The U.S. stock market is by farthe largest in the world, but many people aren’t investing and don’t understand basic stock market terms.
If you aren’t sure about basic terms, it can be dangerous to start investing because of a lack of proper education. Stock market terminology doesn’t have to be confusing, and we are going to explain some of the most important terms.
Continue reading this article to learn more about the stock market and investment terms you need to know about.
1. Stock Market
If you get visions of street vendors haggling with people over small pieces of a company’s building, this is pretty close to what the stock market actually is.
When you learn about investing, understanding that the stock market is where companies offer parts or “shares” of their companies in exchange for funding is an essential part of stock investing.
The stock market isn’t a physical space, but it’s a place where thousands of transactions happen daily. Stocks and bonds help companies fund product launches, research, expansion, and more.
If you want to own a piece of a company without having to own the company, then getting into the stock market is a great way to do so.
2. Stocks & Bonds
While bonds are fixed-income debt instruments, stocks are stakes of ownership in a company.
When you purchase a stock, you are now known as a “stakeholder” in the company. Unless you own enough stocks in the company, you won’t be able to make much of a difference in how the company works, so don’t worry about showing up to meetings of the board.
When you hear the term securities, you might think this refers to the safest financial instruments available in the stock market. Securities, however, refer to different kinds of investments, including mutual funds, bonds, and stocks.
Securities are not tangible assets like gold or silver, but if you buy stock in gold or silver, this would be a security.
Your stock portfolio is a group of financial assets that you hold. These could include stocks, commodities, bonds, cash equivalents, currencies, and more.
A portfolio can be held directly by the investor, or a company can hold and manage the portfolio for them.
Commodities are any physical goods. Some popular commodities are oil and coffee, for example.
You might have heard about equity when it comes to your home. Equity is the difference between the asset’s value and the amount of liabilities. Equity is ownership.
7. Gain & Loss
When a stock increases during a sale, that is a gain. When a stock decreases during a sale, that is a loss.
Keep in mind that stock prices can rise and fall many times throughout the day. Stock prices rise when companies are doing well and fall when companies do poorly.
Exchanges are marketplaces where commodities and securities are traded. Customers are able to access over 6,000 markets through these exchanges.
If you’re just starting to invest, you may be interested in their educational programs that help with understanding trading.
Don’t gloss over fees because fees can eat into your earnings. When you start looking at statements, you might be shocked at how many fees there can be, such as transaction fees, custodian fees, and management fees.
As an investor, you should look for ways to keep the number of fees you pay low and your investment performance high.
Dividends are one of the more exciting parts of stocks. Some companies distribute dividends to their stockholders. These dividends are a portion of their earnings.
Keep in mind that not all companies offer dividends, and a company having dividends or not having dividends shouldn’t be the only thing you consider when choosing investments.
Most dividends are paid out on an annual or quarterly basis.
How to Start Investing in the Stock Market
Now that you understand some of the important terms of the stock market, you’re likely ready to get started. Here are some of the things you can do to set yourself up for success.
Determine Your Risk Tolerance
Before you start putting any money into the stock market, figure out how high your risk tolerance is. If you have a long time until you retire, you might have a higher risk tolerance because you’ll have more time to recoup if something goes wrong.
If you’ve only got a few years before you retire, you might want to look into a more conservative strategy.
Open an Investing Account
Whether you want to DIY your investments or you want help, you need to open an investment account and determine what you want to invest in. If you’re just getting started, you might want to work with a company that can give you some pointers.
Set a Budget
Don’t put yourself in a bind when you start investing. Set a budget and make sure you aren’t putting your financial health in jeopardy by investing money you need for paying bills and day-to-day expenses.
Setting a budget will allow you to build your future without stressing yourself out and causing financial turmoil.
Basic Stock Market Terms – Now You Know
Now you understand basic stock market terms, and you’ll be able to invest with confidence. While there is always a risk when investing, investing is much riskier when you don’t know what is going on.
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