“Knowledge is Power” ~ Sir Francis Bacon.
That said, here is a list of terms you should know to gain more knowledge and confidence about your investments.
- Investment Portfolio – a group of investments - stocks, bonds, mutual funds, ETFs, cash, etc.
- Asset Allocation - is the division of a portfolio among various asset classes such as stocks, bonds, and cash. A portfolio’s asset allocation should reflect the investor’s risk tolerance and goals.
- Risk Tolerance - refers to an investor’s comfort with risk in pursuit of their goals. The higher a person’s risk tolerance, the more comfortable they are in taking on volatility in their portfolio for the potential of higher returns.
- Stocks – aka equity or shares. An ownership stake in a corporation. Shareholders have voting rights in shareholder meetings, receive any distributed dividends, and can sell their shares at a profit or loss.
- Bonds – aka fixed income. A loan issued by a government or company to raise money, often to fund projects or grow their business. Bondholders are the lenders, owning a portion of the overall bond loan. Bondholders earn interest over a set period and receive their principal investment at maturity.
- Mutual Funds – a financial vehicle in which many investors pool their money to invest. A fund manager selects the investments for the fund based on the fund's objectives as outlined in the mutual fund's prospectus.
- ETFs - Exchange-Traded Fund. A financial vehicle in which many investors pool their money and can be traded on an exchange, much like stocks. An ETF can be passive or actively managed. Passive EFTs aim to replicate a specific index, such as the S&P 500 or TSX Composite. Active ETFs aim to outperform a specific benchmark, such as an index, or achieve particular objectives.
- Financial Markets – a marketplace to trade financial instruments such as stocks, bonds, currencies, etc. They can be either physical or digital.
- Index - an index is a collection of assets used to track the performance of a specific sector (e.g., health care, financials, energy, etc.) or a broader market (e.g., stocks, bonds, or commodities).
- Capital Gains – profits from selling a capital asset, such as stocks or real estate.
- Dividends – periodic payments made to a stockholder from a corporation’s profits. Can be paid in cash or as additional shares.
- Interest – the cost of borrowing money, often expressed as a percentage of the amount owing and paid at a set time. There are two types of interest: simple and compound. Simple interest is paid as cash and is calculated on the original loan amount. Compounded interest is reinvested in the loan and is therefore calculated on both the original loan and the accumulated reinvested interest – often referred to as “interest on interest.”
This, of course, isn’t all there is to know about investing, but it’s a good start. How many did you already know?
