Getting started on an investment portfolio can be intimidating to say the very least. Whether you're reluctant to trust someone else with your hard- earned money or just scared off by an investing language you fear you might never fully understand, starting out in the world of stocks, bonds and markets is a big, yet oftentimes confusing, step toward securing your financial future. With that in mind, here's a list of basic terms with which to become acquainted before taking the investing plunge.
STOCKS
" Stock: When you purchase stock in a company, you are purchasing ownership in that company and are a bona fide shareholder. The more shares you buy, the bigger your stake in the company becomes.
" Common Stock: Stock purchased that entitles the buyer to vote at shareholder meetings and receive dividends declared by the company.
" Preferred Stock: Stock purchased that does not entitle a shareholder to any voting rights, but gives him a higher claim on assets than common stockholders. For instance, if a company was to go bankrupt and be forced to liquefy its assets, a preferred stockholder would have priority in staking a claim to those assets.
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" Dividend: A percentage of a company's profits that is distributed to shareholders. Distributing dividends is typically indicative of a healthy company, and shareholders receive a particular amount for each share they own.
" P/E Ratio: A P/E Ratio is the stock's price per share divided by the stock's earning per share. The value of the price to earnings ratio shows how the price of the stock relates to how well the company is doing with respect to earnings.
" Bull Market: Chances are, you've heard this term before. A bull market refers to when a market is on a consistent upward trend (meaning stocks are rising) and generally reflects a strong economy.
" Bear Market: The opposite of a bull, a bear market is when stock prices are falling and a recession is looming.
BONDS
" Bond: Unlike stock, purchasing a bond in a company has nothing to do with ownership. When you buy a bond, you are loaning money to a company (or government), and therefore are a creditor to that company, but not an owner. You make money when buying bonds thanks to agreeing to a predetermined interest rate, the dividends of which will be paid to you along with the initial amount of your loan on a predetermined date.
" Maturity Date: The agreed-upon date that a bond issuer will pay you back the amount you lent plus the interest that has accrued.
· Coupon: The predetermined rate of interest agreed upon between you (the bond buyer) and the bond issuer.
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" Default: A default happens when a company fails to repay a bond.
" Bond Rating: A bond rating specifies a bond issuer's probability of defaulting based on the issuer's financial condition and profit potential. The highest rating available (AAA) signifies a strong investment, while the lowest (D) indicates the issuer is in default.
" Junk Bond: A bond with a rating of BB or lower, meaning the risk for default is very high.
MUTUAL FUNDS
" Mutual Fund: A mutual fund is a collection of stocks and/or bonds. The easiest way to look at a mutual fund is as if it is a company that brings together people and invests their money in stocks and/or bonds. The main objective of a mutual fund is to minimize risk by spreading out your investment dollars over a collection of stocks or bonds, allowing you to avoid putting all of your eggs into one basket.
" Liquidity: An investor's right to ask that his shares in a mutual fund be turned into cash at any time.
" Equity Funds: Mutual funds that invest in stocks and whose goal is to provide long-term capital growth, particularly for those looking to secure their financial situation come retirement.
" Fixed Income Funds: Also known as income or bond funds, fixed income funds are mutual funds that invest in bonds and typically provide steady income to investors. Those who invest in these types of funds are often retirees or conservative investors.
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" Money Market Funds: Money market funds are for those with a particular aversion to financial risk. These funds typically boast short maturities. Similar to bonds, these are generally IOU's issued by institutions in order to allow those institutions some cash flow and the opportunity to escape short- term debt. While they offer an extremely low amount of risk, they also offer very little return.
These are just a few terms that should help you get your feet wet before you dive into the investing waters. While there are several options out there that offer beginning investors low risk, all investors, from beginners to grizzled veterans, would be wise to keep in mind that all investments come with a certain element of risk and that, when it comes to investing, the only sure thing is that there are no sure things. $$$
