Investing your hard-earned money can be intimidating, so understanding key terms is an important first step. Here are some basic investing terms to know.

Basic Investment Concepts

• Investment: An investment is an asset you purchase with the expectation that it will increase in value over time. Common investments include stocks, bonds, real estate, and commodities.

• Risk of Loss: Investing returns are not guaranteed; your investment could go up or down in value, or you could lose all your initial investment. Understanding and assessing the risk of loss is crucial for making informed investment decisions.

• Investment Goal: Investment goals are critical to guiding your investment decisions, like retiring at a specific age. These goals are based on your individual or family circumstances, like age, risk tolerance, and future money needs.

• Debt Securities: Debt securities, like bonds and promissory notes, are a type of loan to a company or government in exchange for interest payment plus the return the initial amount invested at maturity.  The risk of the debt security is tied to the ability of the borrower to repay.

• Equity: Equity securities, like stocks and limited partnership interests, represent an ownership interest in the company. If the company does well, the value of its stock may increase, and you may be able to sell it for a profit. If a company does not do well, you may lose some or all your investment. 

• Diversification: Diversification means spreading your investments across different assets (stocks, bonds, real estate, etc.) to reduce risk. If one investment performs poorly, others may perform well and can help balance your portfolio.

• Portfolio: An investment portfolio is a collection of financial assets, which can include stocks, bonds, commodities, cash, and cash equivalents. The purpose of an investment portfolio is to grow in value over time while balancing risk.

• Public Company: A public company is a publicly traded company whose shareholders own a stake in the company.  Shares in public companies are sold to the public on stock exchanges and over-the-counter markets. These companies are required to be registered and periodically disclose certain financial and business information to the public.

• Private Offering: A private is offering is the private sale of securities, like stocks and bonds, to institutions and certain investors. Private offerings are not open to the public. They are not registered and must be sold under an exemption, which restricts how it is sold or who may purchase the investment. Private companies are not required to publicly disclose certain financial and business information.  An investment in a private company may be difficult to sell if you need cash in the future.

Stock Categories

• Small-Caps, Mid-Caps, and Large-Caps: Stocks are often categorized based on the size of the company, measured by market capitalization (market cap) — that is, the total value of a company’s outstanding shares. 

  • Small-cap stocks are companies with a market cap under $2 billion. These companies may have fewer publicly traded shares and can be more volatile. 

  • Mid-cap stocks are companies with a market cap between $2 billion and $10 billion. 

  • Large-cap stocks are companies with a market cap over $10 billion. These are typically stable, well-established companies.

Common Investment Products

• Mutual Funds: A mutual fund pools money from multiple investors to buy a diversified mix of stocks, bonds, or other assets, actively managed by professionals. Inside a typical growth stock mutual fund are stocks from dozens, sometimes hundreds, of different companies – so you’re basically buying bits and pieces of all those companies. Some of those company stocks go up while others go down, but the idea is that the overall value of the fund should go up over time and beat inflation. Mutual funds can only be purchased at the end of each trading day.

• Index Funds: An index mutual fund tracks the performance of a specific market benchmark, like the S&P 500 Index, as opposed to a fund manager actively selecting the stocks or bonds a fund will hold. This is often referred to as a "passive" investment strategy.

• ETFs: An Exchange-Traded Fund (ETF) pools investor money to buy a mix of assets, like a mutual fund. However, ETFs trade like stock and can be bought or sold on stock exchanges throughout the trading day. ETFs are often passively managed and seek to match the underlying benchmark and industry. 

Investment Strategies

• Value Investing: A strategy that focuses on buying stocks that are undervalued, meaning they are trading for less than their intrinsic worth. Investors look for companies with strong fundamentals that the market has overlooked. 

• Growth Investing: A strategy that focuses on stocks of companies expected to grow faster than the overall market. Growth stocks often reinvest their earnings into expansion instead of paying dividends, making them riskier but with higher potential returns.

• Income Investing: A strategy that focuses on investments that will produce stable, recurring cash flows and generate income. Investors look for income-producing assets, like stocks that pay dividends, bonds, and real estate. 

• Dollar-Cost Averaging: Dollar-cost averaging is an investment strategy in which you invest a fixed amount of money at regular intervals, regardless of market conditions. This helps reduce the impact of market fluctuations and lowers the risk of investing all your money at a high price.

Real Estate & Alternative Investments

• Real Estate Investment Trust (REIT): A REIT is a company that owns, operates, or finances income-producing real estate, such as apartment buildings, malls, and office spaces. Investors can buy shares in a REIT allowing them to invest in real estate without directly owning property.

• Precious Metals: Investing in precious metals, such as gold, silver, and platinum, is a way that some investors hedge against inflation and economic uncertainty. Precious metals are usually volatile in price. 

• Raw Commodities: Prices for raw materials like gas, oil, beef, and grains are largely driven by supply and demand, but factors like weather or political turmoil can play a role in prices. Commodities are a way for investors to diversify their portfolios beyond traditional securities, but can be extremely volatile.

• Digital Assets: A digital asset is any electronically stored unit of value that can be owned, transferred, or traded, including cryptocurrency. (See more on digital assets.)

Advanced Investing Concepts

• Selling Short (Short Selling): Short selling is when an investor borrows shares of a stock and sells them, hoping to buy them back at a lower price later. If the stock price drops, the investor makes a profit. However, if the stock price rises, losses can be unlimited, making short selling highly risky.

• Margin Loans: A margin loan allows investors to borrow money from a brokerage firm to buy more stocks. While this can amplify gains, it also increases risk — if the stock price drops, the investor must repay the loan even if they lose money.

• Derivatives: A derivative is a financial contract in which value depends on the price of an underlying asset, such as stocks, bonds, or commodities. Common derivatives include options, futures, and swaps. They can be used to hedge risk or speculate on price movements.

• Options: Contracts that give investors the right (but not the obligation) to buy or sell a stock at a set price before a certain date.  These contracts are called calls and puts. 

  • Calls: A call option gives the right to buy a stock at a certain price, hoping it will go up.

  • Puts: A put option gives the right to sell a stock at a certain price, often used to protect against losses.

Retirement Plans & Dividend Strategies

• 401(k) & Public Sector Retirement Plans: A 401(k) is a retirement savings plan offered by private employers. Employees contribute money from their paycheck, often with employer-matching contributions, and it grows tax-deferred until retirement. Public sector employees (government workers, teachers, etc.) may have similar plans like 403(b) or 457(b) plans, which function similarly but are designed for non-profits and government employees.

• Individual Retirement Account (IRA): An IRA is a tax-advantaged way to save for retirement. In a traditional IRA, contributions may be tax-deductible, but withdrawals in retirement are taxed as income. In a Roth IRA, contributions are made with after-tax money, but taxes will not be owed on withdrawals in retirement.

• SEP IRA & SIMPLE IRA: For self-employed individuals and small business owners, these plans offer retirement savings options. SEP IRAs (Simplified Employee Pension IRA) are tax-advantaged retirement accounts in which employers contribute to employees’ accounts (including their own, if self-employed). SIMPLE IRAs (Savings Incentive Match Plan for Employees) are designed for small businesses, allowing both employees and employers to contribute.

• Dividend Reinvestment Plan (DRIP): A DRIP allows investors to automatically reinvest dividends from stocks into more shares instead of taking the cash. This helps investors compound their returns over time without having to manually buy more shares.