Beginning to invest is the start of a rewarding journey, but it can be confusing when you are introduced into an entirely new world. In many ways, investing is like learning a new language; especially when you might not be accustomed to the terms used in the industry. If you are thinking about investing, here are some common terms that you should get better acquainted with.
Cash: Starting with the term you may be most familiar with, cash is money. However, in the world of investing, this could be referred to as certificates of deposit (CDs), money market accounts or treasury bills.
Mutual Funds: Mutual funds are known as money that comes from you (the investor) and is then invested in stocks and bonds; which are considered assets. One mutual fund could potentially hold hundreds of stocks, and money managers buy and sell decisions for those mutual funds.
Expense Ratio: Have you ever heard of the term, “It costs money to make money”? Well, the expense ratio is the annual fee you pay to run those mutual funds. It is basically the percentage of money that goes to the managers of the mutual fund that you want to invest in. Naturally, if your expense ratio is high, you won’t make as much money.
Index Funds: Index funds are a popular variety of mutual fund because costs are low. Indexes have the capacity to give you an indication as to how the stock market is doing in the slice of the economy that you are investing in. If you invest in an index fund, you are basically putting your hopes on the companies that the index fund comprises of.
Stocks: Purchasing a stock in a company means that you are purchasing a tiny percentage of ownership. The better the company performs, the more your share is worth.
Bonds: Investing in a bond means that you are loaning money to a particular company, and if it does not collapse, you eventually get to cash in on the bond that you invested in, with interest added. If you ever have had to take out a loan, consider it the opposite.