Terminology used with investing is as important as understanding the different investments.
There are four basic investment categories: Stocks, bonds, cash and real estate. You can invest in them directly or indirectly by buying mutual funds that pool your money with money from other people. Stocks are ownership shares in a corporation. They can pay dividends as well as (hopefully) appreciate in value. Bonds are loans investors make to corporations and governments. They usually pay a stated rate of interest and they “mature” at a future date, returning the principal. Their value is subject to change based on market conditions. Real estate is the fourth investment category, and one in which many people have built wealth. Adding “sweat equity” to property can help you build net worth.
- Diversification* is investing in several different types of investments.
- Allocation is deciding what percentage of your portfolio goes into stocks, bonds and cash — or mutual funds that invest in them.
- Volatility is how much and how quickly the value changes.
- Risk is the chance you take in getting a poor return or losing money.
- Return is what you get back, based on what you invest, usually measured on an annual basis.
- Yield is the income received as a percent of what the investment cost.
- Risk Tolerance is knowing how much risk you can live with. Most investments will drop in value at some point. That is what risk is all about. Knowing how to tolerate risk and avoid panic selling is part of a sound investment strategy.
- Time Horizon is the length of time the funds can stay invested.
- Equities refer specifically to stock and stock mutual funds.
- Fixed Income Investments refer to bonds and bank deposits.
- Dollar Cost Averaging** is an approach to investing that requires the discipline to invest the same amount of money regularly as a buying strategy to help neutralize the impact of volatility.
- Asset Allocation is a science that blends different percentages of stocks, bonds and cash together to help reduce risk and enhance return.
- Qualified Money is money invested in a qualified retirement plan.
- Non-Qualified Money is usually an after tax investment dollar.
- Cost Basis is the initial investment cost plus reinvested dividends.
- Gain is the difference between the current value and your purchase price plus your reinvested dividends.
- Audit Trail is the traceable paper trail left behind.
- A Fiduciary prudently manages money or property for another person.
*Diversification cannot eliminate the risk of investment losses.
**Dollar cost averaging does not ensure a profit nor does it protect against a loss in declining markets. It involves continuous investment in securities regardless of fluctuating price levels. An investor should consider his/her ability to continue purchases in periods of high prices.
Next — Taxes