Investing has a language of its own, but you don’t need to be a linguist to talk smartly about money. Here are a few terms you’ll need to know.
Stocks, bonds, and mutual funds are types of securities for sale to investors. When you buy a corporation’s stock – also called a share or equity – you become an owner, giving you claim to a piece of their earnings. Purchasing a bond means you loan money to a corporation and receive payments back with interest.
A mutual fund is a collection of individual stocks and bonds, available for purchase as a package. When you own a mutual fund, you get a share of the earnings, dividends, and interest produced by the fund’s holdings.
An index is a hypothetical set of securities, used to measure the performance of a specific market. For example, the S&P 500 Index tracks the performance of the 500 largest publicly traded companies in the U.S. Investors can’t buy into an index directly but can buy funds designed to mimic the index.
An index is frequently used as a benchmark, a standard to use in comparing how various markets or investments have performed. The S&P 500 Index is frequently used as a benchmark to gauge how well the U.S. stock market is doing in general.
When you invest in a mutual fund, you will have to choose from a variety of strategies. For example, a growth strategy typically invests in stocks that are fast-growing and high-earning – but that also pose a lot of risk. Less risky stock strategies include value, where you prefer relatively cheap stocks, or income, which focus on securities that pay dividends.
Bond funds have different strategies too. Some invest in short-term (i.e., lower-risk) bonds, while others prefer long-term (i.e., higher risk) bonds. Treasury and government strategies typically invest in lower-risk, high-quality bonds, while corporate and high-yield funds go for bigger yields and bigger risks. Investors can use one strategy or mix them up to create a style that’s right for them. They can also change strategies as their goals change.