As a beginner stepping into the world of investing, there are many key financial terms and concepts to become familiar with. Having a solid grasp of basic investment terminology will help you better understand the markets, evaluate investment opportunities, and communicate effectively with financial professionals. Here we will introduce some of the most fundamental investment words and phrases that every new investor should know. These cover the basics of asset classes, risk and return, financial statements, and more. With this essential vocabulary under your belt, you’ll be well on your way to gaining investing literacy.
Major asset classes in investing
The term asset class refers to a category of investment instrument. The main asset classes important for beginning investors to know are:
– Stocks – Represent ownership shares in a public company. Provide potential growth but higher risk.
– Bonds – Essentially loans made to corporations or governments. Offer lower risk and regular income.
– Cash equivalents – Very liquid investments like money market funds. Low risk with limited return.
– Real estate – Owning physical property either directly or through REITs. Can diversify a portfolio.
– Commodities – Physical goods like precious metals or agricultural products. Help hedge inflation.
Key risk metrics
Two key terms for measuring investment risk are volatility and beta:
– Volatility – How much the value fluctuates up and down over time. High volatility means higher potential risk.
– Beta – Gauge of an asset’s risk relative to the overall market. Higher beta indicates more risk versus the market’s benchmark.
Expected returns
When evaluating potential returns, some key metrics are:
– Dividend yield – How much a company pays out annually in dividends relative to its share price. Higher yield means more income.
– Earnings yield – A company’s annual earnings per share divided by its share price. Useful valuation measure.
– Coupon rate – Interest rate paid on a fixed-income investment like bonds. Directly impacts returns.
Key financial statements
These are the three main reports investors rely on when researching companies:
– Income statement – Shows revenues, expenses and profitability over a period.
– Balance sheet – Snapshot of assets, liabilities and shareholder equity on a certain date.
– Cash flow statement – Breaks down cash inflows and outflows from operations, investing and financing.
Mastering basic investing terms like these assets classes, risk metrics, expected returns and financial statements will provide a solid foundation for any beginning investor before moving on to more advanced topics and strategies down the road.