Are you fluent in investment terms?
If the answer is ‘not exactly’, you’re in the right place.
Understanding the financial world comes with understanding a lot of different financial terms. They might seem intimidating at first, but crack those, and you’ll be able to critically examine the risks and the rewards of any investment opportunity and make financially informed decisions about your future.
In this article, we’ve defined some of the most popular investment terms you should know, arranged by themes.
These investment terms should help you to understand more about the investment world, so you can get involved. Bookmark this article, and you use it to unravel the true meaning behind that next financial jargon-filled piece that you come across. 🙌
1. General investment terms
Commonly used jargon to familiarise yourself with:
1. Long-term investing
An investment that you intend to hold for more than a year.
2. Short-term investing
An investment you intend to hold for less than one year. Stocks are often a short-term investment, intended to be bought and sold monthly, weekly, daily or even hourly.
The name for all of your investments or assets, whether they are shares, gold, cash or something else, such as property. See it as your overall financial wallet.
The profit or loss you make as a result of your investment.
5. Compound interest
The money you earn on the money you earn. For example, if your €10 investment earns you a 20% return each year, the following year you’ll earn 20% on €12, and the year after that you’ll earn 20% on €14,40. Compound interest rewards those who invest early over a long period of time.
6. Risk tolerance
How much of a gamble you’re willing to make in pursuing your financial goals. Generally, a higher risk will deliver higher rewards (or none at all, if the investment doesn’t pay off in your favour).
Owning a range of different types of investments in order to reduce the risk that you’ll lose all of your money. This is recommended because it means that one type of investment suffers a financial hit, it won’t affect your entire portfolio.
Divestment means selling your asset, i.e. the opposite of investment. Nowadays you often hear about individuals and organisations divesting from fossil fuel, selling any stake they have in companies in that industry.
How quickly an investment can be sold and converted into money without losing a substantial amount of value.
For example, cash in your savings account would be considered high liquidity, while property would be seen as low liquidity, because it’s not easy to sell and can lose value when you do so.
The amount your investment goes up and down. If the price goes up and down a lot over a relatively short amount of time, it shows high volatility. Low volatility means the price stays fairly stable. High volatility tends to deliver higher returns because the risk is higher, and vice versa.
11. Bear market
The financial term for when a stock market experiences a substantial drop in value (generally 20% or more) for a prolonged period (normally 2 months or longer).
During a bear market, investors generally have low levels of trust in their investments, and there are more people selling than buying.
12. Bull market
A bull market is the opposite of a bear market, referring to a period of prosperity for stock markets. This is measured as values rising over 20% for a period of at least 2 months. During a bull market investors are positive, and prices rise because there is a lot of demand for stock to buy.
13. Asset class
There are lots of different types of investments — stocks, bonds, funds, ETFs, cash, and more — which can each be primarily grouped into one of three asset classes: equity (e.g. stocks), fixed income (e.g. bonds), and cash equivalents (e.g. paper money). Other asset classes can include real estate assets, commodities, and futures.
Investments are grouped into one of these asset classes because they share similar financial characteristics and structures, which means they can be traded in the same markets and governed by the same rules and regulations.
2. Investment terms relating to stocks
Thinking to invest in your first stocks? Here’s the lingo you need to know first:
When a company ‘goes public’, it gets divided like a pie, so the public can buy pieces of that pie. And like any pie, it can be cut into any number of slices — or stocks. The stock price is based on supply and demand, so the more people want one, the higher the price will go.
The terms stocks and shares can be used interchangeably, as they mean the same thing.
The size of your ‘slice of the pie’, in terms of what proportion of a company you own through the shares you own in them. Equity can also be measured in the amount of money you would get if a) you were to sell (or ‘liquidate’) your asset, or similarly b) if a company was to liquidate, paying off all shareholders for their shares.
A regular payment made to shareholders based on the company’s profit. These vary between companies but are always proportional to the number of shares you own. They provide an incentive for people to buy shares in a company, providing them with a regular income.
17. Blue chip company
While there is no official list of blue chip companies, the term refers to any company that has a good history of earnings, profit and dividend payments.
Generally, these companies find it easier to weather global financial downturns thanks to their steady earnings and well-respected history. They’re typically household names, such as Microsoft, Amazon, Johnson & Johnson, and Mastercard.
18. Profit to Earnings ratio (P/E ratio)
How much you, as an investor, earn for each share you own.
If a company has 100 shares and a profit of €500, each share earns €5. If each share is worth €75, that is divided by the € earnings to reach a P/E ratio of 15 (75/5=15). The higher a P/E ratio, the higher the expected earnings.
19. Stock exchange
The infrastructure where stock brokers and traders buy and sell financial assets, such as stocks, bonds and ETFs. Some of the largest stock exchanges include the New York Stock Exchange (NYSE), the London Stock Exchange (LSE), and Euronext.
A measure of how the stock market is performing, by taking a sample of stocks. By measuring what these stocks are doing, you can get a good understanding of what all stocks are doing and the direction the market is moving.
An index example is the Dow Jones, which measures stocks from the largest 30 companies listed on the New York Stock Exchange (NYSE). The Nasdaq and S&P 500 are the other two largest US indices.
In investment terms, when people talk about “the market is up 50 points” they are often referring to one of these indices.
21. Initial Public Offering (IPO)
When shares first become available to buy and a company becomes listed on a stock exchange. It’s at this point that a company goes from private, owned by individuals, to public, where it’s owned by members of the public.
22. Outstanding shares
The total number of shares authorised, issued and purchased by investors.
23. Shareholders meeting
An annual meeting which all shareholders are invited to, where the annual financial report is shared. Shareholders can also vote on company issues and select the board of directors, either in person or by proxy (done online or by mail).
3. Investment terms relating to bonds
Everything you need to know about bonds:
A type of fixed income investment, in the form of a loan of money from one organisation or individual to another, under set terms and for a set project or investment. When an institution needs money, they will issue bonds which can be bought by investors. These bonds pay an agreed interest rate, also known as the coupon rate. The date at which the money must be returned is also set, and called the maturity date.
Bonds can be bought, sold and traded between investors in the same way as stocks, and are considered to be lower risk with a lower return.
25. Fixed income investment
Any type of investment where the contract includes repayment of a loan along with interest payments. The amount of interest is fixed, so there is less reward than an equity investment such as stocks, but also less risk.
A bank account is an example of a fixed income investment, as are bonds, pensions and loans.
26. Credit rating
A measure of how likely a borrower is to repay a debt. Companies who have the best credit rating get cheaper interest rates for loans, and vice versa. As an investor, loaning money to a company that is more likely to repay the money will mean a lower return, compared to a higher-risk company.
Credit ratings are set by specialist credit rating agencies, like Moody’s.
27. Social impact bonds
A loan taken out by a public company to fund a better outcome for the society of a particular area or demographic. Repayment only happens if the objective of the bond is achieved.
The first ever social impact bond was taken out by a prison, to fund a pilot project to reduce reoffending. Investors were repaid if reoffending rates were 7.5% or less than a similar ex-offender control group.
28. Green bonds
A bond taken out by a company specifically to facilitate a climate or environmental project. Unlike a regular bond, these carry a commitment that the money raised will go to support a defined environmental purpose, tracking results in relation to this.
29. Sustainability bonds
A loan taken out to fund a social or green project, often (but not always) in alignment with the UN’s Sustainable Development Goals (SDG).
The cost of borrowing money to the borrower, normally paid to the lender as a percentage of the loan (or from the other perspective, the reward to the lender for lending money to the borrower).
The annual interest paid on a bond to the bondholder.
32. Coupon rate
The interest paid to the investor who lends money to the lendee, in the form of a bond. The frequency of these payments depends on the individual bond.
33. Maturity date
The date a lender is paid back the money they’ve lent, often in the form of a bond.
4. Investment terms related to other asset classes
So you know it all:
34. Cash equivalents
The third type of asset classes, characterised by being low risk, low return and offering high liquidity. Cash equivalents include certificates of deposit (savings accounts with a fixed interest rate and a fixed date you can withdraw the money) and corporate commercial paper. It’s a good idea for an organisation to hold a proportion of cash equivalents, as these can be used to quickly pay debt.
A natural resource or material that can be traded, like grain, cattle, or fossil fuel.
The market where commodities are traded much like stocks, where suppliers sell to purchasers based on an agreed future delivery date. They’re seldom bought by individual investors. Instead, they are primarily bought and sold by direct suppliers and large organisations.
5. Investment terms related to funds
The different types of funds:
37. Mutual funds
A mutual fund (often just called a fund) is a pool of investors’ money, which is then used by the investment company to buy a range of assets, such as stocks, bonds, gold and sometimes cash.
38. Equity fund
A mutual fund that invests solely in the stock market. It can also be referred to as a stock fund.
39. Bond fund
A mutual fund that invests exclusively in bonds. This can be a more efficient way of investing in bonds than a single bond purchase, since your one bond fund investment will actually be invested in many different bonds.
Typically, the bond fund manager will trade bonds in and out of the fund, rather than wait for them to mature.
40. Exchange traded fund (ETF)
A combination of different financial assets, similar to a mutual fund, in that you can make one investment into an ETF to own numerous assets. As a result of investing in an ETF, you might own a proportion of technology-related stocks, green bonds, gold, and cash. The difference is that ETFs are listed themselves on stock exchanges, so have their own symbol, and are traded over the course of the day.
41. Index fund
A fund that allows you to invest in every company included in a particular index by pooling your money with other investors in a fund. The fund manager will then use that money to invest in each company, so that your one investment becomes diversified to as many companies as are represented in that index.
42. Hedge fund
A high-risk/high-reward alternative investment, similar to a mutual fund, in that it’s a pool of money contributed to by various investors to invest in various assets.
Unlike mutual funds, hedge funds are unregulated.
This means hedge fund managers can invest in anything — from fine art to precious gems — charge whatever they want and manage them in whatever way they want. They can only be used by experienced investors with an income of more than $200,000 per annum, who should understand the complexities and risks involved.
43. Expense ratio
A measure of how much money is spent on the administration of a fund versus the money you make as an investor in that fund. Administrative expenses include money paid to the fund manager, record keeping, and legal expenses.
44. Management fee
The amount an investment manager charges to manage an investment fund. This covers paying for the manager’s time and expertise, as well as the administrative costs of running the fund.
6. Ethical investing
Also known as responsible investing:
45. Corporate Social Responsibility (CSR)
A business model that requires companies to be conscious of the impact they have on all aspects of society, including in economic, social, and environmental terms. This (should) mean that the company has a positive rather than a negative impact on the world, although as this is self-governed it can be difficult to quantify.
A method of analysing companies for potential investment using criteria that looks at how they behave in relation to the environment, society or the way the company is governed. The aim is to provide a list of “good” companies.
It’s becoming an increasingly popular way of investing, but there are no standardised criteria so it depends a lot on who’s deciding what counts as “good”.
47. Impact investing
An investment that looks at the specific measurable impact of a company on a particular issue, e.g. climate change. Investors can see the measurable impact of their money alongside the financial returns.
48. Socially responsible investing (SRI)
An investment selected on the basis of specific ethical guidelines. SRI investments tackle one particular issue and are binary, so, for instance, might exclude any company that tests on animals or has links to gambling.
49. Greenwashing: A phrase used to describe a company making efforts to appear environmentally conscious, often for marketing purposes, but without a proper commitment to addressing its carbon footprint.
7. Investment services
Services that can assist you through your investing journey:
50. Full-service brokerage
A company that you can commission to invest your money on your behalf, which offers a variety of different services besides just investing. This might include financial advice, retirement planning or tax consultancy. Because of these expertise, they typically charge a higher commission than discount brokerages.
Also known as digital wealth advisors, robo-advisor platforms make investing money in stocks easier if you’re inexperienced. Generally it’s just a case of answering some detailed questions about your investment requirements to receive algorithm-based investment recommendations, which are then carried out on your behalf.
We hope that this list of investment terms was helpful! Bookmark this article for later reference to go through the terms again and practice memorising your investing vocabulary. As they say: repetition is the mother of all learning! 😉