Investing your money can be one of the best ways to secure your and your family’s financial future. However, understanding investment terms and definitions can feel daunting. But it is crucial, both for you and the safety of your money. That’s why we took the time to write down the most common and useful terms you need to start safe investing with knowledge.
You will learn:
- Different Types of Investments
- Common Retirement Investment Terms
- Why Should I Teach My Kids and Teens Investing Basics?
Different Types of Investments
Investments come in various forms, each with its own risk and return characteristics. Where you want to start your investment journey depends on the risks you’re willing to take and your goals, but also on your knowledge of investing. Often, we choose options we feel familiar or safe with; sometimes, they are the right ones, and sometimes, there are better options.
To help you choose – based on investment knowledge – there’s a list below containing the most common and popular investment types:
Stocks
Stocks represent ownership in a company. When you buy shares of a company’s stock, you become a shareholder and are entitled to a portion of the company’s profits, as well as voting rights in certain company decisions. The voting rights you get usually depend on how many stocks you own in a certain company. For example, investors with common stock are generally allowed one vote per share they own – an investor who owns 100 shares of stock may have 100 votes to cast. The same goes for the portion of the company; the more you invest, the more you can gain profit (or lose!).
Bonds
Bonds are debt securities issued by governments or corporations. When you buy a bond, you’re essentially lending money to the issuer in exchange for regular interest payments and the return of the bond’s face value at maturity. Bonds pay a fixed rate of interest every six months*. You can hold a bond until it matures or sell it before it matures. Maturity is the date when a bond’s principal is repaid with interest.
*There are different types of bonds, eg. a 5-year bond will mature in 5 years, which means that the holder(you) will receive the principal at that time. Some bond issuers also pay their holder periodic interest or coupon payments that are paid either before or upon maturity.
Mutual Funds
Mutual funds pool money from multiple investors to invest in a diversified portfolio of stocks, bonds, or other assets. They are managed by professional fund managers who make investment decisions on behalf of the investors. Mutual funds are like a big basket of other assets that grows as the interest rises (or goes down as the interest goes down). Something you should always pay attention to when it comes to some mutual funds is their fees. The highest fees are usually the administrative fees – the fees you pay for a professional managing your fund.
ETFs (Exchange-Traded Funds)
ETFs are similar to mutual funds but are traded on stock exchanges like individual stocks. They offer diversification and are often passively managed to track a specific index or sector. You still have the basket of investments like stocks, bonds, or commodities all bundled together and traded on a stock exchange just like one single stock. ETFs are smart offerings that offer instant diversification without picking individual stocks. ETFs are known for their low fees, transparency, and flexibility, making them popular for both beginners and seasoned investors. Do remember that they track a specific index or strategy, so understanding what’s inside is crucial.
Real Estate
Real estate investing boils down to using money to acquire properties (land, buildings, etc.) to generate income, building wealth, or both. You can rent out the property for steady cash flow, flip it for quick profit through renovation and resale, or hold it long-term and hope for value appreciation. It’s a tangible asset offering the potential for stable returns, but be prepared for upfront costs, ongoing management, and the inherent risks of the market. Remember, location and smart decisions are key to success in this exciting yet intricate investment journey.
Investment Terms and Definitions
Now, when you have to learn the basics of different investment types and what they all are, you need to understand more complex terms and definitions you may encounter on your investment journey. Let’s break down all key terms to empower your financial decisions:
Accounts:
- 401(k): An employer-sponsored plan where you contribute pre-tax dollars, reduce your taxable income, and enjoy potential employer-matching contributions.
- IRA: Individual Retirement Account you open independently, offering tax advantages for personal contributions. Traditional IRAs offer tax-deferred growth, while Roth IRAs provide tax-free withdrawals in retirement.
- 403(b): Similar to a 401(k) but for non-profit employees.
- 457(b): Another employer-sponsored option, primarily for government and non-profit workers, with tax-advantaged contributions.
Investment Types:
- Stocks: Ownership shares in companies offer potentially high returns but also higher risk.
- Bonds: Loans you make to companies or governments, providing regular interest payments and lower risk than stocks.
- Mutual Funds: Professionally managed pools of investments diversifying your portfolio across different assets.
- ETFs (Exchange-Traded Funds): Baskets of stocks, bonds, or other assets traded on exchanges like individual stocks, offering low fees and diversification.
Investment Strategies:
- Asset Allocation: Dividing your investments across different asset classes like stocks, bonds, and cash to balance risk and potential returns based on your age, goals, and risk tolerance.
- Dollar-Cost Averaging: Investing a fixed amount regularly, regardless of market price, to average out purchase costs over time.
- Target-Date Funds: Pre-mixed, age-specific funds automatically adjust asset allocation towards safer options as you near retirement.
Terms to Know:
- Expense Ratio: Annual fee charged by mutual funds and ETFs, impacting your returns.
- Risk Tolerance: Your comfort level with investment volatility influencing your asset allocation.
- Diversification: Spreading your investments across different assets to reduce risk.
- Compound Interest: Earnings generated from your earnings accelerate your wealth growth over time.
Why Should I Teach My Kids and Teens Investing Basics?
Besides teaching our beloved teachers necessary investment basics, we also wanted to highlight the benefits these terms and definitions could have on our kids and teens’ future:
- Financial Literacy: Understanding basic investing terms and concepts lays the foundation for financial literacy, empowering kids and teens to make informed decisions about money management.
- Long-Term Wealth Building: Starting to invest early allows for the power of compounding to work its magic, potentially leading to significant wealth accumulation over time.
- Preparation for the Future: Learning about retirement investment terms early on can help kids and teens start planning for their financial future from an early age, setting them up for a comfortable retirement down the road.
- Builds Relationship: Teaching your kids and teens about finance and investments, in general, could benefit your relationship with them as well as their relationship with money.
Understanding basic investment terms is the first step toward becoming a savvy investor. Familiarizing yourself with these terms can lay a solid foundation for financial success and security in the future. So don’t wait—start learning about investing today, and keep exploring our blog for further insights!
