Investing Vocabulary – 45 Terms You Should Know

Investing is an opportunity to put money to work, potentially making more income or more value in the future. As innovations in technology have brought down the cost of investing, more and more people are taking advantage of it. But before you start growing your investment portfolio, there are some basics you should be familiar with.

Generally, you can think of investments as things that have some kind of economic value, like property, a financial security or a patent. Some of these investments have an immediate return — dividends or interest — while others offer the potential to grow in value (price-earnings, for example). Investing is also about balancing risk and reward, and one way to do that is through diversification – spreading your investments across different types of assets, regions and sectors.

Investment terms can get confusing, and if you don’t understand the terminology, you could end up losing out on a great opportunity. To help you better navigate the world of investing, we’ve compiled a list of 45 investing vocabulary terms to know.

Bonds: A debt instrument where investors lend money to a company or government for a set amount of time, in return for interest payments and the repaid sum at the end of the term. They are a key component of most investment portfolios because they help reduce volatility and provide a regular source of income.

Equity: A stake in a company, measured by the number of shares held by shareholders. This can be divided into two parts: common shares and preferred shares. Preferred shareholders receive dividend payments before common shareholders, but do not have voting rights.

ETFs: Exchange-traded funds are a type of mutual fund that holds a mix of investments, such as stocks, bonds, commodities and derivatives. They can be traded like stock and often have lower fees than other investment vehicles.

Investors should be aware that investments in ETFs come with risks, including liquidity and tracking error. They should also be wary of leveraging, which involves borrowing to increase gains or reduce losses.

Derivative: A contract between two parties that gets its price or value from an underlying asset, such as shares, bonds, currencies, commodities or market indexes. Its price fluctuates according to changes in the underlying asset.

Sector: The IA divides the industry into over 50 sectors to allow funds with similar characteristics to be compared. They are grouped by their assets and their geographic focus, for example UK Equity Income, Property, Global and Targeted Absolute Return.

When it comes to investing, knowing your own time frame is important. It’s common to find yourself in a rush to get your money invested, but this can lead to mistakes that can be costly. Keeping your investment time frame in mind can help you avoid chasing returns, and it may even make it easier to stick with a long-term plan.