According to statistics, 47% of Americans
aren’t investing their money, and only 20% are saving for retirement in a 401(k) or an IRA.
If you’re looking to start making investments you’re already a step ahead of almost 50% of Americans.
However, getting started can feel daunting if you’re not yet familiar with wealth management. One of the best ways to gain confidence is by getting to grips with some of the most common investment terms.
Once you do, making your own investments will start to feel a lot easier and simpler.
Wondering what are the investment terms you should be familiar with? Keep reading to find out the 10 investment terms you ought to know.
Investment Terms You Ought To Know
1. Asset Allocation
One of the first investment terms to know about when it comes to wealth management and investments
is asset allocation.
Asset allocation is the process of deciding how to distribute your wealth or savings across different types of investments.
Diverse asset allocation helps with risk management and ensures you have a diversified portfolio. Diversifying your portfolio is one of the oldest and soundest investment tips.
For instance, instead of placing all your money into gold, you might want to distribute it across precious metals, an index fund like the stock market, and real estate.
Precious metals happen to have a low or negative correlation to asset classes like stocks and bonds. What this means is that when the stock market dips, gold and precious metals usually go up in value and vice versa.
2. Bear Market
If you’ve been reading cryptocurrency headlines lately, you might have heard the term “it’s a bear market.” This investment term isn’t confined to digital assets, it can apply to any market.
A bear market is a market that’s in decline or in recession. If prices are dropping sharply, investors call this a bull run.
If you believe that a market is going to drop, then you are “bearish”.
3. Bull Market
A bull market is the opposite of a bear market. In a bull market, prices are rising and assets are appreciating.
You can also say “the market is looking bullish” or “I am bullish” if you think a market is going to take an upward turn.
4. Capital Gains and Losses
Another important set of investment terms to know when planning your investments is capital gains and capital losses.
Capital gains are the profits you make on the sale of an asset. For instance, if you buy 100 Apple stocks for $171 and sell them for $173, you will make $200 in capital gains.
Capital losses are any amounts of money you lose as a result of selling an asset. Eg, if the Apple shares dropped by $1 when you sold them, you would incur a capital loss of $100.
The IRS taxes short-term capital gains at the same rate as income, but long-term capital gains are taxed at a lower rate. Short-term capital gains occur when you buy and sell an asset in the space of a year. If you hold for more than a year before selling, your will either incur long-term capital gains or a long-term capital loss.
The difference between long- and short-term capital gains tax rates can be steep, so it’s important to factor this into your investment and tax strategy
ETF stands for exchange-traded fund. ETFs are baskets of securities or stocks. Investors can buy shares of ETFs just like you would buy individual stocks.
However, when you buy shares of ETFs, you’re essentially investing in all the stocks or securities that are contained in the ETF.
The oldest and largest ETF is the S&P500, which is an amalgamation of the top 500 largest publicly traded companies in the US.
Remember what we said about diversification being one of the top investment tips to follow? ETFs offer investors a simple way to diversify.
If you want to invest in the stock market, but aren’t sure which stocks to pick, investing in an ETF like the S&P500 is a good way to achieve stock diversification.
6. Market Cap
Once you start dabbling in investing and wealth management, you’ll be sure to hear the term “market cap”. Market cap stands for “market capitalization”. Market capitalization is the amount of capital that is within a market or asset.
A company’s market cap is the number of outstanding shares it has multiplied by their price.
7. Margin Trading
Margin trading is the practice of trading using margin, which is essentially borrowed money from a brokerage or trading exchange. The broker or exchange provides the margin credit and your account acts as the collateral.
Margin trading can be highly profitable, but it also comes with a much higher rate of risk.
8. Shares and Stocks
Another investment term you’ll run into frequently when making investments is “shares”. Shares are also known as shares of stock, or stocks for short.
Shares and stocks represent percentage ownership in a company’s equity. This ownership entitles the holder to a share in profits in the form of dividends or a gain in stock price.
Short, also known as short selling, is the practice of borrowing stocks from a holder and selling them at the current price, with the agreement to return the stocks at a future point.
Traders aim to take out shorts when they think a stock price is going to fall and close the short once the stock has dropped. By doing this, traders can buy back the depreciated stock at a profit.
However, if stock prices rise instead of falling, the trader will make a loss on the short.
Volatility refers to how much prices fluctuate in a market or for a stock.
The quicker and more sharply values rise and fall, the more volatility there is.
Commodities tend to be far more volatile than low-volatility stocks
like Coca-Cola, Pepsi, and Berkshire Hathaway.
Volatile markets can offer traders and investors more room for gains, but they are also riskier. Because of this, most wealth management plans include a balance of more volatile assets paired with more stable asset types.
Do You Need Wealth Management Help?
Now that you know the meaning behind some of the most common investing terms, making your first investments probably already feels less daunting.
However, investing can be a complex area, and it’s always helpful to have a wealth management professional on your side.
Do you need assistance with wealth management?
Bogart Wealth is a wealth management firm with offices in McClean, VA and Greater Houston, TX. we specialize in helping people like you achieve peace of mind and inter-generational wealth.
Contact Bogart Wealth
today to discuss your wealth management needs.