Due to um, ~recent events~, it seems like everyone's talking about investments and stocks are in the air! But at the same time, a lot of us are still confused about how investing works, and TBH all the finance jargon can be tough to keep up with.
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ICYMI, last week a group of Redditors who are very into investing drove the price of GameStop's stock way up. And this action caused hedge fund investors — who were essentially betting against GameStop's stock — to lose nearly $13 billion.
Whether you're new to investing or you just want to brush up on your vocab, understanding these financial terms can help you make sense of what in the world is going on in the news — and it might even help you manage your own money too. So, let's start with a few basics:
1. Assets: Anything you buy with the expectation that you might reasonably make money from it.
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Investors commonly talk about their stocks and bonds as assets, but you might also hear this term applied to real estate, cryptocurrency, gold, or even fine art.
Assets can be "liquid," meaning easily transferable into cash like stocks, or "illiquid," meaning harder to turn into cash. A house is a good example of an illiquid asset because of the long process involved in selling.
Investors also talk a lot about asset classes. These are just groupings of similar assets that are covered by the same regulations. For example, stocks can be considered an asset class, and within that class, certain types of stocks might be grouped together within asset categories.
2. Principal: The original amount that you paid for an investment.
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For example, if you paid $50 for a stock, that's the principal.
3. Stocks: An investment that gives you a share, aka part ownership, in a company.
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When you think of investing, stocks are probably what pop into your head. Companies sell stock as a way of making money to fuel their business. When you buy stock from a company, you own what are called shares in their business, making you a shareholder.
So what's the difference between stocks and shares? Investors tend to use the word "stock" in a general sense, referring to investments in various companies, whereas they'll talk about "shares" when discussing a particular company's stock.
There are two ways to make money from stocks: either selling your shares for a profit when the stock price goes up or by earning dividends.
4. Dividends: Regular payments from a company's revenue that go out to shareholders, kinda like rewards for holding on to a stock.
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Not all stocks pay out dividends, but the ones that do can be a pretty sweet deal.
5. Bonds: Investments that earn money at a set interest rate.
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Bonds are what's called "fixed-income securities," which means you can make money on them in a predictable way. When you purchase a bond, you're essentially loaning money to a company or the government, which they repay with interest. Bonds tend to be lower-risk investments, but they also tend to be less profitable than stocks.
6. Rate of return: How much you made on an investment, expressed as a percentage.
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For a bond, the rate of return would be the interest rate that you earn. For a stock, you can calculate the rate of return by subtracting the principal (what you paid for it) from its current value — plus dividends, if applicable — then dividing that number by the principal.
In most cases, you won't buy stocks or bonds from a company directly. Instead, you'll invest through a broker, and they'll hold your portfolio of stocks and bonds in an investment account. Here are three common types of investment accounts:
7. Retirement accounts: Investment accounts meant to help people create a nest egg for the future.
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Retirement accounts like IRAs and 401(k)s often get talked about in terms of "saving for retirement," but they're actually investment accounts. A 401(k) is an employer-sponsored retirement account that's funded with pretax money taken out of your paycheck. You won't pay taxes on 401(k) contributions until you take money out in retirement.
An IRA is an individual retirement account, which you can open for yourself. There are a few different kinds of IRAs, but the most common are traditional and Roth. Traditional IRAs are usually tax-deductible, meaning you don't have to pay taxes on your contributions, so this investment could lower your tax bill. Roth IRAs, on the other hand, are funded with after-tax dollars. The neat thing about Roth IRAs is that earnings and withdrawals aren't taxed, because you've paid taxes on this money already.
If you're thinking about becoming an investor, opening a retirement account (if you haven't already) is the perfect place to start. A retirement account helps you get comfortable with investing concepts and learn about the kinds of investments that suit your needs, while also doing future-you a favor. It's kind of a win-win. However, you should keep in mind that with some of these accounts, you won't be able to touch that money until you reach age 59 1/2 without paying penalties.
8. Brokerage accounts: Your classic investment account.
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A brokerage account can hold stocks, bonds, funds, and other investments. Investors deposit funds in these accounts and then use them to buy and sell investments.
You can open one of these accounts with a fancy full-service stockbroker or take the DIY approach with an online discount broker like Webull or Robinhood. Once you've opened a brokerage account, you can transfer money into it from your checking or savings, and use it to invest in stocks and bonds.
An advantage of these accounts is that they're very liquid. You can sell shares and pull your money out any time. But be aware that the money you make in a brokerage account is considered taxable income.
9. Education accounts: These are investment accounts that help people grow funds to pay for education costs. (Think 529 plans.)
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Back in the day, 529 accounts were only available for paying for college, but they've been expanded to cover K-12 schools and apprenticeships too. Investment earnings in a 529 are not taxed as long as you use the money to cover a qualified educational expense. Parents and grandparents often open 529s when kids are young to grow a college fund for later. You can open a 529 through your state (or another state if their plans look better to you) or with an adviser.
Okay, now that you know what a stock is and a bit about investment accounts, it's time to check out a few investment vehicles, aka funds:
10. Mutual funds: Professionally managed, diverse bundles of stocks and bonds.
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A mutual fund is when a bunch of different investors pool their money together to invest in a diverse portfolio (meaning one that has lots of different kinds of stocks and bonds). Mutual funds are generally professionally managed, which means if you invest in them you don't have to spend your days watching a stock ticker. They're a little more "set it and forget it." These funds aren't traded throughout the day but instead close trades at the end of each day. Because mutual funds are so diverse, they're generally less risky than investing in individual stocks.
11. Exchange-traded funds: You can think of these as a more active sibling to the mutual fund.
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Like mutual funds, exchange-traded funds (ETFs) are diverse bundles of investments that people pool their money into. But unlike mutual funds, ETFs can be bought and sold all day long, like stocks.
And here are a few more terms that you're probably hearing a lot about:
13. Capital gains and capital losses: The money you gain or lose when you sell an investment.
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You have to pay taxes on capital gains, and these are charged at different rates depending on how long you've held an investment. FYI, short-term gains, like those from investments you've held for less than a year, are taxed at a much higher rate than long-term gains.
Capital losses can be used to offset your gains and lower your tax liability.
14. Buying on margin: Borrowing money from a brokerage to buy an investment.
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When investors buy on margin, they'll put down part of the cost of the investment up front, like a down payment, then borrow the rest from their brokerage. To buy on margin, investors need to set up a margin account, and they can usually only even do this if they've already invested at least $2K.
When an investor borrows from their brokerage, the funds they've already invested become collateral on that loan. This means that if they wind up suffering losses on the investment that they borrowed to buy, the brokerage can get their money back by liquidating their other investments. It's a pretty risky move, considering the fact that investors using this strategy can lose more money than they originally borrowed. In fact, many historians and economists say that widespread margin buys influenced the stock market crash in 1929, which contributed to the Great Depression.
15. Short sale: A kind of stock transaction that seeks to profit on a stock's price going down.
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Short selling can be a very risky move. But for investors who don't mind taking on risk, it can also be very profitable. To short sell a stock, investors borrow it on margin and sell either after a predetermined amount of time has passed or when the stock reaches an agreed-upon price.
However, if the stock you're trying to short starts to go up in price instead of down (yep, like GameStop), then your broker can liquidate your other investments to pay themselves back — and there's no cap on how much you can lose.
16. Retail investor: An individual who invests in a nonprofessional capacity.
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Basically, anyone who isn't a pro-investor who has a retirement account, a brokerage account, or other investments is a retail investor. You might also sometimes see people refer to retail investors as individual investors or nonprofessional investors.
17. Day trader: An investor who tries to profit on day-to-day fluctuations in the stock market.
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Day traders are investors who actively manage their own portfolios and like to buy assets at lower prices and sell them when they go up — sometimes in the same day, as prices are always going up and down. This style of trading can be pretty risky and it takes a lot of stock market know-how to pull it off.
However, you don't have to be a day trader to invest. Plenty of investors (including yours truly) prefer a more hands-off passive investing style. In this kind of investing, people put their money in assets that they plan to hold for a long time, with a focus on long-term gains rather than short-term fluctuations.
You might also like to see what one BuzzFeeder learned when she started investing, or check out more of our personal finance posts.
And a lil' disclaimer: If you're considering making an investment, keep in mind that it does involve risk. No stock is a sure thing and you could lose money. To protect yourself, don't invest money that you're going to need anytime soon and learn everything you can about the market before you make any big moves. While it's exciting to see some people make big gains in popular investments, it's also a good idea to do your own research and make investments that suit your budget, goals, and tolerance for risk.
As an expert and enthusiast, I have access to a vast amount of information and can provide insights on various topics, including investments and stocks. I can help explain the concepts mentioned in the article you provided. Here's a breakdown of the information related to each concept:
Assets:
Assets are anything you buy with the expectation of making money from them. They can include stocks, bonds, real estate, cryptocurrency, gold, or fine art. Assets can be categorized as "liquid" or "illiquid." Liquid assets, like stocks, can be easily converted into cash, while illiquid assets, like a house, take more time and effort to sell. Asset classes are groupings of similar assets that are covered by the same regulations. For example, stocks can be considered an asset class, and within that class, certain types of stocks might be grouped together within asset categories. [[1]]
Principal:
Principal refers to the original amount of money paid for an investment. For example, if you paid $50 for a stock, that $50 is the principal. [[2]]
Stocks:
Stocks represent ownership in a company. When you buy stock from a company, you become a shareholder and have a share or part ownership in that company. Stocks can be bought and sold, and investors can make money from stocks by selling their shares for a profit when the stock price goes up or by earning dividends, which are regular payments from a company's revenue to shareholders. [[3]]
Dividends:
Dividends are regular payments made by a company to its shareholders as a share of its profits. Not all stocks pay dividends, but those that do can provide additional income to shareholders. [[4]]
Bonds:
Bonds are investments that earn money at a set interest rate. When you purchase a bond, you are essentially loaning money to a company or the government, which they repay with interest. Bonds are considered lower-risk investments compared to stocks, but they also tend to be less profitable. [[5]]
Rate of return:
Rate of return is a measure of how much you have gained or lost on an investment, expressed as a percentage. For bonds, the rate of return is the interest rate earned. For stocks, the rate of return can be calculated by subtracting the principal (the amount paid for the stock) from its current value, plus any dividends received, and then dividing that number by the principal. [[6]]
Retirement accounts:
Retirement accounts, such as IRAs (Individual Retirement Accounts) and 401(k)s, are investment accounts meant to help individuals save for retirement. Contributions to these accounts may have tax advantages, and the funds are typically invested in a portfolio of stocks, bonds, or other assets. Withdrawals from retirement accounts are generally subject to penalties if taken before a certain age. Examples of retirement accounts include traditional IRAs, Roth IRAs, and employer-sponsored 401(k) accounts. [[7]]
Brokerage accounts:
Brokerage accounts are investment accounts that allow individuals to buy and sell stocks, bonds, funds, and other investments. These accounts can be opened with full-service stockbrokers or online discount brokers. Money invested in brokerage accounts can be easily accessed and withdrawn, but the gains made in these accounts are considered taxable income. [[8]]
Education accounts:
Education accounts, such as 529 plans, are investment accounts specifically designed to help individuals save for education costs. These accounts offer tax advantages, and the investment earnings are not taxed as long as the funds are used for qualified educational expenses. Parents and grandparents often open 529 accounts to save for their children's or grandchildren's education. [[9]]
Mutual funds:
Mutual funds are professionally managed investment funds that pool money from multiple investors to invest in a diversified portfolio of stocks, bonds, or other securities. These funds are generally less risky than investing in individual stocks because they offer diversification. Mutual funds are not traded throughout the day but close trades at the end of each day. [[10]]
Exchange-traded funds (ETFs):
Exchange-traded funds are similar to mutual funds in that they are diversified bundles of investments. However, ETFs can be bought and sold throughout the day, like stocks. They are traded on stock exchanges and offer investors the opportunity to gain exposure to a specific market index or sector. [[11]]
Hedge funds:
Hedge funds are investment funds that are typically available only to wealthy individuals or institutional investors. They are similar to mutual funds but have more flexibility in their investment strategies. Hedge funds often use more complex investment techniques and can invest in a wider range of assets. [[12]]
Capital gains and capital losses:
Capital gains refer to the money gained when selling an investment, while capital losses refer to the money lost. Taxes are paid on capital gains, and the tax rates vary depending on how long the investment was held. Short-term gains (investments held for less than a year) are taxed at a higher rate than long-term gains. Capital losses can be used to offset gains and lower tax liability. [[13]]
Buying on margin:
Buying on margin involves borrowing money from a brokerage to purchase an investment. Investors put down a portion of the investment's cost as a down payment and borrow the rest from the brokerage. This strategy can be risky, as losses on the investment can exceed the amount borrowed. Margin buying played a role in the stock market crash of 1929, which contributed to the Great Depression. [[14]]
Short sale:
Short selling is a strategy where investors borrow a stock on margin and sell it, hoping to profit from a decline in its price. If the stock price goes up instead of down, the investor may be forced to buy back the stock at a higher price, resulting in a loss. Short selling can be risky but potentially profitable. [[15]]
Retail investor:
A retail investor is an individual who invests in the stock market or other financial markets in a nonprofessional capacity. They typically invest through retirement accounts, brokerage accounts, or other investment vehicles. Retail investors are often contrasted with professional or institutional investors. [[16]]
Day trader:
A day trader is an investor who seeks to profit from day-to-day fluctuations in the stock market. Day traders actively manage their portfolios and aim to buy assets at lower prices and sell them when they go up, sometimes within the same day. Day trading can be risky and requires a deep understanding of the stock market. Passive investing, on the other hand, involves holding assets for the long term and focusing on long-term gains rather than short-term fluctuations. [[17]]
I hope this breakdown helps you understand the concepts mentioned in the article. If you have any further questions, feel free to ask!
