Become a better investor
Lesson in Course: Investing basics (beginner, 3min )
Let's step through some commonly used words in the world of investing.
Overwhelming language makes learning about finance and investing more challenging. Let's start by simplifying some of the basics.
We want to get comfortable with the list of terms below. We'll come across these words and concepts in news articles, social media, and other lessons on Archimedes. Don't worry if things don't click right away. We can always return to this lesson for a quick reminder.
An investment vehicle is a financial product or collectible that investors can buy, such as stocks, bonds, ETFs, Mutual Funds, etc. Individuals and corporations invest in vehicles to grow their money.
A portfolio is a collection of investment vehicles. For example, a box of collectible cards fits the definition of a portfolio. In most cases, a portfolio represents all of the investments held in a retirement or brokerage account.
Diversification is a strategy used to minimize risk and the potential of losing money by holding various investment vehicles in a single portfolio. This universal strategy is found both in finance and in the wild. Fish swim in a school together for collective safety against a predator. Even if a predator captures a single fish or an individual stock may lose value, the rest of the school or portfolio is safe.
Concentration is the opposite of diversification. A concentrated portfolio distributes all of the funds across a few vehicles rather than many. Concentrated portfolios can potentially earn higher returns, but they can also result in more significant losses.
The Dow Jones, the Nasdaq, and the S&P 500 (Standard & Poor's 500) are all indexes. Indexes provide a birds-eye view of the performance of a large group of stocks. Each index comprises a group of public companies with tradable stocks (the S&P500 has 500 companies), showing trends across different industries.
Stocks are the most common investment vehicle. They represent fractional ownership in a company. In the denomination of shares, owning stock gives the investor voting rights, rights to the company's assets, and a fraction of the income earned by the company.
Bonds are loans issued by governments or companies. When an investor buys a bond, they lend their money to the government or company issuing the bonds. Investors often use them as a source of income since they pay out interest regularly.
The returns are the gains or increases of our investment. For example, if we invest $100 in a stock and sell the stock for $150. $50 is our return, or 50%.
Exchange-Traded Funds, ETFs, are portfolios of investments created to follow or track different indices. For example, an S&P 500 ETF will have all of the shares in the proportions that make up the S&P 500 index. If the S&P 500 is up 1%, the ETF will also be up 1%. The basket of various investments in ETFs makes them great vehicles for easy diversification.
Mutual funds, like ETFs, provide diversification because they also represent a basket of stocks and bonds. The key difference is that mutual funds don’t necessarily follow an index. Instead, they are built and managed by investment professionals. As a result, mutual funds have higher management fees associated with them but can offer custom-designed strategies that are not available with ETFs.
The ticker symbol is the 1-5 letter identifier for each stock, mutual fund, or ETF. For example, the ticker for Apple is AAPL.
There are a lot of confusing words used in investing. Refer back to this lesson to remember the basic terms. The more often we use these terms, the less intimidating they are, and the more they become part of our vocabulary!
A financial product or collectible that investors can buy, such as stocks, bonds, ETFs, Mutual Funds, etc.
A collection of investments held in an account, often a retirement account or brokerage account.
A strategy used to minimize risk, the potential of losing money, by holding a variety of different investments in a single portfolio.
The opposite of diversification. Instead of having a basket of many different investments, a concentrated portfolio only holds a few investments.
A group of investments that are used to represent or estimate (the S&P500 has 500 companies) trends across one or several industries.
Represent fractional ownership in a company, giving the investor voting rights, rights to the company's assets, and a fraction of the income earned by the company based on the number of shares.
Loans issued by governments or companies. When an investor buys a bond, they lend their money to the government or company issuing the bond.
Portfolios of investments created to follow or track different indices.
Portfolios of investments that are built and managed by investment professionals.
The ticker symbol is the 1-5 lettered identifier for each stock, mutual fund or ETF. For example the ticker for Apple, is AAPL.