Investment Glossary

Want to learn about investments?  Check out this glossary of investment terms for beginners.

Portfolio

An investment portfolio is a collection of investments owned by an individual or an institution. Typically, a portfolio comprises a mix of asset classes such as stocks, bonds, and cash. An investor's risk tolerance, time horizon, and investment goals generally determine a portfolio's asset allocation.

Asset Allocation

The process of allocating an investment portfolio among different asset classes, generally equity, fixed-income, and cash investments, based on an individual’s risk tolerances and return objectives.

Equity (Stock)

A stock is a security that represents ownership, or equity, in a corporation. An investor who purchases shares of stock owns a piece of the company and has a claim on a portion of the assets and earnings. Shareholders are subject to the potential benefits and risks of that ownership, which means they can make money if the company does well or lose money if the company does not. Examples are domestic common stock, domestic preferred stock and foreign stock.

Fixed Income (Bond)

A bond is a fixed-income security issued by a government entity or corporation to raise money needed for ongoing operations or to finance new projects. Investors who buy bonds are essentially lending money to the issuing organization. Bondholders typically receive interest payments at regular, scheduled intervals. These payments are based on a fixed annual interest rate, or coupon rate. Bondholders can expect to be paid the bond's full-face amount at its stated maturity date. A bond’s yield and value can fluctuate with market conditions. Bonds redeemed prior to maturity may be worth more or less than their original cost.

Cash Equivalents

Cash is another investment type, or asset class. It includes currency and cash alternatives that offer low risk and liquidity. Some examples of common cash alternatives are money market funds, savings accounts, certificates of deposit (CDs), and U.S. Treasury bills. The FDIC insures CDs and bank savings accounts, which generally provide a fixed rate of return, up to $250,000 per depositor, per insured institution. U.S. Treasury securities are backed by the full faith and credit of the U.S. government.

Mutual Funds

A mutual fund is a collection of stocks, bonds, or other securities. Investors purchase shares of the mutual fund that is managed by an investment company. Fund managers focus on buying and selling securities according to the goals of their funds. By investing in the fund, a piece of the total portfolio of securities is owned, which could number anywhere from a few dozen to hundreds. Shares are typically bought from and sold back to the investment company at the end of the trading day, with the price determined by the net asset value (NAV) of the underlying securities. This is a convenient way to obtain immediate diversification. 

Exchange-Traded Fund

An exchange-traded fund (ETF) is also a portfolio of securities assembled by an investment company. Unlike mutual funds, ETF shares can be traded throughout the day on stock exchanges, like individual stocks, and the price may be higher or lower than the NAV because of supply and demand. ETFs typically have lower expense ratios than mutual funds, but a brokerage commission is charged when buying and selling them, so overall costs could be higher, especially if placing trades frequently. 

Diversification

Diversification is the process of combining assets to reduce the risk of an investment portfolio while maintaining the desired return. It is used to help manage investment risk. However, it does not guarantee a profit or protect against loss. For example, if only a few securities are owned, a decline in value of one could have a more significant impact on the investment portfolio versus if multiple types of securities are owned.

Dividends

Dividends are the distributions of a company's earnings to shareholders, paid in cash or additional shares of the company's stock. The dividend amount per share is decided by the company's board of directors. Dividends must be reported as income by shareholders in the year received. The amount of a company's dividend can fluctuate with earnings, which are influenced by economic, market, and political events. Dividends are typically not guaranteed and could be changed or eliminated.

Yield

Generally, the yield is the amount of current income provided by an investment. For stocks, the yield is calculated by dividing the total of the annual dividends by the current price. For bonds, the yield is calculated by dividing the annual interest by the current price. The yield is distinguished from the return, which includes price appreciation or depreciation. Investments seeking to achieve higher yields also involve a higher degree of risk.

Index

An index is a statistical composite used to track changes in economic conditions (like inflation) or financial markets over time. Investors use some indexes as benchmarks against which the performance of certain investments can be measured. For example, the S&P 500 Index is considered to be representative of the U.S. stock market in general, but there are hundreds of other indexes based on a wide variety of asset classes, market segments, and styles.

Bear/Bull Market

A bear market is generally defined as a period in which the prices of securities are falling, resulting in a downturn of 20% or more in several broad market indexes over a period of several months or longer. A bull market is a sustained period in which the market is rising, usually occurring over several months or years. Either of these market trends can influence the attitudes and behaviors of investors.

Disclosure Statement: Past performance is not a guarantee of future results. Shares, when sold, may be worth more or less than their original cost.