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Know Your Investing Terms

There are dozens of investing terms that beginners should know! However, most new investors struggles to give a proper definition for them!

It is amazing how many Americans know about the importance of investing, but never do it!

What blows my mind is how many people wait to start putting away money for retirement.

Sure, when you’re 23, retirement sounds like forever away!

But, doesn’t it sound nice to be able to retire early, be able to afford exciting vacations, and build your dream home without any debt? It truly is possible.

 Learn about investing from our favorite personal finance book, The Total Money Makeover!

As Charles Jaffe has stated, “It’s not your salary that makes you rich, it’s your spending habits”.

Let’s be clear: The finance world was not originally created to be easy and not created for WOMEN.

Thankfully there has been a significant shift recently with women becoming interested in taking control of their money and future finances.

Investing your money, understanding your expenses, creating a budget, and having a diverse portfolio (we’ll get to this one later), are SO IMPORTANT to having financial freedom, retiring early, and being able to live the life you’ve always dreamt of.

It is important to realize that you need to be in charge of your future.

Even if your man already handles investing your money, anything can happen to your spouse/boyfriend/father, and you’ll could be left to making your family’s financial decisions.

No matter your age, situation, or how much money you have in the bank, your credit score, and understanding the following terms is a foundational building block when furthering your learning!

So, with that said, to begin the process of understanding the vast world of investing, all beginners investors must learn and memorize these top 10 investing terms:

1. Portfolio
2. Liquidity
3. Assets and Liabilities
4. CDs
5. Mutual Funds
6. Stocks
7. Bonds
8. ETFs
9. IRA
10. 401(k)

1. Portfolio

Your portfolio is the combination of all your money and investments.

Example: If you are young and haven’t began investing yet, your portfolio is just cash. It’s probably sitting in a checking and/or savings account at your bank.

Example: If you are in your thirties and haven’t began investing, but have been working for a company, your portfolio (at minimum) probably contains cash and a 401k.

As you continue to properly manage your money and invest more, having a diversified portfolio is a good way to go. When someone states that you need a diverse portfolio, they are saying that you should have multiple places where your money is put (cash in bank, stocks, mutual funds, IRA, 401k, etc.), so all your eggs aren’t in one basket.

2. Liquidity

When you think of liquid, I want you to think of being able to put your hands on this money fast. The more liquid the money, the quicker you can obtain the money to spend it.The money in your checking and savings account is liquid.

Cash is actually the most liquid of all assets.

Owning expensive items like airplanes, collectibles, or jewelry are also forms of liquid items, they just would require a bit more time to sell to obtain the money from them.

3. Asset and Liability

An asset is something you can make money from. In the most simplest terms, an asset gives you money. Separate this from liabilities, which are things you own that won’t make you money.

Some examples of assets include: owning land with mineral rights, investments, retirement accounts, cash.

Some examples of liabilities include: buying a new car (you lose value on it the moment it’s off the lot), mortgages, student loans, debt. These simply take money from your pocket.

4. CDs (Certificates of Deposit)

Good: Very low risk, easy, short-term investing
Bad: Very low return, cannot withdraw money early

CDs aren’t very common anymore, as they don’t produce you a nice return on your investment. You can obtain a CD through a bank or a credit union.

Essentially, “investing” your money into a CD means you will place your money into another account in your bank, which acts very similar to a saving account.

The difference between your saving account and a CD is that you must not touch that money for a specified amount of time for said CD to mature, while it creates money from interest.

So, let’s say you “invest” $5,000 into a CD that will have a published interest rate. The money invested will accumulate a certain amount of interest (APY = annual percentage yield) over a set of months (60 months, for example).

The APY percentages vary from bank to bank. At the end of the specified time, you can withdraw your money + interest!

A major factor to consider with this investment is inflation.

Sure, your money may grow a bit in this account, but you must do your research to see if the APY will even make it worthwhile.

Although you can withdraw your money before your specified number of months, you will be hit with heavy fees that will take a portion of your earnings.

5. Mutual Fund

Good: Long-term investing, lower risk, good for beginners, great diversity
Bad: Still obtains risk, requires researching mutual fund history

A mutual fund is a compilation of many small stocks, bonds, or other investments that numerous people have compiled money to fund. When thinking of the word mutual, think: shared.

Essentially, a group of people are funding an account mutually.

One reason this could be a great option for beginner investors is that mutual funds are handled by professionals.

You can’t just go to an app on your phone to buy mutual funds, like you can with common stock apps like Robinhood. A financial professional can invest your money in the appropriate mutual funds based on your investment goals.

Many put money in an IRA or 401K with mutual funds to make their retirement money grow.

If you put money into a mutual fund, you’re in this for the long-haul. Don’t expect to be able to put money in now and take out a nice chunk of money in a year. It’s meant for giving you good growth over time.

It’s always good to check out the history of a fund you’re interested in investing into. The longer its history, the less risky it should be.

There are large-cap funds, small-cap funds, some that fluctuate greatly, and some that grow very slowly. We’ll explore all these details in another article.

Learn more about this form of investing with Total Money Makeover!

6. Stock

Good: Some provide less risk, easy to obtain, long term investing, you have more control
Bad: Higher risk, takes research and learning,

Once a company leaves being private and goes public, they can begin to sell stocks for the public to purchase.

Stocks are also considered shares. This is because you are purchasing a very small amount of a company. You are sharing the company with many, many other people.

You can buy individual stocks yourself, or purchase an ETF (see below), or put money in a mutual fund of stocks.

As a stock is more successful, the stock price rises, making your initial investment worth more.

Therefore, making you money. However, this form of investing is a bit more risky, if you’re buying individual stocks. This is because you’ll be betting your money on the success of just one company.

If a company goes bankrupt and you haven’t sold your shares, you could be out of your investments.

7. Bonds

Good: Fairly easy, shorter term investing
Bad: High risk, not for beginners, yield potential is varied

Bonds are a very old way for companies and the government to be able to pay for something. Ever heard of a government bond or a coupon bond? Same idea.

This is how many buildings, roads, and even transportation like railroads have been funded.

So, in its most simplified terms, a bond is you giving your money to a company or the government, so that they can pay you back with interest over time.

It’s a loan, and the company will be in debt to you.

Of course you don’t have millions on your own to fund a project, which is why it takes many investors purchasing bonds to fund said project.

Bonds are associated with an interest rate, where they may promise to give you payments over a specified amount of years.

However, keep in mind that the amount of money you receive back is tied with the company’s success. For example, if a building is built and never succeeds, you could be out of your investment.

8. ETF (Exchange-Traded Funds)

Good: Long-term, less risky, low fees
Bad: Research advised before investing

ETFs have gained popularity over the past few decades as a less expensive and less risky way to invest. They buy and sell the same as stocks. As in, you could go onto a website like Robinhood and buy a few shares, unlike mutual funds.

Also, you can buy and sell shares throughout the day, unlike mutual funds.

One great aspect of ETF’s is that they are inexpensive!

They are groups of funds from many companies that are combined together. They are categorized based on what companies are within the ETF. For instance, one ETF may be all about agriculture, and another can be all technology companies.

An investment into these funds are for the long run, so don’t expect to see any big fluctuations.

9. IRA (Individual Retirement Arrangement)

Good: Long-term retirement, Roth accounts
Bad: Yearly caps

Do you work? If yes, then you can have an IRA. No matter your age (10 or 50), if you earn money or if your spouse does, you can get an IRA account.

You can only invest up to $5,500 a year (or $6,500 if you’re older than 50). After a number of years, you’ll be able to actually withdraw money if you absolutely need it.

This type of account is a great way to start investing with money that you are okay with “giving up” to be able to see it years down the road.

–Roth IRA: What’s great about a Roth account is that you don’t have to pay taxes when withdrawing the money. You put in your money after you paid taxes, so you won’t have to pay huge taxes later on!

This is very significant, considering many investments require hefty taxes when withdrawing your money!

10. 401(k)

Good: Money matching potential, Roth accounts
Bad: Not available for everyone

This retirement investment account is available to many who work for companies. Not everyone can have a 401(k), though. If you work for a nonprofit, hospital, or another employer within the 403(b) plan, you won’t be able to obtain a 401(k)

This was originally developed in the ‘70s after less companies were able to pay health care for their employees. The name originates from a section in tax law.

There are also Roth 401K options, where you can put in money after taxes. Companies can “match” a certain amount of money that you put in to account!

But you will have to pay taxes on the matched money down the road when withdrawing at retirement.

Learn More! Check out these other posts to expedite your financial journey!:

•  10 Huge Money Mistakes to Avoid in Your 20s
• 5 Obvious Budgeting Tips That You’ve Forgotten About!
• How to Retire Early by Investing in Index Funds

Okay, Let’s Summarize!

• The 10 finance terms listed in this article are only some of the many investing terms for beginners that you’ll encounter when learning more about investing! But hey, it’s good to start somewhere! 
• Many of these terms are further discussed in articles on this site. No worries if you need more clarification!

Make sure to reference this page as you continue your journey to investing. You’ve made it this far, let’s keep learning!