, if you wanted to invest in hotel properties, you could consider investing in a hotel REIT. REITs allow you to invest in real estate without having to buy or maintain actual buildings or land. See also: Best Real Estate Crowdfunding Platforms
  • Recession: A recession is defined as two consecutive quarters when a country sees negative economic activity. Usually, this is determined by a decline in GDP (gross domestic product) for two consecutive quarters.
  • S&P 500: The Standard & Poor’s 500 is a stock market index that tracks the value of 500 companies in the United States. It’s similar to the Dow Jones in that it is also a stock market index.
  • Stock: A stock represents ownership in a company. Companies divide their ownership stakes into shares, and the amount of shares you purchase indicates your level of ownership in the company. Stock is bought in the hopes that the company will be successful, and more people will want a stake, so you can sell your stake later at a higher price than you paid.
  • Taxable Accounts: Account you can use for trading stocks, bonds, mutual funds, etc. Taxable accounts don’t carry any tax advantages, so you’ll be taxed on your investment income.
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  • Tax-advantaged Accounts: These types of investment accounts come with tax advantages of some type that let you defer or be exempt from taxes on investment income. Retirement accounts — where you can deduct contributions from your taxes, such as an individual retirement account (IRA) — fall into this category.
  • Yield: This is associated with dividend investing. Your yield represents the ratio between the stock price paid and the dividend paid. A stock trading at $100 per share, with a dividend that amounts to $5 per year, you divide the $5 by $100 and turn it into a percentage. In this case, the yield would be 5%.