Investing Terms Every Beginner Should Know

One of the best things you can do before you start investing is to learn some of the language. Knowing commonly used investing terms makes everything else easier, from choosing an account and selecting investments to understanding what’s happening in the market. Everything starts to click when you understand what you’re looking at.

This guide covers the investing vocabulary you’re most likely to see as a new investor. The terms below are grouped by when they tend to come up, from getting started with investing to understanding how your investments behave over time.

• Investing: buying and selling assets with a growth mindset
• Accounts: where your money lives
• Assets: what you’re buying
• Strategies: ways to invest
• Markets: where you buy and sell

For each term, you’ll get a plain-language definition, an example of where you might see it in real life and a quick explanation of why it matters. You don’t need to learn them all at once. You can come back to this guide as you learn and grow as an investor.

Investing: buying and selling assets with a growth mindset

Investing means using your money to buy assets like stocks, fixed-income securities or funds with the goal of growing it over time. Rather than sitting in a savings account, invested money can increase in value if the underlying asset you purchased appreciates. There’s no guarantee you’ll make money, but historically, investing has been an effective way to build long-term wealth.

That’s the difference between saving and investing. Saving helps protect your money while investing can help grow it.

Accounts: where your money lives

Before you can start investing, you need somewhere to invest your money. You have several options with different types of investment accounts.

A brokerage account is an account you open with an investment firm that lets you buy, sell and hold assets. It’s the most flexible type of investing account. There are no limits on how much you can contribute or when you can take money out. You’ll pay taxes on any money you earn, but you’ll have a lot of choices for investing your money. This is the first account many people open when they start investing.

A retirement account—like an IRA, an employer-sponsored 401(k) or 403(b), or a Thrift Savings Plan (TSP)—is designed specifically to help you save for retirement. These accounts come with tax advantages that a regular brokerage account doesn’t offer. Some also offer inflation-protected options.

• With a tax-advantaged account, you pay taxes now and you can withdraw money tax-free later.
• With a tax-deferred account, you skip paying taxes on your contributions now and pay them later when you withdraw your money.
  

Assets: what you’re buying

An asset is anything you buy with the expectation that it will grow in value or generate income over time. You’ll be able to choose between a handful of common asset classes.

Stocks

A stock represents a small ownership stake in a company. When you buy a stock, you’re buying a piece of that business. If the company grows and becomes more valuable, the amount your share is worth should increase, too. If the company faces challenges, the value of your stock may go down.

Stocks are one of the main ways people participate in company growth and build long-term wealth, even though their value can rise and fall in the short term. Stocks historically have offered strong long-term returns, but they also can experience volatility, meaning their value may change a lot in the short term. Many investors include stocks in their portfolios because they’re considered to have high reward potential. Investors sometimes compare companies using simple valuation measures like price-to-book.

Market capitalization, or market cap, is a way to measure the size of a company. It’s calculated by multiplying the company’s current share price by the total number of outstanding shares. You’ll often see investments described as large-cap, mid-cap or small-cap. Large-cap companies tend to be more stable. Mid-cap and small-cap companies may offer more growth potential, but they can come with more risk, meaning their performance can be less predictable.

Bonds

A bond is essentially a loan you make to a company or government. In return, they agree to pay you back with interest over a set period of time. Bonds are a type of fixed-income security. Examples include Treasury bonds, corporate bonds, mortgage-backed securities and issues from government-sponsored agencies. The interest rate on a bond helps determine how much income it will pay and also can affect its value when market rates change.

Bonds generally are considered lower risk than stocks, but they also tend to offer lower returns. Some bonds, such as high-yield bonds, offer more income but carry higher risk. They’re often used to add stability to a portfolio. For example, investors who are closer to retirement commonly add more bonds to their investment mix to help protect what they’ve built over the years. Some also include non-US debt securities for diversification.

Funds

A fund gives investors exposure to dozens or even hundreds of individual investments at once. Funds are a popular choice for beginners because they automatically spread out your investing risk. Bond funds may hold Treasurys, corporate bonds or mortgage-backed securities.

• A mutual fund is a type of fund that pools money from many investors to buy a diversified mix of stocks, bonds or other assets. A professional fund manager decides what to buy and sell on behalf of investors. Mutual funds are priced once a day after the market closes, based on their net asset value (NAV), and many have minimum investment requirements.
• An exchange-traded fund (ETF) is a type of fund that trades on the stock market just like an individual stock. Most ETFs are designed to track a specific index like the S&P 500, which means they aim to match the performance of a broad group of companies rather than beat it.
• An index fund is a type of fund that follows a market index rather than relying on a manager to choose investments. Each one aims to match the results of the broader market it’s tracking. Some track market-capitalization-weighted indexes. Index funds can be structured as mutual funds or ETFs.

Here’s a simple way to see how these 3 common asset classes compare with each other.

Sectors

A sector is a group of companies that operates in the same area of the economy. Technology, healthcare and energy are examples of market sectors. When you invest in a fund, you’ll often see it described by which sectors it covers. This helps you understand where your money is going and whether your investments are spread across different parts of the economy or concentrated in just one area.

Strategies: ways to invest

Once you understand what you’re buying, the next step is thinking about how you invest. These terms describe common approaches you’ll hear about as you decide how hands-on you want to be and how you handle market ups and downs.

You don’t need to use all these strategies right away. Simply recognizing these terms will help you understand your options and ask better questions as you gain experience.

Buy and sell

Buying means purchasing an investment. Selling means converting it back to cash. Knowing when to buy and sell is where strategy comes into play. Many long-term investors choose to stay invested consistently instead of trying to time every market move. This approach can help manage short-term ups and downs.

Long-term investing

Long-term investing means buying investments with the intention of holding them for years, instead of days or weeks. Markets go up and down in the short term, but historically they’ve trended upward over long periods. Investors who stay the course through market fluctuations are usually better positioned to reach their long-term goals.

Dollar-cost averaging means investing a fixed amount of money on a regular schedule, regardless of what the market is doing. When prices are high, your money buys fewer shares. When prices are low, your money can buy more. Over time, dollar-cost averaging smooths out the impact of market swings and takes the guesswork out of trying to pick the perfect moment to invest.

Keep in mind that using this method won’t guarantee profits or make you immune to losses during downturns. This is a slow, steady investment strategy. It’s designed to ease the effects of market ups and downs and lower your average per-share cost over time. You’ll still need to diversify your investing dollars among a variety of companies, industries and sectors to lower your risk and increase the likelihood of earning returns.

Compounding is what happens when the money you invest starts to earn money. For example, if you earn $100 on an investment and that $100 stays invested, it starts earning money, too. Over time, this snowball effect can turn modest contributions into significant wealth. Reinvested dividends and interest can create cash flows that help compounding work over time. The earlier you start investing, the longer the power of compounding has to work in your favor.

Portfolio

Your portfolio is the complete collection of investments you own across all your accounts. It might include stocks, bonds, funds, ETFs and other assets. Thinking of your investments as a portfolio rather than individual holdings helps you see the bigger picture and how you’re tracking toward your goals.

Asset allocation is how you divide your money across different types of assets—typically stocks, bonds and cash. Your allocation reflects your goals, timeline and investing risk tolerance. A younger investor who has decades until retirement might choose a more aggressive portfolio with most stocks. Someone who’s closer to retirement might increase the percentage of bonds in their portfolio for more stability.

Diversification means spreading your money across different types of investments so that no single one has a large impact on your portfolio. If one investment drops a lot, a well-diversified portfolio can help cushion the impact because other investments may be holding steady or gaining in value. Portfolio diversification is one of the most important principles in investing. You should know that diversification itself won’t ensure you’ll earn a profit nor does it guarantee against loss in a declining market.

Rebalancing your portfolio means periodically adjusting your holdings to get back to your target mix. You could do that by selling some of what’s grown and buying more of what hasn’t. Over time, as some of your investments grow faster than others, your asset allocation might shift away from your target mix. Rebalancing occasionally helps keep your strategy aligned with your goals over time.

Markets: where you buy and sell

Now let’s focus on what happens when your money is invested. These terms help explain what’s happening in the stock market, where investors buy and sell shares and prices move in response to economic news and company performance. They’ll also help you stay calm and informed no matter what the market is doing.

Risk

Risk is the possibility that investments may not do what you hope they’ll do. This can include short‑term volatility, the chance of a drop in value or returns that are less than you wanted. Every investment involves some uncertainty, and profits are never guaranteed. Risk levels vary across stocks, bonds and other debt securities.

Generally speaking, investments with higher potential returns come with higher risk, and investments with lower risk tend to offer more modest returns. Understanding risk helps you choose investments that fit your goals and comfort level.

Returns

Returns are your profits—or what you earn on your investments. Returns can come in 2 forms:

• Capital gains, which are the growth in the value of what you own
• Income like dividends or interest payments

Returns are usually shown as a percentage of what you originally invested. Tracking your returns over time helps you understand how your portfolio is performing and whether your investment strategy is working.

Fees and expenses

Fees and expenses are what you pay to invest. Examples include a fund’s annual expense ratio, trading commissions and account management fees. These costs may seem small, but they add up over time and can have a real impact on your long-term returns. Keeping your investing fees low is one of the easiest ways to keep more of the returns you earn.

Benchmarks

A benchmark is a standard used to measure how well an investment is performing. The 2 most common benchmarks you’ll hear about are:

• the Dow Jones Industrial Average (DJIA), which tracks 30 large US companies
• the S&P 500 (SPX), which tracks 500 of them, making it a broader picture of the overall market

When you hear, “The market was up today,” it usually means one of those 2 indexes went up.

Volatility describes how much an investment’s value goes up and down over time. A highly volatile investment might gain or lose significant value in a short period. A less volatile investment tends to move more slowly and steadily. Volatility is a normal part of how markets function. Investors sometimes spread exposure across US and non-US markets to manage risk.

Risk and volatility sound similar, but they describe different things. This table shows how they compare.

Bull and bear markets describe broad periods of how the stock market behaves over time.

• A bull market is a period when stock prices are rising, and investor confidence is high.
• A bear market is a period when prices decline about 20% or more from recent highs, and investor confidence is lower.

Both types of markets are normal parts of the long-term investing cycle.

Put your investing vocabulary to work

Navy Federal Credit Union’s Investment Services is here to help you take the next step, whether that means exploring your investment account options, building a diversified portfolio or connecting with a financial advisor to create a personalized investment strategy. Check out our investing resources to keep building your knowledge, or visit our Navy Federal Investment Services page to explore your options when you’re ready.