Empower Yourself by Learning More About the Language of the Markets
The world of investing can be intimidating – partly due to investing terminology that sounds complex or foreign to the uninitiated. If you’ve ever felt discouraged about participating in the markets because you don’t feel like you understand the jargon, remember that a little education can go a long way. Knowledge is power and knowing the lingo can not only help you gain confidence as an investor, but it can help you better build your wealth, too.
Below, we’ll review some key investing terminology you should know.
Asset allocation is the mix of securities within your investment account. By determining asset allocation, you’re deciding how you want to divide your assets among different bonds, mutual funds, exchanged traded funds, stocks, and other investments based on what you think will work for your long-term financial goals. Typically, your asset allocation will change throughout your lifetime. Unfortunately, a portfolio’s asset allocation can fall victim to a set-it-and-forget-it mentality. Active asset management of a portfolio’s asset allocation is a big key to building and maintaining long-term wealth.
Stocks issued by established companies that have been around for an extended period of time and have proven that they can bounce back from economic downturns are considered blue-chip stocks. These stocks generally inspire public confidence and they are often household names. Many blue-chip stocks are also known to pay dividends to their shareholders.
Realized Capital Gain or Loss
A realized capital gain or loss is the difference between the price you purchased an investment and the price when you sold it. You’ll want to know this difference to help determine your rate of return on said investment. Realized capital gains carry a tax burden while capital losses will generally lower the amount of taxes you owe. An unrealized capital gain or loss is the difference between the price you purchased an investment and its closing price on any given day. Unrealized gains and losses are also known as paper gains or losses.
Diversification is critical for investors to understand. It’s the process of spreading your investments across many different asset classes and types of securities in order to manage your overall risk.
Dollar-cost averaging is a strategy that makes it easier to deal with uncertain markets by making automatic purchases. It involves investing the same amount of money in a target security at regular intervals of time over a set time period – regardless of the price. The motivation behind this strategy is that investors can lower their average cost per share while simultaneously reducing the impact of volatility on their overall investment portfolio.
SEE ALSO: Trading vs. Investing: Key Differences
Environmental, Social, and Governance (ESG)
ESG refers to three key factors used to measure the sustainability and ethical impact of an investment in a company or business. ESG criteria is used to encourage companies to act responsibly by screening investments based on company policies. It’s a way for investors to better align their investments with their values, too.
An index refers to a statistical measure of the performance of a group of assets. Typically, indexes measure the performance of a basket of securities intended to replicate a certain area of the market. They are often used as benchmarks in order to evaluate the performance of an investment.
A mutual fund is an investment vehicle that consists of stocks, bonds, and/or other securities. The allure of mutual funds is that they give small or individual investors access to diversified, professionally managed portfolios. They’re operated by professional managers who allocate the fund’s assets in an attempt to produce capital gains or income for the investors of that fund. Therefore, each shareholder participates proportionally in the gains and losses of the fund.
Risk tolerance refers to the level of risk you’re willing to take on in your portfolio. Investors with a higher risk tolerance are willing to accept greater risk for the chance of higher returns and are typically younger with plenty of time ahead of them to recover any losses they may experience. It’s important to note that risk tolerance is different than your risk capacity, which refers to your portfolio’s ability to take on risk and the length of time it would take to recover from a protracted downturn in value.
A share is a single right of ownership in a company. When a company goes public, it issues shares to investors. The more shares you buy, the greater the ownership stake you have in a company. Shares often come with other benefits, as well, such as the potential for dividend payments and the right to vote in shareholder elections.
SEE ALSO: Cultivating Your Investor Mindset for Stock Market Success
Also known as a lifecycle fund, a target-date fund is a mutual fund that corresponds to a specific year and adjusts its asset allocation as it gets closer to that set date. Many investors choose funds that correspond to the year they hope to retire. These types of funds are prevalent in 401(k) plans.
In investing, valuation refers to the analytical process of determining the current, or projected, worth of an asset or company. Investors use valuations when deciding whether to buy a stock, sell a stock, or hold a stock. Valuation is also used during mergers and acquisitions among companies. But valuation is just one of a multitude of fundamentals used by professional portfolio managers.
Does Investing Terminology Make You Feel Overwhelmed?
It’s human nature to have a bit of fear about things we don’t understand, and that can certainly be true of investing. The more you’re able to understand investing terminology, though, the more comfortable you’ll begin to feel. And confident, educated investors are usually the ones who can better build their wealth and plan for a financially secure future. Investing is truly key to achieving your long-term goals, and that’s why we believe so strongly in investor education at Davidson Capital Management.
Of course, we offer more than education to our clients. If you’re looking for a partner you can trust to build and actively manage an investment portfolio to serve your unique needs, we’ve got your back. At Davidson Capital Management, our portfolio management team provides experienced and transparent investment management with your interests at the forefront of everything we do. Contact us today to begin a conversation about how we can help you make the most of your investments.