Commonly used words
Lesson in Course: Investing basics (beginner, 3min)
Let's step through some commonly used words in the world of investing.
What it's about: Becoming comfortable with the basic investing terms used in news articles, in videos, and by experts.
Why it's important: Get more out of what we're reading, watching, and listening to make better investment decisions.
Key takeaway: There are a lot of terms, so use the glossary and in-line definitions to get familiar. We can always jump back to old lessons for a quick refresher.
Overwhelming language makes learning about finance and investing more challenging. Let's start by simplifying some of the basics.
We want to get comfortable with the list of terms below because we'll come across them in news articles, social media, and other lessons on Archimedes. Don't worry if things don't click right away. We can always return to this lesson for a quick reminder.
An investment vehicle is a financial product or collectible (like antiques, coins, art, stamps, trading cards) that investors can buy, such as stocks, bonds, ETFs, Mutual Funds, etc.
Individuals and corporations invest in vehicles to grow their money.
A portfolio is a collection of investment vehicles.
For example, a box of collectible cards fits the definition of a portfolio. In most cases, a portfolio represents all of the investments held in a retirement or brokerage account.
Diversification is a strategy used to minimize risk and the potential of losing money by holding various investment vehicles in a single portfolio.
This universal strategy is found both in finance and in the wild. Fish swim in a school together for collective safety against a predator. Even if a predator captures a single fish or an individual stock loses value, the rest of the school or portfolio is safe.
Concentration is the opposite of diversification. A concentrated portfolio distributes all of the funds across a few vehicles rather than many.
Concentrated portfolios can potentially earn higher returns, but they can also result in more significant losses.
Indexes provide a birds-eye view of the performance of a market using hypothetical portfolios.
There are many different indexes because each one tracks different types of investments in different ways. For instance, the S&P 500 tracks 500 large US companies while the Dow Jones follows 30 prominent US companies. Other indexes will track the performance of other types of investments (like bonds), other geographies (like international stocks), and different industries (like tech).
Stocks are a common investment vehicle. They represent fractional ownership in a company.
In the denomination of shares, owning stock gives the investor voting rights, rights to the company's assets, and a fraction of the income earned by the company.
Bonds are loans issued by governments or companies.
When investors buy a bond, they lend their money to the government or company issuing the bonds. Investors often use them as a source of income since they pay out interest regularly.
The returns are the gains or increases of our investment.
For example, if we invest $100 in a stock and then sell it for $150, our return is $50, or 50%.
Exchange-Traded Funds, ETFs, are portfolios of investments created to follow or track different indices.
For example, an S&P 500 ETF will have all of the shares in the proportions that make up the S&P 500 index. If the S&P 500 is up 1%, the ETF will also be up 1%. The basket of various investments in ETFs makes them great vehicles for easy diversification.
Mutual funds, like ETFs, provide diversification because they also represent a basket of stocks and bonds.
The key difference is that mutual funds don't necessarily follow an index. Instead, they are built and managed by investment professionals. As a result, mutual funds typically have higher management fees but can offer custom-designed strategies not available with ETFs.
The ticker symbol is the 1-5 letter identifier for each stock, mutual fund, or ETF.
For example, the ticker for Apple is AAPL.
Actionable ideas
There are a lot of confusing words used in investing. Refer back to this lesson to remember the basic terms. They become less intimidating the more often you use them, and they'll become part of your vocabulary!
Supplementary materials
Glossary
A financial product or collectible that investors can buy, such as stocks, bonds, ETFs, Mutual Funds, etc.
A collection of investments held in an account, often a retirement account or brokerage account.
A strategy used to minimize risk, the potential of losing money, by holding a variety of different investments in a single portfolio.
The opposite of diversification. Instead of having a basket of many different investments, a concentrated portfolio only holds a few investments.
A group of investments that are used to represent or estimate trends across different types of investments, industries, and/or geographies.
Represent fractional ownership in a company, giving the investor voting rights, rights to the company's assets, and a fraction of the income earned by the company based on the number of shares.
Loans issued by governments or companies. When investors buy a bond, they lend their money to the government or company issuing the bond.
Portfolios of investments created to follow or track different indices.
Portfolios of investments that are built and managed by investment professionals.
The ticker symbol is the 1-5 lettered identifier for each stock, mutual fund, or ETF. For example, the ticker for Apple is AAPL.