The Quick and Dirty Investing Glossary: What All These Terms Mean

One of the biggest reasons people don’t get into investing is because it seems inaccessible to them. There’s so many terms and graphs and MATH being thrown around that makes it seem no more understandable than the ancient tomes of Celtic druids. Hell, it took me months of focused studying to even wrap my head around some of these concepts. But I don’t believe in making others suffer as I have suffered, so I’ve made an investing glossary of the most common terms to help you out. It’s meant as a quick and dirty guide for some of the most common investing terms, and I plan to add to it by request. They’re dumbed down as much as possible so even a middle schooler could understand in a pinch.

The Investing Glossary to End All Glossaries

Investing – When you use money to make more money. There is no one investment that is guaranteed to make you money, so you need to use your best judgment and research to assure yourself of finding the best investment.

Portfolio – Everything you’re invested in. Some people’s portfolios are more diverse than others, depending on what you decide is the best portfolio for your situation.

Risk – Every investment has risk involved; you will not make money all the time investing. This is fine as long as you’re making money overall. However, some people can tolerate risk better than others as a psychological thing. Generally, the riskier something is the more potential return you might get from it. If you’re not comfortable with the risk to your investments, you might panic if the risk is realized or have regrets about what you’ve invested in. Again, it’s crucial to research this and understand what you’re getting into.

Return – how much more money you get when you invest your money. This is usually expressed as a percentage; you want to at least get more money than gets eaten away by inflation, which averages to 3%. This means that you make money if your return is more than 3% in a given year.

ROI – stands for “return on investment”. If you see that something has a “8% ROI YOY” it means “This investment, on average, has given an 8% return every year we’ve measured”.

Inflation – You’ve noticed things get more expensive as time goes on. Inflation measures that rate. This describes how the more time that passes, the less valuable a currency is. For example, a $20 bill today will buy you more stuff now than it will in another year. You’ll want your ROI to perform higher than inflation to truly make money.

The opposite of this is deflation, when money becomes more valuable over time.

Stock – A percentage of a company that you can own. Stocks, for the average investor, mean the same thing as shares. When the company makes money, its stock price rises and is worth more than you paid for it. If the company isn’t doing well, its stock price lowers and is worth less money. Because of this, stock prices aren’t predictable over any given period and are known as a more volatile investment than, say, bonds. Some stocks offer dividends, which is another way to make money from stocks besides its value.

Bond – You loan money to an entity, like the government or a business, and receive interest in return. It’s like the opposite of a bank loan where you get money now and pay it back plus interest later. This is different from stocks because holding a bond doesn’t mean you own a piece of the company; you’re acting as a lender instead. It’s also different from stocks because bonds have a much more stable rate of return. You know how much money you’re going to get paid to you when you first purchase a bond, unlike stocks that can bounce way up or way down and everywhere else on the spectrum.

Growth – The main way your investments pay off. Growth means your investment is more valuable over time, aka “grows” in desirability. If you buy something today for $100 and sell it in ten years for $200, your money’s basically grown 10% each year. The more money you have the more money it grows, theoretically.

Dividends – This is another way that investments, specifically stocks, make you money. In a given period of time – usually once every three months (quarterly) or once a year (annually) – a company will pay straight cash to the people who hold company stock. It’s unrelated to the growth of a stock on the surface. A lot of people prefer dividends over growth because you don’t have to sell the investment to start reaping the rewards of owning it.

Holdings – What makes up a fund, or what a fund “holds” within it.

Investment fund: a collection of stocks available on the stock market. The nuances between each fund depends on who manages it and for what purpose. Mutual funds have a human on the other side handpicking the stocks. Index funds are run by a robot that automatically picks (or indexes) the fund’s stocks. Some of the most common funds include ETFs, index funds, mutual funds, hedge funds, and target date funds.

Stock market – There are thousands of stock options out there, and the stock market is where you can buy them. “Stock exchange” is used to mean the same thing. It’s most frequently used as a marker for how well the overall economy is doing (eg “The stock market was up 5% today).

Bond market – same thing, except it tracks the overall rate of bonds instead of stocks

Index – Basically a collection of investments meant to show you how well a part of the market is doing. There are indexes that measure how the overall market is doing, and others that might measure how a certain industry or segment is doing.

S&P 500 – one of the most common ways to measure top market growth. This is an index that tracks the 500 top companies that you can buy stocks with. Others index examples include the Dow and NASDAQ (aka the Dow Jones Industrial Average and NASDAQ Composite).

ETF/mutual fund – stands for “exchange-traded fund”. They trade on the stock market like stocks but are a collection of different shares like an index fund. The main difference between this and an index fund is that they’re managed by a person instead of a computer, so you’re paying for that person’s time and labor. You’re also paying for human fallacy, as four in five mutual funds fail to beat the index returns. I highly recommend index funds over mutual funds for long-term growth prospects, but you might feel differently.

Index fund – a fund that indexes the market as a whole instead of attempting to guess who will win in the game of business. Basically, it seeks to MATCH the market instead of beating it; whatever the market brings in that year is assuredly what your return is. They’re generally tracked via computer algorithms instead of an actual human, which means paying to get them is a lot less expensive than other types of funds.

Hedge fund – These are mutual funds for high net worth individuals, whose fortunes are in the multi-millions at minimum. Most folks know it only when they hear someone became a billionaire as head of a hedge fund. It’s not a fund you need to worry about; they’re generally much higher risk than your average fund and only open to investors with special certification.

Target date fund – a fund looking to maximize/preserve your wealth in a given time period. Target funds set fifty years from now have more aggressive holdings than target funds set ten years from now. The closer you get to that date, the more conservative those holdings get. This is another good option for investing along with target funds.

Further Resources

You can write entire tomes on only ONE of these terms, and I’m leaving a lot of nuance out with the few sentences for each one I have here. If I’ve whetted your appetite for all things finance, there’s some great resources I can point you to.

Of course, I’d be a loser who didn’t have your best interests at heart if I didn’t mention JL Collins’ Stock Series. It’s an excellent bunch of blog posts that really dive into stock investing for the average Joe. His book, The Simple Path to Wealth, is also an excellent read that makes all of this easy to understand. I read it in January during all my bus rides, and I’d get so engrossed at times that I’d almost miss my stops. Reading it made me feel like Collins was sitting next to me and having a patient conversation with me about everything investing-related. It cuts right through the jargon and makes it clear what’s in your best interest.

Speaking of good books, Quit Like a Millionaire is also an excellent read. It’s written by Kristy Shen and Bryce Leung of Millennial Revolution, and I spent many moons drooling over their travel finance posts before reading their book. For people like me that don’t deep-dive into the numbers, this is the book for you.

And for the quarantined folks that want something more entertaining, you can always binge watch Shark Tank. It’s obviously been edited and sensationalized, but it’s also a fascinating peek into company negotiations and strategies. The sharks ask businessowners a myriad of questions, which vary from basic ones about the business to the specific and nitty-gritty. They’re also really good at explaining term definitions in the process, and it really helps show you what investors think about if they decide to go after the riskier investments.

What other terms and resources should I include in this quick-and-dirty investment guide?